Potential for Countrywide Default (Bloomberg)

BofA Keeps Countrywide Bankruptcy as Option

By Hugh Son and Dawn Kopecki - Sep 16, 2011

Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy.

The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said.

The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.

“If the losses become so great, how can Bank of America at least not discuss internally the relative tradeoff of a Countrywide bankruptcy?” Mayo, who has an “underperform” rating on the bank, said in an interview. “And if you pull out the bazooka, you’d better be prepared to use it.”

Countrywide Practices
Just before former CEO Kenneth D. Lewis bought Calabasas, California-based Countrywide, the firm was the biggest mortgage lender in the U.S. with 17 percent of the market and $408 billion of loans originated in 2007, according to industry newsletter Inside Mortgage Finance. Regulators later found its growth was fueled by lax lending standards, with loans marred by false or missing data about borrowers and properties.

Bankruptcy for Countrywide has gained credence with some investors and analysts after Bank of America lost almost half its market value this year. The shares have been whipsawed as the caseload of lawsuits by mortgage bond investors expanded, along with doubts about whether the bank has enough reserves to handle claims.

A Countrywide bankruptcy could halt legal proceedings and consolidate litigation into one court that would split up the subsidiary’s remaining assets for creditors, said Jay Westbrook, a law professor at the University of Texas at Austin. In effect, this would trade one type of litigation for another, one of the people said. The decision would turn on whether the potential savings of a filing outweigh the risks involved in disavowing some of the firm’s obligations, the person said.

What Could Go Wrong
Pitfalls include the possibility that a bankruptcy filing would cast doubt on the entire company’s willingness to support its other subsidiaries and damage Bank of America’s standing in the credit markets or with rating firms, hurting its ability to borrow, according to analysts.

“It’s not some sort of magic elixir that makes it all just go away,” Westbrook said. “I suspect that’s one reason they haven’t done it yet.”

Moynihan, 51, has been asked publicly about a potential Countrywide bankruptcy at least three times in the past year, most recently this week at a conference in New York. The bank’s mortgage division is his only unprofitable business, reporting a $25.3 billion pretax loss in the first half of this year.

Larry DiRita, a Bank of America spokesman, said he couldn’t comment on whether the company planned to file a Countrywide bankruptcy. The bank “took great pains to preserve the separate identity of Countrywide,” DiRita said.

Separate Accounting
Those steps include using separate accounting systems and profit-and-loss statements for Countrywide units, according to a report prepared for Bank of New York Mellon Corp. (BK), the trustee for a group of investors who agreed to an $8.5 billion settlement in June with Bank of America over faulty loans.

Bankruptcy “makes absolute good sense if they can do that,” said David Felt, a Washington-based consultant and former deputy general counsel at the Federal Housing Finance Agency. The FHFA sued Bank of America and 16 other banks this month to recover losses on about $200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mae, the government- backed mortgage firms. Bank of America and its subsidiaries created more than a quarter of those bonds.

“Given the size of these lawsuits, the potential liability could exceed the net worth of the subsidiary,” Felt said. “They could say the claims far exceed the amount that we have and therefore we need a bankruptcy court to pick and choose between those creditors.”

Assets Available
Countrywide has $11 billion in assets that could be depleted through demands to repurchase defective mortgages, Jonathan Glionna of Barclays Plc said in an Aug. 31 note. After that, Bank of America may not have any obligation to pay claims from Countrywide’s creditors, he said.

Typically, a corporation that acquires another firm’s assets isn’t liable for the seller’s debts, unless the transaction is considered a de facto merger or there was fraud in the takeover, Robert M. Daines, a Stanford Law School professor, wrote in a legal opinion prepared for BNY Mellon, trustee for the Countrywide mortgage bonds. Daines analyzed whether Bank of America would have to pay bond investors if Countrywide couldn’t.

American International Group Inc. (AIG), the insurer that sued Bank of America last month to recoup more than $10 billion in losses on Countrywide mortgage bonds, argued that the bank is a legal successor to the unit. New York-based AIG cited a series of transactions by Bank of America in 2008 that “were structured in such a way as to leave Countrywide unable to satisfy its massive contingent liabilities.”

Just in Case
Plaintiffs in the $8.5 billion settlement handled by BNY Mellon didn’t take any chances. Their agreement specified that Bank of America was responsible for making good on the payment because they were concerned that Countrywide might be thrown into bankruptcy, said Bob Madden, a Gibbs & Bruns LLP partner representing institutional investors that sued the bank.

“Bank of America didn’t do this stuff, it was Countrywide, which they had the misfortune of acquiring,” Madden said in an interview. “Anybody who tells you they have a solid handle on whether Bank of America can be forced to pay Countrywide liabilities hasn’t looked very closely at the issue.”

The chances of a bankruptcy filing rise “every time another suit gets put on the pile,” Madden said. Mark Herr, a spokesman for New York-based AIG and Stefanie Johnson of the FHFA declined to comment.

Bankruptcy’s Backlash
Bankruptcy would be a “last-ditch option,” and possibly a costly one, because counterparties might become hesitant to buy the parent company’s debt or open trading lines with its Merrill Lynch unit, David Hendler, a CreditSights Inc. analyst, said in a Sept. 8 note. Credit-rating firms could downgrade Bank of America subsidiaries, which benefit from the implicit support of their corporate parent, he said. That would drive up the bank’s cost of borrowing.

“Most counterparties I speak to think this would be a very difficult option for Bank of America and unlikely to be sanctioned by regulators,” said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund that has bet against the lender’s stock in the past. “The whole reason they would pursue the nuclear option of a Countrywide bankruptcy would be to put this behind them, but all you would be doing is opening up a Pandora’s box.”

Outstanding Debt
Countrywide has $6.53 billion of debt outstanding, including $2.81 billion of senior unsecured notes, $2.2 billion of preferred securities and $529 million of mortgage-backed bonds, Bloomberg data and Bank of America figures show. The unit’s $1 billion in 6.25 percent notes have plunged 9.2 cents since Aug. 1 to 97.1 cents on the dollar as of Sept. 13, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Management’s public stance on a potential Countrywide bankruptcy has evolved. In November, responding to a question from Mayo -- who had written a report that month entitled “Is a Countrywide Bankruptcy Possible?” -- Moynihan said he didn’t “see any liability that would make us think differently about working through it in the way we’re working.”

