Tag Archives: News event
by Liz Hester
In a fun turn of events for technology reporters and Wall Street, Dish Network decided to put together a $25.5 billion bid for Sprint Nextel, offering a competing bid to Japanese Softbank’s.
Here are some of the details from the New York Times:
The pay-TV operator Dish Network said on Monday that it had submitted a $25.5 billion bid for Sprint Nextel.
The move is an attempt to scupper the planned takeover of Sprint Nextel by the Japanese telecommunications company SoftBank, which agreed in October to acquire a 70 percent stake in the American cellphone operator in a complex deal worth about $20 billion.
Dish Network thinks it can do better. Under the terms of its proposed bid, Dish Network said it was offering a cash-and-stock deal worth about 13 percent more than SoftBank’s bid.
Dish Network values its offer at $7 a share, including $4.76 in cash and the remainder in its shares. The offer is 12.5 percent above Sprint Nextel’s closing share price on Friday.
“The Dish proposal clearly presents Sprint shareholders with a superior alternative to the pending SoftBank proposal,” said Charles W. Ergen, Dish Network’s chairman.
Mr. Ergen said a “Dish/Sprint merger will create the only company that can offer customers a convenient, fully integrated, nationwide bundle of in- and out-of-home video, broadband and voice services.”
The Wall Street Journal put the latest move by Dish into great context in this piece:
The unsolicited offer is Mr. Ergen’s most audacious attempt yet to move from the slow-growing pay-television business into the fast-evolving wireless industry. The satellite TV pioneer eased into the industry by amassing spectrum and winning approval from regulators last year to use it to offer land-based mobile-phone service. But he lacks much of the rest of the operation, including a cellphone network, which would be costly and time-consuming to build.
Combining his company with Sprint would allow Dish to offer video, high-speed Internet and voice service across the country in one package whether people are at home or out and about, Mr. Ergen said. People who don’t have access to broadband from a cable company would be able to sign up for Internet service delivered wirelessly from Sprint cellphone towers to an antenna installed on their roof, Mr. Ergen said.
Taking over Sprint would be a big bite. The wireless carrier booked $35.3 billion in revenue last year, compared with $14.3 billion for Dish. The combined company would carry more than $36 billion in debt, according to CapitalIQ, even before loading on the $9 billion Dish indicated it would borrow to do the deal.
Dish said it would be able to execute a definitive merger agreement after reviewing Sprint’s books. The satellite company said it is being advised by Barclays, which is confident it can raise the funding.
Earlier this year, Dish made an informal offer to buy Clearwire Corp. —a wireless carrier that is half-owned by Sprint and that has agreed to sell Sprint the other half. Dish has yet to move forward with a formal bid.
Mr. Ergen said the “deck was stacked against us” with Clearwire due to a tangle of contractual obligations. With Sprint, the only obstacle is a $600 million breakup fee that would be due Softbank. He said he is willing to pay that.
Bloomberg Businessweek wrote a frequently asked questions piece, which offered this info on regulatory and David Einhorn’s position in Sprint:
Are there regulatory issues?
Probably not. Given the power of Verizon (VZ) andAT&T (T), analysts don’t expect a Dish, Sprint tie-up to hit anti-trust hurdles. On the contrary, Dish says the deal would be particularly good news for rural consumers who don’t have access to traditional broadband. If there’s anything FCC commissioners like, it’s rural consumers.
How about that David Einhorn?
Right? Einhorn’s Greenlight Capital snapped up a bunch of Sprint shares as the company swooned in recent years. At the end of the first quarter last year, when Sprint shares were wallowing below $3, Greenlight had 68 million of them.
The Bloomberg wire story quoted an analyst as saying the deal had some merits despite the heavy debt load the potential company might hold:
The combined company will have an estimated $40 billion in debt, a heavy load, said Philip Cusick, an analyst at JPMorgan Chase & Co. in New York. Still, the long-term synergies and cash generation make the idea “very compelling,” he said.
“The next question is the response from the Sprint board and whether Softbank comes back with another bid, potentially using its balance sheet advantage with more cash,” Cusick, who has a neutral rating on Dish, said in a report.
Dish’s offer extends a frenzy of consolidation for the U.S. wireless industry. Smaller carriers are seeking out merger partners to help wage a stronger attack against the two dominant competitors, Verizon Communications Inc. and AT&T Inc.
