This is a crucial question because Devon Energy, the Oklahoma-based independent oil and natural gas producer has just decided to put billion of dollars in Deep sea Gulf of Mexico assets on the market.

Canada’s National Post reported:

Devon Energy Corp. hopes to raise up to US$7.5-billion from the sale of its Gulf of Mexico and international assets as the company moves to restructure itself as a North American on-shore player.

Devon’s chief executive, Larry Nichols, said the company believes the market is not valuing its Gulf of Mexico and international assets properly. Devon hopes to realize between US$4.5-billion and US$7.5-billion from the sale of assets during 2010.

Reporting on the same issue, the New York Times has indicated that the Chinese may well be interested in these assets.

One company that might be interested in taking the risk would be China National Offshore Oil Corporation, known as Cnooc. It recently agreed to buy a stake in some of Statoil’s Gulf assets, the first time that a Chinese company would take an ownership interest in energy assets in the United States.

Only four years ago, Cnooc’s $18.5 billion bid for American oil company Unocal collapsed under pressure from Congress amid concerns about American oil assets falling under the control of the Chinese government. Since then, the Chinese have been wary of bidding on American energy assets and have concentrated their investments on undeveloped fields at home and in Africa, the Middle East and South America.

The Statoil deal seems to have changed all that. But Devon’s assets could be too much, too soon for Cnooc. It may simply continue to buy small stakes in fields across the region before it is ready to make a major purchase.

The Statoil connection for Cnooc has not made much of a splash up in the mainstream press, but it is significant given the protectionism we witnessed when the Chinese were rebuffed when they outbid Chevron for Unocal, an American company which had largely non-U.S.based energy assets.

Forbes reported on the Cnooc Gulf of Mexico acquisition two weeks ago:

CNOOC Ltd has agreed to buy a minority stake in four prospects in the Gulf of Mexico from Norway’s Statoil, opening crude oil reserves in the U.S. Gulf to China for the first time.

CNOOC will have a 10 percent to 20 percent interest in the four exploration areas, CNOOC spokesman Xiao Zongwei told Reuters.

But, the Devon assets are far more substantial. Moreover, Cnooc comes in after the fact as a minority investor in the Statoil projects. With the Devon sale, Cnooc would be a principal actor and that leaves the door ajar for economic nationalism.

Related posts:

• China wants all of Repsol’s Latin American oil assets
• Should we expect a protectionist China?
• Is China avoiding using US dollars?
• China to diversify out of U.S. dollars
• China company performance

The sale to Canadian auto parts maker Magna International and its partner, Russian lender Sberbank is off. With bankruptcy now behind it, General Motors now feels confident it can proceed with Opel under the GM umbrella.

From the GM press release:

Given an improving business environment for GM over the past few months, and the importance of Opel//Vauxhall to GM’s global strategy, the GM Board of Directors has decided to retain Opel and will initiate a restructuring of its European operations in earnest.

“GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration,” said Fritz Henderson, president and CEO. “We understand the complexity and length of this issue has been draining for all involved. However, from the outset, our goal has been to secure the best long term solution for our customers, employee, suppliers, and dealers, which is reflected in the decision reached today. This was deemed to be the most stable and least costly approach for securing Opel/Vauxhall’s long-term future.”

On a preliminary basis, the GM plan entails total restructuring expenses of about € 3 billion, significantly lower than all bids submitted as part of the investor solicitation. GM will work with all European labor unions to develop a plan for meaningful contributions to Opel’s restructuring. While Opel continues to outperform against its viability plan assumptions and immediate liquidity is stable, time is of the essence.

“While strained, the business environment in Europe has improved.” Henderson said. “At the same time, GM’s overall financial health and stability have improved significantly over the past few months, giving us confidence that the European business can be successfully restructured. We are grateful for the hard work of the German and other EU governments in navigating this difficult economic period. We’re also appreciative of the effort put forward by Magna and its partners in Russia in trying to reach an equitable agreement.”

I will be speaking about this issue in an hour’s time on the BBC. But, look at this as a result of economic reflation. GM has exited bankruptcy and feels confident enough of the future path of the economy to keep Opel instead of having to sell in a fire sale. 

The Germans are livid, according to the Wall Street Journal.

The governor of the German state of Hesse, where General Motors Co.’s Opel unit is headquartered, said Wednesday he is "concerned and at the same time annoyed that the months-long efforts to find a good solution for Opel have failed because of GM."

In a statement, Roland Koch, a confidant of German chancellor Angela Merkel, said that considering the "negative experience in recent years with GM’s corporate policy, I’m worried a lot about the future of (Opel) and its staff."

In a surprise move, GM’s board late Tuesday decided it wants to retain its core European operations after talks over a possible sale have been dragging on for months.

Koch said he expects GM to repay by Nov. 30 the bridge financing provided by the German state "so that the German tax payer doesn’t get harmed."

Remember that other EU countries came out of the woodwork saying, in effect, that the Germans had bought off GM and were being advantaged by unfair subsidies while in places like Belgium and Spain workers were suffering.

Very interesting. More after the BBC show!

Related posts:

• GM considers keeping Opel, raising capital
• GM looks to use US and Canadian tax money to bailout Opel
• Economic nationalism and GM’s decision to keep Opel and Vauxhall
• Germans reject Chinese offer for Opel
• Germany gives GM a stiff arm on state aid

I had a feeling there was an energy component to the Berkshire Hathaway decision to buy Burlington Northern Santa Fe. And now comes the evidence via coal, a major freight on BNSF’s tracks. But, there is a lot more to this acquisition than just hauling coal.

Warren Buffett has been increasing his energy plays in recent years, both in the U.S. and abroad.  he has said repeatedly that he likes energy and power. His chief asset in the U.S. is Mid-American Energy, a major utility company whose CEO is often touted as one of the eventual successors to Buffett at the helm of Berkshire.

On the other hand, Berkshire was on record as hating the railroad business.  When I was a panellist on BNN TV in Canada at noon today, fellow panellist Brian Milner, business columnist at the Globe & Mail in Toronto, mentioned that Charlie Munger, Buffett’s right-hand man at Berkshire, said two years ago he and Buffett hated the fundamentals of the railroad business.  Rolfe Winkler has a good post showing that the BNSF acquisition is fully priced. So, what gives – why is Berkshire paying top dollar for a company in an industry with what it used to describe as poor fundamentals?

The answer is coal.

This comes via MarketWatch (hat tip PapaSwamp):

Berkshire Hathaway Inc.’s $44 billion deal to buy Burlington Northern Santa Fe Corp. is basically a huge bet on coal, a fuel that powers Warren Buffett’s power plants at his MidAmerican Energy utility and plays a major role in the railroad business.

While regulatory delays and uncertainty over climate-change legislation has slowed the addition of new U.S. coal plants, plenty of new facilities are expected to come on line in the United States, becoming prospects for future growth for the railroads.

Nine new coal plants have been permitted in the United States and 25 are under construction for a combined generation capacity of nearly 15,000 megawatts, according to an Oct. 9 report by the National Energy Technology Laboratory.

Moves by the Obama administration to curb emissions in proposed climate-change legislation are also anticipated to push the generation industry toward wider use of carbon-capture and storage technology at coal plants, which still supply nearly half of America’s electricity.

With the U.S. economy poised for a rebound, both the coal-fired electricity industry and the railroads that haul the black rock are primed for growth, leading Buffett to describe his huge purchase as "an all-in wager on the economic future of the United States."

Moreover, Munger’s comments in regards to coal were more to the effect ‘we hated railroads for decades. But we love them now because the industry has consolidated, affording the remaining players monopoly-like rents.’ Given the fact that BNSF gets a quarter of revenues from hauling coal and this is a major feedstock for MidAmerican, there are a lot of synergies.

The Motley Fool talks about Munger’s change regarding railroads in a December 2007 post on Charlie Munger’s 10 Rules for Investment Success:

9. Be ready for change
Accept unremovable complexity.

Investing success requires us to accept inevitable changes. Munger and Buffett hated railroads for decades, but as the times changed, they threw their old thoughts out the door and invested billions. The world around us won’t always conform to our preferences and prejudices, and sometimes our best ideas will prove incorrect. If you aren’t willing to roll with a changing market, you may find yourself fighting a lost cause.

The Wall Street Journal’s Matt Phillips also believes Buffett has waited until the turn to buy these assets as freight traffic is off its lows earlier this year – something Buffett tracks as a proxy for aggregate demand. But, this is not a market call alone. When Berkshire buys a business outright, they are making a long-term investment .

Let’s see how this call turns out because Buffett’s record over the last few years has been less stellar than in the past as ‘largeness’ makes earning high returns more difficult.  If you look at the timing of his Conoco Phillips and General Electric calls last year, there is ample room for doubt (Berkshire has since rotated out of COP).  On the other hand, his Goldman preferreds are looking quite nice.

Note: Goldman Sachs was also BNSF’s advisor on this deal.

Other sources

Catching up: Buffett bought railroads, J&J, Comcast – USA Today, May 2007

Buffett’s Berkshire buys more shares in railroad – USA Today, Jan 2008

Related posts:

• Buffett buys up Burlington Northern and does 50-1 split at Berkshire
• Warren Buffett backs Goldman
• Buffett to invest in General Electric
• Quote of the day: Warren Buffett
• Berkshire Hathaway Annual Meeting this weekend

Warren Buffett’s Berkshire Hathaway has been making some very significant moves of late.  Selling of Moody’s shares is one.  But, the latest is sure to cause a stir amongst Buffett watchers because he is definitely making some “bets” on economic recovery with his purchase of Burlington Northern Santa Fe (BNI). It is unclear as yet what precipitated the share split (Hat tip Roula).

From Business Wire:

The boards of directors of Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) and Burlington Northern Santa Fe Corporation (BNSF; NYSE: BNI) today announced a definitive agreement for Berkshire Hathaway to acquire for $100 per share in cash and stock the remaining 77.4 percent of outstanding BNI shares not currently owned to increase its holdings to 100 percent. Based on the number of outstanding BNI shares (including shares currently owned by Berkshire) on Nov. 2, 2009, the transaction is valued at approximately $44 billion, including $10 billion of outstanding BNSF debt, making it the largest acquisition in Berkshire Hathaway history.

“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. “Conversely, America must grow and prosper for railroads to do well. Berkshire’s $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry.

