Monday, August 31, 2009

Don't mess with Texas banks

The old adage that everything is bigger in Texas still seems to hold water --especially when it comes to the business of banking.

Before Guaranty Financial Group collapsed last week, the Austin-based thrift reportedly drew intense interest from lenders and investors across the country. U.S. Bancorp (USB, Fortune 500), Wells Fargo (WFC, Fortune 500) and the private equity pros that bought IndyMac were said to have either bid or consider an offer for its assets. Guaranty was ultimately sold to Spain's Banco Bilbao Vizcaya Argentaria (BBV).

But Guaranty may be an anomaly. Only four Texas banks have failed since the beginning of 2008. And the failure of Guaranty had more to do with exposure to bad real estate loans in California than problems in its home state.

In fact, business has been good for banks operating within the Lone Star State.

In the second quarter, Texas banks reported profitability that surpassed the rest of the country, generating a 0.69% return on assets, compared to the national median of 0.49%, according to a recent report published by investment bank Sheshunoff & Co.

"It is the one area of the country where you could say there is an abundance of interest [on behalf of bankers]," said Brett Rabatin, a senior research analyst at Sterne Agee who tracks a number of Texas-based lenders.

In some ways, Texas seems to have everything a bank could love: a rapidly growing population in need of a place to park their money and a relatively resilient economy that could be among the first to emerge from the recession.

As of July, the state's unemployment rate stood at 7.9%, one of the lowest in the nation. But other recent economic indicators have also been encouraging. Median home prices and sales activity, for example, have both been on the rise this summer, while manufacturing activity has also improved in recent months, according to recent data from the Federal Reserve Bank of Dallas.

That has helped many local banks avoid the hefty credit costs that have saddled so many of their peers across the country -- and ultimately boosted their bottom lines.
A crowded playing field

Such factors, combined with a tough-but-fair state regulatory regime, have made Texas the destination of choice for the banking industry in the past few years.

Before being acquired by Wells Fargo last fall, Wachovia had planned to build about 250 branches in Texas by the end of next year. Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) all have a significant presence in Texas already, with each boasting several hundred retail locations.

With nearly 640 different lenders operating within the state, overseeing some 5,800 branches, some would argue it makes for a crowded playing field. But that has not deterred many lenders from trying to claim their stake in this lucrative market.

Five of the 28 new banks that have opened so far this year have set up shop in Texas, according to the FDIC. Even veteran lenders, like San Francisco's UnionBank, have taken an interest in the region, reportedly applying for a state charter recently.

But that level of interest cuts both ways, notes Rabatin. With the level of competition so fierce, lenders looking to grow have few options other than stealing market share or through acquisitions.

"The problem is it is so hard to get a critical mass without buying something of decent size, which is why Guaranty piqued a number of peoples' interest," he said.
Lessons learned

While Texas may hold the promise of tidy profit margins for banks, some trouble spots still loom for lenders looking to expand their presence there.

The recent decline in the price of natural gas to below $3 has worried some banks with exposure to the local energy industry, while the extent of the fallout in the souring commercial real estate market have also kept some bankers up at night, said Jim Gardner, chairman of Commerce Street Capital, a Dallas-based investment bank.
0:00 /3:29Banking: Lessons learned

"It's been pretty good up until now, but we really started seeing a deterioration in commercial real estate beginning in the second quarter," he said. "I suspect that trend will continue for a while."

Still, few expect the industry to relive the painful banking period of the 1980s and early 1990s, which was also driven by a combination of collapsing energy prices and deterioration in commercial real estate values. Between 1980 and 1994, 599 Texas banking institutions failed.

Living with that memory, many bankers took precautions in the years leading up to the current crisis, employing thorough underwriting practices and taking care not to overexpose themselves to the energy industry, said John Blaylock, an associate director at Sheshunoff & Co.

"They were simply much more careful about underwriting loans the last 10 years because of that," said Blaylock. "There are bankers here who vividly remember what happened and are not about to repeat it."

Monday, August 24, 2009

Cash for Clunkers: Only hours remain

Cash for Clunkers is just about at the end of the road.

The government-funded rebate program, popular with consumers, comes to its official completion on Monday.

Dealers have until 8 p.m. to file claims for any deals.

Some dealers said they were participating in the Clunker program right up to the end. Others said they had stopped because they didn't want to risk giving a $4,500 discount on a car and not be reimbursed by the government.

