Fed Governor Randall Kroszner: "US commercial banks are strongly capitalized" (2007)

Effective banking supervision has helped foster a banking system . . . that today is safe, sound and well-capitalized . . . US commercial banks are strongly capitalized, reflecting years of robust profits.

~ Fed Governor Randall Kroszner, September 2007

Bloomberg: 8 TARP recipients blow $845 million on stadium deals

Citigroup, Inc., targeted by lawmakers for paying $400 million to put its name on the New York Mets’ new ballpark, and seven other banks that received government funds may face questioning by Congress for spending $845 million on stadium sponsorships.

Bank of America Corp., which like Citigroup received $45 billion in government funds, is paying $140 million to have its name on football’s Carolina Panthers stadium. JPMorgan Chase & Co., which received $25 billion from the Troubled Asset Relief Program, is spending $66 million for branding Chase Field in Phoenix, home to baseball’s Arizona Diamondbacks.

The eight banks received a total of $153.4 billion from the $700 billion U.S. bailout and are spending a combined $845 million for naming rights. U.S. banks have had $745 billion in losses and writedowns since the subprime mortgage crisis began in 2007.

~ Bloomberg, "Citigroup, Seven U.S. Banks Spend on Stadium Deals ," February 5, 2009

Ben Bernanke: large global banks sound (2008)

I expect there will be some failures. … I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.

~ Ben Bernanke, Federal Reserve chairman, February 28, 2008

(In September, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup needed an even bigger rescue in November.)

Richard Kovacevich on bailouts and who should be first in line

Q: If the government is going to buy into banks, why not autos, why not airlines?

A: It's important to invest in the banks because banks are the grease that keeps the real economy moving. If there is no financing available for corporations, for consumers, for municipalities, if that does not exist, then no industry can be successful, right? You've got to have that backbone. And that's what you have to do first. Who else you do it with, or for, is for other people to decide. But I think almost everyone agrees, until you fix the financial system, helping others won't make a difference.

~ Richard Kovacevich, CEO, Wells Fargo, "Wells Fargo's Kovacevich: The Importance of Hitting Bottom," BusinessWeek, October 22, 2008 (Nov. 3 issue), interview with Maria Bartiromo

Stephanie Pomboy on how the TARP is encouraging the banks to drag their feet on deleveraging

Proving our long-standing conviction that the only thing more certain than death and taxes is that policymakers will always succeed in making a bad situation worse, Hank’s big TARP tease has put the banking sector 2 months behind its nonbank peers in the process of balance sheet repair. While hedge funds and other nonbank financial institutions have been frantically selling assets and taking down leverage, the banks have sat tight. The promise that the toxic paper boring holes in their balance sheets would shortly be expunged had mooted the need to sell. To wit, bank holdings of MBS hit a new record high last week.

The upshot is that while hedge fund deleveraging is nearly complete, as implied by the massive reduction in total spec positions in any number of markets (like currencies), banks haven’t even begun.

~ Stephanie Pomboy, "Send in the Clowns," MacroMavens, November 20, 2008

Washington Post: Henry Paulson's plan to rescue Fannie Mae and Freddie Mac is really a bailout of the banks

Investor uncertainty over the long-term fate of the companies has left a pall over credit markets. It has been unclear which investors, if any, would suffer should the government intervene to prop up the firms.

The answer, in Paulson's plan, is that holders of preferred shares and subordinated debt, a riskier but higher-paying class of debt, might be made whole. Government leaders were reluctant to allow holders of those assets to incur major losses because they are widely held by banks, and major losses could cause a wave of bank failures.

~ Washington Post, "U.S. nears rescue plan for Fannie, Freddie," September 5, 2008

David Dreman: "Safest plays are among the big banks" (2008)

The safest plays are among the big banks. Most of this group have taken large reserves against their losses in the various mortgage areas, hoping that the market would reward them for their candor. Wall Street's response, however, has usually been to punish the reserve-takers with further cuts in their stock prices.