“Most important of all, however, it’s an all-in wager on the economic future of the United States,” said Mr. Buffett. “I love these bets.”

Railroad freight traffic is often used as a proxy for aggregate demand in the economy when looking for substitutes to government measures of GDP or consumption. So, clearly Buffett is making a bet on American prosperity going forward as the last paragraph I quoted says.

However, the announcements today at Berkshire were a twofer as Berkshire also announced a 50-1 stock split. Berkshire couches the rationale for the split in terms of making the transaction viable for small stockholders of Burlington Northern Sante Fe, but I suspect there is a bigger plan.  The press release on Berkshire’s site says:

The great majority of the stock issued by Berkshire in the BNSF acquisition announced today will be “A” shares. “B” shares, however, will also be needed to accommodate holders of smaller amounts of BNSF shares who opt for a share exchange rather than a cash payment.

By splitting Berkshire “B” shares 50-for-1, we can accommodate even the smallest holdings of BNSF shares that elect a tax-free exchange.

Berkshire Hathaway “A” shares last traded for a massive $98,750.00, putting it clearly out of reach for the average retail investor except through participation in a fund. Berkshire created the B-class of shares to accommodate more retail-oriented investors. So, I suspect this is a move to put “B’ shares further into the reach of retail investors. The B-shares last traded for $3,265, so a 50-1 split puts them at $65.30, a price any retail investor would find reasonable.

Related posts:

• Buffett: Is Berkshire’s Burlington move all about coal?
• Warren Buffett backs Goldman
• Buffett to invest in General Electric
• Berkshire Hathaway Annual Meeting this weekend
• Quote of the day: Warren Buffett

Below is a good video analysis by Jess Bravin of the Wall Street Journal on the BofA-Merrill Lynch saga.  Bravin discusses the recent rejection by Judge Jed Rakoff of the out-of-court settlement between the SEC and Bank of America (BAC) in which BofA was to pay a miniscule $33 million fine.

Rakoff’s decision to scupper this settlement stems from his understanding that BofA shareholders are the ones who have allegedly been harmed by BofA’s actions. Yet they are also the ones to pay the fine.  The SEC deal did not seek charges against bank management or lawyers. Management and attorneys were the alleged perpetrators of the false and misleading proxy statements that led to shareholder approval of the acquisition of Merrill Lynch. Bravin says Rakoff believes this may have been the result of collusion.

The settlement is a perfect example of regulatory capture and demonstrates why the financial system has failed.

Related articles

Andrew Cuomo’s Most Recent Letter To Bank Of America – Zero Hedge

Related posts:

• Judge stops BofA deal with the SEC
• Mea Culpa: I was too bullish on the BofA-Merrill deal
• BofA CEO confirms government coerced him into Merrill deal
• BofA CEO Lewis investigated by SEC
• BofA saga continues as John Thain calls Lewis a liar

With the Federal Deposit Insurance Corporation (FDIC) about to release its latest figures for banks it regulates and its own financial condition, now is a good time to review its role in this crisis. This post is about the FDIC’s role in the credit crisis, how it seizes banks and why I believe this matters.

In my opinion, Sheila Bair, the head of the FDIC,  is the best regulator in government these days (although not everyone feels that way). Her agency has taken on the workman’s regulatory role in this crisis of identifying undercapitalized institutions, seizing them and putting their assets in new hands. These actions are a necessary part of capitalism. When a bank is reckless, it must suffer the consequences.

However, it is the distribution of the losses from failed institutions which I would like to discuss.  Much of the loss falls on the FDIC and, hence, taxpayers. In effect, what is a necessary part of capitalism, the extinction of failed institutions, may in effect be a redistribution of wealth in disguise.

Last week, when I posted on Guaranty, the latest seizure by the FDIC, a reader noted that the loss-sharing agreement between BBVA, which had purchased Guaranty’s assets, and the FDIC was quite favorable for BBVA.

On its website BBVA states in Spanish:

BBVA ha suscrito con la FDIC un “loss sharing agreement”, que cubre todos los créditos adquiridos en la transacción, en virtud del cual la FDIC se haría cargo, en caso de producirse, del 80% de las primeros 2.300 millones de dólares de las posibles pérdidas, y del 95% a partir de dicho límite.

What this says is: “BBVA has signed a “loss sharing agreement” with the FDIC, covering all loans acquired in the transaction. Under that agreement the FDIC would cover 80% of the first 2.3 billion dollars of any losses that may occur, and 95% above that ceiling.”

Translation: The FDIC is on the hook for the lion’s share of any subsequent losses at Guaranty.  As a taxpayer, you would be right to feel you’re not getting a good deal here because you are ultimately the one picking up the losses. How?

Socialization of losses

It works like this. Last year, when IndyMac failed, it was the event which brought the credit crisis into mainstream consciousness. Mind you, the crisis had begun in February 2007 when HSBC wrote down billions of bad debt. But, for the man on the street, it only hit home when a run on IndyMac started in July 2008 and unsecured depositors lost money.

Soon after that event, I pointed out that the FDIC couldn’t possibly bail out all the banks likely to go bust in the crisis.  At the time, the FDIC had just over $50 billion in its kitty. The IndyMac bankruptcy alone was expected to cost $8 billion to the fund, a number that subsequently increased to $10.7 billion.

The losses have taken their toll. The last time the FDIC reported on its financial situation back at the end May, it said it had $13 billion as of the end of March. Now, we await a new report for the period through Jun 30.  Will the FDIC report any funds at all?  Is the FDIC insolvent now?  We will soon find out.  But, one thing is for certain: the FDIC will ask the U.S. Treasury for an enormous amount of money to pay for anticipated bank losses – hundreds of billions of dollars. And they will get it.

This is what is commonly known as the socialization of losses. So when Guaranty enters into a loss-sharing agreement with BBVA, you should realize any future losses will be paid out of funds contributed to the FDIC directly by Congress and the US taxpayer.

The FDIC as a redistribution mechanism

So, obviously, how the FDIC structures its deals to seize and dispose of assets is of great interest to everyone in the U.S.  I would argue that at present, the way assets are seized and sold represents a redistribution of income from taxpayers to the acquiring entities.  Let’s use the BBVA example to illustrate.

Imagine you are Sheila Bair.  You have shuttered 80-odd institutions this year and you realize that 150, 200, maybe 300 more institutions could fail still.  No way on earth does your organization have the manpower to deal with this avalanche of bank failures without sloughing the assets off on willing buyers.  How do you entice those buyers? In a word, price.

It’s what is known as a sweetheart deal.  There were a number of bidders for Guaranty including US Bank, and a private-equity consortium led by Gerald Ford which included Blackstone, Carlyle and TPG.  Yet, the deal went to BBVA in a loss-share agreement that caps their exposure at 20%?  I ‘d like to get in on a deal like that.  If you are a private equity buyer, you’re probably chomping at the bit for more deals like this.

Granted, with visions of a V-shaped recovery on the horizon, you could be forgiven for thinking there will be no further losses.  But what if there is no V-shaped recovery? Then, the American taxpayer is going to be covering a lot of losses – and that is a redistribution from taxpayers to the financial services industry.

More losses to come

I certainly believe the V-shaped recovery is unlikely.  More likely, we will see a sluggish recovery. And a relapse into recession is a distinct possibility. This means more losses on toxic assets at financial institutions, more exposure for the FDIC, and, thus, more socialization of losses.

Update: The FDIC approved a final statement of policy concerning acquisition of failed institutions which eased rules for private equity buyers.  Obviously, the FDIC wants more bidders at the table as I have suggested in this article.

The question is whether the loss-share agreements it is crafting with those bidders will expose the agency to losses which it cannot possibly repay without taxpayer monies.  As it stands now, the FDIC merely has a line of credit from the Treasury for $500 billion.  However, if losses are large, I doubt very seriously those funds will be repaid.

See FDIC press release here and Deal Book article here.

Related posts:

• Guaranty is bankrupt: BBVA gets its FDIC-seized assets
• FDIC moves in at Great Basin Bank
• Corus Bank assets: And the winning bidder is…
• Seven banks seized by FDIC
• FDIC Friday Night Special: San Joaquin Bank, Bakersfield, California

Spain has been a laggard in the search for improving economic fundamentals.  The news coming out of Spain has been dreadful from employment to house prices to mortgages and banking. But the first ray of hope appeared yesterday when it was reported that late payments on loans granted by banks, savings banks and cooperatives fell for the first time in two years.

According to the numbers released by the Bank of Spain the delinquency rate for June 2009 stood at 4.488%, down from May’s 4.563% and the first fall since July 2007.  Mind you, the rate of delinquency is still at levels not seen since 1996.  But this is the first countertrend in the upward march of financial distress for Spanish mortgage holders.

Nevertheless, the news was not all good yesterday.  Edward Hugh reported the same day that twenty percent of Spanish mortgages are now considered high risk.

According to an article which appeared in the Spanish newspaper Expansion this morning, one in five Spanish mortgages is now considered as being high risk and liable to become “non performing”.

The mortgages at greatest risk are naturally those contracted after 2005 where the loan to valuation was over 80% of the total. In 2006 and 2007, according to data from the bank of Spain, LtVs were over 80% in 17.7% of the mortgages granted, since prices are now heading back towards the 2005 level, we can easily conclude that something in the region of one in five Spanish mortgages are now high risk.

Prior to 2006, the main source of data comes from a study by Genworth Financial, who show that loans with +80% LtV rose from 12.2% in 1996 to 26.4% in 2005 (see chart below which comes from Expansion). These loans were especially popular between 2003 and 2006, but then started to decline as the decision of the ECB to raise interest rates made the likelihood of a price correction rise sharply.

It is the Spanish savings banks, the cajas, which are most affected by delinquency and high risk loans. See my April post “Spain’s savings banks may have 40 billion in writedowns.” The big Spanish banks are in a much better capital position.  Just today, it was leaked that BBVA is expected to win a government-run auction for the troubled American lender Guaranty Financial. The FDIC had set a deadline for today for bids.

Both BBVA and Santander have used the credit crisis as an opportunity to strengthen their position internationally. Santander previously bought Sovereign Bancorp in the US and Alliance and Leicester in the UK.  For some time now, BBVA has been making a tactical expansion into the Sun Belt markets in the US, an area with a large Spanish-speaking population.  Obviously, the purchase of Guaranty fits into that strategy.

