PrefBlog

The most interesting news today was a report that Scotiabank is interested in National City. National City has had some problems lately:

Our mortgage business came under considerable pressure starting in late July and early August 2007 with the near-total stoppage in the mortgage capital markets. While we ceased broker production of new national home equity originations immediately, we had a warehouse of loans held for sale for which there were no buyers, as well as a pipeline of approved applications awaiting funding. The retention of these loans increased the size of our balance sheet above where we had planned it to be, and also drove losses in the third and fourth quarters as we marked loans down to their current value. Other than conforming, agency-eligible mortgages, the market for virtually all other types of mortgage loans continues to be illiquid to non-existent. Therefore, we have further downsized and restructured our mortgage business, exiting all wholesale production channels and narrowing our mortgage product set to agency-eligible mortgages and a small amount of high-quality “jumbo” mortgages.
…
The combination of a larger balance sheet, further disruption in the capital markets, mortgage-driven losses, and other developments in the last two months of the year has taken the company’s year-end capital position below its target range. For that reason, we announced in early January plans to raise non-dilutive Tier 1 capital, as well as our Board’s decision to reduce the dividend by 49 percent. We did add $650 million of Tier 1 capital in January, exceeding our objective for that transaction. I can assure you that the decision to reduce the dividend was not taken lightly. However, it was and is an important step, in conjunction with the aforementioned capital issuance, to increase capital to the higher end of our announced target ranges: 5 to 6 percent for tangible common equity and 7 to 8 percent for Tier 1 risk-based capital. We have also embarked on an aggressive program to manage the size of the balance sheet to further accelerate the increase of these ratios to desired levels. A strong balance sheet is the foundation which will see us through difficult times.

National City’s year end ratios were appalling … Tangible common equity / Tangible assets of 5.28% (down from 7.77% at year end 2006); Tier 1 Capital of 6.53% (from 8.93%); Total Capital of 10.27% (from 12.16%). We shall see! I’ve been wondering for a long time when one or more of the Canadian banks would use its strong balance sheet to make a play in the States … but I think it was Ed Clark of TD Bank who said the problem with the idea was that after you bought it, you then had to recapitalize it.

On similar lines, Accrued Interest has a thoughtful piece on what appears to be a change in the Private Equity business model:

Private equity is one area where there is clearly plenty of capital. Its not just the WaMu transaction. Citi is apparently going to sell $12 billion in loans to private equity. Private equity is creating “PennyMac” to buy distressed mortgage loans. Etc. Etc.

So here is the question. Is private equity adroitly putting their excess capital to work in these distressed assets? Is this a case where PE is the only player with adequate capital to take on these risks, and therefore set to reap big profits?

Or is it a case where they have too much cash and not enough good ideas? Two years ago, PE was all about using their business acumen to acquire whole companies, usually by using huge leverage. Now, as Deal Journal’s Dennis Berman wrote, it isn’t PE’s smarts but their capital that’s in demand.

Time will tell. It would be my view that there are very good values in corporate loans. Some good values in residential mortgages, especially if there is some kind of government bailout. But for WaMu, I’m very skeptical. If I were a betting man, I’d bet on Washington Mutual eventually accepting a buyout offer from another bank, probably Wells Fargo or J.P. Morgan. Given that J.P. Morgan supposedly offered $8/share, TPG may wind up disappointed in their results.

I’ll suggest that what’s happening to Private Equity is the same thing that happened to Hedge Funds about ten years ago … time was, they were called “Hedge” funds because they … er … hedged. Market neutrality was the name of the game.

Then the market started getting a little more crowded and the salesmen needed a new gimmick. ‘A hedge’, they remembered, ‘is a position that wipes out the value of your good idea’. So the typical hedge fund model moved from “market neutral” to “highly levered”.

The private equity model is getting similarly crowded. There have been lots of complaints over the past couple of years that deals are getting harder to come by, it’s hard to find those 20% p.a. returns any more. So private equity is morphing too … the name is just a label. You can’t be sure it means anything until you look under the hood.

ABCP? I’m sorry … I just can’t seem to get interested in the whimpering over this fiasco, despite the discussion in the comments to April 9. Flaherty is claiming a federal regulator would have made everything better, but doesn’t say how. The Globe & Mail, of course, is doing its best to whip up hysteria, talking of “loopholes” and such. I’m sorry. It’s all meaningless and boring.

Very quiet day for preferreds today, but the market was up smartly, led by CM.

There were six other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Friday, April 11th, 2008 at 8:51 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.