T-Mobile USA Inc., the fourth-largest U.S. carrier, is closing in on a merger with MetroPCS Communications Inc. (PSC), which is No. 5 in the industry. Deutsche Telekom AG (DTE), T-Mobile’s parent company, sweetened its offer for MetroPCS last week in order to get reluctant investors to agree to the terms.
It’s going to be interesting to see which deal the Sprint board selects and what reasons they offer for their choice. Dish obviously has grand ambitions and sees some part of Sprint playing into its plans. But does the Sprint board agree? Only time will tell.
by Chris Roush
Colleen Nelson, a Wall Street Journal staff reporter, finished the Boston Marathon on Monday just minutes before the explosions that killed two and injured more than 100.
I crossed the finish line of the Boston Marathon a little later than I had hoped—at about three hours and 49 minutes—but was relieved to be done. I limped forward on Boylston, grabbing Gatorade and retrieving my finisher’s medal.
I’d made it several yards past the finish line when I heard the first startling boom.
I kept walking but only took a couple more steps when I heard it again: Boom!
Cheers were replaced by silence and confusion. Farther away, I could hear screams.
“Was that a bomb?” runners asked one another. Was someone shot? Someone pointed to a nearby construction site and suggested that perhaps a crane had fallen.
I was just far enough away that I couldn’t see the gory scene unfolding a block away. There, injured and bloodied spectators who had cheered me on a few minutes earlier now were being rushed to medical tents originally set up for hobbled runners.
Read more here.
by Liz Hester
There were two similar stories in the Wall Street Journal and the New York Times on Thursday about the complexity of large financial firms and what they’re doing to simplify their structures.
The Journal story focused on the number of subsidiaries that many of the largest financial firms have and where they’re located.
Wells Fargo & Co. Chief Executive John Stumpf has described the bank’s business model as “meat and potatoes.” But the fourth-largest U.S. lender has 3,675 subsidiaries, up 8.6% from five years ago, according to an analysis provided to The Wall Street Journal by Swiss research firm Bureau van Dijk Electronic Publishing Inc.
Wells Fargo isn’t alone. In all, the six largest U.S. banks have 22,621 subsidiaries, according to the Journal’s analysis.
While that is down 18% in the past five years, regulators said they are getting frustrated with banks’ slow and uneven progress in streamlining their labyrinths of business units, offshore entities and other appendages.
Comptroller of the Currency Thomas Curry, whose agency oversees national banks, said in an interview that his staff intends to pay closer attention to “needless corporate complexity” and “whether it’s time to start cutting some of the brush out.”
The sprawling nature of the largest U.S. banks will be on display starting Friday, when Wells Fargo and J.P. Morgan Chase Co. report first-quarter financial results. A Wells Fargo spokesman declined to comment on the data provided by Bureau van Dijk “because we do not know its methodology” and said its filings show subsidiaries down by 23% since the end of 2008, to 1,361. The number of legal entities “is not an indicator of risk and Wells Fargo has a long track record of prudent risk management in all our businesses.”
Complexity in the banking sector has vexed regulators since the financial crisis, when troubles at big U.S. firms quickly spread throughout global markets. The U.S. government intervened to prop up the largest firms, prompting calls to break up those deemed “too big to fail.”
Regulators have introduced rules requiring banks to maintain a fatter financial cushion against losses than other institutions, accept strict limits on the biggest banks’ exposure to one another and submit a new set of plans showing how they would be unwound in the crisis.
And according to the Times, some of the largest firms are shifting assets and risk to other parts of the market, which may cause regulators to have a skewed picture of their capital.
Banks have been shedding risky assets to show regulators that they are not as vulnerable as they were during the financial crisis. In some cases, however, the assets don’t actually move — the bank just shifts the risk to another institution.
This trading sleight of hand has been around Wall Street for a while. But as regulators press for banks to be safer, demand for these maneuvers — known as capital relief trades or regulatory capital trades — has been growing, especially in Europe.
Citigroup, Credit Suisse and UBS have recently completed such trades. Rather than selling the assets, potentially at a loss, the banks transfer a slice of the risk associated with the assets, usually loans. The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers. The buyers agree to cover a percentage of losses on these assets for a fee, sometimes 15 percent a year or more.
The loans then look less worrisome — at least to the bank and its regulator. As a result, the bank does not need to hold as much capital, potentially improving profitability.