Perhaps investors are spooked by memories of the 1990--91 crisis in the financial sector, when real estate losses were so huge that investors questioned the ability of some commercial banks to survive without additions to their capital bases. At the same time, scores of savings and loans were collapsing from ill-considered forays into junk bond buying and construction lending.

The story is very different today. Yes, losses are towering, yet Tier I capital--the core measure of a bank's financial strength, chiefly shareholders' equity (including that from preferred shares)--is not threatened, as was true 17 years ago. While most large banks had lousy third quarters, the worst may well be over. Bank of America (43, BAC), Wachovia (40,WB), Citigroup (31, C) , KeyCorp (23, KEY) and JPMorgan Chase (45, JPM) are five that should show good appreciation with time. While you wait for a stock market recovery, all pay above-market yields. Bank of America, KeyCorp and Wachovia pay 6% or better.

~ David Dreman, "Seize the Day," Forbes, January 7, 2008

Bill Fleckenstein on bank SIVs

It just boggles the mind how much leverage is employed by financial institutions and how little knowledge the world has of their workings.

As to why these infinitely leveraged black boxes (with extremely flexible accounting and disclosure rules) exist in the first place, I think we know the pat answer: so that financial institutions can employ them and utilize even more leverage than they are legally allowed to.

Which makes one wonder: Since these entities are designed specifically to circumvent the rules, why have they been countenanced by the rule makers?

~ Bill Fleckenstein, Contrarian Chronicles, MSN.Money, "Banks' dark off-balance-sheet world," September 17, 2007

Kevin Duffy on banks putting their names on major sports stadiums

Today 24 of 72 major sports stadiums have granted naming rights to financial firms, 14 of them banks. (Recall that 19% of the Stadium Class of 2000 -- including PSINet Stadium and Enron Field -- went bankrupt within five years.)

~ Kevin Duffy, Bearing Asset Management, "For Whom Do the Bells Toll", Barron’s, June 18, 2007

Pimco bullish on bank debt

The fact that the banking sector has attracted fresh capital in the last couple of months is huge. We've been playing defense for the better part of two years, and the question we've been asking ourselves is when to go on offense. In the banking sector, we've started to do that.

~ Mark Kiesel, Executive vice president, Pimco, "Pimco Shows Alwaleed Isn't Only One in Love With Citi," Bloomberg, February 13, 2008

Bill Laggner on structured finance

I think you're going to get this constant flow of hits going forward, spread out over multiple quarters. A lot of people think that it doesn't matter what happens, that the Fed will rush in and find some way to save some of these larger institutions and the various assets that they own but I don't see how there's going to be a market for a lot of this paper for a long, long time.

~ Bill Laggner, Bearing Asset Management, "Dow Hits Record Despite Losses At Big Banks", Wall Street Journal, October 2, 2007

Vince Farrell on bank stocks

The deal of the century is these bank stocks with a 6 1/2% yield.

~ Vince Farrell, as appeared on CNBC, November 2007

Mary Beth Kissane: What did the banks know?

The banks didn't know until four days ago they had a big problem? Either they don't know, which is a competence issue, or they do, which is a criminal issue.

~ Mary Beth Kissane, head of investor relations at corporate public relations firm Walek & Associates, and a member of PR Newswire's Disclosure Advisory Board, "Lifting the Lid: Were banks' writedowns too little, too late?," Reuters, November 16, 2007

Henry Paulson on the Super SIV

This is something that is not a savior. Anything at the margin that will speed up liquidity is worth trying.

~ Henry Paulson, Treasury Secretary, "Banks Said to Agree on Credit Backup Fund," New York Times, November 2, 2007

(Paulson expects the fund to begin operating by the end of the year.)

Allan Sloan: "Why on earth should we protect banks from their mistakes?"

If Citi's only problem is that it can't liquidate its SIVs without a profit hit, too bad. If Citi's very existence is at risk, I don't think we dare let it fail, because that would drag down institutions throughout the world. But if the bank needs help, its shareholders should have to pay. Bigtime.

Step one would be to eliminate its common stock dividend, currently more than $10 billion a year. Step two would be to force Citi to raise the capital it needs by selling new stock at a price well below its recent $42 a share. That would force holders to either ante up or have their Citi stake diluted. That just might inflict enough pain on shareholders that someone other than underlings would pay for Citi's SIV sloppiness.

