Tuesday, 24 February 2009

S&P Downgrades the Ratings of Hybrid Capital Securities Issues for 45 U.S. Banks

Standard and Poor's lowered issue ratings on 45 U.S. financial institutions, including the majority of rated U.S. banks following a review of its ratings on the hybrid capital securities of the lenders. S&P didn't change any of the counterparty credit ratings on the banks. The following is a list of parent companies whose hybrid capital issues (and in some cases, the hybrid capital issues of their subsidiaries) were downgraded, and the rating changes:

(To / From)

American Express Co. BBB BBB+

BancorpSouth Inc. BB+ BBB-

Bank of America Corp. BBB+ A

BBB A-

Bank of New York Mellon Corp. A- A

BB&T Corp. BBB+ A-

Capital One Financial Corp. BB+ BBB-

Citizens Republic Bancorp Inc. BB- BB

Cullen/Frost Bankers Inc. BBB- BBB

Doral Financial Corp. CCC CCC+

Fifth Third Bancorp BBB- BBB

First Citizens BancShares Inc. BB BB+

First Horizon National Corp. BB- BB+

BB BBB-

First Midwest Bancorp Inc. BB+ BBB-

General Electric Capital Corp. AA- AA+ / AA AA+

Huntington Bancshares Inc. BB BB+ / BB+ BBB-

iStar Financial Inc. BB- BB

JPMorgan Chase & Co. BBB+ A-

KeyCorp BB+ BBB

Marshall & Ilsley Corp. BB BBB-

National City Corp. BBB BBB+

National Rural Utilities Cooperative Finance Corp. BBB BBB+

Nelnet Inc. BB- BB

New York Community Bancorp Inc. BB- BB

Northern Trust Corp. A- A

Old National Bancorp BB BB+

PNC Financial Services Group BBB BBB+ / BBB+ A-

Popular Inc. BB- BB

Provident Financial Processing Corp. BBB A-

Regions Financial Corp. BBB+ A- / BBB BBB+

Sky Financial Group Inc. BB BBB-

SLM Corp. BB- BB

South Financial Group Inc. (The) BB- BB

State Street Corp. BBB+ A-

Susquehanna Bank PA BB BB+

SVB Financial Group BB BB+

TCF Financial Corp. BB+ BBB- / BB+ BBB+

Textron Financial Corp. BB- BB+

U.S. Bancorp A A+

Union Planters Preferred Funding Corp. BBB BBB+

Valley National Bancorp BBB- BBB

Webster Financial Corp. BB- BB+ / BB BBB-

Wells Fargo & Co. A A+

Wilmington Trust Corp. BB+ BBB-

Zions Bancorp. BB+ BBB-

The following issues were downgraded, but remain on CreditWatch:

(To / From)

B.F Saul Real Estate Investment Trust

BB-/Watch Pos BB/Watch Pos

Bernanke Says Bank Nationalisations Only If Necessary. Majority Stakes Not Needed to Make Bankers Do What They Have to Do. Uhhhmmm ...

Here is an excerpt of a Bloomberg News story on Federal Reserve Governor Ben Bernanke's response to insisting rumours about massive bank nationalisations in the U.S.

Federal Reserve Chairman Ben S. Bernanke rejected the idea that officials plan to use reviews of banks’ balance sheets as a pretext for government takeovers of the nation’s largest lenders. The Treasury will buy convertible preferred stock in the 19 largest U.S. banks if stress tests determine they need more capital to weather a deeper-than-forecast recession, Bernanke told lawmakers in Washington today.

The shares would be converted to common equity stakes only as extraordinary losses materialize, he said. “I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke said at the Senate Banking Committee hearing.

The Fed chairman’s remarks eased concern among some investors that the Treasury’s capital-injection plan would hurt banks’ shareholders and lead to nationalization. The Standard & Poor’s 500 Banks Index climbed 13 percent, the most in more than two weeks, to 66.88 at 3 p.m. in New York. “Today at least there seems to be a growing sense of relief that nationalization was de-emphasized and put into perspective,” said Marshall Front, who oversees $500 million as chief executive officer of Front Barnett Associates in Chicago. “There’s a bit of relief that that’s not going to happen.”

