Britain’s biggest mortgage lender begged for new funding on Tuesday and Germany’s top bank suffered its first quarterly loss in years as the credit crunch sapped financial industry strength.
UK-based HBOS asked shareholders for 4 billion pounds ($7.9 billion) via a rights issue and said it would cut its dividend payout as it grapples with toxic assets and a deteriorating home loans market.
Deutsche Bank wrote down 2.7 billion euros ($4.2 billion) as its contribution to the burgeoning pile of global property-based asset mark-downs, and abandoned its 2008 profits target. Europe’s biggest insurer Allianz also wrote down 900 million euros.
HBOS, which owns Britain’s mortgage market leader, The Halifax, is the second major UK bank in days to turn to investors. Royal Bank of Scotland announced plans last week for a record 12 billion pound cash call. Analysts say the HBOS move could pressure others to follow suit.
Most worryingly for investors, the Deutsche results, the German bank’s worst since the collapse of the dotcom bubble, showed signs of broader problems.
Revenue at Deutsche’s investment bank arm slumped to 880 million euros in the first quarter from 6.1 billion a year ago.
“The issue is not the writedowns,” said Dieter Ewald, a fund manager with Frankfurt Trust. “What is worrying for me is the impact on the operating business — that’s decisive.”
HBOS too said in its trading statement that UK market conditions remained challenging and that it expected a deterioration of the credit environment in 2008.
The race is on.
Facing greater scrutiny from regulators and higher losses on loan portfolios as the credit crunch hits the real economy, U.S. and European banks are scrambling to raise over $50 billion to shore up their capital.
Since the start of the financial crisis last summer, some $191 billion of capital has been raised to rebuild the balance sheets of U.S. and European banks, according to UBS research.
While the first round of fund raising had been driven by sovereign wealth funds, a second round, triggered by UBS’ (UBSN.VX: Quote, Profile, Research) $15 billion rights issue on April 1, has mainly been supported by public share sales.
Analysts and bankers are expecting another $50 billion to $80 billion to be raised over the next one to two months following RBS’s (RBS.L: Quote, Profile, Research) 12 billion pound ($23.66 billion) rights issue, as banks improve their capital positions.
It may be better to be safe than sorry.
“I know of several banks who are thinking about doing a rights issue or hybrid convertibles even though they don’t absolutely need the money,” a London-based equity capital markets banker said.
REGULATORY FOCUS
The allure of rotting mortgage bonds has grown so strong that Wall Street’s vultures have begun picking over their carcasses — a signal the credit crisis has entered a crucial stage in its vicious cycle.
In the past two months, these intrepid investors have begun betting billions of dollars on a hunch that mortgage security prices have fallen enough. It is a risk few have taken for a year or more as the credit crisis rooted in this very market wreaked havoc in financial markets around the world.
In early February, bid lists for bonds backed by middle-quality mortgages found no takers, even at what were then considered fire-sale prices, between 75 cents and 80 cents on the dollar. But the following month, though, Jeffrey Gundlach, chief investment officer at bond manager Trust Company of the West, began snapping up these same securities at 65 cents on the dollar during what he calls the “darkest moments for the markets.
“You had a massive, massive supply-demand imbalance that had developed into a death spiral,” Gundlach said of the systemic liquidity squeeze in early March. “Those securities were really cheap against the fundamentals, so we went in big and started buying.”
WATCH THE VULTURES
The behavior of Gundlach and those like him is important because this brand of investor — patient, value scavengers willing to stomach some initial loss in exchange for huge windfalls when a market turns — frequently signals that a market is forming a bottom when they are active.
In early March, banks and hedge funds stripped of access to credit had to sell mortgage securities to raise cash for margin calls. That helped send already panicky U.S. markets into a full-fledged credit freeze.
But the Federal Reserve stepped in and announced that it would lend up to $200 billion of U.S. Treasury securities to banks for 28-day periods in return for debt, including a range of mortgage-backed securities. That broke a month-long sell-off, sending the mortgage securities rallying strongly.
Delta and Northwest, seeking to combine to create the world’s largest airline, posted losses Wednesday totaling $10.5 billion due to exorbitant fuel prices and writedowns of their companies’ value.
Atlanta-based Delta Air Lines Inc. said its loss widened in the first quarter to a whopping $6.39 billion. A few hours later, Eagan, Minn.-based Northwest Airlines Corp. reported a $4.1 billion loss for the period.
Both airlines have been hampered by the steep rise in fuel prices. Delta recorded a $585 million year-over-year increase in the cost of fuel in the first quarter, while Northwest’s fuel costs increased $445 million.