Santander has a market capitalization of over 80 billion Euros (nearly $120 billion) while BBVA has a market cap over 40 billion Euros (nearly $60 billion). By comparison, only Goldman Sachs, Wells Fargo, JPMorgan Chase and Bank of America are bigger in the U.S., a country with six times the population of Spain. So, these are very international banks of enormous size, well regarded in the capital markets.

So while Spain is a country still beset with problems, especially in the banking sector, there is an extreme dichotomy between the fortunes of the international big banks and the domestic savings banks.

Source

La morosidad del crédito baja en junio por primera vez en casi dos años – Finanzas

Related posts:

• Spain’s savings banks may have 40 billion in writedowns
• Banco Santander is very confident
• Spain’s BBVA making a push in the US
• Sovereign Bancorp: Santander looking to buy regional bank
• Guaranty is bankrupt: BBVA gets its FDIC-seized assets

Bank of America’s story in the BofA-Merrill saga has always sounded dubious at best.  Ken Lewis has always claimed he was doing what was right by shareholders and America, that Gentle Ben and Hammering Hank coerced him into the Merrill deal, that Merrill’s CEO John Thain was not completely above board.

All of this should be looked at with great suspicion, especially in light of the SEC’s charges against BofA for lying to investors about Merrill’s bonuses.  The Washington Post reports:

The Securities and Exchange Commission on Monday charged Bank of America with lying to investors about its plan to pay billions of dollars in bonuses to employees of Merrill Lynch.

Bank of America, which bought the ailing investment bank this year, agreed to settle the charges and pay a $33 million penalty, according to the SEC. The company did not admit or deny wrongdoing.

The agency alleged that Bank of America violated securities law by telling investors in a November 2008 filing that bonuses would not be paid without its consent.

"In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008," the SEC said in a statement. "The disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008."

This case represents one of the highest profile instances so far of legal fallout from the financial crisis. The Bank of America settlement involves a company in which the U.S. government owns a large stake, having provided tens of billions of dollars in emergency relief.

Bank of America bought Merrill Lynch for $50 billion under heavy pressure from the U.S. government.

"Bank of America believes that the settlement, which it entered into without admitting or denying the SEC’s allegations, represents a constructive conclusion to this issue," said a Bank of America spokesman, Scott Silvestri. "This is an important step forward for Bank of America and allows us to focus our energies on enhancing stockholder value by continuing to execute our strategies for the long-term success of our business."

He would say that, wouldn’t he?  Let’s rewind a bit, shall we?  Lewis claimed that John Thain gave out bonuses to Merrill employees in an unauthorized way.  He fired Thain and made his name mud in public.  At the time, I said:

As for John Thain, the man has been pilloried publicly, in particular because of the bonus scandal and the office re-design.  But, let me ask you this: was BofA going to underpay its vaunted Merrill money-makers in a one-off bonus round and risk their exiting the company?  No.  If you went to a Fortune 500 company with a new CEO, what would you guess the average amount spent for office renovations would be?

Now we learn the truth: BofA may have authorized $5.8 billion in bonuses all along as I suspected.  BofA will now pay a penalty to avoid having to admit guilt or admitting the allegations. Whether they admit guilt, one should certainly be suspicious.

In my view, Ken Lewis seems to have been self-dealing and empire building throughout this. Clearly he saw Merrill as a jewel in the crown he has been building for years.  When the deal started to go pear shaped, he started pointing his finger at others. I do not see him looking out for his investors. Is anyone going to take the blame for this public relations disaster and black eye at BofA?  Will Ken Lewis resign?  Doubtful.

And it is pretty pathetic that Bank of America gets off with a mere slap on the wrist after the billions in money taxpayers have ponied up for that organization.  There should be absolutely no deal.  We deserve to know exactly what happened.  If BofA has a reasonable defense – fine.  If not, force wrongdoers to resign and suffer the legal ramifications.

But, of course, that’s not going to happen.

Related posts:

• BofA saga continues as John Thain calls Lewis a liar
• Mea Culpa: I was too bullish on the BofA-Merrill deal
• Ken Lewis points the finger at Bernanke and Paulson
• Merrill – Bank of America deal
• BofA CEO confirms government coerced him into Merrill deal

You have probably heard the stories about China National Offshore Oil Company (CNOOC) bidding for Repsol YP’F’s Argentine assets in a quest for more natural resources for China. Well, apparently, the Chinese want a lot more than just Argentina; they want the whole of Repsol’s Latin American asset base.

The Chinese have been buying up African oil assets left and right.  But, this is a HUGE asset grab by the Chinese in America’s backyard.  Remember the Monroe Doctrine? Well, forget about that now, because it is game on for the Chinese.

Here’s my translation of the important bits of a Spanish-language article discussing this development.

Contacts between Repsol and several Asian companies goes beyond their Argentine subsidiary YPF. As confirmed by sources close to the talks, the Spanish oil company has negotiated with China National Offshore Oil Company (CNOOC) to unite all exploration activities in Latin America.

According to what Finanzas.com has learned, the discussions between representatives of the Spanish energy group and the Chinese oil company began a little over six months, but intensified in April and May. The aim was to create a group owned by the two companies, with the majority owned by Repsol, which bring their exploration activities.

The negotiations progressed to the point that both requested a valuation of the assets by two investment banks. However, according to official sources of the Spanish group, there has been no agreement between Repsol and CNOOC on price, such that the contacts have cooled in June. In fact, yesterday, the president of the third largest oil company in China said "CNOOC’s strategic focus remains focused on the search for cooperation, rather than mergers and acquisitions," explained Fu-Chengyuan.

Irrespective of whether these developments yield results, CNOOC obviously is willing to spend a lot of money to get access to more oil.  And several sources are saying that Chinese companies are willing to pay top dollar.  You will recall that CNOOC is the same company that attempted to buy Unocal in March 2005.  Their overtures were spurned on national security grounds despite the very limited domestic asset base that Unocal controlled and despite their offer being materially higher than Chevron.

I have a couple of takes on this news.  First, the Chinese clearly want access to natural resource assets in order to power their domestic growth. Previous attempts to acquire Unocal and and the over-indebted Rio Tinto by Chinese companies proves this. But, these attempts have been met with protectionism and I imagine the Chinese find this extremely frustrating.  So, they have decided to look elsewhere for their natural resources.

In my view, the fact that they have met protectionist hackles in the West makes them all the more desirous to acquire good assets outside of developed countries both to power their economy and to reduce dependence on the West. Let’s see if the Repsol deal meets with a protectionist response.

Source

Repsol negocia una alianza con la china CNOOC para toda Latinoamérica – Finanzas

Related posts:

• Will the U.S. allow China to buy more Gulf of Mexico oil assets?
• China detains Rio executive on suspicion of espionage
• Should we expect a protectionist China?
• Spain: consumption drop four times as much as in ‘93
• China company performance

Congressman Darrell Issa (R-CA) claims to have evidence supporting Ken Lewis’ original contention that he as threatened by government officials for contemplating pulling out of the BofA-Merrill deal.  Let’s review.  Two weeks ago, Lewis pointed the finger at Paulson and Bernanke in testimony before Congress (see my post).  This came after claims of government coercion that Lewis made in a he said-she said drama between Lewis and John Thain, the former head of Merrill Lynch. Clearly, someone is lying and this drama has become a political football.  Translation: a scapegoat will be found – justifiably or not.

So, now we have Issa going after the Fed after Obama presents his banking reform package asking to increase Federal Reserve power.  The narrative against the Fed reads as follows:  first these guys were asleep at the wheel on regulation, allowing a mortgage bubble to spin out of control.  Then, they recklessly lower interest rates, encouraging speculation and making the bubble that much larger.  Now, we see the Fed strong-arming banks in a desperate attempt to clean up the mess they made. And, they are covering it up to boot.  Do you want these people to have more power?

This argument is coming to a TV screen near you very soon – and most of it is justified.

Below is the clip of Issa making his case that the Federal Reserve coerce Lewis and is now covering it up (By the way, I should point out that this doesn’t get Ken Lewis off the hook for potentially disregarding his fiduciary responsibilities).

Related posts:

• Ken Lewis points the finger at Bernanke and Paulson
• Is Bernanke Toast? If he is, Summers is a shoo-in
• The Federal Reserve bails out AIG
• BofA CEO confirms government coerced him into Merrill deal
• Countrywide is the real problem at Bank of America

During the Great Depression, it was the Smoot-Hawley Tariff Act, which in hindsight is blamed for triggering a wave of protectionist actions globally.  Protectionism was a major contributor to the downward spiral that created depression.  So, have we avoided this kind of outcome this go around?

At this juncture, it is pretty unclear we have. Simmering disputes with China in particular are creating anger in Beijing.  First, there was the U.S. steel industry complaint over the dumping of cheap Chinese tires in the U.S.  This dispute has received little press.  However, the International Trade Commission(ITC) has just sided with U.S. steel interests. I reckon the issue will now become more important.

Then, there was the link between Rio Tinto, the Australian commodities producer and Chinalco, the Chinese commodities company. Rio got itself in a bit of a mess when it leveraged up only to see commodity prices tumble. As a result, the company was forced into the arms of Chinalco.  But, Australians and Rio shareholders did not like the concept of the Chinese having such a huge stake.  So, BHP Billiton came to the rescue and Chinalco was stuffed (and received a hefty breakup fee).

These types of things are really getting the Chinese sour.  And the China of 2009 is akin to the United States of 1930 as Alpha Creditor to the world economy. So, when just days ago Beijing started a ‘Buy China’ policy, we should realize that a Smoot-Hawley outcome is still something we need to act vigorously to avoid.  It is protectionism in China as retaliation that we must worry about.

Now that the U.S. has received a green light from the ITC to restrict Chinese tire imports, it will be instructive to see what the Obama Administration does.

Related posts:

• China detains Rio executive on suspicion of espionage
• China launches retaliatory investigation into U.S auto subsidies
• China: we “will take steps to protect the interests of our domestic industries”
• Tariffs: Other industries may line up for sanctions against China
• Jagdish Bhagwati: Obama is a protectionist

You probably saw in my links that Fiat had bowed out because of German government demands. The Magna story also comes via the BBC:

Canadian car parts maker Magna International is the preferred bidder for GM Europe, owner of Opel and Vauxhall, Lord Mandelson has said.