Since then, damage from Countrywide has steadily mounted as U.S.-owned Fannie Mae and Freddie Mac step up demands that the bank repurchase soured loans and new suits emerge, including from AIG and the FHFA. Further, New York Attorney General Eric Schneiderman is seeking to scuttle the $8.5 billion deal, which may result in greater mortgage costs, Bank of America has said.

Last month, when Moynihan was asked during a conference call held by fund manager and bank shareholder Bruce Berkowitz if a Chapter 11 restructuring would be a “viable solution” for Countrywide, the CEO declined to say what he’d do.

“When you face liabilities like this, we thought of every possible thing we could,” Moynihan said, “but I don’t think I’d comment on any outcome.”

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.
.®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.

The Worst Banks in South Florida (MiamiHerald.com)

Company name City Total assets(in millions) Must capital ratios be raised? Enforcement action
1st National Bank of South Florida Homestead 321,271 Yes Cease and Desist
Bank of Coral Gables Coral Gables 145,320 Yes Cease and Desist
BankAtlantic Fort Lauderdale 4,424,565 Yes Cease and Desist
City National Bank of Florida Miami 3,861,652 No Formal Agreement/Consent Order
Coconut Grove Bank Miami 615,282 No Formal Agreement/Consent Order
Eastern National Bank Miami 427,616 No Formal Agreement/Consent Order
Executive National Bank Miami 285,467 No Formal Agreement/Consent Order
First East Side Savings Bank Sunrise 81,591 Yes Cease and Desist
Gibraltar Private Bank & Trust Coral Gables 1,654,974 No Cease and Desist
Great Eastern Bank of Florida Miami 62,757 Yes Cease and Desist
Great Florida Bank Miami Lakes 1,516,057 Yes Cease and Desist
Home Federal Bank of Hollywood Hallandale Beach 81,082 Yes Cease and Desist
Intercredit Bank Miami 258,268 No Formal Agreement/Consent Order
Landmark Bank Fort Lauderdale 316,166 No Formal Agreement/Consent Order
Ocean Bank Miami 3,590,044 Yes Cease and Desist
OptimumBank Fort Lauderdale 183,601 Yes Cease and Desist
Pacific National Bank Miami 348,912 No Cease and Desist
Professional Bank Coral Gables 124,016 No Cease and Desist
Regent Bank Davie 487,796 Yes Formal Agreement/Consent Order
Security Bank North Lauderdale 113,404 Yes Cease and Desist
TransCapital Bank Sunrise 244,993 Yes Cease and Desist
Valley Bank Fort Lauderdale 124,427 Yes Cease and Desist

Type of Enforcement Action

Order to Cease and Desist:

An order issued when a bank is engaging or has engaged or is about to engage in an unsafe or unsound banking practice or a violation of law. The bank must follow certain requirements or take specific actions.

Formal agreement/Consent Order:

A formal agreement between a bank and the FDIC. The agreement states that certain actions be taken and/or certain activities are prohibited, or else the bank will be subject to a cease and desist order.


• Written agreement/Consent Order: A formal agreement between a bank and the FDIC. The agreement states that certain actions must be taken and/or certain activities are prohibited, or else the bank will be subject to a cease and desist order.

South Florida banks under scrutiny
.Many financial institutions in South Florida are operating under regulatory directives, working to put themselves back on sound footing.

By Ina Paiva Cordle
icordle@MiamiHerald.com
Hit hard when the real estate bubble popped in 2007, many South Florida-based community banks are still reeling from the aftershocks.

Over the last few years, past-due loans have mounted, funds required to offset loan losses have skyrocketed, and real estate has been repossessed and marked down, leading to a flood of red ink and a drain on capital.

All the while, regulators have been keeping a close watch.

In fact, of 240 Florida-based banks and thrifts, 78 — 32.5 percent — are currently operating under severe regulatory enforcement actions, including prompt corrective actions, cease and desist orders, formal agreements and consent orders. The actions are among the tools regulators use to work with banks to correct deficiencies and make sure they are on sound financial footing, and following safety and soundness guidelines and regulations.

That’s a higher proportion than in most, if not any, other state, banking experts say, and it reflects the current economy.

“It’s just only natural to see the increase in actions when the economy does go down,’’ said David Barr, spokesman for the Federal Deposit Insurance Corp. “It happened in the last crisis, in the late ‘80s and early ‘90s. And during the good times, there were considerably fewer.’’

Florida led the nation in bank failures in 2010, with 29 statewide. And one-third of all U.S. bank failures were in two states: Florida and Georgia, said Ken Thomas, a Miami-based independent banking consultant and economist. With 10 failures to date — including Palm Beach-based Lydian Bank on Aug. 19 — he anticipates a total of at least 15 bank failures in Florida this year. That would be on par with 2009, when 14 banks failed in the state, following two failures in 2008 and none in 2007 or 2006, before the crisis, when the number of banks in Florida topped 300.

The impact on the local economy of a bank seizure and sale to a stronger institution is hard to measure, Thomas said. Senior staff may well lose jobs, and if the new owners close branches, other employees may be out of work as well.

The successor bank may be stricter in its lending practices. Customers sometimes find themselves stripped of long-time working relationships and the accumulated good will that came with them. Though deposits are protected, bank closures may heighten anxiety about the overall economy.

A regulatory action doesn’t necessarily mean a bank is heading into failure; many are issued to banks that recover and thrive. Still, all but two of the 37 Florida banks and thrifts that have failed since Jan. 1, 2010 had a severe enforcement action in place, according to SNL Financial, a data and analysis firm.

“Many of the institutions cited by regulators may correct their infractions, yet others may be forced to raise capital, merge with a stronger peer, or see their bank seized by regulators,’’ SNL said in a report.

Without a doubt, South Florida holds the largest concentration of banks operating under regulatory directives within the state. Of the 78 community-based banks in Florida under such directives, 22 are based in Miami-Dade or Broward Counties, SNL data shows.

Requirements may be both strategic and operational. Some banks are instructed to engage their board of directors more actively in decision-making; others are told to bring in experienced senior managers. Some are told to create formal ethics policies, formalize anti-money laundering procedures, raise credit standards, increase loan-loss funds or write off bad loans. Most significant are directives to boost capital to meet higher capital-to-asset ratios required by regulators .

