At the beginning of 2008, there were 5 major investment banks: Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, and Morgan Stanley. What set these 5 banks apart from conventional banks was that they did not accept or solicit bank deposits, the kinds of deposits insured by the Feds through the FDIC insurance program. These banks raised capital for other companies, made markets in stocks and bought and sold securities of all types. In return for not accepting deposits as commercial banks do, for their entire history they have been subject to significantly less regulation than the banking sector. This is primarily due to the fact that the banking sector has had more of a responsibility to the public trust. That was until Sun night 9/21/08.
Things have changed. All 5 banks are different now than the investment banking entities they used to be.
1) Bear Stearns, acquired by JP Morgan Chase and subject to stiffer merchant and commercial banking regulations.
2) Merrill Lynch, acquired by Bank of America and subject to stiffer commercial banking regulations.
3) Lehman Brothers, filed for bankruptcy protection and liquidation
4) Goldman Sachs, allowed by the Federal Government to accept deposits and convert into a commercial bank in order to stay alive and be subject to stiffer commercial banking regulations.
5) Morgan Stanley, allowed by the Federal Government to accept deposits and convert into a commercial bank in order to stay alive and be subject to stiffer commercial banking regulations.
Yesterday, the decision on Goldman and Morgan, the last 2 remaining investment banks made it official that no independent and lesser regulated investment banks are going to remain on Wall Street.
How this will affect companies trying to use the public markets to raise capital through the issuance of stocks or bonds remains to be seen but suffice it to say, it will be different.
Monday, September 22, 2008
Monday, September 15, 2008
Wall Street Awakes to 2 Storied Firms Failing
Reprinted from Yahoo News from the Associated Press
By JOE BEL BRUNO, CHRISTOPHER S. RUGABER and MARTIN CRUTSINGER, AP Business Writers
When Wall Street woke up Monday morning, two more of its storied firms had fallen.
Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed. Bank of America Corp. said it is snapping up Merrill Lynch & Co. Inc. in a $50 billion all-stock transaction.
The demise of the independent Wall Street institutions came as shock waves from the 14-month-old credit crisis roiled the U.S. financial system six months after the collapse of Bear Stearns.
The world's largest insurance company, American International Group Inc., also was forced into a restructuring. And a global consortium of banks, working with government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies.
U.S. stocks were headed for a sharply lower open and Treasury bond prices soared as the market reacted to the news.
The aim of the bank consortium, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.
Ten banks — Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS — each agreed to provide $7 billion "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."
The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.
Federal Reserve Chairman Ben Bernanke said the discussions had been aimed at identifying "potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses."
The European Central Bank, the Bank of England, and the Swiss central bank also made more short-term credit available to banks. European stocks fell sharply, with the FTSE 100 Index off 3.42 percent in London, the CAC-40 down 4.27 percent in Paris, and Germany's blue-chip DAX 30 falling 3.38 percent. Asian stock markets also tumbled, with India's Sensex sinking more than 3 percent. Japan and Hong Kong were closed for holidays.
Financial stocks were hard hit and the dollar fell against the pound and the euro.
Futures pegged to the Dow Jones industrial average fell more than 250 points in electronic trading Sunday evening, pointing to a sharply lower open for the blue chip index Monday morning. The stunning weekend developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. It likely will spur a much greater focus by presidential candidates — Republican John McCain and Democrat Barack Obama — and members of Congress on the need for stricter financial regulation.
Samuel Hayes, finance professor emeritus at Harvard Business School, said the Bush administration may get a lot of blame for the situation, which could benefit Obama.
"Just the psychological impact of this kind of failure is going to be significant," he said. "It will color people's feelings about their well-being and the integrity of the financial system."
Lehman Brothers' announcement that it is filing for bankruptcy came after all potential buyers walked away. Potential suitors were spooked by the U.S. Treasury's refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized Fannie Mae and Freddie Mac.
In an effort to calm the markets, Lehman pre-announced third-quarter results on Wednesday. In an affidavit filed with the bankruptcy court, Lehman Chief Financial Officer Ian Lowitt said that action "did little to quell the rumors in the markets and the concerns about the viability of the company." He said the uncertainty made it impossible for Lehman to continue.
Employees emerging from Lehman's headquarters near the heart of Times Square Sunday night carried boxes, tote bags and duffel bags, rolling suitcases, framed artwork and spare umbrellas. Many were emblazoned with the Lehman Brothers name.