Cemex, Facing Cash Problems, Wants to Sell Debt. Issuance May Add to $6 Billion Already Raised by Mexico, Quasi-Government Companies in 2009

ISSUER: CEMEX SAB
GUARANTORS: CEMEX MEXICO; NEW SUNWARD HOLDING B.V.
RANKING: SENIOR UNSECURED NOTES
RATINGS: TBC
SIZE: US$ BENCHMARK ($500 MLN OR MORE)
MATURITY: INTERMEDIATE
COVENANTS: HIGH YIELD
LEADS: CITIGROUP INC. (GLOBAL COORDINATOR) / BBVA / HSBC HOLDINGS PLC. / RBS PLC. / BANCO SANTANDER SA
USE OF PROCEEDS: REFINANCE EXISTING DEBT
COC PUT: 101%
ROADSHOW: LONDON/NEW YORK/WEST COAST/BOSTON/NEW YORK

First Warning to BRICs: S&P May Cut India's Credit Ratings to Junk. Banks Already Suffer the Consequences of It

India’s credit rating might be cut by Standard and Poor’s to junk, citing the ''not sustainable´´ government pre-electoral spending plans to help fend off the impact of the global recession on the world's biggest democracy. S&P lowered its rating outlook on India, one of the BRICs, to negative from stable while affirming the country's BBB- long term credit rating, the lowest level in the investment grade. The government last week said it would pursue a budget deficit of 6 percent of gross domestic product, twice as much its target for the year. Tax cuts were also announced hours after the S&P announcement -- signaling the government is more interested in reviving the economy at any cost than anything else. Given the gravity of the global recession, governments will try to lift spending restrictions -- remember the case of Brazil that we have treated extensively in this blog, -- at a time investors begin monitoring fiscal numbers more closely.

Furthermore, S&P also revised the outlook on the counterparty credit ratings for ten Indian banks to negative from stable: Axis Bank; Bank of Baroda; Bank of India; Canara Bank; HDFC Bank Ltd.; ICICI Bank Ltd.; IDBI Bank Ltd.; Indian Overseas Bank; Indian Bank; State Bank of India; Syndicate Bank; Union Bank of India. We wish them good luck.

Changes to Basel II Would Require Banks to Hold More Capital Against Trading Risk. Too Late?

The Basel Committee's proposed changes to Basel II for financial institutions worldwide would require banks to hold more capital than they do now against their trading books. Standard and Poor's says the changes will be more consistent with underlying market risks. S&P analyst Thierry Grunspan says the proposed regulatory capital requirements for market risk are likely to be less procyclical than current rules. But, are these changes coming too late, or not?

Yes. But evidence shows that market participants tend to forget lessons from previous crises during liquidity boom periods. So, better to prevent than regret -- as the old Colombian idiom says. In general, market participants see the proposed changes as positive because they will force banks to engage into more prudent risk management, improve dealing with specific risks about complex markets like derivatives and structured finance, treat illiquidity risk more carefully. The reckless days of disgruntled risk management for extreme market movement risk, which was underestimated in the current regulatory framework according to Grunspan, might be over. ''Due to the underweighted regulatory capital requirements for the trading book under current rules, returns on equity on banks' trading activities were artificially high,´´ he says, adding this ''may have given some banks an incentive to develop their trading books excessively.´´

Thus, if changes to Basel II are implemented, the new regulation should discourage banks from taking on risk in a benign market environment by accumulating large trading positions that turn out to be hard to manage when market conditions deteriorate. The changes would be effective Jan. 1, 2011 if implemented. They feature three major changes to Basel II's Pillar 1, some recommendations for Pillar 2, as well as expanded requirements for public disclosures by financial institutions under Pillar 3, according to S&P.

Pimco's Bill Gross Answers His Own Questions. Anyways, Good Answers, Specially Those About U.S. Bank Nationalisations

We failed to get a picture of him, but it seems he got rid of the moustache. He is Bill Gross, the manager of the world's largest bond fund, Pacific Investment Management Co., or Pimco. The man knows this subject well. Read carefully the part about bank nationalisations.

For the entire ''interview,´´
click here.

Question: Mr. Gross, is this a recession or a depression?
Answer: We don’t know yet, Madame Congresswoman. Recessions are cyclical downturns of a relatively brief time frame, characterized by inventory corrections and addressed by low interest rates and mild doses of fiscal stimulus. Depressions are more extreme with double-digit levels of unemployment but defined more importantly by credit contraction and debt liquidation. The deflation that normally accompanies a depression is dangerous not because prices are going down, but because the “for sale” sign goes up on the credit markets which have always made capitalism possible. At the moment, you policymakers are attempting to prevent that. We shall see.


Question: How did this happen so fast?