BauerFinancial, which rates banks nationwide on a five-star scale — two or fewer stars are classified as “troubled and problematic’’ — counts 19 problem banks in Miami-Dade and Broward, based on March 31, 2011 financial statements.

“Capital, profitability and asset quality, or non-performing or delinquent loans — those have the most impact’’ on the bank’s rating, said Karen Dorway, president and director of research for Coral Gables-based BauerFinancial.

Almost all the banks deemed “troubled and problematic’’ by BauerFinancial are also those operating under regulatory orders.

But consumers need not worry.

“As long as their money is insured by the FDIC, there are a lot of other things they need to worry about than the safety of their money,’’ Barr said.

REAL ESTATE SPILLOVER

Florida and South Florida have been hit harder than other markets because of the severity of the real estate downturn and our location as the epicenter of the housing crisis, Thomas said.

“The fortunes of most Florida banks, especially here in South Florida, are tied to the real estate market, both the residential and commercial sides,’’ he said. “And as it has collapsed so too have the fortunes of our banks.’’

While some indicators suggest local real estate values may soon be on an upswing, experts agree that the banking recovery will still take more time.

“It took us six years to blow up the bubble. It’s going to take five to six years to get out of this mess. And we’re now entering the fifth year,’’ said Ben Bishop, chairman of Jacksonville-based Allen C. Ewing & Co., an investment banking firm that specializes in banking.

Recent turmoil in the global economy has renewed fears about the health of the national banking system. Still, Bishop believes the worst is over for Florida. As long as the economy does not dip into another recession, next year will be the first full year of the recovery for Florida community banks, he said.

“Two-thousand-twelve is the first year that will see the loan loss provisions for banks start to decline, and that means earnings are right around the corner,’’ Bishop said. “They may not make a lot of money, but they will lose a whole lot less in 2012.’’

In the meantime, many South Florida banks operating under regulatory actions are working hard to correct their issues, including raising capital.

CORRECTING ISSUES

Here are the stories of seven such banks and the steps they say they are taking to meet regulators’ requirements.

• U.S. Century: In June, Doral-based U.S. Century Bank signed a consent order with regulators that cited issues with asset quality, management, earnings, capital, liquidity and sensitivity to market risk. The order was released by the FDIC in late July.

“The problem you will find with most banks is devaluation,’’ said U.S. Century Vice-Chairman, President and Chief Executive Octavio Hernandez. “When you have properties that have lost 50, 60, in some cases 70 percent of their original value, it is very difficult not to have capital issues, because when new appraisals come in, you have to adjust your books accordingly.’’

So far, the nine-year-old bank has made strides in disposing of some of its problem loans, which are mostly related to commercial real estate.

With $359 million in delinquent loans, U.S. Century sought to dispose of at least $25 million in loans in the second quarter, and it succeeded in selling off $38 million, said Abel Montuori, first executive vice president and senior lending officer. The goal for the third quarter is to dispose of another $71 to $80 million in loans, he said.

U.S. Century also recently hired the Japanese investment banking firm Nomura Securities to raise at least $150 million in private equity funds, said Hernandez. Last week he flew to New York to make presentations to potential investors. U.S. Century currently has $1.6 billion in assets.

“Our focus right now is on two things: raising capital and reducing our classified assets, and we have beefed up that department significantly,’’ Hernandez said. “All the attention of the bank is there and on the effort to raise capital, and meeting all the other areas of the consent order. We’re focused on that, and hope to have all that resolved quickly to regulatory satisfaction.’’

• Ocean Bank: Miami-based Ocean Bank, which previously had been asked to correct deficiencies, signed its most recent consent order with regulators April 28. The directive required stricter capital ratios and anti-money laundering controls and cited weaknesses in asset quality, management, earnings, liquidity and sensitivity to market risk. The bank, with $3.5 billion in assets, was founded in 1982.

Ocean Bank President and Chief Executive A. Alfonso Macedo said the bank has invested in new anti-money laundering systems and training and has put together a new team of experts.

Ocean Bank also has reduced its delinquent loans by half, from more than $770 million to $324 million.

“That’s been our biggest focus, because the more we improve our asset quality, the better we’re going to look and the more profitable we are going to be,’’ Macedo said.

To boost its ratio of capital to assets, since 2007 Ocean Bank reduced overall assets and has raised $100 million from its current shareholders. The company is now seeking additional capital from both current shareholders and outside investors. But it has not yet met an early July deadline for raising its capital ratios to the required level.

“We have a very good relationship with regulators,’’ Macedo said. “We are working closely with them and they know what we are doing.’’

• Great Florida Bank: Miami Lakes-based Great Florida Bank, which previously was served with a cease- and-desist order, received its most recent directive in April. It also was instructed to increase its capital. The bank, founded in 2004, has $1.4 billion in assets.

“We have entirely focused our plan on making sure we manage our risk, which we have, and making sure our risk does not deteriorate, and that our ratios improve, which they did over the last quarter,’’ said Great Florida Bank President and Chief Executive Mehdi Ghomeshi.

Trying to improve its capital ratios through internal measures, since late 2010 Great Florida has shrunk its balance sheet by 7 percent; reduced its non-performing loans by 8 percent; decreased its interest expense by 26 percent; and cut its overall expenses by 16 percent, Ghomeshi said.

“When the investors gain confidence in the economy and the banking sector, we will be able to raise the capital [from investors],’’ he said. “Unfortunately right now, investors are investing in bonds.’’

• Professional Bank: Coral Gables-based Professional Bank, which agreed to a consent order in December, just satisfied one of regulators’ primary directives last week by hiring an experienced president and chief executive, Raul G. Valdes-Fauli. Most recently president of the South Florida market at CNL Bank where he managed the tri-county region, Valdes-Fauli was previously president and CEO of commercial banking for Miami-Dade County for Colonial Bank.

Other issues — such as creating a business plan, a blueprint for earnings, and creating policies for lending, loan losses, ethics and interest rate risk management — have either been addressed or are in the works, said Valdes-Fauli, who started his job Aug. 15. The bank, founded in 2008, has $126 million in assets.

“We have a detailed business plan that is addressing all the issues raised in the order,’’ he said. “And we’re making wonderful progress in hopefully showing examiners we have everything buttoned up.’’

Other South Florida banks say they have already been successful in correcting every issue cited by regulators.