AutoNation (AN, Fortune 500), the country's largest dealership chain, stopped doing Cash for Clunker transactions after Friday. AutoNation had completed nearly 11,000 deals, according to spokesman Mark Cannon.

"It's been a great run," Cannon said.

Under Clunkers, which launched July 27, vehicles purchased after July 1 are eligible for refund vouchers worth $3,500 to $4,500 on traded-in cars with a fuel economy rating of 18 miles per gallon or less.

Car buyers trading in a vehicle must prove that the vehicle has been titled to them for at least a year and, in most states, that the car has been insured for a year. Dealers have to provide copies of that paperwork, among other things, to the National Highway Traffic Safety Administration in order to get their rebates.

The Virginia Automobile Dealers Association reported late last week that about 25% of its member dealerships had already dropped out of the program because of uncertainty over getting paid for their deals.

The Virginia auto dealers' group reports that dealers have been reimbursed for only about 3% of all the deals that have been done in that state. Hall described the submission process as challenging, with frequent problems and rejections.

"It's been ugly, ugly," Hall said.

The principal trade group for dealers made a last-minute push to extend the deadline.
0:00 /1:42Cash for clunkers gets clunked

In a statement released late Friday, the National Automobile Dealers Association called on the government to accept rebate requests until Aug. 31. The group cited computer slowdowns that could result from "overwhelming demand" on Monday. The government has yet to rule on whether it would extend the deadline.

Friday, August 21, 2009

Oil surges to 10-month high

Oil prices soared on Friday to their highest level since October as investors grow hopeful that a recovery of the world economy is in sight.

On Friday, the price of oil for October delivery rose as high as $74.15, after settling the day before at $72.42. The price of oil hasn't traded that high since Oct. 20, 2008, when it reached an intra-day peak of $76.12.

All told, oil has surged by two-thirds this year since after closing out 2008 at $44.60 per barrel.

Manouchehr Takin, petroleum analyst at the Center for Global Energy Studies in London, said the increases in oil prices don't make sense when you look at them purely at face value.

"On the fundamentals of supply and demand, one cannot explain why the price is high," said Takin. "All the [global] inventories are full. The outlook for the demand for oil in the coming weeks is really weak."

But investors who lack confidence in the volatile stock markets have shifted their money into commodities like oil, which is why prices have been escalating, said Takin.

"There is not much confidence in the stocks around the world," he said. "Obviously commodities is an alternative. They trade in oil, and therefore the paper value goes up."
0:00 /3:12Oil prices endanger recovery

At the same time, analysts say oil investments are being driven by the belief that the worldwide economic downturn has bottomed out and is due for a recovery -- a turn of events that would bolster demand in the near future.

"If things are getting better with the economy, then the demand will rise for commodities, and that's the expectation," said Joseph Stanislaw, independent senior advisor at Deloitte LLP.

In the United States, this perception is likely fueled by positive comments from Federal Reserve Chairman Ben Bernanke and improvements in the housing market.

But Stanislaw noted that it's too early to tell whether this perception of recovery will blossom into a reality.

"What usually happens in this type of economy is that the price rise happens before the demand rise," Stanislaw said. "People want to be there before it happens."

Monday, August 17, 2009

How Obama's transparency promise holds up

The Obama administration pledged unprecedented transparency in its accounting of the $700 billion bank and auto bailouts (TARP) and the $787.2 billion Recovery Act. A lot of information has been made public but there are some key details where the transparency falls far short.

Here's what we still don't know:

1. How are banks using TARP funds?
2. Who are bailed out banks lending to?
3. What is the value of the assets that Treasury has accumulated as a result of TARP?
4. Where are stimulus funds ultimately going?

They're important questions: We want the government to ensure it is spending our money wisely, and experts want to know why the Obama administration won't provide the answers.

"Why are we bailing out banks, and what are we getting out of it?" asked Craig Jennings, senior fiscal policy analyst at transparency research organization OMBWatch. "These are very big questions, and the administration doesn't seem to be willing to answer them."

What we do know. To make the bailouts and stimulus more transparent, the administration commissioned Web sites like recovery.gov and financialstability.gov, which have given the public previously unattainable information about how taxpayer funds are spent.

