NEW YORK (
) -- Financial stocks endured a difficult 2009. Who would have predicted, last December, that the sector would have sunk to generational lows in March, endured the government stress tests in June and then seen share prices rebound, allowing many companies to repay bailout money later in the year? Our fearless forecasters offer five possibilities for 2010 -- some of them unlikely, but all of them possible, and sure to be fodder for debate at your next holiday party.
What if the Government Turns a Profit on AIG?
Bank of America
has repaid its bailout investment, and even
is making headway in that direction, it's worth asking the bold question of whether taxpayers might get their money back from
American International Group
Short answer: The outcome - while highly unlikely - isn't entirely impossible.
AIG owes a hefty chunk of change, and the Treasury Department predicts it will lose $30.4 billion on its AIG investments. But since CEO Bob Benmosche has taken the helm, the insurer has been making significant headway, which is expected to continue into 2010.
Of the $180 billion in taxpayer support connected to AIG, $70 billion in loan principal still needs to be paid back. AIG also owes quite a bit in dividends and interest, though the total amount is unclear. (AIG didn't respond to a request for those figures in time for publication.)
In November, AIG extinguished
by issuing preferred stakes in subsidiaries that are being prepared for spin-offs or sales. It has also generated $5.6 billion in cash through dozens of asset sales that will be used to pay down balances further. There are plenty of other businesses on the chopping block, and Benmosche has indicated that he will be patient and sell or spin them off only when the price is right.
Of course taxpayers also need to consider two AIG-related vehicles sitting on the
balance sheet. Maiden Lane II and III house $36.7 billion worth of assets once owned by AIG that are mainly backed by residential real estate.
The bailout inspector general, SIGTARP, has said it's "difficult to assess the true costs" of Fed actions, and that "full recovery
of taxpayer investment is far from certain." But while the Maiden Lane assets were once labeled toxic, they actually haven't fared so poorly.
The entities have repaid $7.1 billion in Fed loans since their creation in October 2008, including interest and fees. The fair value of their assets has improved by $10.7 billion. If the Fed sold all of them in the market today, they'd be worth $3 billion more than remaining loans. If the Fed holds onto the assets as the economic recovery moves forward, taxpayers might earn even more.
The insurer would have to raise quite a bit more through earnings, asset sales or capital raises to repay what it owes the government. It would also need to extinguish another $61.8 billion in untapped federal credit lines that exist in case of emergency. Perhaps most importantly, it would need to prove its financial stability to regulators, while continuing to unwind more than $1 trillion worth of derivatives and whittling itself down to mainly a core property and casualty business.
Achieving that over the next 12 months would certainly be bold. But given AIG's progress so far - including two consecutive quarters of profit for the first time since 2007 - it seems as though a bailout repayment is possible, and may occur sooner than initially expected.
Written by Lauren Tara LaCapra in New York.
Next: What if Goldman Sachs' CEO Lloyd Blankfein Steps Down?>>>
What if Goldman Sachs' CEO Lloyd Blankfein Steps Down?
After facing extinction last year until being rescued by the government and
Chairman Warren Buffett (view
is back to making more money than anyone can imagine. Why in the world would the boss of such a place hang it up now?
Well, Lloyd Blankfein has made plenty of money, and isn't he tired? And lately, the attacks from the public, the press, regulators and members of Congress are unrelenting. It's gotten so bad that Goldman is going so far as to pay the 2009 bonuses for its entire 30-person management committee in restricted stock instead of the usual cold, hard cash.
At 55 years old, Blankfein is far from retirement age, though he is two years older than his
counterpart Jamie Dimon, and talk that Dimon may be bored in his job has been going on for months, forcing Dimon to eventually shuffle top management in order to groom Jes Staley as his potential successor. Also, Blankfein, like Dimon, seems like he could function outside finance -- probably not in politics, since everyone now hates Goldman, but maybe as a stand-up comic.