In any event, if we believe in markets, Citi should have to take its chances. We small fry take chances when we borrow, and we pay the price if we're wrong. Big fish should have to do the same.

~ Allan Sloan, "Citigroup: 'Gimme shelter'," Fortune, October 29, 2007 (Nov. 12 issue)

Ted Wolff: "I don't think Citi is broken"

I don't think Citi is broken. The real issue is what's on the balance sheet.

[Although an analyst this week suggested that Citigroup should slash its dividend to boost its capital, Mr. Wolff said there were other ways to address the bank's capital adequacy, such as selling its 80% stake in Student Loan Corp. or stakes in some foreign investments.]

They have plenty of assets that they can sell that would have no impact on the long-term performance of the bank and would take worry out of the market. Just by shrinking the balance sheet they would give shareholders comfort.

~ Ted Wolff, executive at Solaris Asset Management, "Citigroup CEO Plans to ResignAs Losses Grow," The Wall Street Journal, November 3, 2007, by Robin Sidel, Monica Langley and Gregory Zuckerman

(Solaris Asset Management is a New York investment manager that has more than $1.5 billion in assets and would consider buying Citigroup stock if it gets somewhat cheaper.)

Forbes on Citigroup: "Widows and orphans beware"

Regulators view banks as well capitalized if they maintain leverage ratios at or above 5% and total capital at or above 10%. Citigroup, in the third quarter, had a leverage ratio of 4.1% and total capital of 10.7%, down from 11.8% in January 2006. Tangible capital, which measures the ratio of tangible equity to tangible assets, is at 2.8%, where most banks are closer to 5%.

Problem is, Citigroup's balance sheet has ballooned in assets, bloated by more than $26 billion worth of acquisitions since last year and the return of off-balance-sheet assets brought back on since the summer's credit crunch.

A so-called "superfund" designed to alleviate the pressure on certain off-balance-sheet investment conduits (Citi has among the biggest individual exposures, at $80 billion to $100 billion) organized by Citi, JPMorgan Chase (JPM) and Bank of America (BAC), seems to be struggling to get off the ground.

Citi could raise capital levels by selling assets or relying on earnings to rebuild capital, but any move it makes is likely to take a dent out of its share price.

The company wouldn't comment, and some other analysts said they thought a dividend cut would be an extreme step. Certainly, it's never a great sign when a bank--the stalwart of an income investor's portfolio--cuts its dividend. Widows and orphans beware.

~ Liz Moyer, Forbes.com, "Credit Crunch: More To Come," November 2, 2007

Jon Markman: Avoid bank and brokerage stocks

Somehow, the big banks have to find a way to retain investors' confidence despite a January that is likely to feature many of the same problems we witnessed earlier this month. In early October, you may recall, institutions such as Wachovia (WB, news), Bank of America (BAC, news) and Merrill Lynch (MER, news) did an about-face from assertions that their businesses were not harmed by the credit crunch when they announced massive write-downs on asset-backed paper.

Investors will let them get away with that sort of rudeness only once. If the banks do it again -- after potentially being forced to take a lot of debt onto their balance sheets from failed "structured investment vehicles" -- shareholders are likely to slaughter the bank stocks, pushing them down at least another 20%.

[Banking analyst Richard] Bove contends that for every $1 in uncollected debts that they have written off so far, the banks have uncovered another $2.50 from failed mortgages, auto loans and commercial lending. "Bad loans are going onto their balance sheet faster than they can write them off," he said.

Once investors determine that the banks' bad loans are out of control and that the risk cannot be adequately measured, they will sell first and ask questions later. So, we are about to enter even more interesting times. A debt-led recession punctuated with joblessness and foreclosure is almost certainly en route. The only questions are whether it comes early next year or in 2009, and how deep a hole we'll need to dig for the burial. Whatever the timing or depth, continue to avoid the bank and brokerage stocks.

~ Jon Markman, "Why we need a recession -- soon," MSN Money, October 25, 2007