TV trucks lined Seventh Avenue opposite the building, while barricades at the building's main entrance attempted to keep workers and onlookers from gumming up the steady flow of pedestrians flowing in and out of Times Square.
Some workers had moist eyes while a few others wept and shared hugs. Most who left the building quietly declined interviews.
People snapped pictures with cameras and their phones. Observers pressed up against a police barricade drew the ire of one man who emerged from the building and shouted: "Are you enjoying watching this? You think this is funny?"
Its businesses in Britain were placed in administration Monday, said the administrator, accounting firm PricewaterhouseCoopers, and employees carrying boxes and bags were walking out of Lehman's London offices.
Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the U.S., agreed to be acquired by Bank of America for 0.8595 shares of Bank of America common stock for each Merrill Lynch common share.
That values Merrill at $29 a share, a 70 percent premium over the brokerage's Friday closing price of $17.05, but well below what Merrill was worth at its peak in early 2007, when its shares traded above $98.
Charlotte, N.C.,-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest brokerage. A combination of the two would create a global financial giant to rival Citigroup Inc., the biggest U.S. bank in terms of assets.
Strategically, most industry analysts say it's a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base. There is not a great deal of overlap between the two companies — Bank of America does have an investment bank already, but it has never been terribly strong.
Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.
The deal would not come without risks, however. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses.
Bank of America's own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still in the midst of absorbing the embattled mortgage lender Countrywide Financial, which it acquired in January.
Insurer AIG, hit hard by deterioration in the credit markets, said Sunday it is reviewing its operations and discussing possible options with outside parties to improve its business after a week when its stock dropped 45 percent amid concerns about the company's financial underpinnings.
The Wall Street Journal and The New York Times both reported early Monday on their Web sites that the American International Group is seeking an additional $40 billion in emergency funds — possibly from the Federal Reserve — to help it avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. The insurer has already raised $20 billion in fresh capital this year.
AIG was working with New York Insurance Superintendent Eric Dinallo and a representative of the governor's office through the weekend to craft a solution that protects policyholders, according to Dinallo's spokesman David Neustadt.
"It's clear we're one step away from a financial meltdown," said Nouriel Roubini, chairman of the consulting firm RGE Monitor.
The meetings that began Friday night were a who's who of financial heavyweights: Treasury Secretary Hank Paulson, Timothy Geithner, president of the New York Fed, Securities and Exchange Commission Chairman Christopher Cox, and a host of CEOs, including Vikram Pandit of Citigroup Inc., Jamie Dimon of JPMorgan Chase & Co., John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs Group Inc., and Merrill Lynch & Co.'s John Thain.
For all their efforts, Lehman had to file for bankruptcy.
The end of Lehman may not stop the financial crisis that has gripped Wall Street for months, analysts said. More investment banks could disappear soon.
The independent broker-dealers "are going the way of the dodo bird," said Bert Ely, an Alexandria, Va.,-based banking consultant.
That's partly because some of the firms, particularly Merrill, made bad bets on real estate. But several analysts said that investment companies will need the deep pockets of commercial banks to survive the next few years.
On Sunday, there was also an emergency trading session being held at the International Swaps and Derivatives Association to "reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy." The ISDA, which arranges trades for derivatives, said it was allowing customers to make trades and unwind positions linked to Lehman.
Roubini said it's difficult to accurately gauge the health of companies like Merrill because their financial health depends on how they value complex securities. As a result, their finances aren't very transparent, he said.
That can lead to a loss of confidence in the financial markets, he said, which can overwhelm an investment bank even if it is financially healthy by some measures.
"Once you lose confidence, the fundamentals matter less," he said.
The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25 percent so far. Roubini predicted they could drop another 15 percent.
The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending. Many economists are now forecasting that the economy could slip into recession by the end of this year and early next year.
That, in turn, could cause additional losses for commercial banks on credit cards, auto loans and student loans.
The Fed is widely expected to keep interest rates steady at 2 percent, below inflation, when it meets Tuesday. It was possible, however, that the central bank might decide in coming weeks to cut rates if such a move is seen as needed to calm turbulent financial markets.
The International Monetary Fund predicted earlier this year that total losses from the credit crisis could reach almost $1 trillion. So far, banks have only taken about $350 billion in losses.