The obvious candidate to replace Blankfein would be Gary Cohn, the bank's president who, like Blankfein, came up through Goldman's commodities trading unit, J.Aron. But maybe the board would use a Blankfein resignation to try and change the company's image, described in a recent
article as obsessed "with making money first and foremost," instead of thinking about client relationships, as the old Goldman apparently did.
That might argue for putting one of Goldman's top-ranked "relationship" bankers in charge, like David Solomon or John Weinberg, the co-heads of investment banking. Neither, though, seems to have the legendary client skills that have characterized the best Goldman dealmakers over the years. Star M&A banker Gene Sykes fits that description, but who knows if he would be interested. Also, anyone who did not meet with the Federal Reserve and the Treasury during the depths of the crisis last year, or were at least closer to those discussions as Cohn surely was, would probably be seen as lacking the experience of those who did.
Or maybe such speculation is a useless exercise. William Cohan, who wrote "House of Cards," about Bear Stearns' collapse and is now at work on a Goldman book, tells me via email that the idea of a Blankfein resignation is "Bold, brash but
it ain't gonna happen anytime soon."
Written by Dan Freed in New York.
Next: What if Citigroup CEO Vikram Pandit Keeps His Job?>>>
What if Citigroup CEO Vikram Pandit Keeps His Job?
CEO Vikram Pandit has been through the ringer this past year.
As he passes his two-year anniversary at the helm, not only is he still working his way out from under a mountain of toxic assets, but he also has to deal with a giant albatross in the form of the U.S. government since it handed over $45 billion in taxpayer funds to stabilize the company in late 2008. The present situation has the government as both a debtor (owed payback on roughly $27 billion in trust preferred securities) and a shareholder (owning about 34% of the company's common stock).
Throughout 2009 media reports have suggested that Pandit was not up to the enormous task of returning Citigroup to profitability, that he does not have enough commercial banking experience to run the company and that he wasn't working fast enough to remedy the balance sheet. There's also been speculation that his position was hampered because he did not get along with certain regulators, most specifically
Federal Deposit Insurance Corp.
Chairwoman Sheila Bair, and that perhaps she wanted him removed.
But, as the year draws to a close, it appears the perception of Pandit is changing as the company has made palpable progress under his stewardship, unwinding toxic assets, and reducing headcount and expenses, so as to come out this mess a slimmer, more focused international bank. The latest evidence came just this week in reports that say the company has apparently built up enough credibility to embark on a capital raise which could involve the sale of as much as $20 billion in common stock as part of the plan to clear its bailout tab.
"We're past the moment of maximum stress on Citi. He's
Pandit actually proven himself to be a pretty smart, savvy operator," says Peter Sorrentino, senior portfolio manager at Huntington Funds, a subsidiary to
. "He's just been inside the belly of the beast, turning the wheels and making the machine move."
If Citigroup is indeed able to come through with the aforementioned equity offering later this month or even early next year, it would be a major victory for Pandit, likely putting him in the driver's seat with regard to his continued employment, a distinct change from the sentiment he faced for most of the past year.
--Written by Laurie Kulikowski in New York.
Next: What if JPMorgan Chase Buys Another Big Bank?>>>
What if JPMorgan Chase Buys Another Big Bank?
made out big with its fire-sale acquisitions of Bear Stearns and Washington Mutual in 2008, adding significantly to its capital markets business and branch presence, respectively. Could it look to repeat this success in 2009, albeit in a much different market environment?
The FDIC-led sale of
to JPMorgan conveniently added branches and deposits in some of the most hard-hit states in the country - California, Texas (where Chase already had a sizable presence) and Florida, as well as much of the West Coast.
But the New York-based financial institution still lacks much of a footprint in the Southeast region.
Bank failures, which currently stand at 130 for 2009, are expected to continue to pile up in 2010, given the depths of the mortgage mess as well as a growing commercial real estate problem that could put many small and mid-size regional banks at risk. Conditions might once again conspire for JPMorgan to make a fortuitous pick-up of bank gem (or gems) on the cheap.