• Fort Lauderdale-based BankAtlantic was issued its most recent action, a cease and desist order, in February 2011, requiring, among other issues, that the bank raise its capital.

“What led to the C and D was that our non-performing loans ballooned because we’re a Florida bank, and many of our commercial real estate customers were having trouble, and as a result, the regulators required us to have even higher capital than we currently had,’’ said Alan Levan, chairman and chief executive of BankAtlantic Bancorp, the parent of BankAtlantic.

“We understood the rationale for it, and they gave us to June 30 of 2011 to increase the capital ratios, which we did,’’ he said. The ratios now meet regulators demands and are the highest capital ratios since the bank was founded in 1952, Levan said.

BankAtlantic raised its ratios through several methods, including selling its branches in Tampa; completing a stock offering to existing shareholders; reducing its concentrations of loans; and restructuring its balance sheet. For the quarter ending June 20, 2011, the bank, with $3.8 billion in assets, showed a profit for the first time since the second quarter of 2007.

“We believe that we have met everything that was required of us in the C and D,’’ Levan said. Typically, it takes regulators months to reexamine a bank and lift any enforcement actions.

• City National Bank of Florida, co-founded in 1970 by Leonard Abess and sold by his son Leonard Abess Jr. in 2009, signed a formal agreement/consent order with regulators in April 2010. The order cited City National’s anti-money laundering procedures as well as its concentration of real estate risk.

“Like most community banks we had a high percentage of real estate assets on our books,’’ said Jorge Gonzalez, president and chief executive of Miami-based City National Bank, which has $3.9 billion in assets and is now owned by Caja Madrid, the third largest financial services company in Spain.

“So we cleaned up all the assets that were underperforming, and we reduced the amount of real estate concentration,’’ he said. The bank’s nonperforming assets now represent 1.3 percent of total assets, and its capital ratios are above required levels, Gonzalez said. He expects the regulatory action to be lifted by the end of this year.

• In March 2010, Coconut Grove Bank signed a formal agreement/consent order that cited concerns found during a March 2009 examination, said Lynn M. Cambest, chief financial officer and treasurer.

“By the time we signed the agreement we literally had substantial compliance with all the issues raised in the letter, with the exception of raising capital,’’ Cambest said. Among those issues were board oversight, credit risk management, funds for loan losses, and improvement of assets and investments.

On June 24, Miami’s oldest continuously run bank — founded in 1926 — completed its last requirement, raising $32 million in a private placement, funded by 33 local investors, including Ivax Pharmaceuticals-founder Dr. Phillip Frost. It now has $648 million in assets.

Frost is now the bank’s largest individual shareholder, with more than 20 percent of the bank’s shares.

Other experienced businesspeople — including TECO Energy Executive Chairman Sherill Hudson — have recently joined the board.

As a result of the private placement, Cambest said Coconut Grove Bank’s capital ratios at the end of the second quarter were more than in compliance with regulatory directives.



Read more: http://www.miamiherald.com/2011/08/21/v-fullstory/2369351/south-florida-banks-under-scrutiny.html#ixzz1VmU8xVPP

How Healthy are the US Banks? (Zacks)

Analyst Interviews: U.S. Banks Stock Update

By Zacks Investment Research on May 19, 2010

Although a major recovery in the asset markets has been witnessed in recent quarters, the outlook for the U.S. banking industry still remains in question due to several negatives, including asset-quality troubles, drawbacks of new regulations and the continuation of both residential and commercial real estate loan defaults.

After enduring extraordinary shocks in 2008, the U.S. banks entered an exceptional state of turmoil in 2009. Starting as a credit issue in the subprime segment of the mortgage market, the situation affected about the entire financial services industry, in all corners of the globe. In other words, the financial crisis ultimately morphed into a massive economic crisis, which has had major ramifications across the whole world.

Although the banking industry is dealing with liquidity and confidence challenges in 2010, it is now comparatively stable, with financial support from the U.S. government. The government had taken several steps, including programs offering capital injections and debt guarantees, to stabilize the financial system.

We believe that the worst of the credit crisis is now behind us. After more than a year of initiating the $700 billion Troubled Asset Relief Program (TARP), a lot has improved with respect to the economic crisis.

But the banking system is not yet out of the woods, as there are persistent problems that need to be addressed by the government before shifting the strategy to growth. We believe that the U.S. economy will regain its growth momentum once these issues are resolved.

While the bigger banks benefited greatly from the various programs launched by the government, many smaller banks are still in a very weak financial state, and the Federal Deposit Insurance Corporation’s (FDIC) list of problem banks continues to grow.

Bank Failures Continue

Despite the government’s strong efforts, we continue to see bank failures. Tumbling home prices, soaring loan defaults and a high unemployment rate continue to take their toll on small banks. As the industry tolerates bad loans made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures.

Furthermore, government efforts have not succeeded in restoring the lending activity at the banks. Lower lending will continue to hurt margins and the overall economy, though the low interest rate environment should be beneficial to banks with a liability-sensitive balance sheet.

Out of the $247 billion given to the banks, more than half has come back from the healthy banks who have repaid their TARP funds in full. Banks have also paid about $11 billion in interest and dividends. Also, taxpayers have received decent returns on many of its financial-sector investments. Repayments under the TARP have generated a 17% annualized return from stock-warrant repurchases and $12 billion in dividend payments from dozens of banks.

Many of the major banks that have already repaid the bailout money include JPMorgan Chase (JPM: 39.56 +0.54 +1.38%), Goldman Sachs (GS: 138.90 +1.54 +1.12%), Morgan Stanley (MS: 26.98 +0.25 +0.94%), BB&T (BBT: 32.44 -0.10 -0.31%), US Bancorp (USB: 24.37 +0.01 +0.04%), Bank of America (BAC: 16.2894 +0.3394 +2.13%), Wells Fargo (WFC: 30.17 -0.42 -1.37%) and Citigroup (C: 3.82 +0.09 +2.41%).

Following the U.S. Treasury’s appeal to the world banking system to maintain stronger capital and liquidity standards by the end of 2010 to prevent a re-run of the global financial crisis, 15 large banks that control the majority of derivative trading worldwide have committed themselves to maintaining greater transparency in the $600 trillion market, which needs stricter oversight in the interest of the global financial system.

