Transcript Slide 1

Tarp Impact on Bank Capital
and Funding Activity
February 2009
Will Taylor - Vining Sparks
Will Taylor - Vining Sparks
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A Full Plate of Issues
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Bank Capital under pressure as losses mount
Growing list of banks in trouble
FHLB suspends payment of stock dividends
Bank Preferred Stocks may suspend dividends
Nationalization of large banks
Liquidity concerns
Fed Funds target 0 to 25 basis points
Legislators, accountants, the FED intervening in the MBS
and possibly treasury markets resulting in low yields on
security purchases
Agency preferred stocks trading near zero
Other credit risk products, CDO, Whole Loans
Municipal Security Insurer downgrades
Other-than-temporary impairment Issues
Not sure what’s next
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Capital considerations
• Capital is scarce outside TARP
• Trust preferred pools are non-existent
• Options:
– Insiders and friends (including institutions)
• Public Markets
• Evaluate
– Importance
– Specific need (Tier 1, Tier 2)
– Alternatives
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Current Liquidity Options
FHLB
 Increasing Margin
 Collateral Required
 Purchase Stock
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Brokered Deposits
• In order to accept or roll over brokered
deposits,
– Institutions must be “well capitalized” OR
– Obtain prior written permission from FDIC
• Many deposit brokers will only deal with
“well capitalized” banks
• Institutions fearful of falling to
adequately capitalized are locking in
liquidity NOW
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The 16 FDIC guaranteed TLGP Issuers
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American Express
Bank of America
Citigroup
General Electric
Goldman Sachs
HSBC
John Deere
JP Morgan
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Key Bank
Morgan Stanley
New York Community Bank
PNC Funding
Regions Bank
Sovereign Bank
Suntrust Bank
Wells Fargo
The list above is comprised of corporations that the US
Government is allowing to issue corporate debt that is also
guaranteed (full faith & credit) by the FDIC. The sixteen banks and
FDIC approved financing units have raised $128 billion in
Temporary Liquidity Guarantee bonds through the FDIC’s
Temporary Liquidity Guarantee Program (TLGP) based on
Bloomberg data as of January 23, 2009.
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Senior Unsecured Debt Ratings of the TLGP 16
The sixteen banks and FDIC approved financing units have raised $114.7 billion in Temporary Liquidity Guarantee bonds
through the FDIC’s Temporary Liquidity Guarantee Program (TLGP) based on Bloomberg data. The program, announced
in October to help thaw the credit markets, assures investors they will get a timely payment of principal and interest should
an issuer go bankrupt. The FDIC’s website says that they created this program to strengthen confidence and encourage
liquidity in the banking system by confidence in the financial markets is a stated goal of Secretary Paulson and Chairman
Bernanke. The TLGP is one of many programs instituted by the US government to avoid a repeat of the Lehman Brothers
bankruptcy and the damage that it caused. Guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain
holding companies.
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Corporate Issues – Two Tracks of Debt
Track 1 FDIC Guarantee
• Wells Fargo FDIC
Guaranteed Floater
• Due 12/2011
• Yield 1.41% (3 Month
LIBOR DM +18)
• Yield if Libor Drops to
zero 0.18%
• 20% risk weight
• US Gov. Guarantee
Track 2 Corp. Guarantee
• Wells Fargo Sr.
Unsecured Debt
• Due 3/1/2012
• Yield 5.24% (3 Month
LIBOR DM +401)
• Yield if Libor Drops to
zero 4.01%
• 100% risk weight
• Corp. Guarantee
• Aa3/AA/AA
• Neg. Outlook
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Intervention in the MBS Market
• title
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Intervention in the MBS Market
• title
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The MBS Refinance Application Index
• We could see a wave of refinance activity
similar to the 02/03 wave later this year
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Intervention in the MBS Market
• Senator McConnell has made proposals for 30 year 4%
government backed mortgages.
• Plans such as the Hubbard Meyer Plan calls for the Government
to subsidize the refinance of loans where a borrower has
negative equity are being considered.
• Proposals have been seriously discussed which would allow
bankruptcy judges or even servicers to modify loans to
– Lower principal balances
– Extend maturities
– Lower the interest rate
• The bottom line – there are many forces on the move that
could result in a massive refinance wave.
