If the talks doing the rounds are to be believed then the much talked about US financial rescue package could in turn result in a major shakeout of the nation’s banks. A new round of mergers is expected to be on the anvil as the treasury department is said to have allocated a chunk of the rescue package towards those banks and financial institutions that are keen and have shown willingness to buy their weaker banking rivals. This motive clearly outlines the agenda of the US government who is gearing up not only to stabilize the shaken economy but also to reshape it and to give it a new direction.
This inclination of the Treasury department towards mergers shows that the treasury is not interested in buttressing weaker banks and other such financial institutions but would rather drive towards their consolidation. The banking and the investment sector is as it is badly shaken up by the ongoing financial turmoil and there are plenty such players operating in the market who are willing and open to the idea of putting themselves on the selling block. The potential roadblock in this direction is the absence of well capitalized buyers.
This is where the Treasury department hopes to play a role by channelizing funds towards banks which are big institutions are have strong financial fundamentals strengthening their base and working. The government plans to allow access to funds at favorable rates to these strong players with the aim of encouraging them to expand. Though aimed to cover the entire banking and investment sector this plan is not expected to be rolled out on a first come first serve basis, rather in depth study and analysis will form the basis of organizational selection.
It is note worthy to mention that the Federal Reserve and the Federal Deposit Insurance Corporation have been hugely burdened in the recent times by having to come all out to save banking institutions like Wachovia. But some analysts have rightly questioned this thought by putting across the point that as to how does the government plan to exert control over the investments that it intends to pump into banks to see that the investment is used for the same purpose for which it was provided.
Tags: us banks merger
The ongoing financial crisis wrecking havoc on the US shores in undoubtedly the biggest financial calamity to hit the country since the great depression of 1929. The Wall Street investment giants have crumbled like a pack of cards and the story is not all that rosy with the countries banks too. The financial chaos reigning high in the country has considerably shaken its financial credentials and has not spared the global financial markets. The cost of rescuing these financial investment giants by the US Federal reserve amounts to an astronomical figure of close to a trillion dollars. Believe it or not this figure is almost equivalent to India’s national income. And what is more heartening to know is that the end to this financial turmoil does not seem to be anywhere in the near future. This situation has made economists and financial guru’s in India to take notice and stock up some immediate measures.
The RBI has been continuously pumping in money into the system to enhance liquidity in the market and the banks too have been borrowing easily under LAF which is the Liquidity Adjustment Facility but still liquidity has been drying up. A major factor amounting to this financial situation is the hard hitting taken by industrial economies world over which has subsequently reduced the demand for goods and services. What is noteworthy is the fact that India’s GDP growth estimate for the current fiscal year has been downgraded from 8% to 7.4%. The enormous caution exercised by the RBI and its policies relating to glowing slow on opening new complex financial products has immensely helped in insulating India from drastic effects from the financial crisis.
Taking lessons from the sub prime mortgage and investment crisis which has wrecked the US fundamentals the approach of the RBI was completely cautious on all fronts including permitting hedge funds to invest in Indian equities and real estate, allowing greater FDI in the banking sector or at the same time allowing excessive capital inflows. The present churnings in the global financial sector mainly the investment and banking sector has exposed chinks in the Indian financial sector too in the form of inadequacies within the system to contain losses mainly because of the absence of a healthy and effective risk assessment and management system and to absorb the losses there should be the presence of a strong capital base.
Tags: indian crisis
Strengthening rumors of Prudential’s keen interest for bidding for the stricken US insurance giant AIG it is reported that Prudential has appointed Credit Sussie to assist them in making the decision on promising acquisitions that that could make from the insurance company AIG that has already been bailed twice by the US Federal Reserve. Looking at the present market conditions it is highly unlikely that Prudential will raise any money for any kind of purchases using its rights issue and therefore Credit Sussie has been given the responsibility to talk to potential investors on behalf of Prudential. It is worth noting that it is the Asia operation of the insurance mogul AIG excluding Japan that Prudential is most interested to acquire. The amount it expects to collect from subsequent investors to help realize this goal is about 15 billion US Dollars. Prudential seeks the investors to take a 20% stake in the company and subsequently help the company to finance its bid for the insurance giant. It has been since long that Prudential has been eyeing the emerging insurance market in Asia as a part of its global expansion plan.