Commercial banks are also starting to feel the pinch. Eleven have closed so far this year, including Pasadena, Calif.-based IndyMac Bank, which had $32 billion in assets and $19 billion in deposits.
Christopher Whalen, managing director of Institutional Risk Analytics, a research firm, predicts that approximately 110 banks with $850 billion in assets could close by next July. That's out of 8,400 federally insured institutions, he said, which together hold $13 trillion in assets.
Individual customers are starting to get nervous about the financial health of their banks for the first time in generations, he said. Whalen's firm analyzes the safety and soundness of banks for business clients, but began receiving inquiries from individuals in the past two months for the first time, he said.
"If we don't get ahead of this, we are going to face a run on the retail banks by election day," he said.
___
Editor's Note: While the losses are immense, the true issue across the board of the financial industry is liquidity, the access to capital/funds to lend. Loan loss provisions have some $$ on the sidelines already and no new growth in funds/deposits/cash means no additional liquidity in the marketplace. This is a sign its likely to get worse before it gets better, at least for the financial sector.
By JOE BEL BRUNO, CHRISTOPHER S. RUGABER and MARTIN CRUTSINGER, AP Business Writers
When Wall Street woke up Monday morning, two more of its storied firms had fallen.
Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed. Bank of America Corp. said it is snapping up Merrill Lynch & Co. Inc. in a $50 billion all-stock transaction.
The demise of the independent Wall Street institutions came as shock waves from the 14-month-old credit crisis roiled the U.S. financial system six months after the collapse of Bear Stearns.
The world's largest insurance company, American International Group Inc., also was forced into a restructuring. And a global consortium of banks, working with government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies.
U.S. stocks were headed for a sharply lower open and Treasury bond prices soared as the market reacted to the news.
The aim of the bank consortium, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.
Ten banks — Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS — each agreed to provide $7 billion "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."
The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.
Federal Reserve Chairman Ben Bernanke said the discussions had been aimed at identifying "potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses."
The European Central Bank, the Bank of England, and the Swiss central bank also made more short-term credit available to banks. European stocks fell sharply, with the FTSE 100 Index off 3.42 percent in London, the CAC-40 down 4.27 percent in Paris, and Germany's blue-chip DAX 30 falling 3.38 percent. Asian stock markets also tumbled, with India's Sensex sinking more than 3 percent. Japan and Hong Kong were closed for holidays.
Financial stocks were hard hit and the dollar fell against the pound and the euro.
Futures pegged to the Dow Jones industrial average fell more than 250 points in electronic trading Sunday evening, pointing to a sharply lower open for the blue chip index Monday morning. The stunning weekend developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. It likely will spur a much greater focus by presidential candidates — Republican John McCain and Democrat Barack Obama — and members of Congress on the need for stricter financial regulation.
Samuel Hayes, finance professor emeritus at Harvard Business School, said the Bush administration may get a lot of blame for the situation, which could benefit Obama.
"Just the psychological impact of this kind of failure is going to be significant," he said. "It will color people's feelings about their well-being and the integrity of the financial system."
Lehman Brothers' announcement that it is filing for bankruptcy came after all potential buyers walked away. Potential suitors were spooked by the U.S. Treasury's refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized Fannie Mae and Freddie Mac.
In an effort to calm the markets, Lehman pre-announced third-quarter results on Wednesday. In an affidavit filed with the bankruptcy court, Lehman Chief Financial Officer Ian Lowitt said that action "did little to quell the rumors in the markets and the concerns about the viability of the company." He said the uncertainty made it impossible for Lehman to continue.
Employees emerging from Lehman's headquarters near the heart of Times Square Sunday night carried boxes, tote bags and duffel bags, rolling suitcases, framed artwork and spare umbrellas. Many were emblazoned with the Lehman Brothers name.
TV trucks lined Seventh Avenue opposite the building, while barricades at the building's main entrance attempted to keep workers and onlookers from gumming up the steady flow of pedestrians flowing in and out of Times Square.
Some workers had moist eyes while a few others wept and shared hugs. Most who left the building quietly declined interviews.
People snapped pictures with cameras and their phones. Observers pressed up against a police barricade drew the ire of one man who emerged from the building and shouted: "Are you enjoying watching this? You think this is funny?"
Its businesses in Britain were placed in administration Monday, said the administrator, accounting firm PricewaterhouseCoopers, and employees carrying boxes and bags were walking out of Lehman's London offices.
Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the U.S., agreed to be acquired by Bank of America for 0.8595 shares of Bank of America common stock for each Merrill Lynch common share.
That values Merrill at $29 a share, a 70 percent premium over the brokerage's Friday closing price of $17.05, but well below what Merrill was worth at its peak in early 2007, when its shares traded above $98.
Charlotte, N.C.,-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest brokerage. A combination of the two would create a global financial giant to rival Citigroup Inc., the biggest U.S. bank in terms of assets.
Strategically, most industry analysts say it's a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base. There is not a great deal of overlap between the two companies — Bank of America does have an investment bank already, but it has never been terribly strong.
Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.
The deal would not come without risks, however. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses.
Bank of America's own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still in the midst of absorbing the embattled mortgage lender Countrywide Financial, which it acquired in January.
Insurer AIG, hit hard by deterioration in the credit markets, said Sunday it is reviewing its operations and discussing possible options with outside parties to improve its business after a week when its stock dropped 45 percent amid concerns about the company's financial underpinnings.
The Wall Street Journal and The New York Times both reported early Monday on their Web sites that the American International Group is seeking an additional $40 billion in emergency funds — possibly from the Federal Reserve — to help it avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. The insurer has already raised $20 billion in fresh capital this year.
AIG was working with New York Insurance Superintendent Eric Dinallo and a representative of the governor's office through the weekend to craft a solution that protects policyholders, according to Dinallo's spokesman David Neustadt.
"It's clear we're one step away from a financial meltdown," said Nouriel Roubini, chairman of the consulting firm RGE Monitor.
The meetings that began Friday night were a who's who of financial heavyweights: Treasury Secretary Hank Paulson, Timothy Geithner, president of the New York Fed, Securities and Exchange Commission Chairman Christopher Cox, and a host of CEOs, including Vikram Pandit of Citigroup Inc., Jamie Dimon of JPMorgan Chase & Co., John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs Group Inc., and Merrill Lynch & Co.'s John Thain.
For all their efforts, Lehman had to file for bankruptcy.
The end of Lehman may not stop the financial crisis that has gripped Wall Street for months, analysts said. More investment banks could disappear soon.
The independent broker-dealers "are going the way of the dodo bird," said Bert Ely, an Alexandria, Va.,-based banking consultant.
That's partly because some of the firms, particularly Merrill, made bad bets on real estate. But several analysts said that investment companies will need the deep pockets of commercial banks to survive the next few years.
On Sunday, there was also an emergency trading session being held at the International Swaps and Derivatives Association to "reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy." The ISDA, which arranges trades for derivatives, said it was allowing customers to make trades and unwind positions linked to Lehman.
Roubini said it's difficult to accurately gauge the health of companies like Merrill because their financial health depends on how they value complex securities. As a result, their finances aren't very transparent, he said.
That can lead to a loss of confidence in the financial markets, he said, which can overwhelm an investment bank even if it is financially healthy by some measures.
"Once you lose confidence, the fundamentals matter less," he said.
The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25 percent so far. Roubini predicted they could drop another 15 percent.
The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending. Many economists are now forecasting that the economy could slip into recession by the end of this year and early next year.
That, in turn, could cause additional losses for commercial banks on credit cards, auto loans and student loans.
The Fed is widely expected to keep interest rates steady at 2 percent, below inflation, when it meets Tuesday. It was possible, however, that the central bank might decide in coming weeks to cut rates if such a move is seen as needed to calm turbulent financial markets.
The International Monetary Fund predicted earlier this year that total losses from the credit crisis could reach almost $1 trillion. So far, banks have only taken about $350 billion in losses.
Commercial banks are also starting to feel the pinch. Eleven have closed so far this year, including Pasadena, Calif.-based IndyMac Bank, which had $32 billion in assets and $19 billion in deposits.
Christopher Whalen, managing director of Institutional Risk Analytics, a research firm, predicts that approximately 110 banks with $850 billion in assets could close by next July. That's out of 8,400 federally insured institutions, he said, which together hold $13 trillion in assets.
Individual customers are starting to get nervous about the financial health of their banks for the first time in generations, he said. Whalen's firm analyzes the safety and soundness of banks for business clients, but began receiving inquiries from individuals in the past two months for the first time, he said.
"If we don't get ahead of this, we are going to face a run on the retail banks by election day," he said.
