Feb 24, 2009
Time's running out for Obama; he has to decide soon to get credit flowing
By Chua Chin Hon
WITHIN weeks of assuming office, US President Barack Obama has successfully passed a US$787 billion (S$1.2 trillion) economic stimulus package, unveiled broad plans to fix the banking sector, and promised another US$275 billion to help troubled home owners.
But instead of feeling confident and assured, the stock markets have instead fallen to their lowest in months. The Dow Jones Industrial Average fell 6.2 per cent last week, its worst performance since last October's massive sell-off.
What has gone wrong? In a word: banks.
Analysts said the uncertainties in the markets would persist until the US government bites the bullet and decides once and for all whether to nationalise ailing banks like Bank of America and Citigroup, or adopt alternative remedies.
Treasury Secretary Timothy Geithner avoided this central question when he presented a vague rescue plan for the financial sector earlier this month.
Though the banks have received tens of billions of dollars in fresh capital injections under an earlier rescue plan, the credit system remains frozen as these institutions are hoarding the bailout money out of fears about the toxic assets on their balance sheets.
No one knows how to value these bad assets, or how their value will change once the government steps in, making the banks ultra-cautious.
'I see policy at the moment as scattershot,' said Professor Eugene White, an economist with Rutgers University in New Jersey.
'And until the government directly deals with the underlying problem of the financial sector and large 'zombie' banks, there is going to be great uncertainty about when credit is going to be restarted, and that means confidence in the US economy would decline, spending would decline, and imports from Asia would decline.'
Economists and investors alike say the Obama administration has to act fast to fix the financial sector, but there is no consensus on what the best solution might be.
One of the most talked about options in past months is that of setting up a 'bad bank' that would buy up the toxic assets from existing banks. But given the difficulties of valuing these dud loans and uncertainties about the true extent of the problem, the government could potentially be throwing billions of dollars in taxpayer money down a bottomless pit.
Other experts propose that the US government should instead use the bailout funds to set up a new lender, a 'good bank' so to speak. Tough questions remain, however, as to whether a sufficiently large bank can be set up soon enough, and who can run it successfully.
Last week, the one option that the Obama administration has been most reluctant to discuss in public - nationalisation of the ailing banks - began gathering steam, thanks to support from the unlikeliest quarters.
Mr Alan Greenspan, the former Federal Reserve chairman and so-called high priest of laissez-faire capitalism, told the Financial Times that temporary nationalisation 'may be necessary', adding: 'I understand that once in a hundred years this is what you do.'
Conservative Republican Senator Lindsey Graham also lent his unlikely support to the idea, saying: 'If nationalisation is what works, then we should do it.'
The successful example of Sweden, which undertook a temporary nationalisation of its banks in the early 1990s to deal with problems not unlike those faced by the US right now, is the one most talked about.
But a hesitant Mr Obama pointed out: '(Sweden) only had a handful of banks. We've got thousands of banks. The scale, the magnitude of what we're dealing with is much bigger.'
Indeed, nationalisation of the US banks could mean the federal government taking a majority stake in dozens, if not hundreds of lenders. And with the government already committing over a trillion dollars to the stimulus package and the housing crisis, the backlash against yet another expensive initiative could prove politically damaging for Mr Obama.
The President already got a taste last week of how quickly populist anger can be whipped up. CNBC reporter Rick Santelli slammed the government's housing rescue plan for rewarding 'bad behaviour', and demanded that an online vote be held to see if Americans 'really want to subsidise the losers' mortgages'.
'President Obama! Are you listening?' Mr Santelli railed from the floors of the Chicago Mercantile Exchange. His rant became an instant Internet and talk-show sensation, drawing support from many similarly unhappy home owners, though other viewers decried his lack of professionalism.
More significantly, the incident marked perhaps the first instance where public criticism of the popular President had taken on a real edge. Is he prepared for more attacks like this which could shift public opinion of his fledgling administration?
The President, unfortunately, will not have the luxury of postponing a decision indefinitely.
'Without credible measures to restart the credit mechanism, the fiscal stimulus and housing support measures will be ineffective,' said Mr Manu Bhaskaran, chief executive of economic consulting firm Centennial Asia Advisors.
