Posted on 01/16/2008 12:16:41 AM PST by bruinbirdman
In a reversal of fortunes, the big Japanese banks have readied as much as $10 billion to rescue the West's banking titans.
The three wealthiest Japanese finance houses are set to step into the worsening sub-prime carnage as the “silent investment partners” of Wall Street and Europe's stricken banking titans.
Senior sources at the “big three” Tokyo megabanks told The Times that they had readied a combined cashpile of as much as $10 billion (£5 billion) and were open to negotiation with any struggling Wall Street bank that approached them for a cash infusion.
Mitsubishi UFJ (MUFJ), Mitsui Sumitomo Financial Group (SMFG) and Mizuho Financial - banks that have been scarred only very lightly by the sub-prime crisis in the United States - are understood to have already opened preliminary talks with several American firms.
One MUFJ insider said that his firm was planning to compete directly with the leading Asian sovereign wealth funds as a long-term investor in the troubled American banks. The Japanese banks, flush with cash and desperate to find ways of raising their return on capital, are keen to become central players in what some predict will be an all-Asian solution to the sub-prime woes contorting America and Europe.
The interest of the Tokyo megabanks emerged as the fallout from America's sub-prime mortgage problems continued. Merrill Lynch, one of the Wall Street firms hit hardest by sub-prime investment losses, said that it had secured a $6.6 billion cash injection from a consortium that included Mizuho, together with the Kuwait Investment Authority and the Korean Investment Corporation.
Separately, Citigroup announced the biggest loss, of $9.83 billion for the fourth quarter, in its 196-year history and took an $18 billion writedown on its sub-prime investment portfolio, in the largest such loss on record. The world's biggest bank also agreed a $14.5billion capital infusion from investors such as the Government of Singapore, Prince Alwaleed bin Talal and Sanford Weill, a former Citigroup chief executive. The bank took measures to reduce costs, announcing a
41 per cent cut in its fourth-quarter dividend and the loss of 4,200 of its 300,000-strong global workforce.
The Japanese banks' interest in investing in distressed US banking names comes as they are keen to expand their overseas operations after nearly two decades of timid confinement to their domestic market after the bursting of the Japanese bubble.
The ultra-conservatism of the Japanese banks dates from their own financial crisis that came to a head in 2003 with the collapse of several leading players. But by the end of 2006, the banks had mostly paid back the emergency cash with which the Government rescued them. “With the public money repaid, the Japanese banks are under pressure from investors to use their capital more effectively. Banks' managements are being told to look for investments every single day, and they see these Wall Street firms as a good chance to do that,” Shinichi Tamura, a banks analyst at UBS, said.
Citibank, Lehman Brothers and Bear Sterns are among American firms rumoured already to be in talks with Japanese banks, as well as other Asian investors and sovereign wealth funds.
The Mizuho deal represents the first time since 1989 that a Japanese financial house has taken a substantial stake in a “bulge bracket” American or European banking name.
bargain or burden?
A buck is only worth 106.29 yen right now. If Japan has bucks, they might as well use them.
Weeeeelllll.... that depends.
If the Japanese bankers have judged the liabilities of the banks taking their deal correctly, it could be quite the bargain.
If, however, the Japanese banks are doing what Bank of America did with Countrywide Finance, the Japanese banks could find that they have to fling a lot more cash into the banks they’re propping up.
BofA didn’t plan to buy Countrywide. They bought $2B worth of CFC around $17/share. But as CFC continued to collapse due to a lack of liquidity, BofA realized that if they wanted to not simply write off the $2B, they were going to have to buy all of CFC to inject sufficient control and liquidity to keep CFC a viable investment.
If the Japanese have deep enough pockets, we’ve now seen that the idiots at the helm(s) of US banks are incompetent enough to have put their banks into a situation where their entire operation can be bought out at fire-sale prices - and the only alternative is bankruptcy, during which the price for the buy-out will only go lower.
The US banks might avoid this, if they get their heads out of their posteriors and belly up to the Fed’s discount window.
Don't they have to put up collateral when they do that? And didn't the Fed just recently lower the standards for collateral to include commercial paper?
Yes and yes.
But for some reason, bankers continue to think that a) they have it “under control” (they don’t), b) that going to the discount window carries a stigma, that bank shareholders will panic and sell the shares down, and c) that other banks and creditors will refuse to lend to the bank because going to the discount window is a sign that they’re in a cash crunch (which they are).
Instead, bankers have adopted a position that they’ll get through somehow, that it can’t get worse.
It can. It is. It will.
The problem isn’t just getting cash right now. These banks are still neck deep in writedowns because they were mark to fantasying their revenue. For years, the had been originating loan products like “Option ARMS” with no documentation or stated income required. Then they turned around and booked the potential interest earned on these loans as guaranteed revenue. Many of these loans were originated for housing gamblers who didn’t have any form of collateral/income for the property they were buying as quick flip investments. The majority of the MSM has been criminally negligent in the reporting of this. They only run stories about the few people who were steered into loans or refi’s and might lose their homes because that follows their “banks are all evil and prey on the poor” line of crap.