Moreover, in mid-January 2010, the Obama Administration proposed a tax on about 50 of the nation’s largest financial firms in order to recover the losses incurred by the government on its $700 billion bailout program. On approval of Congress, the tax, which the White House calls a “financial crisis responsibility fee,” would force the banks to reportedly pay the federal government about $90 billion over 10 years.

Targeting banks to recover the shortfall in bailout money can be considered justified, as they are the major beneficiaries of the taxpayers’ largesse. Most of the bailout loan was provided to financial institutions, as they form the backbone of the economy and were the primary victims of the crisis.

If the economic recovery tails off, high-risk loan defaults could re-emerge. About $500 billion in commercial real estate loans would be due annually over the next few years.

Above all, there are lingering concerns related to the banking industry as well as the economy. Continued asset-quality troubles are expected to force many banks to record substantial additional provisions at least through the end of 2010. This will be a drag on the profitability of many banks for extended periods, which will further stretch their capital levels.

While the economy is in a recovery phase, a lot remains to be done. The Treasury continues to hold huge direct investments in institutions like American International Group (AIG: 37.4205 -0.3595 -0.95%), Fannie Mae (FNM: 0.9394 -0.0406 -4.14%) and Freddie Mac (FRE: 1.265 -0.085 -6.30%).

Additionally, rating agency Standard & Poor’s said in March 2010 that it is maintaining its negative outlook for the U.S. banking industry based on FDIC’s industry financial performance data as of the end of 2009. The agency expects credit losses in the loan books of banks to be on the upside. Further, the agency warned that the pressure on ratings has not yet fully eased.

In conclusion, we expect loan losses on commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans. Also, as a result of a rise in charge-offs, the levels of reserve coverage have fallen over the past quarters and the banks will have to make higher provisions at least in the near term, affecting their profitability. We think that the financial crisis is far from over, and it will be awhile before we can write the end to this crisis story.

OPPORTUNITIES

The Treasury’s requirement of focusing on banking institutions towards higher-quality capital will help banks absorb big losses. Though this would somewhat limit the profitability of banks, a proper implementation would bring stability to the overall sector and hopefully address bank failures.

Specific banks that we like with a Zacks #1 Rank (Strong Buy) include Central Valley Community Bancorp (CVCY: 6.21 -0.09 -1.43%), Financial Institutions Inc. (FISI: 17.57 -0.08 -0.45%), S&T Bancorp Inc. (STBA: 22.56 -0.07 -0.31%), Bank of the Ozarks, Inc. (OZRK: 37.16 +0.25 +0.68%), First Community Bancshares, Inc. (NASDAQ:FCBC), Republic Bancorp Inc. (NASDAQ:RBCAA) and Old National Bancorp. (NYSE:ONB).

There are currently a number of stocks in the U.S. banking universe with a Zacks #2 Rank (Buy) including Mainsource Financial Group (NASDAQ:MSFG), Bancorp Rhode Island, Inc. (NASDAQ:BARI), MBT Financial Corp. (NASDAQ:MBTF), Mercantile Bank Corp. (NASDAQ:MBWM), MidWest One Financial Group, Inc. (NASDAQ:MOFG), Tower Financial Corporation (NASDAQ:TOFC), BancFirst Corporation (NASDAQ:BANF), Southwest Bancorp Inc. (NASDAQ:OKSB), Viewpoint Financial Group (NASDAQ:VPFG), Center Financial Corporation (NASDAQ:CLFC), North Valley Bancorp (NASDAQ:NOVB), Summit State Bank (NASDAQ:SSBI), Washington Banking Co. (NASDAQ:WBCO), Washington Trust Bancorp Inc. (NASDAQ:WASH), Lakeland Bancorp Inc. (NASDAQ:LBAI), Fidelity Southern Corporation (NASDAQ:LION) and Cardinal Financial Corp. (NASDAQ:CFNL).

We favor Commerce Bancshares Inc. (NASDAQ:CBSH) in this space since this company is one of the few names that did not report losses even during the current financial crisis. We believe that Commerce is one of the best-capitalized banks in the industry and will generate positive earnings throughout the credit cycle. While the bank had a decent growth in deposits in the most recent quarter, trends in its credit metrics were negative.

WEAKNESSES

The financial system is going through massive de-leveraging, and banks in particular have lowered leverage. The implication for banks is that the profitability metrics (like returns on equity and return on assets) will be lower than in recent years.

Furthermore, the current crisis has dramatically accelerated the consolidation trend in the industry. As a result, failure of a large financial institution will be a major concern in the upcoming quarters as weaker entities are being absorbed by the larger ones.

We think banks with high exposure to housing and Commercial Real Estate loans, like Wilmington Trust Corporation (NYSE:WL), KeyCorp (NYSE:KEY) and Zions Bancorp (NASDAQ:ZION), will remain under pressure.

Also, there are currently a number of stocks with a Zacks #5 Rank (Strong Sell) including Nara Bancorp Inc. (NASDAQ:NARA), Sierra Bancorp (NASDAQ:BSRR), Bryn Mawr Bank Corp. (NASDAQ:BMTC), Horizon Bancorp (NASDAQ:HBNC), Hudson Valley Holding Corp. (HUVL), Legacy Bancorp Inc. (NASDAQ:LEGC), VIST Financial Corp. (NASDAQ:VIST), Metrocorp Bancshares Inc. (NASDAQ:MCBI), Firstbank Corporation (NASDAQ:FBMI) and First Financial Bancorp (NASDAQ:FFBC).

Why Are CDs, Money Market Rates So Low? (NY Times)

December 26, 2009
At Tiny Rates, Saving Money Costs Investors
By STEPHANIE STROM
Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.

The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.

“Open a Savings Plus Account today and get a great rate,” read an advertisement in the Dec. 16 Newsday for Citibank, which was then offering 1.2 percent for an account. (As low as it was, the offer was good only for accounts of $25,000 and up.)

“They’re advertising it in the papers as if they’re actually proud of that,” said Steven Weisman, a title insurance consultant in New York. “It’s a joke.”

The advertised rate for the Savings Plus account has expired, according to the bank’s Web site; as of Friday, the account paid an interest rate of 0.5 percent. The bank’s highest-yield savings account, the Ultimate, was paying 1.01 percent.