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Comforts – Overall Credit Quality
• Comfort areas
– Agency MBS, CMO, ARM, and Senior Agency Debt
– UTGO Municipal Securities with “A” or better
underlying credit
– Municipal Securities with insurance providers that
remain AAA rated
• Assured Guaranty
• Texas Permanent School Fund
• FSA
– SBAs
• Pools, DCPC and SPIC offers
• Full Faith & Credit, Yield near 6%, 15 year final
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Munis
• Key to high performing portfolios
• Review credit quality of Insurance
Provider
• Understand insurance role
• Understand credit considerations
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Muni’s Importance
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Moody's Cumulative Default Rates
10-yr Cumulative
Rating
Aaa
Aa
A
Baa
Ba
B
Caa-C
Invt-Grade
Speculative-Grade
All Rated
Corporates
0.52%
0.52%
1.29%
4.64%
19.12%
43.34%
69.18%
2.09%
31.37%
9.70%
Municipals
0.00%
0.06%
0.03%
0.13%
2.65%
11.86%
16.58%
0.07%
4.29%
0.10%
Source: Moody’s “The U.S. Municipal Bond Rating Scale:Mapping to the
Global Rating Scale And Assigning Global Scale Ratings to Municipal
Obligations” from March 2007
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Municipal Insurer Ratings
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Private Label / Whole Loan CMOs
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Opportunities amid land mines
Avoid loans originated prior to 2004
Review cross collateralization
Prices can decline dramatically for a
small uptick in delinquencies
• Extremely illiquid
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Private Label / Whole Loan CMOs
• Consider the:
– Collateral
• Be aware of cross collateralization
– Coverage
– Cash flow
• Front-end sequential benefits
• Locked-out cash flow risks
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Challenges in reviewing deals
• Cross collateralization is frequent
– Credit support comes from broader collateral than
cash flow group
Group 1
Seniors
Group 2
Seniors
Group 3
Seniors
Mezzanine and Subordinate Classes
provide credit support to the whole deal
Group 1
Seniors
Group 2
Seniors
Group 3
Seniors
Mez/Support for G1 & G2
Mez/
Support for
G3
– Bloomberg defaults to cash flow group, not credit
support group
• Determining estimated losses or even sizing up
credit risk of collateral involves broad review of
collateral statistics & performance
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Opportunities Abound
– Cash purchases
– Leverages
– Credit Swaps
• MBS for Sweet 16 Corporate Bonds
– Municipals
– Corporate issuers that are receiving
government assistance
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Putting it all together
Capital
Liquidity
• Risk based
capital
• Tier 1
• Sources, Needs,
and Uses
• Process
• Measurement
• Monitoring
• Contingencies
• Sources
• Locking in and
Laddering
Maximizing
Profits
• Where are the
opportunities?
• How can I
participate?
Investments can and should play a role
in all of these considerations
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Framework for Investment Decision Making
• Identify Asset / Liability Exposure to Rate Shifts
– Positive or Negative Gap
– What structure / performance do I Need in the investment
portfolio
• Determine Objectives & Constraints
– Liquidity, Earnings, Deposit Maturity / Runoff
• Determine Rate Bias
– Prefer Bonds with Defensive or Offensive Characteristics
• Consider Investment Policy Risk Levels
– Market Price Volatility, Cash Flow Volatility, Liquidity
• Compare Alternatives Using Spread, Grade, Price Volatility,
Total Return & Cash Flow Characteristics
• Focus on Bonds Addressing Risks, Policy Limits & Rate Bias
Will Taylor - Vining Sparks
William M. J. Taylor, Director, Senior Vice President
– Will has been involved in the banking and investment business sine 1986. His
career began as an employee of Shelby County, TN working in the investment
and distribution of public funds. Will later moved to the correspondent banking
group of Union Planters Bank. Under his management, the group grew to over
$3.5 billion in warehouse lending . In this capacity Will was appointed to a
number of key committees and subcommittees of the Mortgage Bankers
Association of America. In addition to working in the lending area, Will was
active in the trading operation. During his tenure he oversaw the financing and
securitization of Collateralized Mortgage Backed Obligations (CMOs), Fixed and
Adjustable Mortgage Backed Securities ( with emphasis on Multifamily projects)
and Small Business Administration Loan Securities. Will joined Vining Sparks as a
result of a combination of Union Planters dealer operation with Vining Sparks in
September 1990.
– Will received his B.A. in finance from the University of Mississippi in Oxford.
During his career Will has lobbied and testified before congress and government
agencies, as well as speaking to various groups at FDIC and OCC sponsored
seminars. Will has been published in the following periodicals: Texas Banking;
Technical Topics of the Municipal Treasurers of the Association of the United
States & Canada; and Bankers Monthly. He has served on the faculty of the MidSouth School of Banking and holds the National Association of Securities
Dealers' Series 7 and 63 General Securities Representative Licenses.
Will Taylor - Vining Sparks