Some regulators say they are concerned that in some instances these transactions are not actually taking risk off bank balance sheets. For instance, a financial institution may end up lending money to clients so they can invest in one of these trades, a move that could leave a bank with even more risk on its books.
Critics point to other reasons to worry. Most of these trades are structured as credit-default swaps, a derivative that resembles insurance. These kinds of swaps pushed the insurance giant American International Group to the brink of collapse in September 2008. Another red flag is that banks often use special-purpose vehicles located abroad, frequently in the Cayman Islands, to structure these trades.
Both these stories, while different in focus and tone, tackle the complicated issue of simplifying the banks and determining if they’re making progress toward complying with new laws. As the rules continue to be shaped, coverage of the banks and if they’re working to prevent a collapse will be increasingly important and likely to go on for years.
by Chris Roush
U.S. law enforcement officials have reversed a decision to wind down an investigation into how news agencies handle the release of economic data to investors, concerned some sensitive information may have leaked into financial markets.
Timothy Ahman of Reuters writes, “The Wall Street Journal reported earlier on Wednesday that Thomson Reuters Corp, the parent of Reuters News, Bloomberg LP and Dow Jones & Co., a unit of News Corp, were among the media companies under investigation.
“The source who spoke to Reuters declined to provide details.
“Reuters and the Wall Street Journal reported in January that law enforcement authorities had conducted an investigation into whether media companies facilitated insider trading by prematurely releasing market-sensitive data, but decided not to bring charges.
“Media organizations are provided sensitive economic data during “lockups” in which they are not supposed to transmit any information until a set embargo time has lifted.
“The Wall Street Journal reported on Wednesday that the FBI had been frustrated the Commodity Futures Trading Commission had not provided data sought by investigators. Citing officials familiar with the probe, it said the CFTC had since agreed to provide trading data and analysis to help the investigation.
“‘We are not aware of a current investigation nor any embargo violations,’ said Ty Trippet, a spokesman for Bloomberg LP. A spokeswoman for Dow Jones, Paul Keve, said the government had not contacted Dow Jones about any criminal investigation. Thomson Reuters spokesman David Girardin declined to comment.”
Read more here.
by Liz Hester
The news that J.C. Penney replaced CEO Ron Johnson, who tried to remake the retailer into a one-price clothing store, means that activist investors won. And it also means the company is returning to the leadership of former CEO Myron Ullman.
The coverage was mostly complimentary. Here’s the New York Times basic take on the news:
After a troublesome 17-month run, Ron Johnson is out as chief executive of J. C. Penney, and with that, the most closely watched revival effort in retail in recent memory is in danger of disintegrating.
The company’s board said on Monday that Mr. Johnson, who engineered Apple’s retail strategy, is leaving Penney and that Myron E. Ullman III, who had been C.E.O. at the retailer for seven years until Mr. Johnson took over, has returned to the helm.
Talk of Mr. Johnson’s possible departure had been swirling in recent weeks as Penney’s troubles with sales and strategy mounted, and as William A. Ackman, the activist investor and board member who recruited Mr. Johnson to revive Penney’s fortunes, seemed to withdraw support for him late last week.
Still, it is a curious move to go back to Mr. Ullman. Most of the senior employees that he had assembled at Penney either left or were dismissed by Mr. Johnson. And it was dissatisfaction with where Mr. Ullman was taking the company that led Mr. Ackman to look for another leader in the first place. Though profitable, Penney was seen as a mediocre retailer that was losing ground to competitors like Macy’s and Kohl’s.
The Wall Street Journal took the angle of what the returning CEO will likely keep of JC Penney’s new retail strategy and what will likely be replaced in order to make up some of that lost market share:
The mini boutiques with which Mr. Johnson planned to pepper Penney are likely out the door, analysts say. And reestablishing relationships with vendors is probably a priority.
Investor concern remains high: In early trading Tuesday, Penney stock was down about 10%.
Mr. Ullman is likely to take a close look at the company’s biggest transformation project: its home department. The multi-million dollar project includes bringing in fresh merchandise and new stagings.
Mr. Ullman’s stamp isn’t likely to be too heavy handed at the start.
“One thing they can’t do is swing the pendulum back to the way things were under Mr. Ullman because that wasn’t working either,” said Kathy Gersch, co-founder of Kotter International, a leadership consulting firm. “As a management team, they have to take a look at who their customer is and what they want and move in that direction. And that can’t be Ron Johnson’s or Mr. Ullman’s.”