___
Editor's Note: While the losses are immense, the true issue across the board of the financial industry is liquidity, the access to capital/funds to lend. Loan loss provisions have some $$ on the sidelines already and no new growth in funds/deposits/cash means no additional liquidity in the marketplace. This is a sign its likely to get worse before it gets better, at least for the financial sector.
Tuesday, September 2, 2008
Banks to See Rising Costs of Funds in the Months Ahead
Reprinted from The Monitor Daily Online
The Wall Street Journal noted yesterday that with about $800 billion in floating rate notes and other medium-term obligation coming due over the next 12-18 months, banks will likely be less willing to make new loans to borrowers as investors will be demanding higher interest rates for new bank borrowings.
And for some of the larger banks that have agreed to buy back some $42 billion in auction rate securities, the problem is exacerbated even further. To provide a glimpse of what may be in store, we checked out recent prices for 5-year obligations on JB Hanauer & Co.’s website for a mix of banks and finance companies. And even though many of these companies are currently holding investment grade ratings, the price-to-yield data was indicative of investor sentiment with regard to the real or perceived risk of lending to some of these banks. For example, KeyCorp’s 5-year maturities with a coupon of 6.5% were priced to yield almost 10.5% or something close to a 750 basis point spread over like-term Treasuries. National City’s notes maturing in February 2011 were priced to yield 14.4%, which would translate into a spread of 1170 basis points over similar term Treasuries.
As a contrast, GE Capital’s 5-year notes with a coupon of 5.40% were trading at prices to yield about 4.6%, a spread of about 150 basis points over like-term Treasuries. Similarly Cat Financial’s 5-year notes with a coupon of 4.9% were priced to yield about 4.2%. However, beleaguered CIT showed several 5-year obligations with coupon rates ranging from 4.65% to 5.50%, which were selling at prices to yield about 12.4%, a spread of over 900 basis points. It would also indicate what may be at the root of why CIT’s vendor finance business showed substantially reduced profits of 17.6 million for the first half of 2008 versus 146.5 million, for the same period in 2007.
What this picture would suggest is a significant market advantage or disadvantage, depending on where you sit, when pricing on a match-funded basis in a competitive situation. It occurs to us that sustaining a vendor program, for example, would become increasingly more difficult to expect returns that were anticipated at program inception. And unless subsidized for the long-term, this phenomenon would seemingly preclude an aggressive run at a new vendor prospect.
Editor's Note: As bank costs of funds rise, that affects not just bank lending but equipment finance companies who are reliant on bank loans and lines in order to fund their deals with GE, CIT and KeyCorp listed among them. This is an example of why commercial finance rates are tied to costs of funds and not tied to Prime, as many expect that it is.
The Wall Street Journal noted yesterday that with about $800 billion in floating rate notes and other medium-term obligation coming due over the next 12-18 months, banks will likely be less willing to make new loans to borrowers as investors will be demanding higher interest rates for new bank borrowings.
And for some of the larger banks that have agreed to buy back some $42 billion in auction rate securities, the problem is exacerbated even further. To provide a glimpse of what may be in store, we checked out recent prices for 5-year obligations on JB Hanauer & Co.’s website for a mix of banks and finance companies. And even though many of these companies are currently holding investment grade ratings, the price-to-yield data was indicative of investor sentiment with regard to the real or perceived risk of lending to some of these banks. For example, KeyCorp’s 5-year maturities with a coupon of 6.5% were priced to yield almost 10.5% or something close to a 750 basis point spread over like-term Treasuries. National City’s notes maturing in February 2011 were priced to yield 14.4%, which would translate into a spread of 1170 basis points over similar term Treasuries.
As a contrast, GE Capital’s 5-year notes with a coupon of 5.40% were trading at prices to yield about 4.6%, a spread of about 150 basis points over like-term Treasuries. Similarly Cat Financial’s 5-year notes with a coupon of 4.9% were priced to yield about 4.2%. However, beleaguered CIT showed several 5-year obligations with coupon rates ranging from 4.65% to 5.50%, which were selling at prices to yield about 12.4%, a spread of over 900 basis points. It would also indicate what may be at the root of why CIT’s vendor finance business showed substantially reduced profits of 17.6 million for the first half of 2008 versus 146.5 million, for the same period in 2007.