Answer: Trillions of dollars of credit have been sucked out of the financial system over the past 12 months. Banks may be lending but the larger shadow banking system is not. All of those SIVs and credit default swaps that once generated credit are now contracting and pulling the real economy down with them. Think of it this way: If you had three or four pints of blood drained from your body you’d be on life support, very quickly. Same thing now. The solution is for government spending to simulate a transfusion of whole blood, plasma, or whatever’s available.


Question: How bad could this get?

Answer: No one knows for sure, but common sense would provide a good guess. If the government cannot substitute credit to the same extent that it is disappearing from the private system, then the U.S. and global economies will retreat. If the economy is viewed as a bathtub filled with water (credit) at two different times with two different levels, then draining it back down to the lower first level might reduce economic activity proportionately. Liquidate debt (credit) to 2003 totals and you just might reduce economic activity (GDP) to 2003 numbers as well. Whoops! That would mean a 10%+ contraction in the economy with unemployment approaching the teens. Keep that bathtub full!


Question: What can be done?

Answer: Keeping the tub sufficiently full means advancing policies in content and magnitude never contemplated since the days of FDR. The U.S. and global financial systems require credit creation and foreclosure prevention, not bank nationalization as currently contemplated by some. Trillions will be required in the U.S. alone and it is critical that there be a high degree of policy coordination among all nations, which avoids protectionist measures reflective of failed policies in the 1930s. To date, PIMCO’s Mohamed El-Erian’s imperative of “shock and awe” has been more like “don’t bother us, we’re working on it.” Get moving. Risk being bold – Washington.


Question: Are there no negative consequences from “shock and awe?” Will these policies destroy capitalism while trying to save it?

Answer: Good question. The substitution of the benevolent fist of government for the invisible hand of Adam Smith involves risk. The private system is the heart of capitalism and generates most of its productivity, so more government usually involves less prosperity and certainly more inflation. PIMCO recommends a 180-degree turn towards government only as a last resort. They have the only credible checkbook in town. Will those checks create inflation? Let’s hope so provided it is low and stable over time. Policymakers are more than vocal about attempting to reflate the economy, which in essence means a hoped for return to nominal GDP growth levels of 5-6%, the majority of which might actually come in the form of higher prices as opposed to increased production. This Faustian bargain would be acceptable if only to stabilize what now appears to be an even more dangerous deflationary debt liquidation.


Question: Why do we assume that the U.S. can unilaterally do whatever it wants?

Answer: Much like we are the world’s strongest nation militarily, we entered this crisis with certain economic and financial strengths relative to all other nations. Our reserve currency status was the primary one which means that we can write checks in our own currency and they are accepted all over the world – sort of like American Express Travelers Cheques. This privilege, however, can be and is being abused. Travelers Cheques are acceptable only when redeemed at 100 cents on the dollar. Lately, quasi-American dollars in the form of Aaa CDOs, corporate bonds, and even national champion bank stocks have floundered closer to zero than par. There is fear on foreign shores that even U.S. agency debt may not be honored and that U.S. Treasury debt itself, when “repoed” as in prior years, may now suffer from counterparty risk. Global willingness to accept American dollars is being tested. Granted, the U.S. currency has appreciated strongly against its counterparts during most of this crisis, but technical short covering as opposed to a flight to quality may have been the dominant consideration. Watch the dollar. If it falls hard, there may be nothing policymakers can do to restore the ensuing financial chaos.


Question: What do you think about nationalizing the banks?

Answer: I think Roubini, Dodd and Greenspan haven’t thought this one through. The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.

Glencore and Reficar: Senator Adds Word 'Re-Nationalisation´ to the In-Vogue Global Dictionary of Nationalisations


Reficar, as the refinery is called, is located 30 minutes to the west
of Cartagena in the Colombian Caribbean coast. Its location is strategic
because Reficar has access to the Gulf Coast and Caribbean markets
by the Atlantic Ocean, as well as to the center of the country market by river


The recent feud between the Colombian government and the Swiss trading company Glencore for the upgrading of the Cartagena refinery is far from resolved. President Alvaro Uribe, in one of his frequent tantrums, decided to attack Glencore for the delays in the project and threatened to rescind all its contracts in Colombia should the company failed to make good on the $3 billion investment. Glencore is currently in negotiations to sell back its stake on the refinery, 51 percent, to Ecopetrol, for $200 million or so, to maintain its other Colombian investments. The company says the financial crisis cut access to funding for the project -- clearly they weren't and are not interested in Cartagena anymore.