Standard Chartered Bank added in a recent research note: 'This caution (over the decision to nationalise or not) will delay, or at least slow, the economic recovery.
'The economy can pick up some while the banking system is still weak, but a robust recovery will need the financial system back in health.'
chinhon@sph.com.sg
------------------------
Feb 24, 2009
Citi asking US govt, GIC to up direct stakes
American government could end up owning up to 40% of the bank
By Fiona Chan
THE United States government is on the brink of taking a huge stake in ailing Citigroup as the global financial crisis tightens its grip on the banking giant.
The dramatic step could involve the government taking a 40 per cent holding in Citi, a controversial move that will raise the spectre of nationalisation in America's beleaguered financial sector.
Citi is driving the move. It approached regulators yesterday with a plan for the government to convert some of its US$45 billion (S$69 billion) in preferred shares into up to 40 per cent of common equity, according to news reports.
But the Wall Street Journal said Citi executives hope to limit the stake closer to 25 per cent, which will allow it more independence.
The news helped Asian share markets and gave financial shares a boost in early trading on Wall Street last night as it may be seen to have taken out some of the uncertainty surrounding Citi.
But the bank is in an almost impossible position. Its shares have been in freefall, plunging 44 per cent just last week alone to end at an 18-year low of US$1.61 on Friday. The selloff has wiped away more than 90 per cent off its value in a year.
Once the world's largest bank, Citi is now only No. 5 in the US and its market value of US$10 billion last week is even below DBS' $18 billion. It has lost almost US$30 billion in the last 15 months and is running out of options.
Its spiral into crisis has been escalating for months. The shares crashed in November, forcing the US government to shovel in US$20 billion in cash to keep it afloat but the bleeding has continued.
It is now scrambling to stitch together a life-saving deal by asking holders of preferred shares - including the Government of Singapore Investment Corporation (GIC) - to take more direct stakes.
GIC holds convertible preferred shares in Citi that it bought for US$6.88 billion in January last year.
It can convert these into ordinary stock, but at a price likely to be more than 10 times Citi's current price. Until then, the preferred shares pay dividends every quarter at a rate of 7 per cent a year for as long as GIC wants to hold them.
Citi hopes to persuade GIC and other preferred stock holders, such as the Abu Dhabi Investment Authority and the Kuwait Investment Authority, to convert some of their stakes into common equity, according to news reports yesterday.
This would give the bank more capital and help it avoid drawing on another government lifeline, a move that would revive fears of nationalisation. If the government nationalises a bank, its common shares become virtually worthless.
GIC declined to comment yesterday on whether it had been approached by Citi and whether it was planning to convert its preferred shares to common stock.
Market watchers said it is not clear what the state-owned investment company would do at this point.
'It's a very unenviable position to be in,' said one local banking analyst, who declined to be named. At the point when GIC bought the preferred stock, Citi shares were hovering at about US$29.
The conversion price, an estimated average of the trading price of Citi shares in the few days after GIC's deal plus a conversion premium, is likely above US$30.
'I suppose if GIC is really long term, and if they believe in the long-term viability of the recapitalised Citigroup, I think there's no reason not to convert their shares,' said the analyst.
'But at some point, if they don't have that view any longer, there's no point throwing good money after bad.'
One concern is that if Citi strikes a deal with the government, GIC's shareholding would be diluted because Citi would have to issue more new shares. A larger pool of shares means each existing shareholder has less overall ownership and may see his stock and dividend payments drop in value.
If GIC had converted its preferred shares right after the purchase in January last year, it would have owned a 4 per cent stake in Citi.
Any eventual Citi deal would be under intense scrutiny by other battered US banks, such as Bank of America, that might be interested in a similar arrangement with the government.
fiochan@sph.com.sg
[Based on the analysis in a previous article (see below), Nationalisation may be inevitable. If so, GIC should cut its losses. It is not just a matter of long term viability. Nationalisation may well be a unilateral approach that would most likely render GIC stakes valueless.]
http://heresthenews.blogspot.com/2009/02/time-to-nationalise-insolvent-banks.html
Time's running out for Obama; he has to decide soon to get credit flowing
By Chua Chin Hon
WITHIN weeks of assuming office, US President Barack Obama has successfully passed a US$787 billion (S$1.2 trillion) economic stimulus package, unveiled broad plans to fix the banking sector, and promised another US$275 billion to help troubled home owners.