The UK business secretary said a deal between Magna and GM was very near.

He was speaking after reports that Magna had reached an agreement in principle to rescue GM Europe.

The other potential bidder, Fiat, did not attend Friday’s talks with the German government, saying Berlin’s position was "unreasonable".

GM in the US is expected to declare Chapter 11 bankruptcy on Monday.

Here is the associated video of Lord Mandelson spinning the details about how government in the UK sees things.

Related posts:

• GM considers keeping Opel, raising capital
• German Press: Fiat to sign a deal with Opel, not Chrysler
• Opel and Fiat spells bankruptcy for Chrysler and GM
• Fiat as the engine for change in the auto industry
• Germans reject Chinese offer for Opel

As developments in the global auto industry continue apace, it is becoming increasingly evident that Fiat has fashioned itself as a change agent in an industry rife with overcapacity. While eyes in the U.S. are fixed on a Fiat-Chrysler link-up, eyes in Europe are also fixed on Fiat in a Fiat-GM Europe merger.  But, these are not the only developments ongoing at present.  There has been a rush of activity involving VW, Porsche, Daimler, BMW, Saab, and GM Latin America. Let me fill in the gaps in those developments and sum up what I think it means for the industry going forward.

Fiat – Chrysler

Chrysler has now filed for Chapter 11 bankruptcy.  It has also received approval from the bankruptcy court to access a loan of $4.5 million from the Canadian and U.S. governments (Chrysler has a major presence in Windsor, Ontario, just across the U.S.-Canadian border from Detroit). 

The company is looking to sell its assets to Fiat under section 363 of the U.S. bankruptcy code.  This gives Chrysler, as a company protected under Chapter 11, the opportunity to sell assets to another party without expressed consent of its creditors, secured and unsecured.  And it can do so even before a restructuring plan has been developed.  Effectively, what this means for creditors at Chrysler is fewer fixed assets against which to make their claim.  Obviously, Chrysler will receive money for these assets, but because there is only one bidder in discussion, Fiat, the assets will not command a premium price.  It has filed a motion in court to request approval to do this quickly (the Obama Administration wants bankruptcy fast-tracked to finish in two months or less). Selling to Fiat will likely mean losses for creditors.  As a result, a number of secured creditors have sued to stop this.  You should note that Chrysler’s argument before the court is that it MUST sell quickly or its assets will quickly depreciate, leaving even less for creditors.

GM Europe – Fiat – Magna

While Chrysler has already filed for Chapter 11, General Motors is working under a deadline of June 1st imposed by the Obama Administration, after which time the company would run out of cash and be forced to file for bankruptcy protection. So General Motors is keen to sell as many assets now as possible, chief among them its European operations in Germany (Opel) and the U.K. (Vauxhall).  The major contenders for a GM Europe bid are Fiat again and an Austrian-Canadian auto parts maker called Magna.  Basically, this is a choice between vertical integration and horizontal integration as Fiat and GM Europe are direct competitors, whereas Magna is a supplier to automakers.

In my opinion, much of this discussion hinges on the position of the German government, because the GM Europe deal will not proceed without government backing and credit guarantees. The government, which is preparing for a country-wide election, consists of a grand coalition of the two major parties led by the the CDU (right of centre) and joined by the SPD (left of centre).  In the elections, Chancellor Merkel of the CDU will face off against Frank-Walter Steinmeier, the Vice Chancellor from the SPD. So, this is a crucial issue for the government.

You should note that Fiat is considered the buyer of choice for the CDU. The go-between there is Roland Berger, a well-regarded businessman and founder of the large consultancy by the same name.  Magna is the SPD choice and this deal is being facilitated by none other than Gerhard Schroeder, the former German Chancellor.  SO, as you can see, this is a very political environment.

Making things even more complicated here is the fact that the German unions are opposed to a deal with Fiat. It is widely expected that there will be major job cuts if Fiat wins the GM Europe bid.  The Fiat head Marchionne pitched up in a $125,000 Maserati Quattroporte in Berlin for talks with the German government while rumors circulated that he planned to shutter the Kaiserslautern factory, one of four major Opel locations in Germany (the other three are Russelsheim, Eisenach, and Bochum).  Marchionne subsequently said he would not close the Kaiserslautern factory (perhaps just to get the deal done, in my opinion).

Other developments

But these are not the only developments in the car industry at the moment. 

Porsche – VW. The internecine fight over Porsche, pitting the Porsches against Ferdinand Piëch and his family, is reaching a fever pitch.  Somehow, Porsche got itself deep into debt as it looked to swallow Volkswagen whole.  Piëch has an alternative plan for VW to take over Porsche The whole thing is a mess that has included a massive short-squeeze last year and the suicide of a major shareholder.

Fiat – Saab.  Is Fiat looking to take over the world?  NRC Handelsblad, a major Dutch financial daily, says that Fiat is also interested in Saab, the Swedish automaker now owned by GM (See link in Dutch).   When we hear about GM Europe, it is generally used to mean Opel and Vauxhall as these two brands run on the same platforms and are easily integrated. Vauxhall had its own production pre-Oil Shock II in 1979, but around that time GM rationalised production and the Opelization of Vauxhall made the platforms identical.  Saab is another story.  It is completely separate from the other two and has significant problems in that its cars are now outdated and a major overhaul would be necessary (see my post, "GM finding no takers on Saab?”).  How and why are two good questions to ask Fiat regarding its plans for Saab.

Fiat – GM Latin America. Apparently, Fiat is talking to GM about its Latin American operations as well, or at least this is what the Sydney Morning Herald is reporting. No specifics have been given.  A blurb reads simply, “Fiat is interested in US auto giant General Motors’ operations in Latin America and discussions on a possible deal are under way, an industry source told AFP Tuesday.”  Bloomberg goes a bit further saying: “People familiar with the matter said Fiat may also seek to acquire the GM’s operations in Latin America, China and Russia to expand its reach.” From these stories, you could infer that all options are on the table for Fiat.  They want to acquire and grow in a number of different markets.

Saturn and Hummer. Dagens Nyheter, a major Swedish daily reports that, in addition to the ongoing discussions about Saab, Opel and Vauxhall, GM is currently looking at ways to unload Saturn, the once promising company within a company, and Hummer, the U.S. maker of gas-guzzling tank-lie SUV’s. While the short article (in Swedish) says there are “several” bidders for Saturn, it mentions nothing about interest in Hummer.

Daimler – BMW. As a testament to the depth of the downturn in the auto industry, even luxury car makers Daimler and BMW are looking for ways to work together.  To date, the two have cooperated in terms of buying from suppliers (like Magna).  But, they want to cooperate on deeper initiatives.  According to German daily Die Welt, they are exploring the possibility of working together on green technologies, higher safety standards and auto-assisted safety measures (see story in German).

Thoughts

I am sure there is much I am leaving out here.  But, as all of these stories have popped up just in the last day, it is testament how the Chrysler bankruptcy and the GM deadline are driving the industry toward a much-needed consolidation.  Fiat is looking to lead the charge in that realm, judging from Marchionne’s statements and the number of different fronts on which it is now holding merger and acquisition discussions.  In my view, Fiat risks over-reaching, with disastrous consequences down the line.  They have already tried and failed in a joint venture with Opel. Daimler has already tried and failed in a merger with Chrysler. And Saab is a potentially bottomless pit, which needs to hoover up cash to meet re-model its antiquated product line.  Professor Garel Rhys of Cardiff Business School compares the Fiat dealmania to the “Organized chaos” of the British Leyland merger from 40 years ago.

I would have thought swallowing Chrysler or Opel whole was enough.  Digesting them both, two companies that operate on different continents and in different languages from Fiat, is sheer madness.  Adding the talks over other GM brands into the mix makes these negotiations look that much more risky.

In the end, however, this flurry of activity is good for the auto industry.  There is significant over-capacity which makes it difficult for all players to turn a profit, especially in this downturn. One way or another, this industry will consolidate, whether through merger or bankruptcy and liquidation.

Related posts:

• German Press: Fiat to sign a deal with Opel, not Chrysler
• Opel and Fiat spells bankruptcy for Chrysler and GM
• Magna is going to get GM Europe
• GM headed for bankruptcy
• Chrysler: bulls make money, bears make money, pigs get slaughtered

With the stress test results coming out, it is a wonderful thing for Citigroup that it has been able to sell its Japanese brokerage unit to Sumitomo Mitsui, and at a good price of $7.8 billion.

Here’s an excerpt of the FT story:

Citigroup on Friday sold its Japanese brokerage and some parts of its local investment bank to Sumitomo Mitsui Financial Group (SMFG) as part of a deal worth Y774.5bn ($7.8bn) that will boost the troubled US bank’s capital.

Japan’s third largest bank is paying Y545bn for Citi’s Japanese securities business, which is mainly comprised of Nikko Cordial Securities, and a further Y28.5bn for Japanese-listed securities held by Citi.

Additionally, Citi is to receive Y201bn in cash by either retaining excess cash held in Nikko Cordial or by receiving repayment of debt owned by the Japanese brokerage to Citi.

The acquisition of Nikko Cordial, which catapults SMFG to the top ranks of Japanese securities companies, is a further step in the re-ordering of Japan’s financial landscape.

This deal will reduce assets and raise capital, all very much necessary for Citgroup as it is the bank where all eyes will be focused when the stress test results are made public.

Sources
Citi sells Japanese unit for $7.8bn – FT.com

Related posts:

• Citigroup and Redecard: shedding international assets
• JPMorgan has record revenue and $2.7 billion in profit
• Japan circa 1996 – forgotten already?
• Citigroup and Morgan Stanley: the City Morgue is now open
• Unscathed Japanese banks on the prowl

Over the past few days, I have written two posts regarding the increasingly acrimonious sparring surrounding Bank of America’s acquisition of Merrill Lynch.

• The horrible self-dealing of Ken Lewis and the principal-agent problem
• BofA CEO Lewis investigated by SEC
• BofA saga continues as John Thain calls Lewis a liar

The latest news is stunning: Bank of America’s MAC clause could probably never have been invoked because it had a specific exclusion for the deteriorating prices of legacy assets on Merrill’s books.