A major correction in housing prices wasn’t even required for this meltdown, just a return to normal appreciation or flatlining for a few months. Now that housing in many markets has simply peaked, the housing gamblers have stopped making any type of payments on these exotic mortgage products, such as option arms where they could choose if they wanted to just pay interest, interest and some towards principal, or even skip paying for periods of time and the size of the loan would simply increase.
This is beyond bailout time. Its time for the major financial institutions to mark their assets to market, but they will avoid this at all costs. Or at least drag it out over a longer period of time to make things appear not as bad as they are.
Everything you say is true. For the banks, however, the situation has now snowballed beyond the housing market into exposing a multi-tiered liquidity crisis that keeps blowing up in wave after wave.
What we’re now seeing in the major banks and the housing market is, as you say, beyond bailout time. It isn’t just the amount of money that would be required, it is that the market has to correct. A capitalist system has both booms and busts, and without the busts to correct the excesses and mis-allocations, the system (esp. the financial sector) gets further and further out of whack with the real market.
Greenspan and the Fed kept pumping liquidity into the system, something that came to be known as “the Greenspan put.” At some point, the system cannot withstand the pressure to correct the imbalances. We’re there or beyond now.
The 80s and 90s deregulation of banking resulted in the lifting of Glass Steagall. Now we see another banking crisis directly caused by overleveraged mortgage security insurance and ratings.
Won't we ever learn ?
i say dont bail em out.
Let the market correct itself. And yes the banks will suffer horrible losses.
but if they are gonna belly up somewhere to save their fat asses...let em belly up to the fed. Instead of giving foreign nations control of american finance.
what a friggen mess.
BOA bought preferred convertible stock though - I don’t know much about that kind of thing, but I thought that was a “can’t lose” proposition.
BofA did buy, as you say, convertable preferred stock, yielding 7.25%, convertable to common stock at $18/share.
A convertible preferred is not a “can’t lose” proposition by any means.
For those who don’t know what a “convertible preferred” is:
Companies can sell many different classes of stock. The largest class of shares is called “the common” and the common stock usually (but not always) has voting rights. It might pay a dividend.
Preferred stock is usually sold to raise additional capital over a defined time period. Think of it like a bond that is sold as stock. Preferred are usually priced at $25/share when they’re issued.
Often preferred shares don’t have voting rights. What they do have (where the “preferred” comes in) is that the dividend on preferred stock is paid before dividends on the common stock. There may be several classes of preferred stock, where the more senior classes are to get their dividends before other, less senior classes of preferred stocks.
Preferred stock might also have more claim to the assets of the company should the company go bankrupt. Owners of the common are last to be paid anything in bankruptcy actions. Bondholders are usually first.
Convertibles: When a company gets into a jam, sometimes they’ll see preferred stock that will convert to the common at a specified price at a future point in time. If the buyer gets a good dividend and the company pulls out of their problems and the common share price is above the conversion price, the buy of the convertible preferred gets a really, really sweet deal.
OK, so BofA was looking for a sweet deal. BofA wanted to buy Countrywide for years - they offered $30 billion for CFC several years back. Because the CEO of BofA was a patient guy, he’s now able to buy up all of CFC for about $6+ billion.
With CFC dropping into the single digits, the convertible preferred becomes a “busted convert” - a convertible where the underlying common price has dropped significantly under the conversion price.
With CFC around (let’s be generous) $8/share, BofA would need a more than 100% increase in the common price to get back to even on the common they’re going to get as a result of the conversion. Assuming CFC could get their situation turned around, we’d be looking at years and years down the line before the common price is back up there.
BofA is now in a position where they thought they were getting a much larger percentage of the company than they’re going to own when the conversion happens.
Busted converts are often great deals for investors - but only for those who come along after the convert has gone bust and they’re getting a high yield and compensated for buying the busted convert. If you were the initial buyer of the convertible preferred, well.... you’ve lost a lot of the opportunity you priced into the conversion price.
OK, that’s bad enough. But when CFC started cratering and it was looking as tho they could go bankrupt, suddenly now the dividend, even on a preferred, is in serious doubt. And a big percentage ownership of a company in bankruptcy isn’t such a great deal; everything you, an angel coming in to buy up the company in bankruptcy, might do to change things is going to have to go through a judge in a bankruptcy court.
So, to protect the first $2B, BofA bought the rest of the assets before someone else swooped in on the common or CFC went belly-up.
As you see, convertible preferred stock is far from a “can’t lose” proposition. ;-)
Funny you should mention Glass-Steagall.
Guess what was merged together to create the Citigroup monster?
A big insurance company and a big bank.
As you say, “don’t we ever learn?”
What’s to learn? The movers and shaker walked away with many millions, and the devil take the hindmost. Somewhere right now, execs are planning the next fiasco that they’ll profit from in grand fashion.
Would you consider the possibility of a liquidity leak from the pipeline? The leakage collected in pools in Dubai and Saudi Arabia and Tokyo. That leakage is now being shunted back into the system.
The banks are soaking up the leakage before going to the discount window.
If MBIA and AMBAC fail (they are close to insolvency) then all their insured MBS bonds will be derated to junk, unless the originators have the capital to self-insure them (they don't).
If this happens, our financial system could face its worst crisis in 75 years.
I’m assuming the guys who got rich from this mess have their assets safely squirreled away. Like I said, the devil take the hindmost.
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