But instead of feeling confident and assured, the stock markets have instead fallen to their lowest in months. The Dow Jones Industrial Average fell 6.2 per cent last week, its worst performance since last October's massive sell-off.
What has gone wrong? In a word: banks.
Analysts said the uncertainties in the markets would persist until the US government bites the bullet and decides once and for all whether to nationalise ailing banks like Bank of America and Citigroup, or adopt alternative remedies.
Treasury Secretary Timothy Geithner avoided this central question when he presented a vague rescue plan for the financial sector earlier this month.
Though the banks have received tens of billions of dollars in fresh capital injections under an earlier rescue plan, the credit system remains frozen as these institutions are hoarding the bailout money out of fears about the toxic assets on their balance sheets.
No one knows how to value these bad assets, or how their value will change once the government steps in, making the banks ultra-cautious.
'I see policy at the moment as scattershot,' said Professor Eugene White, an economist with Rutgers University in New Jersey.
'And until the government directly deals with the underlying problem of the financial sector and large 'zombie' banks, there is going to be great uncertainty about when credit is going to be restarted, and that means confidence in the US economy would decline, spending would decline, and imports from Asia would decline.'
Economists and investors alike say the Obama administration has to act fast to fix the financial sector, but there is no consensus on what the best solution might be.
One of the most talked about options in past months is that of setting up a 'bad bank' that would buy up the toxic assets from existing banks. But given the difficulties of valuing these dud loans and uncertainties about the true extent of the problem, the government could potentially be throwing billions of dollars in taxpayer money down a bottomless pit.
Other experts propose that the US government should instead use the bailout funds to set up a new lender, a 'good bank' so to speak. Tough questions remain, however, as to whether a sufficiently large bank can be set up soon enough, and who can run it successfully.
Last week, the one option that the Obama administration has been most reluctant to discuss in public - nationalisation of the ailing banks - began gathering steam, thanks to support from the unlikeliest quarters.
Mr Alan Greenspan, the former Federal Reserve chairman and so-called high priest of laissez-faire capitalism, told the Financial Times that temporary nationalisation 'may be necessary', adding: 'I understand that once in a hundred years this is what you do.'
Conservative Republican Senator Lindsey Graham also lent his unlikely support to the idea, saying: 'If nationalisation is what works, then we should do it.'
The successful example of Sweden, which undertook a temporary nationalisation of its banks in the early 1990s to deal with problems not unlike those faced by the US right now, is the one most talked about.
But a hesitant Mr Obama pointed out: '(Sweden) only had a handful of banks. We've got thousands of banks. The scale, the magnitude of what we're dealing with is much bigger.'
Indeed, nationalisation of the US banks could mean the federal government taking a majority stake in dozens, if not hundreds of lenders. And with the government already committing over a trillion dollars to the stimulus package and the housing crisis, the backlash against yet another expensive initiative could prove politically damaging for Mr Obama.
The President already got a taste last week of how quickly populist anger can be whipped up. CNBC reporter Rick Santelli slammed the government's housing rescue plan for rewarding 'bad behaviour', and demanded that an online vote be held to see if Americans 'really want to subsidise the losers' mortgages'.
'President Obama! Are you listening?' Mr Santelli railed from the floors of the Chicago Mercantile Exchange. His rant became an instant Internet and talk-show sensation, drawing support from many similarly unhappy home owners, though other viewers decried his lack of professionalism.
More significantly, the incident marked perhaps the first instance where public criticism of the popular President had taken on a real edge. Is he prepared for more attacks like this which could shift public opinion of his fledgling administration?
The President, unfortunately, will not have the luxury of postponing a decision indefinitely.
'Without credible measures to restart the credit mechanism, the fiscal stimulus and housing support measures will be ineffective,' said Mr Manu Bhaskaran, chief executive of economic consulting firm Centennial Asia Advisors.