What this picture would suggest is a significant market advantage or disadvantage, depending on where you sit, when pricing on a match-funded basis in a competitive situation. It occurs to us that sustaining a vendor program, for example, would become increasingly more difficult to expect returns that were anticipated at program inception. And unless subsidized for the long-term, this phenomenon would seemingly preclude an aggressive run at a new vendor prospect.
Editor's Note: As bank costs of funds rise, that affects not just bank lending but equipment finance companies who are reliant on bank loans and lines in order to fund their deals with GE, CIT and KeyCorp listed among them. This is an example of why commercial finance rates are tied to costs of funds and not tied to Prime, as many expect that it is.
Monday, September 1, 2008
Disclosure
Site Disclosure Policy
Monday, October 27, 2008
This policy is valid from 27 October 2008.This blog is a personal blog written and edited by me. This blog accepts forms of cash advertising, sponsorship, paid insertions or other forms of compensation.The compensation received may influence the advertising content, topics or posts made in this blog. That content, advertising space or post may not always be identified as paid or sponsored content.The owner(s) of this blog is compensated to provide opinion on products, services, websites and various other topics. Even though the owner(s) of this blog receives compensation for our posts or advertisements, we always give our honest opinions, findings, beliefs, or experiences on those topics or products. The views and opinions expressed on this blog are purely the bloggers' own. Any product claim, statistic, quote or other representation about a product or service should be verified with the manufacturer, provider or party in question.This blog does not contain any content that might present a conflict of interest
Monday, October 27, 2008
This policy is valid from 27 October 2008.This blog is a personal blog written and edited by me. This blog accepts forms of cash advertising, sponsorship, paid insertions or other forms of compensation.The compensation received may influence the advertising content, topics or posts made in this blog. That content, advertising space or post may not always be identified as paid or sponsored content.The owner(s) of this blog is compensated to provide opinion on products, services, websites and various other topics. Even though the owner(s) of this blog receives compensation for our posts or advertisements, we always give our honest opinions, findings, beliefs, or experiences on those topics or products. The views and opinions expressed on this blog are purely the bloggers' own. Any product claim, statistic, quote or other representation about a product or service should be verified with the manufacturer, provider or party in question.This blog does not contain any content that might present a conflict of interest
Friday, August 29, 2008
Structured Finance
What is Structured Finance?
The most common lease structures have a residual and final payment of Fair Market Value (FMV), 10% of Value new or $1. Anything that falls outside those structures is considered structured finance. This occurs most often when there is a 'story' about the company or the equipment it wants.
For example, if a company has excellent cash flow but poor credit of the owners then a structured deal might look something like this:
Instead of zero, 1 or 2 payments down, 15% down with a 36 month lease with a residual value of 15% of value new.
Structured finance allows for more deals to be done by lessors and for more customization of programs for the lessee. It's a real win/win/win
The most common lease structures have a residual and final payment of Fair Market Value (FMV), 10% of Value new or $1. Anything that falls outside those structures is considered structured finance. This occurs most often when there is a 'story' about the company or the equipment it wants.
For example, if a company has excellent cash flow but poor credit of the owners then a structured deal might look something like this:
Instead of zero, 1 or 2 payments down, 15% down with a 36 month lease with a residual value of 15% of value new.
Structured finance allows for more deals to be done by lessors and for more customization of programs for the lessee. It's a real win/win/win
Thursday, August 14, 2008
Fed Survey Shows Continued Tightening of Bank Lending Standards
Reprinted from The Monitor
More banks are tightening lending standards on home mortgages and other consumer and business loans as a deepening credit crisis exerts a heavier toll on the economy, according to new survey data from the Federal Reserve. As reported in the Fed's July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, which is released every three months, about 60% of domestic banks - a slightly larger fraction than in the April survey - reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. About 65% of those institutions - up notably from roughly 50% in the April survey - also indicated that they had tightened their lending standards on C&I loans to small firms over the same period.
Significant majorities of domestic respondents indicated that they had tightened selected price terms on C&I loans to firms of all sizes: About 80% of banks, up from roughly 70% in the April survey, noted that they had increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms, and about 70% of respondents, a somewhat higher fraction than in the April survey, reported having widened spreads on loans to small firms. In addition, considerable fractions of domestic respondents reported having boosted non-price-related lending terms on C&I loans to firms of all sizes over the survey period, and the fraction of banks that tightened such terms on loans to small firms increased significantly relative to the April survey.