Here’s what it says. All you need to do is read the highlighted parts:

3.8 Absence of Certain Changes or Events. (a) Since June 27, 2008, no event or events have occurred that have had or would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect on Company. As used in this Agreement, the term “Material Adverse Effect” means, with respect to Parent or Company, as the case may be, a material adverse effect on (i) the financial condition, results of operations or business of such party and its Subsidiaries taken as a whole (provided, however, that, with respect to clause (i), a “Material Adverse Effect” shall not be deemed to include effects to the extent resulting from (A) changes, after the date hereof, in GAAP or regulatory accounting requirements applicable generally to companies in the industries in which such party and its Subsidiaries operate, (B) changes, after the date hereof, in laws, rules, regulations or the interpretation of laws, rules or regulations by Governmental Authorities of general applicability to companies in the industries in which such party and its Subsidiaries operate, (C) actions or omissions taken with the prior written consent of the other party or expressly required by this Agreement, (D) changes in global, national or regional political conditions (including acts of terrorism or war) or general business, economic or market conditions, including changes generally in prevailing interest rates, currency exchange rates, credit markets and price levels or trading volumes in the United States or foreign securities markets, in each case generally affecting the industries in which such party or its Subsidiaries operate and including changes to any previously correctly applied asset marks resulting there from, (E) the execution of this Agreement or the public disclosure of this Agreement or the transactions contemplated hereby, including acts of competitors or losses of employees to the extent resulting therefrom, (F) failure, in and of itself, to meet earnings projections, but not including any underlying causes thereof or (G) changes in the trading price of a party’s common stock, in and of itself, but not including any underlying causes, except, with respect to clauses (A), (B) and (D), to the extent that the effects of such change are disproportionately adverse to the financial condition, results of operations or business of such party and its Subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its Subsidiaries operate) or (ii) the ability of such party to timely consummate the transactions contemplated by this Agreement.

(b) Since June 27, 2008 through and including the date of this Agreement, Company and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary course of business consistent with their past practice.

(c) Since June 27, 2008 through and including the date of this Agreement, neither Company nor any of its Subsidiaries has (i) except for (A) normal increases for or payments to employees (other than officers subject to the reporting requirements of Section 16(a) of the Exchange Act (the “Executive Officers”)) made in the ordinary course of business consistent with past practice or (B) as required by applicable law or contractual obligations existing as of the date hereof, increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any Executive Officer or other employee or director from the amount thereof in effect as of June 27, 2008, granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay (in each case, except as required under the terms of agreements or severance plans listed on Section 3.11 of the Company Disclosure Schedule, as in effect as of the date hereof ), or paid any cash bonus in excess of $1,000,000 other than the customary year-end bonuses in amounts consistent with past practice and other than the monthly incentive payments made to financial advisors under current Company programs, (ii) granted any options to purchase shares of Company Common Stock, any restricted shares of Company Common Stock or any right to acquire any shares of its capital stock, or any right to payment based on the value of Company’s capital stock, to any Executive Officer or other employee or director other than grants to employees (other than Executive Officers) made in the ordinary course of business consistent with past practice under the Company Stock Plans or grants relating to shares of Company Common Stock with an aggregate value for all such grants of less than $1 million for any individual, (iii) changed any financial accounting methods, principles or practices of Company or its Subsidiaries affecting its assets, liabilities or businesses, including any reserving, renewal or residual method, practice or policy, (iv) suffered any strike, work stoppage, slow-down, or other labor disturbance, or (v) except for publicly disclosed ordinary dividends on the Company Common Stock or Company Preferred Stock and except for distributions by wholly-owned Subsidiaries of Company to Company or another wholly-owned Subsidiary of Company, made or declared any distribution in cash or kind to its stockholder or repurchased any shares of its capital stock or other equity interests.

Translation: If the market tanks and assets already on the books when this deal is consummated are marked down, then this is NOT grounds for Bank of America to renegotiate or pull out.

Look, here’s the story:

• Ken Lewis rushed into a terrible deal for Merrill Lynch at a grossly inflated price because he desperately wanted Bank of America to be a top notch franchise across the full spectrum of products.  Merrill has a very good franchise and had a good brand until recently.
• The deal terms specifically excluded poor market conditions as a MAC clause.  I should add that this is standard operating procedure in many mergers as I have been witness to countless MAC clauses with this very exclusion in mergers when I worked in Leveraged Finance and Corporate Development.
• John Thain was doing his duty in getting the best deal for his shareholders and protecting the 60,000 jobs of Merrill Lynch from a Lehman cataclysm. Ken Lewis was arguably not worried enough that he was overpaying and wasting shareholder money.

So, if Ken Lewis says that he told Hank Paulson and Ben Bernanke on December 21st that he was invoking the MAC clause, then this was a hollow statement because the MAC clause could not be invoked.  Whether Lewis knew/knows that is unclear.

As for John Thain, the man has been pilloried publicly, in particular because of the bonus scandal and the office re-design.  But, let me ask you this: was BofA going to underpay its vaunted Merrill money-makers in a one-off bonus round and risk their exiting the company?  No.  If you went to a Fortune 500 company with a new CEO, what would you guess the average amount spent for office renovations would be?

All of the Thain theatrics were bread and circuses, distracting us from the real issues: is our financial system safe yet and, if not, how can we most prudently ensure it is.

Source
Definitive Proxy Statement (Schedule 14A), Merrill Lynch – BofA Merger – SEC Website

Related posts:

• UBS woes with IRS have Swiss worried
• Creditors paid in full? No – try 6 cents on the dollar
• Are European banks sitting on 16.3 trillion in toxic assets?
• Bank failures to surge in coming years
• Structured Credit downgrades

The German car maker Daimler wants to put the Chrysler chapter behind it, so it will give up its remaining 19.9% stake and forgive all remaining loans. See BBC story.

Related posts:

• Volkswagen: if the American carmakers can get bailout funds, so can we
• Foreign Press Alert: 2 Sep 2008 – Germany
• Fiat as the engine for change in the auto industry
• German Press: Fiat to sign a deal with Opel, not Chrysler
• Magna is going to get GM Europe

The Wall Street Journal is running a front-page story about John Thain today in which he  accuses Bank of America CEO Ken Lewis of lying about events surrounding the Bank of America – Merrill transaction and the ouster of Thain as a top Bank of America executive.  Thain spent most of his career at Goldman Sachs, but left to head the New York Stock Exchange when he was passed over at Goldman in 2003.

The key issue as far as John Thain is concerned has to do with the bonuses paid out to Merrill Lynch executives.  Ken Lewis says he was apoplectic that these bonuses were paid when Merrill lost $15 billion.

But Mr. Thain says that he and Bank of America Chief Executive Kenneth Lewis agreed in writing that the bonuses could be paid before Bank of America’s acquisition of Merrill closed, which led to the early payments. “The suggestion Bank of America was not heavily involved in this process, and that I alone made these decisions, is simply not true,” he says.

Bank of America has painted a different picture than Mr. Thain’s of critical decisions that were made last fall. It has cast him as the person responsible for distributing billions of dollars of bonus money despite Merrill’s huge losses. Before Mr. Thain’s recent discussions with the Journal, he had refrained from commenting in depth.

Edward here. Honestly, Ken Lewis does not have a lot of credibility here after details of a February deposition were revealed last week. In that deposition, Lewis admitted to consummating the merger with Merrill Lynch despite his own misgivings about the deal, apparently because his job was on the line. So we have to take Lewis’ statements with this in mind.

The Wall Street Journal article continues later with this:

According to the merger documents, many other compensation decisions at Merrill were to be made “in consultation” with Bank of America officials. Bank of America approved paying a portion of the bonuses in Bank of America stock and was involved in setting compensation for a number of Merrill executives, people involved in the matter say.

Within days of the takeover announcement, Bank of America’s transition team arrived at Merrill to begin figuring out how to combine the two companies. About 200 employees set up on one floor of Merrill’s headquarters, and Bank of America Chief Accounting Officer Neil Cotty moved into an office on the 32nd floor.

The group became involved in nearly every aspect of Merrill’s operations, with dozens of Bank of America employees tracking Merrill’s financial condition on a daily basis, according to people who work at the firm.

In October, Bank of America announced that Mr. Thain had agreed to become president of the combined company’s global banking, securities and wealth-management business once the acquisition was completed. A bank spokesman said there had been “no commitment about succession in Mr. Thain’s decision to stay.”

Mr. Thain says that in late September, over a dinner in Charlotte, Mr. Lewis told him he was the only real candidate in line to succeed him.

By the end of November, Merrill’s losses were ballooning because of deteriorating market conditions and write-downs on various mortgage-related investments. Still, the daily emails sent to executives at both companies summarizing the deal’s status said “status green,” according to Mr. Thain, signaling that the takeover was on track.

In early December, the compensation committee of Merrill’s board agreed to a bonus pool of $3.62 billion. On Dec. 11, Bank of America asked Merrill to increase the amount of cash to 70%, according to a letter reviewed by the Journal. The two companies agreed that the stock portion of Merrill’s bonuses would be paid in early January. Mr. Thain says the documents prove that Bank of America was actively involved in compensation decisions.

Some Bank of America executives have said that Mr. Lewis lost confidence in Mr. Thain when Mr. Lewis learned of the losses from the transition team. Mr. Lewis flew to Washington on Dec. 17 to tell federal regulators that he was considering abandoning the takeover. Two days later, Mr. Thain left for vacation in Vail, Colo., unaware that the regulatory showdown had happened. Messrs. Thain and Lewis both have said that Mr. Thain didn’t find out until Jan. 5.