Though the insurance sector has seen a drastic slip in its growth pattern in the recent times this deal never the less would come as a big boost Prudential. The recent financial tsunami has spared no one and has caused significant damage to the share prices of Prudential and other players operating in the same segment too. The yet to be named potential investor funds for the insurance bid reported to be hailing from China and Middle East are expected to pump into prudential funds in the tune of 1.2 billion Pounds. But Prudential is not the only company showing its keenness towards acquiring AIG. It is reported that the other potential buyers in the foray include French insurance giants AXA and the ING unit of Holland.
It was only last month that the US government had to come to the rescue of the world largest Insurance company AIG with a $ 85 billion bailout package which was subsequently raised to $123 billion. It is reported that AIG is keen on retaining its US property and operations along with its foreign general insurance businesses and an ownership interest in its foreign life operations while is keen to sell the rest off.
Tags: aig, prudential
In times when uncertainty looms large over global financial markets there is an interesting observation that I would like to point out. The bloodbath which has taken its toll on almost all big, reputed and established Wall Street institutions have strangely left the smaller, lesser known firms untouched and in a position where surprisingly it is expected that they will not only survive but will also lead towards prosperity.
The large firms had to bear the brunt as they were suffered from heavy leverage as against the small firms which take very less risk because in reality it is the money of the partners of the firm which fuel and fund the business. It is generally observed that in smaller firms the owners of the firm play the role of the officers as well. This puts their own money at stake when they operate and thereby are careful with the operations relating to the business like the underwriting process undertaken for the transactions etc.
This proves out to be the major reason for these smaller entities dwelling on Wall Street to do well. They have been seen generating profits even in such turbulent times and have gained a significant share in the market. I would mark this current scenario as the biggest opportunity ever seen by these firms since they have no debts or burdens to carry forward and are now spoilt for choices looking at the huge number of brokers and bankers available in the market for recruitment.
Also worth consideration is the act of acquisition of other smaller firms by them with the aim of expanding their reach in the financial market. But the recent spate of reforms I believe is a cause of worry amongst the community of these small firms. The lawmakers will have to take into consideration that these proposed reforms follow a tiered system so that the small firms do not end up on the receiving end owing to their small size and limited capabilities to do business.
Tags: small firms, wall street
In continuation to the haunted times presently gripping the US financial sector, Citigroup, the world’s biggest bank in a daring bid announced its plans to come to the rescue of Wachovia Corporation which in recent times had reached the brink of collapse. Orchestrated by the Federal regulators, this deal is similar to the takeover of Bear Stearns by JP Morgan Chase and will cost Citigroup a bargain basement price of about $2.2 billion in stocks. in accordance to the deal Citigroup will absorb the $42 billion losses associated with the Wachovia’s mortgages and FDIC will assume responsibility of the losses exceeding this amount. In return, Citigroup will offer FDIC $12 billion in preferred stocks and warrants. As a result of this deal there is further concentration noticed in the deposit market of the United States where Bank of America, Citigroup and JP Morgan Chase will now sit over almost 30% of the industry’s deposits. This will automatically increase the scrutiny of the federal bodies on these organizations and will leave the small and lesser significant entities operating in the financial market with no other option but to look out for suitable suitors to enable them to continue operations. This deal clearly cements the impressive progress made by Citigroup after registering huge losses in the recent path. This deal will allow Citigroup to have access to all the assets and liabilities of Wachovia which in turn is expected to provide safety to all the present bondholders of Wachovia. The deal will also enable Citigroup to exercise control over Wachovia’s corporate and private banking operations. At present Wachovia had about 3,300 branches in about 21 states of the United States and held about $447 billion in form of customer deposits.
It is expected that Citigroup will raise money to pay for this deal by announcing the issuance of new shares of its common stock. This act is pegged to generate around $10 billion for Citigroup. It was the portfolio of Wachovia which had a huge share of mortgages known as ‘option ARM’s’ which proved to be the nail in the coffin of the bank. These mortgages gave the customers enhanced capabilities to restructure their repayment cycles causing increased distress to the bank’s operation. This year has clearly spelt doom for the banking sector in the US with 14 commercial banks already pulling down their shutters. This figure looks all the more baffling when compared to the aggregated count of 3 bank failures which the US witnessed in the last 3 years.