Microsoft Corp (MSFT.O: Quote, Profile, Research) is prepared to walk away from its $43.6 billion bid for Yahoo Inc (YHOO.O: Quote, Profile, Research) if the two sides can’t agree on a price, Chief Executive Steve Ballmer said on Wednesday.
Speaking at a technology conference near Milan, Ballmer said Yahoo’s better-than-expected first-quarter results, reported on Tuesday, have not changed Microsoft’s view of Yahoo’s value.
Microsoft sees Yahoo as a way to compete with arch-rival Google Inc (GOOG.O: Quote, Profile, Research) in the Internet search and advertising arena, but it has limits to what it is willing to pay to get a deal done.
“We’re prepared to move forward without a merger with Yahoo,” Ballmer said. “We think the best way to move forward quickly (and gain critical mass against Google) is to come together with Yahoo.”
“Hopefully that works. But if it doesn’t, we go forward,” he said. “Time is money. We made (that) clear in the last letter we sent.”
In that letter, Ballmer set a Saturday deadline for Yahoo’s board to accept a deal with Microsoft or face a lower bid that Microsoft would take directly to Yahoo’s shareholders. Yahoo’s board of directors has said Microsoft’s cash-and-stock offer significantly undervalues the company.
Analysts downplayed the possibility of Microsoft walking away from the deal.
“It is unlikely Microsoft will walk away, as the company has a strategic imperative to establish a more significant presence in Internet advertising,” Marianne Wolk, analyst with Susquehanna Financial Group, wrote in a report on Wednesday.
Shares of Canadian mining companies with operations in Ecuador were pounded yesterday as an assembly that’s writing the country’s new constitution overwhelmingly approved a decree to revoke most mining concessions there.
Ninety-five members of the 130-member body voted for the measure, which also calls for creation of a state-run mining company.
The assembly is controlled by the party of leftist President Rafael Correa. When he took office last year, he vowed to increase state control of natural resources and the economy.
A number of large Canadian mining companies have concessions in the South American country and could be affected.
Shares of Aurelian Resources Inc., which holds the 950-square-kilometre Fruta del Norte discovery, fell $2.22, or more than 30 per cent, to $5.14. Dynasty Metals & Mining Inc. shares fell $2.11, or 34 per cent, to $4.05.
Shares of Corriente Resources Inc. fell 50 cents, or more than 10 per cent, to $4.10 before trading in the shares was halted pending the news from Ecuador.
"The company has requested an official version of this mining mandate and will advise further as to the impact of this mandate on the company’s operations in Ecuador when the company’s analysis is completed," Corriente said in a statement.
Corriente holds the Mirador copper-gold operation.
Miners and industry observers bemoaned the situation, calling the government’s move a blow to junior miners, particularly those such as Aurelian with a fat stable of concessions in the Andean country.
"It sends a message that this administration is not fully aware of what mining can do for their economy, and what modern mining is like," said Patrick Anderson, Aurelian’s chief executive.
The decree revokes hundreds of concessions and limits the amount any company can hold to three. Toronto-based Aurelian currently has 38 concessions in Ecuador.
Mining companies will not be allowed to appeal the government’s decision in courts and no compensation will be granted for expropriated holdings.
Alberto Acosta, head of the assembly that is rewriting Ecuador’s constitution, said recently he was concerned about the effects mining could have on the country’s pristine environment.
With files from Associated Press and Reuters News Agency
Nelson Peltz’s Trian Partners said on Friday it will seek a special meeting of Wendy’s International Inc (WEN.N: Quote, Profile, Research) shareholders after the hamburger chain rejected two separate takeover offers from Trian and the billionaire investor’s Triarc Cos Inc (TRY.N: Quote, Profile, Research).
One proposal called for combining Wendy’s and Triarc’s Arby’s sandwich chain. The other involved buying 100 percent of Wendy’s “for over $900 million in cash with the balance in stock,” Trian and Triarc said in a letter addressed to Wendy’s Chairman James Pickett.
In the letter, which was included with a regulatory filing on Friday, the suitors said their proposals would have required the approval of the shareholders on each side of the transaction and that neither was conditioned on the receipt of third-party financing.
“Our most recent proposals were summarily rejected in less than 24 hours,” they wrote.
The suitors also said they want any transaction entered into by Wendy’s to be approved by all shareholders, and not just the special committee of the board of directors that rejected the Trian/Triarc takeover proposals.
Wendy’s spokesman Bob Bertini declined to comment on the filing.
Wendy’s directors have been weighing a sale of the company since June 2007 under pressure from Peltz, who has been pressing for a better financial performance.