What transpired is not entirely clear, but the following is a potential course of events:

• John Thain sees Merrill Lynch on the verge of failure on the weekend of Lehman’s demise and rings Ken Lewis, a man he hardly knows – after all Bank of America is not really a creature of Wall Street. John Thain and Merrill Lynch are.
• Thain wants to strike a deal – one that the Feds (read Paulson, Bernanke and Geithner) – facilitate (See Fed Chair Hoenig’s off-the-cuff remarks about this, which I first mentioned in March).
• Later, the banking industry gets hammered.  Anyone with a large prop desk (Goldman, Merrill, Deutsche, Morgan Stanley) suffers huge losses. Merrill is one of the worst hit.
• Now, remember Bank of America is NOT a Wall Street firm.  They are based in Charlotte.  They are a regional commercial bank (BofA is really Nations Bank/NCNB) with a very different culture to the likes of Merrill.  So they probably were shocked by the losses here – which I imagine they were kept abreast of on an ongoing basis.  In March, The FT has said BofA knew how Merrill’s books were being marked.
• The next part is tricky.  Did Lewis, a deal hound if there ever was one, want to back out at this point?  My gut says no.  Were they going to pay big bonuses to retain personnel at Merrill? Yes! Remember, they had just paid a monster $44 billion for Merrills.  They were not about to let the deal founder on a one-off bonus round.
• Things changed somehow by December as the losses mounted.  And I suspect there was a real culture clash as well.  Thain and Lewis started to get to know one another and it was not working.  From my perspective, it is irrelevant what really happened in December between Thain and Lewis.
• What is relevant is that Lewis and the board of directors of Bank of America allowed the Merrill Lynch transaction to take place knowing that huge bonuses had been paid out and huge losses had been sustained – making the Merrill franchise considerably weaker than it was in September.  The MAC clause is completely valid as a reason to pull out or change the terms of the deal. This is what I argued in a post yesterday about Lewis.
• Because BofA did not change the deal terms and was subsequently bailed out, we can only believe that there was a nod-and-wink deal made with Bernanke and Paulson that more funds would be coming to bolster BofA’s worsening balance sheet as the stock price cratered.

At the end of the day, none of this is beneficial to Bank of America shareholders, who have seen their shares fall from over $50 per share to as low as $3 before rebounding to over $10. They now trade for $9.10.

Just think back, before the Countrywide and Merrill acquisitions, Ken Lewis could have claimed to be a rival for king of the hill to JPMorgan CEO Jamie Dimon, who now touts his firm’s ‘fortress’ balance sheet. But, after two disastrous mergers, Bank of America is a shambles. The real losers in this he-said she-said saga of corporate executives managers and regulations are the owners of the business, the shareholders.

And yet, John Thain is the only one to have lost his job.

Source
Thain Fires Back at Bank of America – WSJ

Related posts:

• SEC charges BofA of lying to investors over Merrill but settles
• Mea Culpa: I was too bullish on the BofA-Merrill deal
• Ken Lewis points the finger at Bernanke and Paulson
• BofA CEO Lewis investigated by SEC
• Ken Lewis defends Bank of America’s stress test results

I don’t much like Ken Lewis. It should be fairly obvious to everyone that he is a man who has only his own interests at heart. But, his revelation that BofA bought Merrill Lynch for the agreed-upon September price, despite Merrill’s having an additional $7 billion in losses is grounds for legal action.

Let’s review the situation.

In September, Hank Paulson, Ben Bernanke, and Tim Geithner committed the financial blunder of the century in allowing Lehman to fail spectacularly without any contingency plan for the probable market fallout. (Yes, Tim Geithner was a principal actor in this fiasco.)  Now, there was nothing wrong in letting Lehman Brothers fail.  However, there was something very wrong with bailing out Fannie Mac and Bear Stearns and allowing everyone on Wall Street to believe Lehman was too big to fail.  And there was even more wrong in having no contingency plan for the fallout.

So as a direct result of that fallout, Merrill Lynch was poised to be the next to go under.  Enter Ken Lewis, our White Knight.  I have to admit to being idiot enough to have thought the Bank of America – Merrill deal was a good one.  It seemed all was well when Ken Lewis plunked down $44 billion in September (even though Barclays got much of the Lehman assets for a song days later).  But, as markets went into freefall, so too did Merrill Lynch, hemorrhaging losses.  So why did Ken Lewis buy the company without at least trying to negotiate a lower price tag?

Answer: self-dealing.

It was the real thing. The banker, as you may have guessed, is Ken Lewis, CEO of Bank of America. And the bad guys harassing him are Hank Paulson, then Treasury secretary, and Ben Bernanke, head of the Federal Reserve, aided and abetted by shadowy henchmen.

The script for this stranger-than-fiction melodrama was provided by that rabid (and fiercely ambitious) bulldog New York state attorney general, Andrew Cuomo. Mr. Cuomo, back in February, had been grilling Mr. Lewis on what his keen canine eye detected as another indignity — the awarding of $3.6 billion to employees of Merrill Lynch, the giant brokerage firm acquired by BofA on Jan. 1 of this year.

What had Mr. Cuomo frothing at the mouth was that the $3.6 billion was shelled out even though Merrill suffered losses upwards of $15 billion in 2008’s fourth quarter alone.

We must point out how fortuitous it was that losses had not reached, say, $30 billion, since by the peculiar calculus being used to reward red-ink, that would have boosted Merrill’s bonus tab to $7.2 billion. And enraging the chronically enraged Mr. Cuomo all the more was that the bonuses were distributed even while the losses manifested themselves but were not disclosed, least of all to the bank’s shareholders.

According to Mr. Cuomo’s dour narrative, the product of four hours of interrogation of Mr. Lewis, the merger with Merrill was proposed in September after two days of due diligence (sounds more like due negligence to us). It gained approval of shareholders of both companies on Dec. 5. Barely a week later comes the revelation: Merrill’s losses were spiraling ever higher, causing an increasingly frantic Mr. Lewis to weigh calling the marriage off.

He reckoned he could legally do so thanks to MAC (material adverse event), recognizing that $7 billion more in losses than had been projected when the merger was agreed to was a very big MAC, indeed. He diffidently informed the powers-that-were of his plan to nix the nuptials and was summarily summoned to powwow with them in Washington that very evening. And it was there that Messrs. Bernanke and Paulson put the screws to him to not break the deal lest he trigger a systemic calamity.

On Dec. 21, Mr. Lewis, still of a mind to ditch the merger, communicated his determination to Mr. Paulson, who bluntly warned that he would give the boot to Mr. Lewis and his board unless the acquisition went through. To that bald threat, Mr. Lewis’ retort was a resounding purr: “That makes it simple. Let’s de-escalate.”

And de-escalate he did. The merger became a done deal right on schedule. To help salve any hurt feelings, Bank of America got $118 billion in loan guarantees from rich Uncle Sam to absorb any potential losses from Merrill.

To me, this sounds like a deal was worked out whereby BofA got a bailout if it went through with the deal. But, it should be plain from the events above that Ken Lewis did NOT have his fiduciary responsibilities for his shareholders top of mind.

So, let’s recap.

• Paulson, Bernanke and Geithner blow Lehman up and everybody panics.
• Merrill looks ready to blow up and take the system down with it.
• Bank of America steps in – or better yet, is coerced in – and pays $44 billion for Merrill.
• But, the market freefall continues, taking WaMu, AIG and Wachovia down with it.  Merrill loses its shirt in this disaster.
• By December, Ken Lewis is ready to pull out of the deal, citing the MAC (material adverse change) clause as grounds.
• Paulson and Bernanke go ballistic (Geithner was prepping to be Treasury Secretary) and get Ken Lewis to do something he thinks is bad for shareholders
• By February, BofA needs to be bailed out again to the tune of tens of billions more government money from Tim Geithner.  BofA’s stock tanks – shareholders are looking at 90%+ losses.
• Now, the SEC is investigating.

This whole episode stinks to high heaven and Ken Lewis doesn’t even look the worst of the lot here. That honor goes to Paulson and Bernanke.

But, what about the shareholders? Oh, those people, right. Don’t they deserve better? Yes, they do. But, they are not going to get better because mega-corporations are run by managers who are in it for their own enrichment and shareholders have zero say. This is a classic principal-agent conflict.

The essence of the principal-agent problem comes when a principal (let’s call them the owners) hires an agent (we’ll call them the managers) to act on her behalf. Often times, one is just too busy – or too inexperienced – to manage a business or negotiate a contract or what have you. So, one hires a professional steeped in experience to do it.

For instance, sports agents, made famous by the film Jerry Maguire, are the classic agents to the sports stars principal. As it happens, the agent has his own agenda – and this may or may not be the same as the principal’s employing him. You will recall the 2007 incident when Alex Rodriguez negotiated his own contract with the New York Yankees baseball team in order to make sure the result was one that was most favorable to his wants and needs (See NY Times article here.)

In business, the same dynamic is at play. While a dry cleaner can be the owner-proprietor of his own store, he cannot run two stores or ten stores at the same time (think George Jefferson). George needs to hire managers to run those stores – and he better hope those managers don’t have their hand in the till.

In today’s age, corporations are absolutely enormous, globe-spanning enterprises whose owners – the shareholders – individually have no influence over decision-making. What’s more is, the larger the organization, the less likely anyone is to have sway over the company’s managers. Supposedly, that’s why there is a board of directors, right?

A board of directors is a body of elected or appointed persons who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of trustees, board of governors, board of managers, or executive board. It is often simply referred to as “the board.”

A board’s activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization’s bylaws. The bylaws commonly also specify the number of members of the board, how they are to be chosen, and when they are to meet.

In an organization with voting members, e.g., a professional society, the board acts on behalf of, and is subordinate to, the organization’s full assembly, which usually chooses the members of the board. In a stock corporation, the board is elected by the stockholders and is the highest authority in the management of the corporation. In a nonstock corporation with no general voting membership, e.g., a university, the board is the supreme governing body of the institution.

So, where was Bank of America’s Board of Directors? Didn’t they see that Merrill had imploded. Why did they allow this travesty to take place? Shareholders had approved the merger on 5 Dec 2008, 16 days BEFORE Ken Lewis had said he was willing to back out. So they obviously had no say here.

Only the board of directors could have stopped Ken Lewis consummating a merger that should never have taken place or that had been re-negotiated. You should notice that this is the exact same run of events that we witnessed in the Countrywide transaction as well.

But, in the end, the deal went ahead as planned and Bank of America shareholders got their clocks cleaned as a result.

Sources
Shareholders Be Damned! – Alan Abelson, Barron’s
Board of directors – Wikipedia

Related posts:

• BofA saga continues as John Thain calls Lewis a liar
• BofA CEO confirms government coerced him into Merrill deal
• Ken Lewis is out as Chairman of Bank of America
• Ken Lewis defends Bank of America’s stress test results
• Mea Culpa: I was too bullish on the BofA-Merrill deal

Ken Lewis, the embattled CEO of Bank of America, has recently admitted to being coerced by U.S. Government officials to consummate the Merrill Lynch acquisition. The problem for Lewis is he may have neglected his fiduciary responsibility to shareholders in bowing to this pressure. The SEC is now investigating. See the video below for details.