The best deal Mr. Weisman has found is 2 percent on a one-year certificate of deposit offered by ING Direct, an online bank that has become a bit of a darling among the fixed-income crowd.

Interest on one- and two-year Treasury notes was just 0.40 percent and 0.89 percent, as of Monday. Bank of America offers 0.35 percent on a standard money market account with $10,000 to $25,000, and Wells Fargo will pay 0.05 percent on a basic savings account.

Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money. In fact, Northern Trust waived some $8 million in fees on money market accounts because they would have wiped out all interest, and then some.

“The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. “It’s a real problem.”

Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.
“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”
Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

Many think the Federal Reserve is fueling a stock market bubble by keeping rates so low that investors decide to bet on stocks instead. Mr. Parks of Better Investing moved more money into the stock market early this year, when C.D.’s he held began maturing and he could not nearly recover the income they had generated by rolling them over.

He began investing some of the money in blue chip stocks with a dividend yield of at least 3 percent and even managed to find an oil-and-gas limited partnership that offered 8 percent.

Mr. Parks said, however, that he would not pursue that strategy as more of his C.D.’s matured. “What worked in the first quarter of this year isn’t as relevant, because the market has come up so much,” he said.

No one is advising a venture into higher-risk investments. Katie Nixon, chief investment officer for the northeast region at Northern Trust, said that, in general, “no one should be taking risks with their pillow money.”

“What people are paying for is safety and security,” she said, “and that’s probably just right.”

People who rely on income from such investments for support, however, are being forced to consider new options.

Eileen Lurie, 75, is taking out a reverse mortgage to help offset the decline in returns on her investments tied to interest rates. Reverse mortgages have a checkered reputation, but Ms. Lurie said her bank was going out of its way to explain the product to her.

“These banks don’t want to be held responsible for thousands of seniors standing in bread lines,” she said.

Such mortgages allow people who are 62 and older to convert equity in their homes into cash tax-free and without any impact on Social Security or Medicare payments. The loans are repaid after death.

“If your assets aren’t appreciating and aren’t producing any income, you’re getting eaten up in this interest rate environment,” said Peter Strauss, a lawyer who advises the elderly. “A reverse mortgage is one way of making a very large asset produce income.”

Eve Wilmore, 93, has watched returns on her C.D.’s drop to between 1 percent and 2 percent from about 5 percent a year or so ago. Yet the Social Security Administration recently raised her Medicare Part B premium based on those higher rates she had been earning. “I’m being hit from both sides,” Mrs. Wilmore said. “There’s some way I can apply for a reconsideration, and I’m going to fight it. I have to.”

She said she was reluctant to redeploy her money into higher-risk investments. “I don’t know what my medical bills will be from here on in, and so I want to keep the money where I can get to it easily if I need it,” she said.

Peter Gomori, who taught a course on money and investing for Dorot, a nonprofit that offers services for the elderly, did not advise his students on investment strategies but said that if he had, he would probably have told them to sit tight.

“I know interest rates are very low for Treasury securities and bank products, but that isn’t going to be forever,” he said.

But investment professionals doubt rates will rise any time soon — or to any level close to those before the crash.

“What the futures market is telling me,” Mr. Gross said, “is that in April 2011, these savers that are currently earning nothing will be earning 1.25 percent.”

Bank Overdraft Fees - news from B of A (Charlotte Observer)

BofA Alters Policies on Overdrafts: Bank Raises No-Fee Ceiling From $5 to $10 Amid Criticism and Threat of Crackdown.

By Rick Rothacker and Christina Rexrode, The Charlotte Observer, N.C.

Sep. 23--Bank of America Corp. is making significant changes to its overdraft fee policies, as banks face increasing criticism and potential new laws around customer surcharges.

Starting Oct. 19, the Charlotte-based bank said Tuesday it will no longer charge overdraft fees if a customer's account is overdrawn by less than $10 per day. Previously, the bank charged a $10 fee if an account was overdrawn by less than $5 per day.

In addition, the bank said it will not charge overdraft fees on more than four instances per day. In the past, the cap was 10 per day. The fee stays at $35 per overdraft.

The bank also said that customers can visit a branch or call the bank to opt out of overdraft protection, meaning payments won't be made on their behalf if they don't have enough money in their accounts. The bank also plans more changes next year.

In a down economy, overdraft fees have become a particular sore point lately because customers can rack up big charges if they withdraw money at an ATM, write a check or use a debit card and don't have enough money in their account. With the proliferation of debit cards, in particular, they can rack up multiple fees in a short span of time.

The announcement comes a little more than a month after Brian Moynihan took charge of the bank's consumer banking unit, following a management shakeup. In an interview Tuesday, Moynihan said changes were already in the works but he pressed for them to be completed quickly.

"The economy kept getting tougher and tougher," Moynihan said. "Customers continued to be stretched more and more. We were watching how customers were being affected."

Moynihan said the bank was driven by customer need, not legislative pressure. A bill in the U.S. House would require banks to inform customers that an ATM withdrawal or debit payment is about to put them into the negative. Senate Banking Committee Chairman Chris Dodd, D-Conn., has also said he is drawing up legislation.
Overdraft fees have been a major source of income for banks, especially at a time when they're struggling with rising loan losses. Bank of America's deposits segment, which includes checking accounts and other services, collected $3.3 billion from all service charges in the first half of this year.
Moynihan declined to say how much income the bank might lose from the change.

"If the customer gets the benefit, that's less fees for the company," he said. "Long-term, it's in the best interest of the customer and the shareholder."

Research firm Moebs Services has estimated the industry will make $38.5 billion from overdraft fees this year, up from $18 billion in 1999, partly because the average fee has climbed.

Mike Moebs, an economist and the CEO of Moebs Services, lauded Bank of America's announcement and said he hopes the bank will introduce more consumer-friendly initiatives in the next month or two. For example, he said, the bank could drop its overdraft fee of $35 for most transactions to the industry median of $26. "I highly praise Bank of America, even if it's totally political," Moebs said. "It's a huge step in the right direction."

Bank of America, the nation's biggest bank, also said Tuesday it has more changes in the works starting in June 2010.

The bank will introduce an annual limit on the number of times customers can overdraw their accounts when they make a purchase at a store.

Customers will be contacted when they near that limit. The bank will also allow customers to opt out of overdraft capability when they open a new account.