Standard Chartered Bank added in a recent research note: 'This caution (over the decision to nationalise or not) will delay, or at least slow, the economic recovery.
'The economy can pick up some while the banking system is still weak, but a robust recovery will need the financial system back in health.'
chinhon@sph.com.sg
------------------------
Feb 24, 2009
Citi asking US govt, GIC to up direct stakes
American government could end up owning up to 40% of the bank
By Fiona Chan
THE United States government is on the brink of taking a huge stake in ailing Citigroup as the global financial crisis tightens its grip on the banking giant.
The dramatic step could involve the government taking a 40 per cent holding in Citi, a controversial move that will raise the spectre of nationalisation in America's beleaguered financial sector.
Citi is driving the move. It approached regulators yesterday with a plan for the government to convert some of its US$45 billion (S$69 billion) in preferred shares into up to 40 per cent of common equity, according to news reports.
But the Wall Street Journal said Citi executives hope to limit the stake closer to 25 per cent, which will allow it more independence.
The news helped Asian share markets and gave financial shares a boost in early trading on Wall Street last night as it may be seen to have taken out some of the uncertainty surrounding Citi.
But the bank is in an almost impossible position. Its shares have been in freefall, plunging 44 per cent just last week alone to end at an 18-year low of US$1.61 on Friday. The selloff has wiped away more than 90 per cent off its value in a year.
Once the world's largest bank, Citi is now only No. 5 in the US and its market value of US$10 billion last week is even below DBS' $18 billion. It has lost almost US$30 billion in the last 15 months and is running out of options.
Its spiral into crisis has been escalating for months. The shares crashed in November, forcing the US government to shovel in US$20 billion in cash to keep it afloat but the bleeding has continued.
It is now scrambling to stitch together a life-saving deal by asking holders of preferred shares - including the Government of Singapore Investment Corporation (GIC) - to take more direct stakes.
GIC holds convertible preferred shares in Citi that it bought for US$6.88 billion in January last year.
It can convert these into ordinary stock, but at a price likely to be more than 10 times Citi's current price. Until then, the preferred shares pay dividends every quarter at a rate of 7 per cent a year for as long as GIC wants to hold them.
Citi hopes to persuade GIC and other preferred stock holders, such as the Abu Dhabi Investment Authority and the Kuwait Investment Authority, to convert some of their stakes into common equity, according to news reports yesterday.
This would give the bank more capital and help it avoid drawing on another government lifeline, a move that would revive fears of nationalisation. If the government nationalises a bank, its common shares become virtually worthless.
GIC declined to comment yesterday on whether it had been approached by Citi and whether it was planning to convert its preferred shares to common stock.
Market watchers said it is not clear what the state-owned investment company would do at this point.
'It's a very unenviable position to be in,' said one local banking analyst, who declined to be named. At the point when GIC bought the preferred stock, Citi shares were hovering at about US$29.
The conversion price, an estimated average of the trading price of Citi shares in the few days after GIC's deal plus a conversion premium, is likely above US$30.
'I suppose if GIC is really long term, and if they believe in the long-term viability of the recapitalised Citigroup, I think there's no reason not to convert their shares,' said the analyst.
'But at some point, if they don't have that view any longer, there's no point throwing good money after bad.'
One concern is that if Citi strikes a deal with the government, GIC's shareholding would be diluted because Citi would have to issue more new shares. A larger pool of shares means each existing shareholder has less overall ownership and may see his stock and dividend payments drop in value.
If GIC had converted its preferred shares right after the purchase in January last year, it would have owned a 4 per cent stake in Citi.
Any eventual Citi deal would be under intense scrutiny by other battered US banks, such as Bank of America, that might be interested in a similar arrangement with the government.
fiochan@sph.com.sg
[Based on the analysis in a previous article (see below), Nationalisation may be inevitable. If so, GIC should cut its losses. It is not just a matter of long term viability. Nationalisation may well be a unilateral approach that would most likely render GIC stakes valueless.]
http://heresthenews.blogspot.com/2009/02/time-to-nationalise-insolvent-banks.html
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