Related posts:

• BofA saga continues as John Thain calls Lewis a liar
• Ken Lewis defends Bank of America’s stress test results
• Ken Lewis points the finger at Bernanke and Paulson
• BofA CEO confirms government coerced him into Merrill deal
• The horrible self-dealing of Ken Lewis and the principal-agent problem

I want to make clear the significance of the Treasury’s Chapter 11 bankruptcy plan for Chrysler if Fiat pulls out.  It will mean massive job losses and and a huge down-tick in consumer demand.  There will be no second half recovery. Geithner and Obama will look very much like greenhorns and lose a lot of credibility.

This is a very real possibility given the statements coming out of the German press.  While the U.S. Government is integrally involved in both the Opel-Fiat-GM and the Fiat-Chrysler love fests, it remains to be seen that they can strike a deal that is agreeable to all parties. These are very, very complicated negotiations, involving legal and employee issues in three different countries.

Handelsblatt, the most widely-read Finance paper in Germany said the following earlier today:

In searching for an investor to survive, first serious interested parties for struggling carmaker Opel have crystallized. Fiat Group and the Austrian-Canadian auto supplier Magna are the hot contenders for the Rüsselsheimer company. “Fiat and Magna are possible partners. But it should also be clear that there no decisions have been made,” said the Hessian Minister President Roland Koch (CDU). The Rhineland-Palatinate’s Minister for Economic Affairs Hendrik Hering (SPD) also confirmed that Fiat and Magna count as the main contenders for Opel.

An entry of Fiat would be problematic because of its high debt and the excess capacity of the Italians, Herring said through his spokesman Joachim Winkler. Opel employs about 3,400 workers in an engine and transmission factory in Rhineland-Palatinate.

As early as next week, we probably should have a memorandum of understanding between Fiat and Opel signed. Fiat and the management of Opel declined to comment. Opel works council chief Klaus Franz, however, confirmed that Fiat seek a majority takeover. In negotiating circles it is said that Fiat has already been talking with the Federal Government in the past week.

For the struggling General Motors subsidiary, a long-awaited new investor is in its grasp. But the looming entry of Fiat, ensures trouble, even before completion of negotiations: the employees’ side, announced opposition to the Italians. They feared massive job cuts if the majority Fiat took over. Works chief Franz yesterday intentionally brought the talks with Fiat into the public in order to torpedo the unwanted merger.

Amongst deal makers, it is said that GM management in Detroit and the federal government favor a quick solution with the Italians. Fiat managers met yesterday together with Jochen Homann, State Secretary for the Federal Ministry of Economic Affairs, in Washington to deal with the U.S. side over the Italians start at negotiations. The federal government has, in the case of an entry at Opel, made guarantees and is therefore very much involved in the search for investors. Even representatives of the Hessian state government are already in Washington. Opel’s headquarters are in Hesse.

Opel has already scheduled a Tuesday press conference. GM boss Fritz Henderson had said last Friday that the U.S. company is talking with more than six interested parties, for whom it has opened the books. Opel wants to largely decouple from GM and is looking for investors for an independent company in which GM has only a minority participation.

With a merger of Opel and Fiat, two companies would be back together, which split in dispute n 2005. At the time, GM paid 1.55 billion euros, in order not to have to take over the automotive business of Fiat. In 2000, GM and Fiat had started the joint development of engines and transmissions in Europe. At the same time, the U.S. group bought ten percent of Fiat’s shares. Again, this has been reversed. Opel and Fiat are direct competitors in many markets. Works chief Franz is, therefore, afraid of a “dramatic loss of jobs at Opel and plant closures in Germany.”

An Opel-Fiat merger will be resisted by the unions in Germany. But, just as with the Dresdner-Commerzbank merger, this can be overcome if there are no good alternatives.

GM has the best hand here as it is going to get rid of Opel come hell or high water. Fiat is next because they have a choice of Opel or Chrysler. Opel is next because it has multiple suitors lined up and the German government is probably willing to bail it out temporarily if a suitor can’t be immediately. Chrysler and the U.S. Government are in the worst situation because they need a deal desperately. Their best alternative to a negotiated agreement is bankruptcy.

Source
Fiat und Magna buhlen um Opel – Handelsblatt
Fiat in talks to buy Opel and Vauxhall – Guardian

Related posts:

• Opel and Fiat spells bankruptcy for Chrysler and GM
• Fiat as the engine for change in the auto industry
• Chrysler: bulls make money, bears make money, pigs get slaughtered
• Germans reject Chinese offer for Opel
• GM headed for bankruptcy

Bank of America CEO Ken Lewis is fighting to keep his job because earnings at his company have plummeted. BofA’s acquisition of Merrill Lynch has been a large part of the problem.  Now, understanding that he is being made out to be the fall guy, he has fessed up that BofA was coerced into the deal.

Federal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co. — a deal that later triggered a government bailout of BofA — according to testimony by Kenneth Lewis, the bank’s chief executive.

Mr. Lewis, testifying under oath before New York’s attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.

Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren’t normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA’s shareholders an opportunity to stop the deal and let Merrill collapse instead.

“Isn’t that something that any shareholder at Bank of America…would want to know?” Mr. Lewis was asked by a representative of New York’s attorney general, Andrew Cuomo, according to the transcript.

“It wasn’t up to me,” Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would “impose a big risk to the financial system” of the U.S. as a whole.

Mr. Lewis’s testimony suggests how aggressively federal regulators have been willing to behave in their fight to fix the U.S. financial system. The testimony for the first time spreads some of the blame to Messrs. Paulson and Bernanke for Mr. Lewis’s decision to keep problems at Merrill under wraps.

“Everybody — Lewis, Paulson, Bernanke — eventually agreed that any public discussion of the situation at Merrill would have adverse consequences for the system,” according to an individual close to BofA.

A person in government familiar with Mr. Bernanke’s conversations with Mr. Lewis said Wednesday that the Fed chairman didn’t offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel.

Mr. Paulson repeatedly told Mr. Lewis that “the U.S. government was committed to ensuring that no systemically important financial institution would fail,” according to his spokeswoman.

All of this should be quite alarming to American citizens because it demonstrates the lengths to which our government has gone to conceal the true nature of this financial crisis. I do want to point out that BofA was apparently coerced into the Countrywide deal as well as I said in a March post.

This past Monday, I posted an article about comments made by Kansas City Fed Chair Hoenig which have received zero press despite their significance.  Here they are (I have bolded the significant part):

“The Treasury Department, the Federal Reserve and other regulators have also arranged bailouts and mergers for large struggling or insolvent institutions, including Fannie Mae and Freddie Mac, Bear Stearns, WaMu, Wachovia, AIG, Countrywide, and Merrill Lynch. But other firms, such as Lehman Brothers, have been allowed to fail.”

Now, I don’t know about you, but I certainly do not remember hearing about the Bank of America transactions with Countrywide and Merrill Lynch as deals foisted upon BofA by the government.  In essence, Hoenig is suggesting that Bank of America is a US-equivalent of Lloyds Bank.

If you recall, HBOS, a very reckless lender in Britain, was on the verge of collapse after Lehman Brothers declared insolvency in September.  Gordon Brown, desperate to save his legacy as Chancellor during the asset bubble, coerced Lloyds into taking over HBOS without proper due diligence.  This deal has failed spectacularly as HBOS has many more writedowns than was anticipated and Lloyds has effectively been nationalized along with Royal Bank of Scotland (not before the executives involved came under criticism).

If one looks across the pond at Bank of America, Countrywide and Merrill Lynch, circumstances are not too dissimilar. To my mind, it makes sense that no one has gone to jail if the government basically foisted Countrywide and Merrill on to Ken Lewis and BofA in return for assurances down the line that the government would not make waves.

BofA is to Lloyds as Merrill and Countrywide are to HBOS. In both cases, the government was desperate to consummate a merger which prevented the collapse of a systemically-important financial institution. Unfortunately for shareholders of BofA and Lloyds, these mergers have been quite destructive to shareholder value. Ken Lewis’ revelations certainly demonstrate that BofA shareholders have reason to complain.

Source
Lewis Testifies U.S. Urged Silence on Deal – WSJ

Related posts:

• Mea Culpa: I was too bullish on the BofA-Merrill deal
• Ken Lewis points the finger at Bernanke and Paulson
• Throwing Bernanke under the bus
• SEC charges BofA of lying to investors over Merrill but settles
• BofA is nuts: still going to acquire Countrywide

Dunfermline, the largest uilding society in Scotland was forced into the hands of the Nationwide.  This happened only after the U.K. government was forced to pony up 1.6 billion pounds – not the best of news for Gordon Brown before a major world summit.

As the Times Online says:

The state-backed rescue brings to six the number of UK deposit takers saved with direct taxpayer cash. The others are the Northern Rock, Bradford & Bingley, Royal Bank of Scotland and HBOS and Lloyds TSB, now merged into Lloyds Banking Group

Below is the Nationwide’s press release on the event:

ACQUISITION OF DUNFERMLINE BY NATIONWIDE BUILDING SOCIETY

Following the announcement by the Bank of England (30 March 2009), in relation to Dunfermline, Nationwide can confirm that it has taken ownership of Dunfermline’s:

• £2,353 million of retail deposits, representing the accounts of c.300,000 Dunfermline members;
• Dunfermline’s 34 branches and retail sites, and all related employees, plus Dunfermline’s head office at Dunfermline;
• Dunfermline’s £1,022 million prime mortgage lending book;

 These assets were transferred to Nationwide under a statutory instrument made under the provisions of the Banking Act 2009.

The acquisition of Dunfermline’s savings accounts and prime lending book further strengthens Nationwide’s retail customer base and franchise. The business acquired will continue to trade as Dunfermline Building Society and will complement the other regional brands operating in Nationwide’s group namely Cheshire Building Society and Derbyshire Building Society. This acquisition allows Nationwide to operate at a national and local level and recognises the goodwill attached to regional building societies.