"The president and vice president made a clear commitment from the beginning that we would provide unprecedented accountability and transparency," said Liz Oxhorn, the Obama administration's spokeswoman for the Recovery Act. "Look at recovery.gov and compare it to the standard of how government worked in the past. It is truly a pioneering site in terms of access."

But many analysts and overseers say that the provided information is not nearly enough.

"The administration's transparency goals clearly have not been reached," said John Clippinger, co-director, of the Berkman Center for Internet & Society at Harvard University. "I think this administration is making a huge effort to enable them, considering where we've been in the last eight years, but they're certainly not there yet."

Accounting for TARP. The Treasury Department states on financialstability.gov that the $204 billion in capital investments in banks are "for stability or lending." But it does not require banks who have received the funds to show how they are using the money.

Special Inspector General for TARP (SIGTARP) Neil Barofsky, and Prof. Elizabeth Warren's Congressional Oversight Panel (COP) have been outspoken on this issue, and Barofsky even performed his own voluntary survey to show the accounting could be done. Treasury responded that its current method of accounting is sufficient -- reporting on broad trends for the top 21 banks' lending habits.

"We share SIGTARP's interest in tracking the level of lending by those institutions that have received government investment," a Treasury official said. "To that end, Treasury has released monthly reports tracking how much these institutions are actually lending."

Experts say without deeper digging into the question of "where the money is going," the public will never really know if the program is working: If banks are lending, what do they have to show for it? How has lending improved?

"Are they giving loans just to extremely credit-worthy people? Subprime borrowers? Are minorities able to secure loans?" asked Jennings.

Besides "is it working," Treasury also won't answer how taxpayers' investments are faring, declining to make public the fair market value for the shares and warrants it holds as a result of TARP. Taxpayers won't have any way of knowing whether they have lost or gained money on their investments in companies like General Motors, AIG (AIG, Fortune 500), Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) until after the government sells its stakes.

Digging into stimulus. The accounting of stimulus has been met with less scrutiny, mostly because Congress made it a point to track how every dollar was spent after struggling to get the same information from the TARP program.

Still, the government's accounting only goes as far as the first tier recipients from the states. For example, say a construction company gets stimulus funds from the state of Nebraska. That company has to report the receipt of those funds to the government, but if they hire a dump truck company and an asphalt company to do the work, that doesn't get reported.

Why do we care? "It would enable the Obama administration to say there were X amount of businesses that benefited from a particular project, and the government could connect the dots if there is fraud, waste or abuse," said Jennings.

What can be done. Some argue open-source technology is the best solution for both the government and the public.

That is, use the Internet to provide all forms of government data in a very sortable, searchable database, said Clippinger. He argues that if all the data are in one place, with independent eyes looking at it, then the data couldn't be co-opted, or selectively made available.

"When you get lots of people looking at it, you'll create better accountability and efficiency," said Clippinger.

That idea is supported by House bill H.R. 1242, backed by Reps. Carolyn Maloney (D-N.Y.) and Peter King (R-N.Y.). The bill would take the reporting out Treasury's hands, and require the administration to send all data straight into a database.

It's similar to the model used by recovery.gov, which is run by the independent Recovery Accountability and Transparency Board (Recovery Board), not by the Obama administration, which runs financialstability.gov.

"We're fully aware of what our name is and what the public expects of us," said Ed Pound, a Recovery Board spokesman. "We're not going to fall into that trap of not sharing certain information."

In the end, experts say the Obama administration will have to find ways to make a greater amount of data even more accessible to achieve the transparency goals it set out for itself.

"There are other ways of skinning this cat," said Clippinger.

Wednesday, August 12, 2009

Stocks: The latest Fed bubble

The Federal Reserve has spent the past year cleaning up after a housing bubble it helped create. But along the way it may have pumped up another bubble, this time in stocks.

To head off the worst downturn since the Great Depression, the central bank has slashed interest rates while funneling money to banks.

The Fed has mostly won praise for its efforts. The pace of job losses has slowed, and there has been a modest recovery in output.

At the same time, stocks have bounced back with startling speed. Since global markets hit their bottom in March, the S&P 500 has jumped 51% -- even as the outlook for economic recovery remains dim.

"This is the most speculative momentum-driven equity market since the early 1930s," Gluskin Sheff economist David Rosenberg wrote in a note to clients Monday.