Moynihan said the bank already warns customers of possible overdraft fees at the bank's own ATMs, but doesn't have that capacity when customers make retail purchases. In the future, though, customers will be able to opt out of different aspects of overdraft protection, he said.

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To see more of The Charlotte Observer, or to subscribe to the newspaper, go to http://www.charlotteobserver.com.

Copyright (c) 2009, The Charlotte Observer, N.C.

How to Create the Next Bull Market ( WSJ Opinion)

OPINION
JULY 15, 2009
The Bernanke Market
We won't get real growth until Congress and Treasury get policy right.

By ANDY KESSLER
I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.
Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.
Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.
Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

Citigroup Exchange Offer Update (Bloomberg)

Citigroup Inc. Announces Public Share Exchange Launch, Finalizes Definitive Agreement With U.S. Government
8:00am EDT
Citigroup Inc. announced that it has finalized a definitive agreement with the U.S. Government and will now launch its exchange offers for publicly held convertible and non convertible preferred and trust preferred securities. Under the agreement, the Government will exchange a portion of its preferred securities with an aggregate liquidation value of up to $25 billion for interim securities and warrants and its remaining preferred securities for trust preferred securities. The public exchange offers are currently scheduled to expire on July 24, 2009, subject to extension by Citi. Assuming full participation of holders of convertible and non convertible public preferred and trust preferred securities in the exchange offers, Citi will convert into common shares approximately $58 billion in aggregate liquidation value of preferred stock and trust preferred securities.

Citi Press Release http://www.citigroup.com/citi/press/2009/090610a.htm

Bank of America Tender Offer for Preferred Stock

Bank of America Announces Exchange Offer For Certain Series of Preferred StockCHARLOTTE, N.C., May 28 /
-- - Bank of America Corporation today announced that it is commencing an offer to exchange up to 200 million shares of common stock for outstanding depositary shares of certain series of preferred stock.


The exchange offer is subject to the terms and conditions described in the Offer to Exchange dated May 28, 2009, and the related Letter of Transmittal, which will be filed with the Securities and Exchange Commission.


The exchange offer will expire at midnight, New York City time, on June 24, 2009, unless extended or earlier terminated by Bank of America. Holders of the depositary shares eligible for the exchange will be able to tender their depositary shares, or withdraw their previously tendered depositary shares, any time prior to the expiration of the exchange offer.


The exchange offer would increase Bank of America's Tier 1 common capital by an amount equal to the aggregate liquidation preference of the depositary shares exchanged. The shares issuable in the Exchange Offer are part of Bank of America's previously announced plan to exchange common stock for (non-government) perpetual preferred stock. Bank of America believes that these actions will assist in meeting its $33.9 billion indicated Supervisory Capital Assessment Program (SCAP) buffer set by the Federal Reserve.


Bank of America is offering to issue shares of common stock in the exchange offer in the applicable consideration amount per depositary share specified in the table below. The number of shares of common stock issuable for each exchanged depositary share will be equal to this consideration amount divided by the average of the daily per share volume-weighted average price of Bank of America common stock for each of the five consecutive trading days ending on and including June 22, 2009 (the second business day prior to the scheduled expiration date of the exchange offer). Bank of America will announce this common stock average price no later than 9 a.m., New York City time, on June 23, 2009. One of the conditions of the exchange offer that must be satisfied or waived is that the common stock average price be $10 or greater.

Acceptance CUSIP No. of Series of Preferred Stock NYSE Consideration
Priority Depositary Represented by Ticker for Depositary
Level Shares Depositary Shares Symbol Share


1 060505815 Floating Rate Non-Cumulative BAC PrE $16.25
Preferred Stock, Series E
2 060505583 Floating Rate Non-Cumulative BML PrL $16.25
Preferred Stock, Series 5
3 060505633 Floating Rate Non-Cumulative BML PrG $15.00
Preferred Stock, Series 1
4 060505625 Floating Rate Non-Cumulative BML PrH $15.00
Preferred Stock, Series 2
5 060505617 6.375% Non-Cumulative BML PrI $17.00
Preferred Stock, Series 3
6 060505740 6.625% Non-Cumulative BAC PrI $17.50
Preferred Stock, Series I
7 060505724 7.25% Non-Cumulative BAC PrJ $18.75
Preferred Stock, Series J
8 060505765 8.20% Non-Cumulative BAC PrH $20.50
Preferred Stock, Series H
9 060505559 8.625% Non-Cumulative BML PrQ $21.00
Preferred Stock, Series 8

If the number of shares of common stock issuable in exchange for depositary shares that are validly tendered and not properly withdrawn as of the expiration date exceeds 200 million, Bank of America will accept for exchange that number of depositary shares that does not result in a number of shares of common stock being issued in the exchange offer in excess of 200 million. In that event, acceptance of validly tendered depositary shares will be based on priority levels assigned to each series of preferred stock described below (with priority level 1 being accepted first). Acceptance of the depositary shares also may be subject to proration, as described in the Offer to Exchange.


The exchange offer is subject to a number of conditions which must be satisfied or waived by Bank of America on or prior to the expiration date, as described in the Offer to Exchange.


The terms of the exchange offer and procedures for validly tendering and withdrawing depositary shares are described in detail in the Offer to Exchange and related materials, copies of which may be obtained without charge from the information agent for the exchange offer, D.F. King & Co., Inc., by calling (800) 829-6551 (toll free) or (212) 269-5550 (collect). The Offer to Exchange also will be available free of charge on the SEC's website at www.sec.gov after it is filed as an exhibit to the tender offer schedule.


The exchange offer is being made to holders of depositary shares in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 3(a)(9) of the Securities Act. This press release is not an offer to purchase or an offer to exchange or a solicitation of acceptance of an offer to exchange any securities, and the exchange offer is being made only pursuant to the terms of the Offer to Exchange and the related materials.

Bank of America, Merrill Preferreds Downgrade (Dow Jones Newswire)

DOW JONES NEWSWIRES

MAY 18, 2009, 9:47 A.M. ET Fitch Cuts Some BofA Rtgs On Capital Needs, Asset Quality

Fitch Ratings downgraded some of Bank of America Corp. (BAC) ratings and those of several units on asset-quality and capital-needs concerns, but the ratings agency affirmed its main ratings on the bank.