“Perhaps Mr. Ullman can take the best ideas from Mr. Johnson’s regime, such as the specialty shops—but where will the cash come from to execute it—and abandon the worst ideas, such as eliminating discounts and clogging the aisles with gelato stands, and return the company to its former glory,” said Carol Levenson, director of research at Gimme Credit, a corporate bond research firm.
There are also personnel issues that will have to be dealt with. For instance, there has been no word of the fate of Chief Financial Officer Kenneth Hannah, who Mr. Johnson brought in, or other of his top management hires that remain.
Mr. Ullman “is coming in, but he’s not coming back to the same leadership team he had when he left,” given Mr. Johnson having brought in his own people, said Ms. Gersch. “Mike Ullman needs to pull that team together because they have a short period to get things back in order.”
The Bloomberg coverage was the most drastic, saying the retailer may have to sell itself in order to regain its previous place in the market:
J.C. Penney Co. (JCP) made a radical break with tradition by hiring Silicon Valley wunderkind Ron Johnson as chief executive officer. With Johnson gone, the chain may have to pursue even more radical options, such as selling itself.
Ullman faces several tough choices. He’ll have to decide whether to continue Johnson’s strategy of turning the chain into a collection of boutiques or return to a more traditional department-store model. Ullman will also have to consider whether to sell the company or break it up, said Dave Larcker, a corporate governance professor at the Stanford Graduate School of Business in Stanford, California.
“The board is going to have to get much more involved in the strategy of the company,” Larcker said. “People may attack the board, as well, for how this happened. This was a high- profile hire. For it to unravel this quickly is kind of terrifying.”
The Plano, Texas-based chain was so damaged under Johnson that Ullman will struggle to turn it around. On Feb. 27, J.C. Penney reported annual revenue dropped to $13 billion, the lowest since at least 1987. Johnson alienated the company’s core customers by doing away with sales and promotions and only recently began trying to win them back by putting discounts front and center again.
“There is a tremendous amount of cleaning up and rebuilding that has to take place,” Howard Gross, managing director of the retail and fashion practice at executive search firm Boyden in New York, said in a telephone interview.
Johnson’s appointment as CEO in November 2011 was greeted with much anticipation by analysts and investors. After all, he had helped Steve Jobs prove doubters wrong by turning Apple Inc.’s stores into a success with unrivaled sales per square foot. Johnson was expected to work similar feats at J.C. Penney, which was struggling for relevance. The shares surged 17 percent on June 14, 2011, the day Johnson’s hiring was announced, for the biggest gain in more than a decade.
It looks like Ullman doesn’t have the same star power with investors. It’s interesting that the retailer would return to an ousted CEO in order to right itself. It’s likely to be a closely watched story in the next several quarters as the company sorts through strategy, management and what it’s going to look like in the future. I’m sure the press will chronicle each and every move, likely putting different spins on the news.
The next coup will be who gets the first interview with Ullman as he retakes the helm.
by Liz Hester
The coverage of China by the business press continues to be wide-ranging and extensive, which is as it should be given its increasingly important role in the global economy.
I was reminded Monday by several different stories about how the People’s Republic is all over the map in terms of its business environment.
First, the New York Times wrote a piece about companies looking to move some of their production out of China as wages rise and to hedge against government policies that could change at any given time.
Foreign companies are flocking to Cambodia for a simple reason. They want to limit their overwhelming reliance on factories in China.
Problems are multiplying fast for foreign investors in China. Blue-collar wages have surged, quadrupling in the last decade as a factory construction boom has coincided with waning numbers of young people interested in factory jobs. Starting last year, the labor force has actually begun shrinking because of the “one child” policy and an aging population.
“Every couple days, I’m getting calls from manufacturers who want to move their businesses here from China,” said Bradley Gordon, an American lawyer in Phnom Penh.
But multinationals are finding that they can run from China’s rising wages but cannot truly hide. The populations, economies and even electricity output of most Southeast Asian countries are smaller than in many Chinese provinces, and sometimes smaller than a single Chinese city. As companies shift south, they quickly use up local labor supplies and push wages up sharply.
While wages and benefits often remain below levels needed to provide proper housing and balanced diets, the manufacturing investment — foreign direct investment in Cambodia rose 70 percent last year from 2011 — is starting to raise millions of people out of destitution. “People along the Mekong River are being lifted out of poverty by foreign investment inflows driven by higher Chinese wages,” said Peter Brimble, the senior economist for Cambodia at the Asian Development Bank.