Meanwhile, the July survey indicates a drop in demand for business loans over the past three months. On net, about 15% of small domestic and 25% of foreign banks reported weaker demand for C&I loans from firms of all sizes over the survey period. About 15% of large domestic banks, on net, experienced weaker demand from small firms, although about 5% of these banks, on balance, reported that demand for C&I loans from large and middle-market firms had increased over the past three months. The Fed survey found that only seven of the 50 banks said they were still participating in subprime mortgages, loans made to borrowers with weak credit histories. Of those seven, six said they had tightened lending standards on subprime loans with only one saying it had left standards basically unchanged for subprime loans.
For all the Fed Data, please click here.
Editor's Note: Bank lending rates are going higher, while both the supply of $$ to lend and the demand for business loans is softening, with smaller businesses being affected the most.
More banks are tightening lending standards on home mortgages and other consumer and business loans as a deepening credit crisis exerts a heavier toll on the economy, according to new survey data from the Federal Reserve. As reported in the Fed's July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, which is released every three months, about 60% of domestic banks - a slightly larger fraction than in the April survey - reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. About 65% of those institutions - up notably from roughly 50% in the April survey - also indicated that they had tightened their lending standards on C&I loans to small firms over the same period.
Significant majorities of domestic respondents indicated that they had tightened selected price terms on C&I loans to firms of all sizes: About 80% of banks, up from roughly 70% in the April survey, noted that they had increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms, and about 70% of respondents, a somewhat higher fraction than in the April survey, reported having widened spreads on loans to small firms. In addition, considerable fractions of domestic respondents reported having boosted non-price-related lending terms on C&I loans to firms of all sizes over the survey period, and the fraction of banks that tightened such terms on loans to small firms increased significantly relative to the April survey.
Meanwhile, the July survey indicates a drop in demand for business loans over the past three months. On net, about 15% of small domestic and 25% of foreign banks reported weaker demand for C&I loans from firms of all sizes over the survey period. About 15% of large domestic banks, on net, experienced weaker demand from small firms, although about 5% of these banks, on balance, reported that demand for C&I loans from large and middle-market firms had increased over the past three months. The Fed survey found that only seven of the 50 banks said they were still participating in subprime mortgages, loans made to borrowers with weak credit histories. Of those seven, six said they had tightened lending standards on subprime loans with only one saying it had left standards basically unchanged for subprime loans.
For all the Fed Data, please click here.
Editor's Note: Bank lending rates are going higher, while both the supply of $$ to lend and the demand for business loans is softening, with smaller businesses being affected the most.
Thursday, July 24, 2008
Depreciation: Part 3
The third primary method of depreciating new equipment purchases is MACRS. MACRS stands for Modified Accelerated Cost Recovery System. Publication 946 from the IRS goes through this and all the other types of depreciation.
MACRS uses a predetermined useful life of the equipment in question. For instance, software is 3 years and computers are 5 years. So for computers, MACRS allows for depreciating a 5 year asset over 6 years using the following percentages according to the IRS:
Year 1: 20%
Year 2: 32%
Year 3: 19%
Year 4: 11.5%
Year 5: 11.5%
Year 6: 6%
All these charts are available at the above link to Publication 946. As to whether this method is best, please consult your CPA, CFO or tax professional.
So this is more front loaded than book value, where the computers would be deducted an equal 20% each year but depreciates less in years 4 and 5. It's much less front loaded than the 179 deduction where all 100% is taken in the first year. As you can see there are lots of options and no one size fits all. These factors can be affected by leasing structures so the desire to take advantage of one of these deductions needs to be known by your leasing professional in advance.
MACRS uses a predetermined useful life of the equipment in question. For instance, software is 3 years and computers are 5 years. So for computers, MACRS allows for depreciating a 5 year asset over 6 years using the following percentages according to the IRS:
Year 1: 20%
Year 2: 32%
Year 3: 19%
Year 4: 11.5%
Year 5: 11.5%
Year 6: 6%
All these charts are available at the above link to Publication 946. As to whether this method is best, please consult your CPA, CFO or tax professional.
So this is more front loaded than book value, where the computers would be deducted an equal 20% each year but depreciates less in years 4 and 5. It's much less front loaded than the 179 deduction where all 100% is taken in the first year. As you can see there are lots of options and no one size fits all. These factors can be affected by leasing structures so the desire to take advantage of one of these deductions needs to be known by your leasing professional in advance.
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