The juicier possibility is a blockbuster deal, and Anton Schutz, president of Mendon Capital Advisors and the fund manager to Burnham Financial Services, doesn't discount the idea that, if the economy stabilizes further, Chairman and CEO Jamie Dimon might decide to make a big splash if he deems the acquisition essential.
Schutz says Dimon's tastes could run from smaller banks like
to something much bigger like
, among others.
JPMorgan certainly has the capital to fund another deal. As of Sept. 30, it had a Tier One capital ratio of 10.2% and a Tier One common capital ratio of 8.2%, although the industry as a whole is still waiting for clarity on what higher requirements regulators may put in place going forward.
Still another bank acquisition does not come without its issues. JPMorgan is already tapping up against the 10% national deposit market share limits with $2.04 trillion in assets as of Sept. 30, with its more than 5,000 branches and businesses spreading from investment banking to credit cards. An acquisition of yet another large bank might not get clearance in the current political environment, some say. Already Dimon has publicly argued that, while companies should not be "too big too fail," they also shouldn't have caps on their sizes.
any eventual transaction will be their last
bank deal because from a market share perspective they're probably going to be as big as they're able going to get," Schutz says.
--Written by Laurie Kulikowski in New York.
Next: What if Bank of America Spins Off Merrill Lynch?>>>
What if Bank of America Spins Off Merrill Lynch?
Bank of America
that still profited from
, but didn't have to deal with its headaches. If the company made the bold move to spin off its Merrill division next year, it could do just that.
According to several barometers, Bank of America has gotten financially stronger via the Merrill acquisition. Merrill's charging bulls provided 18% of Bank of America's revenue during the first nine months of 2009, and a whopping 34% of its profit. Bank of America also has a much broader client base and a more diverse revenue stream. It can build upon those gains by cross-selling retail products to Merrill customers, and vice versa.
However, the Merrill deal also came with some hefty costs, including Bank of America's CEO, Ken Lewis, who plans to retire at year-end following a string of investigations and litigation stemming from the transaction. It also came with $15.3 billion in Merrill losses, $20 billion in additional TARP funds that needed to be repaid with dilutive stock offerings, and untold legal costs and damage to the company's reputation.
Though Bank of America has now
taxpayers' $45 billion bailout investment with a sizable return, it has also lost its good standing with regulators, lawmakers and taxpayers. Investors who are suing the company aren't very happy either. Nor are the former Merrill employees who defected due to culture shock, or the ones who stayed, but continue to bristle at their new "Bank of America-Merrill Lynch" corporate logos.
There are strong arguments on both sides as to whether the benefits of the acquisition have outweighed the cost. But before the Merrill deal was discussed or announced, Bank of America shares were trading above $35. Lately they've struggled to stay above $15.
If Merrill were spun off into a separate entity, some of those problems wouldn't go away, and others might even get worse. But as the chorus of public criticism reached a fever pitch in early September, one analyst suggested it might be necessary.
"If the result of these entanglements is that Bank of America will be forced to divest itself of Merrill Lynch or that shareholders must pay hundreds of millions in fines then the courts will have meaningfully harmed all involved," wrote Rochdale Securities' Richard Bove.
Of course, that speculation was ahead of CEO Ken Lewis' retirement announcement on Sept. 30, and there are no indications from the bank itself that a Merrill divestiture is on the table. But if all the talk in Washington about some banks being "too big to fail" leads to action, Bank of America appears to be a prime candidate for a break-up.
On the bright side, Bank of America could reap some big short-term gains if a spin-off did happen. The company could also opt to retain a stake in the independent Merrill franchise -- similar to its large stake in
-- thereby keeping exposure to some of the hardy profits it has enjoyed this year. Perhaps most importantly, it could go back to doing what it does best: Being America's biggest bank, without the notoriety of America's most controversial investment bank.
Written by Lauren Tara LaCapra in New York.
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