The word nationalisation in in vogue these days, but the word re-nationalisation has been somehow unheard of during the ongoing crisis.
Colombian Senator Hugo Serrano Gómez, one local eminence in the energy industry, is urging the Colombian government to re-nationalise the Cartagena refinery, cease all payments to Glencore and cancel its contracts in Colombia. A wee too much, some may say. Not that much -- he might be quite right actually, we believe. Serrano Gómez argues that Glencore has failed to meet any contractual clauses, delayed a project vital for Colombia while systematically lying over its experience in the oil and refining industry. A re-nationalisation would kick start a project that has been paralysed since Glencore won the bidding process for the refinery in 2006. The Colombian government gave Glencore a number of guarantees that no government in this region can afford anymore: turned the Cartagena refinery a duty-free zone to permit the importing of machinery, equipment and materials necessary for the upgrade; even as Glencore isn't a producer of fuels, the government awarded the company such status and provided it with $300 million in subsidies and fresh financing. Awful things we do in this country to get foreign investment coming, right? Serrano Gómez says Ecopetrol has the cash to perform the upgrading; President Uribe is trying to lure the Brazilians, who recently fell out with Venezuela for the Abreu e Silva refinery in Pernambuco, Brazil.


So, you might have guessed already that we do not support nationalisations in this blog, but we do support re-nationalisations of this type.
This is a different case form Venezuela, where foreign oil companies in the Orinoco Belt were doing their job, but for the government they were bad partners because they were an obstacle to the Hugo Chávez's administration's goal of cutting production to keep prices high. Absurd. The case of Ecopetrol-Glencore is different. The Uribe administration policy of building up investor confidence shouldn't come at the expense of eroding our already-weak judicial and legal stability. Glencore has clearly failed to meet contract terms. The Cartagena refinery stake should be taken away from the company, so the state can sell the stake to other companies. To prevent these type of companies from entering Colombian soil, more rules and covenants should introduced in contracts, while their existing concessions be revised. Cancelling the contracts might be a bit extreme, but the government is in the obligation of making a thorough revision of Glencore's activities in Colombia, and find out why it delayed commencement and execution for this very key infrastructure project for Colombia.

Snapshots About Bank Nationalisation in the U.S. By The WSJ

Click here for an interesting article by the WSJ called ''Taking the Nationalisation Route.´´ It contains the basics about nationalisation, the good and evil of it and recent moves by the U.S. government to increase its stake in commercial lenders.

The Wall Street Journal shocked markets yesterday with a report that the U.S. government is mulling taking a 40 percent stake in Citigroup Inc., once upon a time the largest financial services company in the world. According to the report, Citigroup officials are in talks with federal officials to forge a deal that permits the survival of the ailing lender. If discussions fell apart, for any reason (clearly the convenience of taking over such monster would have serious political shortcomings,) the government could wind up holding as much as 40 percent of Citigroup's common stock! The WSJ also said, citing unnamed sources involved in the negotiations, that Citigroup bank executives want a government stake no bigger than 25 percent.

The Obama administration, which hasn't indicated if it supports the plan, has to take a responsible stance here: if some banks failed to assess risks properly and have become a barrier to the entry of new, more risk-conscious players, the government is in the obligation of letting the former fail.
Read our posting yesterday about necessary bankruptcy law efficiencies, and the government's stance on nationalisations.

Morgan Stanley Says Mexico Won't Suffer With Falling Oil Revenues

In an article called ''Mexico: No Oil, No Problem?´´ Morgan Stanley economists Luis Arcentales and Daniel Volberg make a very interesting counter-intuitive exercise. They say oil proceeds are responsible for nearly 40 percent of Mexico’s fiscal receipts and ask themselves whether if the current slump in oil prices continues Mexico will have a fiscal dilemma in 2010 when the current hedge runs out. ''Right? Wrong,´´ answered the economists. They argued ''the interplay with domestic controlled oil product prices and a weaker peso should help produce a modest revenue shortfall easily manageable even after the recent years of a rapidly growing budget.´´

Both Arcentales and Volberg conclude that, ultimately, Mexico would benefit it were to reduce its oil dependency as its single largest revenue source. Mexico’s fiscal oil addiction ''conspires to make fiscal policy even more pro-cyclical as oil revenue shortfalls loom precisely when non-oil sources of revenue come under the greatest stress.´´ The current stabilization funds are too modest in scope and have not prevented Mexico’s fiscal stimulus to grow in recent years precisely when greater savings would have been in order. ''Nonetheless, while Mexico’s current oil policy mix is no substitution for the task of strengthening non-oil revenues, the authorities should have little difficulties resolving any fiscal shortfalls in 2010 even if oil prices remain unchanged from current levels,´´ the economists wrote.