Tags: citigroup, Wachovia
The present financial situation in the US aggravated by the weakening dollar has left investors there feeling cornered and disillusioned thereby increasing the attraction quotient towards foreign stock markets and currencies. The inflation situation too is no better and the grim situation seems to be moving towards further deterioration owing to low interest rates, a rapid increase in the money supply, easy credit availability, presence of undisciplined underwriting in times when the government is bailing out financial situation which has seriously damaged the country’s banking system. Portfolio’s which have their asset allocations focusing on US companies have been now found to be ill prepared to handle the turbulent conditions prevailing there in the wake of increasing interest rates. One effective way to control this economic angst has is to increase one’s foreign equity exposure and adopting the strategy of shifting to short term government bond holdings dealing in high return yielding foreign currencies.
The weakening US Dollar in comparison to other foreign currencies and commodities has made the investors in the US to search for better result yielding international investment opportunities. I too would like to add here that short term debt instruments denominated in foreign currencies have been found to give good returns and results. Also, the equity markets in certain countries like China, India, Brazil and other fast growing economies have been found to be yielding substantial returns.
The equity opportunities offered by countries like Australia and Norway too have been found to be capable of yielding good returns in comparison to that given by the US market at this point of time. This kind of diversification has also been found to be successful in curtailing major negative impact on your portfolio as a result of rapid changes in the global financial environment. I would also like to point out that the record spanning the last couple of decades have shown that well managed currencies have consistently outperformed the UD dollar and have proved to be better result oriented options.
Tags: currency trading, foreign currency
In regard to the ongoing financial crisis hitting the US market the Indian insurance authority IRDA or the Insurance Regulation and Development Authority have ruled out the need of further tightening the regulations for insurance firms here in India by citing that the Indian insurance counterparts are well capitalized and are therefore not likely to be affected by the global financial turmoil. I suspect that the call for tightening of regulations would have translated into a revision of solvency margins for these insurance firms.
IRDA however looks staunch on bringing out a plan to put in place risk based solvency norms by the end of this ongoing fiscal. In further announcement IRDA has reported to have shown its intention of allowing LIC with a reasonable amount of time for it to pare down with its equity stake that it enjoys in several companies to the limit of 10% which is the level of allowed investment cap specified by IRDA. This decision very well indicates to me the cautious approach taken by the regulator so that LIC does not go in for a forced sale which subsequently would make it to offload its investments in the market in return for major losses in the form of low returns.
LIC is a major investor in some of India’s biggest equities and is in possession of a stake exceeding more than 10% in some of India’s major blue chip companies which include the likes of ITC, Cipla, Maruti, MTNL, Ranbaxy, HPCL, Tata Motors etc. I consider the denial against changing the solvency margins to be based upon the fact that with no major company drawing external investment they are presently very well capitalized and working efficiently and smoothly within the present prescribed solvency margins. Taking concern on the fate of AIG in the US the regulators here in India have asked the company to present them with a business report in order to understand what the company is actually facing and how is their local Indian partner planning to proceed with changes in the structure of AIG taking place in the US.
Tags: lic
After the seizure of Washington Mutual by the US Federal regulators due to its performance which is being dubbed as to being the largest ever failure by a US Bank, it was bought by JP Morgan Chase for US$ 1.9 billion. By means of this deal JP Morgan goes on to stake claim on all deposits, assets and some liabilities of leading savings and loan associations. This acquisition would result in giving JP Morgan the rare distinction of being the leading US depository institution in lieu of its over $900 billion of customer deposits.
This deal though would not let JP Morgan stake control on Washington Mutual’s senior unsecured debt, subordinated debts and the preferred stocks of Washington Mutual’s banks. Also, the deal prohibits Morgan Chase from staking claim on any asset or liability of the bank’s parent holding company or the non-bank subsidiaries of the holding company. JP Morgan plans to write down the loan portfolio of Washington Mutual by about $31 billion. A seizure of Washington Mutual was long anticipated considering the heavy mortgage related losses that the company had recently incurred. Its stock prices had experienced a huge plummet in its price which was in the tune of being a 95% drop and in turn bought the share prices crashing to a low of $1.69 as against its high of $36.47.