As a result of the government's bank stress tests, Bank of America must raise another $33.9 billion in common stock by early November, which Fitch called "a daunting task in any environment." The amount is by far the largest required of any of the 19 banks tested.

The ratings agency cut its preferred-stock ratings on Bank of America and units Merrill Lynch & Co. and BankAmerica Corp. three notches to B, saying the risk of dividend deferral or omission has increased. It also cut the company's trust preferred securities ratings one notch to BB-.
But Fitch reaffirmed the company's long- and short-term issuer default ratings at A+, linked to government support.

Bank of America's shares were recently up 8.4% at $11.57 as Goldman Sachs put the stock on its conviction buy list. The firm's previous investment rating on the shares was neutral. Despite jumping more than threefold in the last two months, the shares are still off by more than two-thirds in the last year.

Fitch said the downgrades reflected the uncertainty surrounding near-term credit costs and market conditions, which have led to heightened risk in meeting the capital requirement. The company's management has outlined a plan to raise the mandated amount of capital and sold part of its stake in China Construction Bank (601939.SH) as part of the plan.

But Fitch said in order to achieve the $33.9 billion goal, the company will need market access, the ability to sell off other units at a sufficient price and the ability to keep earnings above stress-test projections. Fitch said keeping the earnings up may be the hardest part.

The ratings agency added that besides the capital requirements, Bank of America still faces a challenging operating environment, including the potential for higher losses in some sectors - especially home equity loans and credit cards. It also faces the integration of several mergers, including that of Merrill, which may cause more write-downs.

-By Kerry E. Grace, Dow Jones Newswires; 201-938-5089; kerry.grace@dowjones.com

The Bailout Banks - How are They Doing (Barrons)

Home > News & Commentary > This Week's Magazine > Features
MONDAY, MAY 11, 2009
FEATURE



After All That Stress, a Hugh Sigh of Relief
By ANDREW BARY

Now that the leading financial companies have passed their stress tests, investors are eager to buy bank stocks again. But which ones?

WALL STREET CHEERED THE GOVERNMENT'S EAGERLY awaited release last week of stress tests on 19 leading financial companies. Bank stocks gained 36%, extending a furious rally that has produced a 135% gain in the widely followed KBW Bank Index from its March lows.

Investors viewed the stress tests as showing that the major public financial companies can handle potential loan losses even in a draconian economic scenario with a manageable amount of new equity capital -- or no new capital at all. The big fear had been that banks would have to resort to capital raising that would massively dilute existing common shareholders.

Now institutional investors are eager to buy financial stocks. Morgan Stanley and Wells Fargo took advantage of growing institutional demand for new stock issues immediately after the stress-test results were released Thursday.

"A lot of money managers were underweighted in bank stocks relative to their benchmarks, and they've been panicked buyers because of what they see as an inflection point," says John McDonald, banking analyst at Sanford Bernstein.

There were broad gains through the sector. Fifth Third soared 120% to $8.49; PNC Financial rose 40% to $53.08; Bank of America gained 63% to $14.17, and Wells Fargo gained 44% to $28.18, helped by a plug from Warren Buffett, whose Berkshire Hathaway is Wells' largest holder.
Credit-card specialists American Express and Capital One were strong; AmEx shares rose 17% in the five sessions to $28.40, and Capital One gained 81% to $31.34. Because the stress tests took a rosier-than-anticipated view of potential credit-card losses, AmEx and Capital One weren't deemed to be capital-deficient. Many on Wall Street had expected that Capital One would be forced to boost capital.

Analysts saw room for further gains in the sector, but investors need to recognize that profits for this year are likely to be weak, and that 2010 earnings may continue to be depressed by elevated losses on commercial-real-estate mortgages and on home-equity and credit-card loans.
Investors are starting to look at what analysts call "normalized" earnings, or what banks can earn in a more benign economic and credit environment, which may not come until 2011. Banks are generally trading for four to nine times those normalized earnings.

Those potential profits, however, are subject to a host of variables, including the economy, interest rates, bank capital requirements and asset returns. McDonald favors some of the stronger banks, including JPMorgan Chase and PNC. JPMorgan, which rose 20% to $38.94 last week, now is valued at around seven times normalized earnings of more than $5 a share.

UNTIL RECENTLY, INVESTORS FEARFUL about earnings power tended to value banks on tangible book value, a conservative measure of shareholder equity. "Two weeks ago, the only thing people cared about was price to tangible book," says Barclays Capital analyst Jason Goldberg. "Now it's price to normalized earnings. Two weeks from now, who knows what it will be?"

Goldberg favors Bank of America, whose shares were up sharply despite needing to raise an industry-leading $33.9 billion. The stock trades for less than five times Goldberg's estimate of normalized earnings of $3.47 a share. Wall Street believes BofA can raise required capital without much dilution. The bank said it plans to sell 1.25 billion of common shares and convert some of its preferred stock to common -- and to sell some non-core assets, including the Columbia investment-management business.

Bank of America's $33 billion of preferred stock offers a high-yielding play on the bank's revival. The Series J 7.25% preferred trades around $15 (60% of face value of $25) for a yield of 12%. A former Merrill Lynch preferred issue, now called Series 5, trades for just $9, a fraction of its face value of $25. It has a yield of 11%. The BofA preferred dividends now look more secure, and the common yields next to nothing.
One of best plays for fans of beleaguered Citigroup is its $15 billion of preferred stock, which is due to be converted into common shares in an exchange offer to get under way soon. Citi's Series P preferred traded Friday around $22.50, enabling investors to buy Citi common at around $3 a share, considerably below Citi's close of $4.02. Each preferred share is likely to get 7.3 common shares. The opportunity exists because arbitrageurs can't close the currently wide spread between the preferred and common, with Citi shares virtually impossible to short.

Citi's trust preferred, which is senior to the regular preferred, also could be appealing. Some probably will be converted to common to meet the need for $5.5 billion of additional capital called for in the government stress tests. Citi's Series W trust preferred trades around 15, for a yield of 10%.

Citi's common is a dicier bet because the company's plan to convert more than $50 billion of preferred stock to common to boost key capital ratios could balloon its share count to 23 billion from the current five billion, permanently capping its earnings power. Moreover, the government likely will emerge as a major shareholder, leading to further potential meddling in Citi's business. With Citi's business mix shifting, it's tough to peg normalized earnings power, which could be anywhere from 50 cents to $1 a share.

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