Of course, stocks have rallied in part because investors perceive the worst-case scenario -- a 1930s-style Depression -- is off the table. And while the gains have been remarkable, they come after an even bigger decline. The S&P is still down 16% since Lehman Brothers collapsed in September.

But while most people take the rise in stocks as a hopeful sign for the economy, some see evidence that the Fed has been financing a speculative mania that could end in another damaging rout.

Recent weeks have brought huge rallies in some of the lowest-quality stocks -- including firms such as AIG (AIG, Fortune 500), Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) that are being propped up by the government and are unlikely to return to health any time soon.

What's more, this year has brought an 80% surge in emerging market stocks, while the dollar has posted a 10% decline since March. A declining dollar and surging emerging markets were the hallmarks of the credit-fueled bull run earlier this decade.

"We have put the band back together on a lot of this," said Howard Simons, a strategist at Bianco Research in Chicago. "That couldn't have happened without liquidity."

Though liquidity is admittedly a nebulous concept, there's no question that central bankers around the globe have poured huge amounts of money into the markets to ease the financial crisis. Given free money, investors' appetite for risk shoots higher and they gobble up stocks.

That's good, except when the outlook for economic growth doesn't seem to support the higher stock values.

"Many observers are wondering whether the strong stock market rebound since mid-March is already a forerunner of the next recovery or simply driven by a reflux of liquidity into riskier asset markets," Deutsche Bank Research analyst Sebastian Becker wrote in a report last month.

Rosenberg, who notes that consumer credit has dropped an unprecedented five straight months, said it's far from clear the recession is over. He says the risk of a market relapse later this year is high.

Simons said another factor that could work against recovery is that short-term interest rates could soon head higher, judging by action in futures markets. That could raise companies' borrowing costs at a time when policymakers have committed to holding rates near zero to restore economic growth.
0:00 /1:22Greenspan: New rules required

Fed officials have stressed that they will start to unwind their financial support programs at the earliest sign of inflation. Given the cost of cleaning up after the last bubble, Becker writes that "this time, policymakers are unlikely to remain inactive should they suspect the formation of another asset price bubble."

But it's clear that bankers are loath to pull back on their support for the financial system before it's clear the economy has staged a stronger recovery. And the Fed has a long and painful history of ignoring asset price inflation.

"The central bankers have this textbook belief that the only inflation is the kind that appears in consumer price indexes," said Simons. "They don't believe what they're doing could cause an asset price bubble."

For now, Fed chief Ben Bernanke and other central bankers can console themselves for now with stable consumer price inflation readings in major economies.

But comparing the bankers with a driver pulled over for speeding for the umpteenth time, Simons said, "At some point, you have to say maybe your speedometer's broken."

Thursday, August 6, 2009

Cash for Clunkers vote set for Thursday

The Senate is expected to vote Thursday on a $2 billion extension of the popular Cash for Clunkers program, as lawmakers rush to finish business before their August recess.

The House voted to extend the program, which blew through its $1 billion in initial funding, before it adjourned for the summer last Friday.

Now the Senate must agree to make the additional money available so that President Obama can sign the extension into law.

Debate on the bill is expected to begin after the Senate's confirmation vote on the Supreme Court nomination of Judge Sonia Sotomayor.

Senate Majority Leader Harry Reid of Nevada indicated that an agreement had been reached with Senate Republicans and that a vote is expected Thursday.

"We'll pass Cash for Clunkers ... before we leave here" for the August break, Reid told journalists Tuesday.
0:00 /5:09Against Cash for Clunkers

Sen. John Thune of South Dakota, the third-ranking Republican, said he expects all Senate Democrats and several Republicans to vote for additional funding.

"In the end, we know where the numbers are," said Thune, who opposes the program.

Senate Minority Leader Mitch McConnell of Kentucky said the Senate would vote on the measure before going on holiday, but wouldn't guess about the outcome.
How it's going

Under the Clunkers program as enacted, vehicles purchased after July 1 are eligible for refund vouchers worth $3,500 to $4,500 on traded-in gas guzzlers. The trade-in vehicle has to get a combined city and highway fuel economy rating of 18 miles per gallon or less.

According to government figures, compact cars and hybrids have been the top sellers so far.

The top-selling car was the Ford Focus, and the top three -- including the Honda Civic and Toyota Corolla -- were compacts. The list also includes three vehicles that are available as hybrids. One, the Ford Escape, is a small crossover SUV also available as a hybrid.