Only a smattering of companies, mostly in low-tech sectors like garment and shoe manufacturing, are seeking to leave China entirely. Many more companies are building new factories in Southeast Asia to supplement operations in China. China’s fast-growing domestic market, large population and huge industrial base still make it attractive for many companies, while productivity in China is rising almost as fast as wages in many industries.
Foreign investment in China nonetheless slipped 3.5 percent last year, after rising every year since 1980 except 1999, during the Asian financial crisis, and 2009, during the global financial crisis. Still, at $119.7 billion, foreign investment in China continues to dwarf investment elsewhere. By comparison, investment in Cambodia rose to $1.5 billion.
But there is still a lot of ceremony and hoops to jump through if you’re going to be a big foreign player in the Chinese market. The Wall Street Journal had an interesting story about executives of several companies getting to speak to President Xi Jinping.
Here are a few excerpts:
In a variation on the elevator pitch, several dozen Chinese, Asian and Western business leaders sat down Monday with Chinese President Xi Jinping for what was billed as a roundtable discussion. In reality, it was short speeches by a handful of executives representing various regions, with a response from Mr. Xi.
These are treacherous times for many foreign businesses in China. Apple Inc. apologized last week after China’s state-run media accused the company of offering inferior customer service. Japanese auto sales have plunged amid a consumer backlash stemming from a territorial dispute between Beijing and Tokyo over a group of uninhabited islands. The Chinese economy is slowing, wages are rising, intellectual-property theft is rampant and the U.S. business community, in particular, is alarmed by reports of hacking by the Chinese military to obtain commercial secrets.
Mr. Xi addressed the concerns with few specifics beyond saying “we will step up” intellectual-property rights. “We are protecting the legitimate rights of foreign enterprises according to law,” he said. “We will continue to enhance the legal system and improve investment environment so that all enterprises can enjoy equal access to production, market competition and legal protection.”
“I will endeavor to build a more favorable environment for investors,” Mr. Xi said. But to the point raised by PepsiCo’s Mr. Abdalla, the president responded, “China has a level playing field.”
What remains to be seen is if Xi is willing to step in and create real reform. It seems that he may not have a choice if companies continue to move production elsewhere. I look forward to seeing the coverage, which is always tricky given the restrictions on journalism in China. Kudos to the organizations working hard to get the real story out to investors.
by Chris Roush
Salmon writes, “The problem is that in the chase for revenue growth, Blodget is sacrificing a pleasant user experience. He installs ugly automatic links under certain phrases, for instance, which when you mouse over them start playing video ads. Or he sells a lot of interstitial ads which force you to click another time before reaching the story you want to read. Quartz points out that there’s a good chance Business Insider is worth less than the much younger BuzzFeed, where CEO Jonah Peretti is adamant that he’ll never run a BI-style slideshow, or even “crappy display ads”, just because readers clearly prefer everything on one page and don’t get value from those ads.
“The problem is that if Blodget decides to pare back on artificial revenue juicers which readers dislike, that hurts revenue growth as well as profits — even as BI is saying that it intends to accelerate revenues this year to something in the $15 million range. In order to keep revenues growing even as he re-engineers his site to make it sleeker and less optimized towards pageview maximization, Blodget would have to invest not only in technology, but also in sales — paying big money for expensive staffers to build relationships with brands. BI gets too much of its revenue from banner ads right now: it needs to diversify its ad revenue, and start finding more ways for brands to reach BI’s coveted readership. One of those new channels is conference sponsorship, and I expect that BI will use a bunch of its new money to invest aggressively in conferences. But one of the big hidden costs behind building a new kind of website is the fact that you need to build a new kind of sales team, too, selling the kind of products which are often referred to as ‘native,’ whatever that’s supposed to mean.
“Business Insider has always been run on something of a shoestring; it made the entirely understandable decision, for instance, to hold onto a large chunk of the capital it raised in the past, rather than blowing through it and then suddenly being forced to cut back for the sake of profitability. This new round allows BI to increase the amount it’s investing while still retaining a reassuring cushion. But $5 million is not remotely enough money to allow Blodget to pivot to a very different business model, even if he wanted to do so, which he probably doesn’t. For better or for worse, he’s stuck in a world of banner ads and CPMs, and although he’s done well in that world to date, the future of that world looks pretty bleak.”