Earlier this month, Wendy’s said first-quarter sales at restaurants open at least 15 months fell at both franchised and company-owned locations, hurt by bad weather and an early Easter.
Local health departments face a mounting work force crisis as they struggle to recruit, train and retain qualified workers ranging from nurses to epidemiologists, according to a study released today by the Center for Studying Health System Change.
Inadequate funding, a lack of competitive salaries and benefits, an exodus of retiring workers, too few trained workers and lack of enthusiasm for public health as a career choice were all reasons for the shortage, according to the study. It was funded through a grant from the Robert Wood Johnson Foundation.
Respondents described public health funding as inadequate, undermining public health agencies’ ability to recruit and retain a sufficient and trained work force. Many respondents blamed a lack of political support for public health.
Uncompetitive salaries were the most frequently cited reason for being unable to attract candidates to public health, especially new graduates who have to pay off large student loans.
The U.S. Treasury wants hedge fund managers to improve disclosure of hard-to-value assets and adopt audited public company-style performance reports for investors, a summary of recommendations, obtained by Reuters on Monday, shows.
They did not propose any new regulation, but chose instead to rely on market-driven due diligence and improved disclosure.
The Treasury on Tuesday is due to release hedge fund best practices guides from two committees it commissioned last year — one for hedge fund managers and one for hedge fund investors.
They were among a number of steps that the Treasury-led President’s Working Group on Financial Markets recommended in September 2007 to protect investors and reduce systemic risks posed by the growth of hedge funds while not restraining financial innovation.
The two committees started their work as financial market stress from subprime mortgage defaults were gathering steam, creating worries about investments made by the nearly $2 trillion hedge funds sector.
Among the thorniest problems in the global credit crisis is
establishing valuations for largely illiquid mortgage-backed securities lodged on bank and hedge fund balance sheets.
The Treasury group’s Asset Managers’ Committee, headed by Eric Mindich, chief executive of Eton Park Capital Management, calls on hedge funds to put in place more robust procedures for the valuation of assets, including written policies, segregation of responsibilities and other measures.
Anxiety about the economy extends to concern about the ability of corporate employers to pay promised pension benefits. And well it might.
The threat is greater than most people realize. Few know that ERISA Industry Committee (ERIC) advocates a plan that would enable employers to cut loose existing defined benefit pensions with insufficient funding.
Many companies have terminated retiree health care plans, shrunk employee insurance coverage and shifted health care costs to workers.
The recent General Motors/United Auto Workers agreement transferred GM’s retiree health care program to a new "trust" operated by the union, but its funding may be inadequate.
ERIC’s "New Benefit Platform for Life Security" comes wrapped in cotton-candy rhetoric about promoting retirement and health security. But here’s what’s "new" — companies with defined benefit pension plans would have the option to off-load those plans to outside "administrators."
Company assets no longer would back pension plan promises; instead the administrator would pay from company contributions plus whatever they earned — or lost. Since 2000, they’ve lost billions.
The "New Benefit Platform" proposes that the U.S. Pension Benefit Guarantee Corporation (PBGC) stand behind plan promises. Unfortunately, PBGC already is in the red.
Reports of plan underfunding and PBGC insolvency often elicit suggestions that the government "bail out" PBGC. They invoke the economy-shaking bailout of federal savings and loans insured by the Federal Deposit Insurance Corporation as a precedent.
The two situations are not analogous: FDIC guaranteed money that account holders had deposited; but PBGC "guarantees" benefits that have not been funded. Further, "The (Senate and House) expect the (PBGC) program … to be self-sustaining."
That means that fees paid by participating companies and earnings on them would fuel the program. A bailout would dishonor that rationale.
Employer-sponsored medical care and retirement plans receive more tax forgiveness than those for charitable contributions and mortgage payments.
ERIC’s justification for this "new" proposal: Pension regulations are so intricate that employers who sponsor plans can’t master them.
But the new "administrators," who specialize in plans, could. It will amaze people that companies like DuPont, FedEx, GE, GM, Hewlett-Packard, IBM, Motorola, Tyco and Wells Fargo cannot muster adequate staffs and consultants equal to the task.
The economy faces daunting problems: The disintegration of defined benefit pension plans, the collapsed earnings and employer manipulation of 401(k)s, the meltdown of employment-based health insurance and out-of-control medical care prices.
It is puzzling that so high-powered a group as ERIC has fielded so unappealing a proposal, to abandon pension obligations, with the rationale that the largest corporations in American cannot understand requirements.
The "New Platform" offers no help to the workers and retirees.
Merton C. Bernstein is Coles Professor of Law Emeritus at Washington University.
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