Commenting on the transaction, Graham Beale, chief executive of Nationwide, said: “This is good news for the members of Dunfermline who are now joining the world’s largest building society. As members of a solid, stable and dependable organisation, members of Dunfermline can be assured that their savings are safe. Nationwide has a strong association with Scotland and has been providing service to customers in this key market for many years. This transaction will enhance Nationwide’s ability to operate nationally and locally, whilst recognising the goodwill attached to a historic and important Scottish brand.

“Nationwide is in a unique position by virtue of its size and financial strength, to provide support to Dunfermline, and we regard it as both responsible and commercially beneficial to undertake this transaction. This transaction excludes high risk assets: commercial loans and some residential loans (including the acquired and equity release portfolios) were not transferred, and the transaction will enhance the overall value to Nationwide’s membership over the medium term.”

The Dunfermline brand will remain and Dunfermline’s customers will continue to use their existing channels – branches, telephone and post – for transactions, as usual. They will see minimal change or disruption.

The combined business of Nationwide and Dunfermline will have around 900 branches with a good geographical spread across the UK. In addition, it is also expected that upon completion of the transfer, Nationwide’s market share of retail deposits will increase to around 11% and the combined business will have a member base of 15 million.

Background to the transactions

Nationwide: Nationwide has satisfied itself that the proposed transaction is in the long term interests of its members and will generate value over the medium term. The Board regards it as responsible and commercially beneficial to support the mutual sector in this way and to extend the franchise of Nationwide that already includes two regionally branded building societies.

Financial Impact

Nationwide has a strong and high quality balance sheet with total assets of around £200 billion, and total capital of £9.7 billion as at 30 September 2008.

Members

The combined Society will continue to operate as a mutual building society, owned by and run for the benefit of its members. Nationwide has a membership of nearly 15 million, Dunfermline has a membership of 0.3 million.

As part of the enlarged organisation, Dunfermline members will benefit from the security provided by Nationwide’s scale and financial strength. The Dunfermline brand and branch network will continue.

Nationwide has a long-standing track record of value creation for its membership, and estimates that members benefited by £350 million in the first half of the current financial year (08/09) as a result of better pricing, lower interest rates and lower charges.

Transaction structure

The transaction will take place under the so-called “special resolution regime” contained in the recently introduced Banking Act 2009. This legislation grants the UK Tripartite authorities – the Treasury, the Bank of England and the FSA – special powers to deal with financial institutions that are in difficulties, including making statutory instruments to transfer some or all of the business of the institution in financial difficulty to a third party. The proposed transaction will take place by way of the Bank of England making such an order under the Banking Act 2009. This order will transfer certain of the assets and liabilities of Dunfermline to Nationwide, as well as certain other assets and liabilities to a wholly-owned subsidiary of the Bank of England.

The terms of the transfer were negotiated between the Nationwide Board, Bank of England and the Treasury.

Board and operational structure

On completion of the merger, the combined Society will be run by the current Nationwide Board, led by chairman, Geoffrey Howe, and chief executive, Graham Beale. The board of Dunfermline will resign concurrent with the transfer of the business to Nationwide.

Dunfermline will sit alongside the Derbyshire and Cheshire building societies as part of Nationwide’s regional franchise and will report through to Nationwide’s Group Development Director, Tony Prestedge. Nationwide’s existing head office in Swindon will remain the head office for the combined Society.

The business of Dunfermline will continue on the effective date to operate under its current brand as a separate trading franchise of Nationwide. There are no immediate plans to integrate Dunfermline’s member business with Nationwide’s member business and the branch network will remain. However, it is likely that some back office and central group functions of Dunfermline will no longer be required.

Timetable

Under a statutory instrument made under the Banking Act 2009, the transfer of the relevant assets and liabilities of Dunfermline to Nationwide will be effective from 8am on 30 March 2009.

Morgan Stanley & Co Limited is acting as financial adviser to Nationwide and no one else in connection with the matters described in this announcement. In connection with such matters, Morgan Stanley & Co Limited, its affiliates and their directors, officers, employees and agents will not regard any other person as their client nor will they be responsible to any other person for providing the protections afforded to their clients.

Allen & Overy LLP has acted as legal adviser to Nationwide.

Source
Nationwide Media Centre
Nationwide’s Dunfermline rescue costs taxpayers £1.6bn – Times Online

Related posts:

• Nationwide looking to buy targets in UK mortgage market
• U.K.’s Nationwide releases robust earnings and capital report
• Nationwide: example of how UK recap scheme matters
• Nationwide merger with Cheshire and Derbysire now a done deal
• Nationwide brings back 125% LTV mortgages

Last summer, as a number of sinister revelations were made about the goings-on in the financial services sector, I speculated that we would definitely see the government going after individual executives for illegal activities. I saw Angelo Mozilo, the man with a tan, as the most likely scapegoat – a mortgage industry Ken Lay, if you will (see my August post “Ex-Countrywide CEO is the new Ken Lay“).  In August, it seemed perp walks were imminent. Yet, none of this came to pass.

Now, mind you, we have busted a few executives on Wall Street.  And we just got a conviction on Bernard Madoff for the world’s biggest financial fraud.  But, there have really been few convictions of the nature of Ken Lay, Jeffrey Skilling, Bernie Ebbers, Joseph Naccio or any of the others convicted after the tech bubble burst.  I have my ideas as to why.  Let me make my case here.

This past Monday, I posted an article about comments made by Kansas City Fed Chair Hoenig which have received zero press despite their significance.  Here they are (I have bolded the significant part):

“The Treasury Department, the Federal Reserve and other regulators have also arranged bailouts and mergers for large struggling or insolvent institutions, including Fannie Mae and Freddie Mac, Bear Stearns, WaMu, Wachovia, AIG, Countrywide, and Merrill Lynch. But other firms, such as Lehman Brothers, have been allowed to fail.”

Now, I don’t know about you, but I certainly do not remember hearing about the Bank of America transactions with Countrywide and Merrill Lynch as deals foisted upon BofA by the government.  In essence, Hoenig is suggesting that Bank of America is a US-equivalent of Lloyds Bank.

If you recall, HBOS, a very reckless lender in Britain, was on the verge of collapse after Lehman Brothers declared insolvency in September.  Gordon Brown, desperate to save his legacy as Chancellor during the asset bubble, coerced Lloyds into taking over HBOS without proper due diligence.  This deal has failed spectacularly as HBOS has many more writedowns than was anticipated and Lloyds has effectively been nationalized along with Royal Bank of Scotland (not before the executives involved came under criticism).

If one looks across the pond at Bank of America, Countrywide and Merrill Lynch, circumstances are not too dissimilar. To my mind, it makes sense that no one has gone to jail if the government basically foisted Countrywide and Merrill on to Ken Lewis and BofA in return for assurances down the line that the government would not make waves.

Nevertheless, two questions remain unanswered.  First, why has the Obama Administration not shown prosecutorial zeal with financial executives for alleged wrongdoings?  I would have anticipated that Eric Holder at the Justice Department  would have  signalling to the American public that the new administration was breaking with the old – that Barack Obama wanted to at a minimum investigate wrong-doing.

I foresaw the new Administration making a big to-do about this.  But, it has not. To my mind, this makes political sense and would certainly give Barack Obama more political capital with a rightly indignant American public.  It would certainly make bailouts at Citgroup and Bank of America more palatable.

Second, why is Hoenig coming out proclaiming that Countrywide and Merrill were government-enabled deals?  Was there a deal — and, if so, what were the terms of that deal?  I reckon the American public has a right to know, just as it should know who is getting money in deals with AIG and what kind of assets the Federal Reserve is now accepting as collateral.

My understanding is that investigations regarding criminal activity are indeed ongoing, especially at AIG.  However, I am still puzzled as to whether the Obama Administration is more interested in burnishing its populist pro-Main Street credentials or its business pro-Wall Street ones.

Related posts:

• BofA CEO confirms government coerced him into Merrill deal
• BofA is nuts: still going to acquire Countrywide
• Mea Culpa: I was too bullish on the BofA-Merrill deal
• Too big has failed
• Countrywide is the real problem at Bank of America

Chris Whalen, a well-regarded bank analyst, ran an interview piece with Nouriel Roubini on Barry Ritholtz’s site. The conversation was very illuminating and I highly recommend reading the whole post linked below. However, I wanted to point out a quote from Chris in the piece that I find significant in light of the recent dividend cut by JPMorgan Chase.

The difference between BAC and WFC, and JPM on the other hand, is that Jamie Dimon, who we like more and more, bought WaMu for three cents on the dollar of assets. WFC bought Wachovia whole, without a resolution. So JPM does not have to soft-pedal on foreclosures, despite what you read in the newspaper, and they don’t have to write anything down. WFC and BAC are choking on their acquisitions because they were not restructured first.

I am very impressed by Jamie Dimon. He has been as cautious as any of the big bank CEOs as evidenced by the lower writedowns at JPM and the firesale acquisition prices. Even the pro-active dividend cut smacks of prudent foresight. If any big bank can survive this mess, it will be JPMorgan Chase.

Sources
Now What for the Big Banks?: Interview with Nouriel Roubini – Chris Whalen, The Big Picture

Related posts:

• Quote of the day: “Jamie is always hanging around the hoop”
• Jamie Dimon: November was terrible, December is terrible
• Industrial & Commercial Bank of China
• Jamie Dimon on the economy
• Jamie Dimon: ‘we don’t need’ your money

Merrill Lynch is looking like a real dog these days — much more than I realized back in September.  They were obviously bankrupt, much as Lehman Brothers was.  As bearish/cautious as I have been on the economy and the financial sector, obviously I was not bearish enough.  When the Bank of America – Merrill deal got done, I had this to say:

Merrill shrewdly dialed up Bank of America, in fear for their own continued existence. They have been able to strike a deal – and at a decent price. Notch one up for John Thain.

Bank of America made a big mistake in buying Countrywide Financial — one that they will regret for years. Buying Lehman Brothers would have been even more disastrous given their exposure to Commercial Real Estate. But, this deal is good for several reasons. It is better for Merrill than BoA though, as it is a premium to book value and the current stock price.

The Merrill deal is much better than a potential Lehman deal.

Better than Lehman? That’s not saying much. Obviously, I was out to lunch on this one. Lesson learned.

Related posts:

• Merrill – Bank of America deal
• BofA CEO confirms government coerced him into Merrill deal
• Why Lehman failed
• Brace yourself!
• BofA is nuts: still going to acquire Countrywide