Adhi’s Blog

Picture courtesy of Reuters

Without naming the banks allowed to repay the TARP funds, US Treasury Department officially announced today that 10 of the nation’s healtier banks are allowed to repay a total of $68 billion of taxpayer money; previously injected to help them out of the credit crisis. However, banks are likely to announce that they were making the repayment in the couple of days, according to Reuters.

US government received dividend-paying preferred shares and the repayments as the return of 700 billion taxpayer money pumped in under TARP programs. According to Reuters, “Banks that repay their preferred stock have the right to repurchase warrants that the Treasury holds in their firms at fair market value. The warrants give the government the right to buy common stock at a predetermined price for up to 10 years and are intended to give taxpayers a chance to share in the profits of healthy banks.”

Banks that are still in the government support will continue to have certain degree of restriction in spending, for example in the payment level of their executives. With repayment, the healthier Banks will be further separated and enjoy competitive advantage over their government-backed peers. These repayments, signal that some banks have actually capable and independent enough to raise money from private sector by issuing debt, without the help of government. Hopefully, the market will response with a gain in confidence that will speed up the recovery of the current financial crisis.

References:

http://www.reuters.com/article/ousiv/idUSTRE5582Y720090609

The US Treasury is expected to announce on this week whether it let some of the US biggest bank repay the government bailout fund. The 10 healthier banks, including JP Morgan, Goldman Sachs, Morgan Stanley, and so on intend to buy back a combined $63 Billion of government shares in their asset.

The current financial crisis was once stimulated by sub-prime mortgage crisis. Many of these sub-prime borrower were not able to pay their loan as the morgtage rates increased, as the result of increased refinancing due to the home price drop. Sequrities that are backed by these mortgage lost most of their value. Banks, that hold these sequrities were forced to write many of these assets down. For these financial institutions, the loans which are in their “Asset” side of balance sheet, are financed by “debt” and “equity”. Thus, decreasing value of banks’ asset resulted in decline of capital and tightening the credit around the world.

The US Government poured $700 billion of Troubled Asset Relief Program (TARP) fund to help banks deal with balance sheet that is deteriorated by their toxic assets. Accepting these aid, were once made the recipient viewed as worthy to get taxpayer’s money. The TARP fund had helped banks to have more capital buffer, thus allow them to issue easier loans. However, many would nowadays think that the recipients of TARP fund is to weak to raise capital on their own, as well as have limited ability to return devidends and pay their best empoyees.

Nine of the 19 US biggest banks subjected to stress tests by U.S. regulators were told last month they needed no additional capital to withstand a deeper economic downturn. However, officials later told that some of the banks, including JPMorgan and American Express still needed to boost their common equity. In the past weeks, Morgan Stanley has raised $6.8 billion common equity, signalling a strong intend from banks to escape from government ties as soon as possible.

Nevertheless, Banks are going to push to pay for a lower price to return the warrants issued to government, but government with taxpayer money, would want to push back. Will they reach an agreement for government to let banks repay the TARP fund with an agreed warrant price? US Treasury Secretarty Timothy Geithner will be asked in a hearing with this Tuesday, 10.30 am, Washigton time. Well, I guess the decission will follow up after this hearing.

References:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4KAOeb3LQPk

http://www.reuters.com/article/reutersEdge/idUSTRE5545T120090608?sp=true

The Financial industry is one sector that is hit the most by the current crisis. According to Bloomberg, U.S. banks have posted a combined $583 billion in writedowns, losses and credit provisions since the collapse of the sub prime mortgage market in 2007.

The collapse of Lehman Brothers which is still recorded as the biggest bankruptcy in US history has brought the whole financial industry down. Goldman Sachs, together with Morgan Stanley was converted to traditional bank holding company on 22nd September 2008, bringing an ending to the era of Wall Street’s investment bank. The Standard & Poor’s 500 Index tumbled 41 % in the following two months and forcing the U.S. government to spend $700 billion bailing out banks.

Recently, JPMorgan, Goldman Sachs and Morgan Stanley have applied to refund a combined $45 billion of government bail-out funds, the biggest. Not surprisingly, the three banks have performed better than direct competitors in the stock market (see picture). Goldman has almost recoup all its lost in stock market since the collapse of Lehman. While one could argue that the financial crisis is not yet over, an increasingly clearer picture about who are the survivors has emerged.

 Reference:

http://www.bloomberg.com/apps/news?pid=20601109&sid=avji6hDU.wJk

On Monday, 1st June 2009, General Motors (GM) filed the Chapter 11 bankruptcy protection. The 100 year old company, once made almost half of the cars in American roads, followed the path of Chrysler – currenlty sold to Italian’s Fiat — leaving only Ford as the only Detroit’s big three that doesn’t declare bankruptcy.

United Auto Worker (UAW) was partially blamed as heavily burdened the big three with high wages and employee’s benefit. In November 2008, a New York Times editor claimed that UAW workers receive $74/hour of benefit while Toyota US’s workers only receive $44. However this is only a small part of the problem. GM’s road to failure is viewed as have been started since it began doing badge engineering- selling fundamentally the same car only with different brands. Moreover, in 1990 to 2000-s GM failed to keep technological innovation at its bay, as what Japanese manufacturer always did. While GM’s product has improved vastly in recent years (including Cadillac CTS and Chevy Cruze), it is still not fast enough to back trend the market share lost of its dated product to the Jap’s more technologically advanced, fuel efficient and reliable products (see picture below).

The story of GM somehow reminds us with to Bristish Leyland Motor Corporation (BLMC) story. BLMC was created in 1968 , as the merger between British Motor Holdings and Leyland Motor Corporation. In 1970’s the BMC became the monument of British car industry failure, as the result of intra-brand competition, unwanted badge engineeringproduct, and lack of innovation as compared to competitors like Ford. The company went bankrupt after complication of problem, including trade union relation and 1973 oil crisis. The Labour Government came to salvage and nationalize it under the umbrella of British Leyland Limited (BL). After the restructuring, situation appeared to be a bit better in 1980s, while modern product such as Austin Metro became one of the most popular car in British Road. However, market share continued to diminish and BL’s brands were purchased by other car maker one by one. By 1986, it changed its name to Rover Group, which finally defunct in 2000.

The US Government has so far injected $50 Billion to GM, in order to save its 21,000 workers and 1 million jobs which will be affected if GM go out of business. After emerging from bankruptcy, GM will be 72.5% owned by combined American and Canadian government, and will only have 4 core brands: Chevrolet, GMC, Cadillac, and Buick. The product portfolio of new GM will be focused in the two world’s biggest market, North America and China. Products like Chevrolet Cruze and Chevrolet Volt will be GM’s main contenders in the increasingly environmentally conscious world car market. Buick, at the other hand is as fancy as BMW in the US for nouveau rich China although it still hold the reputation as grandma’s careverywhere in the world. The question is, will the government intervention result in the much leaner, profitable, and competitive new GM as it intended? Or is it just another British Leyland story?

Source:

http://www.economist.com/business/displayStory.cfm?story_id=13764993&source=features_box_main

http://www.msnbc.msn.com/id/31048538/

http://en.wikipedia.org/wiki/British_Leyland_Motor_Corporation