I go along with the word of analysts and consider that the depositors and customers of the banks are expected to see this development as a simple combination of two banks and expect normal working and functioning of the processes in the banks. The Federal deposit Insurance Corp doctored this sale to JP Morgan after realizing that if Washington Mutual remained open then it was not interested in it and then stepped up to organize an auction including this bank and three other institutions whose identities were not revealed. The government takes into consideration the assets of the bank to measure its failure. Washington Mutual had approximately $310 billion in assets. I would consider this deal to be a big win for JP Morgan Chase who by getting to pay $1.9 to FDIC get the opportunity to fan out and penetrate deep into the world market by providing it roughly with 5,400 branches.
Tags: jp morgan
The recent collapse of Lehman Brothers has put a question mark on the transparency of structured financial products operating in the financial markets. With Lehman Brothers signing for bankruptcy in the recent past, the security of these structured products have come under the scanner. Also this recent development is also expected to have a major impact on the new product development because the structured products need the backing of an issuer and Lehman Brothers was one of these major issuers. These recent happenings are going to make the market all the more conservative and not at all conducive for new products to come in. The structured products are designed to create an investment product which combines the features of both equity and fixed income options and involves the use of derivatives to meet specific investment objectives. This aim can be best achieved by creating a mixture of different types of investments which could include various kinds of commodities, bonds, currencies, real estate options, equities etc.
These structured products might seem similar to mutual funds or exchange traded funds but are not so. The main point of difference lies in the fact that unlike mutual funds or exchange traded funds, these structured products come with a defined maturity date along with the option of principal protection and the ability towards customization so as to suit the individual need of the investor depending upon the market conditions. Though enabling greater transparency in regard to the structural products is essential to regain back the customers faith and confidence but this wont be the only measure necessary to be adopted.
The producers of these specialized products need to be more forthright and active to explain these products better to the investors and to help them in clearing their doubts and queries pertaining to them. I recommend paying more attention to the protection issued to the investors in case the issuer goes belly up. Therefore to sum up the fears I would state that the biggest challenge posing in front of the structured product issuers would be to improve and work upon the education and communication aspects revolving around these products which would automatically instill confidence amongst the investor community.
Tags: scrutiny
The gloomy atmosphere enveloping the Wall Street finally saw some glimmer of hope with the world’s prominent stock picker Warren Buffett deciding to back Goldman Sach. The faith of investors had been considerably shaken when the investment company model took a beating on Wall Street. Since then the companies were finding it very difficult to get investors to back them in raising cash. This investment of $5 billion by Warren Buffett which will be channelized through his company Berkshire Hathaway has provided a major impetus to Goldman Sach and was also evident from the leap that the shares of the company registered in the market.
But this deal for Goldman Sach has come with a heavy price. Berkshire Hathaway Inc which is led by the veteran investor will end up buying almost $5 billion of Goldman’s preferred shares which would come with a 10% dividend. In addition to this the company would get ownership of warrants which would allow it to buy $5 billion of the firm’s common stocks during any time in the next five years. These stocks would be priced at $115 a share. These stocks of Goldman would sit in Buffett’s impressive portfolio along with other major US commercial banks. This move is expected to inject confidence in the troubled US financial market. In addition to this boost got from Buffett, Goldman also plans to sell about $2 billion worth of its common stocks to the public in quest of additional funds.
Warren Buffett went on to describe Goldman Sach as an exceptional institution. With its fanned global presence along with a proven management team the firm has an impressive track record to its name. Goldman Sach see’s this aid from Buffett as a strong validation of their client franchise and its future prospects. Until now Warren Buffett had refrained from investing in investment firms as he considered the working of these firms to be complex and too large to manage and run efficiently and took this decision also only when Goldman Sach along with Morgan Stanley decided to give up the tag of being investment banks and became bank holding companies.
Tags: Goldman Sach