The sales results indicate that consumers are buying more fuel-efficient vehicles than most people expected. The average combined city and highway fuel economy of the 10 cars ranges from at 27 to 33 miles per gallon, depending on which versions people choose.

While critics had feared that car shoppers would use the program mostly to buy trucks, in fact 83% of the vehicles traded in have been trucks and SUVs while 60% of vehicles purchased were passenger cars, according to Secretary of Transportation Ray LaHood.

The broad category of SUVs includes many small car-like crossover SUVs, including the Escape.

Last month, many of the vehicles with the biggest reported year-over-year sales gains were small crossovers, a fact that several of the top automakers attributed to the Cash for Clunkers program.

The average fuel economy of new vehicles being purchased under Cash for Clunkers is 25.4 mpg, LaHood said, and the average fuel economy increase from the old vehicle to the new is about 61%.

Wednesday, August 5, 2009

Service sector index falls back

The U.S. service sector contracted in July at a faster pace than in June, according to a report released Wednesday.

The Institute for Supply Management's services index fell to 46.4 last month from 47.0 in June, below economists' median forecast for a rise to 48.0. The dividing line between growth and contraction is 50.

The services sector represents about 80% of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

Sunday, August 2, 2009

Ford says it will post July sales rise

Ford Motor Co. will report its U.S. sales for July rose from a year ago on a late-month surge under the federal government's "Cash for Clunkers" incentive program, senior U.S. executives said Sunday.

The July increase marks Ford's first year-over-year monthly rise since November 2007, just before the U.S. economic downturn began, and the first increase for any of the largest automakers since the start of the financial crisis a year ago.

The result is "important to Ford, but it is also a very good indication for the economy," Ford U.S. sales chief Ken Czubay said in a telephone interview.

"It was a deep hole that the entire economy was in," Czubay said. "We may not be out of the hole, but we are seeing very encouraging signs in July."

Ford (F, Fortune 500), the only U.S automaker that has not restructured in bankruptcy with federal funding, has consistently outperformed the other six largest automakers in the U.S. market this year, with less severe sales declines than its rivals amid the lowest vehicle sales rate in nearly three decades.

"The beginning of July was firming up for us and then a week ago last Friday the government's 'Cash for Clunkers' program kicked in and there was a substantial increase in business and that kicked us over the top," Czubay said. "We don't know about the others, but we do know that we are going to have an increase year over year."

The "Cash for Clunkers" program took effect on July 24, a week before the end of the July sales period. Automakers will report their July U.S. sales on Monday.

The "Cash for Clunkers" program provides consumers payments of up to $4,500 for the purchase of a new car when an older vehicle is traded in for a more fuel-efficient one. The initial $1 billion of funding could cover 222,000 to nearly 286,000 vehicles.

Ford will also report its first year-over-year retail sales increase since July 2007, supported by sales of more fuel-efficient vehicles, chief sales analyst George Pipas said.

"You are going to see large gains in almost every Ford product that is powered by a four-cylinder engine -- the Focus, the Fusion, Fusion Hybrid, the Escape small utility and its hybrid version, the companion Mercury products -- that is where the demand was, particularly this past week," Pipas said.

July's monthly U.S. seasonally adjusted annualized sales rate is expected to be the strongest of 2009, though weak by historical standards.
0:00 /02:56Auto families still believe

Czubay said the annualized rate, a figure economists use, was expected to be "well into" the 10 million unit range.

Automakers sold about 13.2 million light vehicles in the United States in 2008, a sharp decline from more than 16 million sold in 2007, but sales rates plunged further in the first half of 2009 to an annualized rate as low as 9.1 million in February.

"No one is happy with a 10-plus (million unit annual rate), but it's a solid indicator for the economy that we are into the double-digits," Czubay said.

The sales downturn has left Ford burning cash and helped push its rivals General Motors and Chrysler into bankruptcy.

U.S. Transportation Secretary Ray LaHood said Sunday in an interview with C-SPAN that the initial funding for "Cash for Clunkers" could last through at least Tuesday.

The U.S. House has approved an additional $2 billion for the program. The extra funding, which the White House backs, is contingent on backing by the Senate.

Ford shares closed at $8 on Friday.
 

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