Read more here.
by Chris Roush
A former Thomson Reuters employee filed a lawsuit claiming he was fired for telling the FBI that the company’s “tiered release” of a consumer survey violated insider-trading laws.
David Glovin of Bloomberg News writes, “Mark Rosenblum said in his complaint, filed today in Manhattan federal court, that he was fired on Aug. 3, soon after complaining to U.S. authorities that the company gave some customers an advantage by releasing the Thomson Reuters/University of Michigan Surveys of Consumers to them first. He said he told company executives about his complaint to the federal agents.
“‘Mere weeks after the report, Rosenblum’s employment with Thomson was terminated with no severance,’ the plaintiff, a former redistribution specialist selling financial data, said in his complaint.
“Rosenblum, who lives in New Jersey, is seeking unspecified damages for alleged violations of a U.S. whistle-blower law.
“‘We believe the accusations from the complaint against Thomson Reuters to be unsubstantiated and without merit,’ Alan Duerden, a spokesman for New York-based Thomson Reuters, said in an e-mailed statement.”
Read more here.
by Chris Roush
Pulitzer Prize-winning business journalist David Cay Johnston writes for American Journalism Review about how business reporters are missing the story about how new regulations are enriching companies at the cost of consumers.
Johnston writes, “The costs of these new rules are enormous. Take that railroad industry rule on monopoly pricing. It costs the people of Lafayette, Louisiana, $6.5 million more than if they paid competitive shipping prices for coal brought from Wyoming to their municipal electricity plant. Eliminating the monopoly overcharge would be the equivalent of a 10 percent cut in property taxes.
“In my book ‘Free Lunch,’ I explained how rules for new electricity markets actually tend to raise prices to levels almost as high as what an unregulated monopoly could charge. Those rules, not coincidentally, were written by Enron.
“The six untold or little-told stories cited at the beginning of this article are just examples of a multitude of pocketbook stories missed by reporters in our state capitals and Washington, on Main Street and on Wall Street, especially in the business section. We should be pursuing such stories with vigor.
“These changes get missed or misreported in part because, in the framing of the great newspaper editor Gene Roberts, instead of emerging in an official announcement, they ‘ooze.’
“Part of the problem is that far fewer reporters are covering important departments and agencies in Washington, D.C., as well as the 50 state capitals, according to detailed surveys by AJR.”
Read more here.
by Liz Hester
Banks in the United Kingdom need more capital, even after new regulations created during the financial crisis.
Here’s the Wall Street Journal story:
U.K. banks must come up with £25 billion ($38 billion) in fresh capital this year, the Bank of England warned Wednesday, piling pressure on partly state-owned banks Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC to step up the pace of asset sales.
The Bank of England’s Financial Policy Committee said banks’ capital buffers need to be higher to withstand the effects of the weak domestic economy and euro-zone crisis. Gov. Mervyn King, a member of the FPC, said the shortfall isn’t “an immediate threat to the banking system and the problem is perfectly manageable.”
Analysts said the £25 billion figure is roughly what they had expected since the FPC in November said banks might be underestimating their potential losses on U.K. commercial real estate and loans to borrowers in weakened euro-zone countries such as Ireland and Spain.
How the capital will be raised wasn’t immediately clear. Bank of England Deputy Gov. Andrew Bailey, who also sits on the FPC, said around half of the £25 billion is already in banks’ plans for the year. The most common ways for lenders to improve their capital positions are to issue new shares, retain earnings or reduce their overall assets.
The New York Times story had good context and a comparison to the U.S. banking sector at the top of its story, information that many shareholders are likely searching for at this point.
The announcement follows a five-month inquiry by British officials into the financial strength of the country’s banking industry. With the world’s largest financial institutions facing new stringent capital requirements, the Bank of England had been concerned that local firms did not have large enough capital reserves to offset instability in the world’s financial industry.
Earlier this month, the Federal Reserve also released the results of so-called stress tests of America’s largest banks, which indicated that most big banks had sufficient capital to survive a severe recession and major downturn in financial markets. Citigroup and Bank of America, after disappointing performance the previous year, now appeared to be among the strongest.
British banks are not so lucky.
The reported released on Wednesday said that local banks had overstated their capital reserves by a combined £50 billion, which authorities said would now be adjusted on the firm’s balance sheets. Many of the country’s banks already have enough money to handle the accounting adjustment, the report said on Wednesday.
Bloomberg’s story did mention that the capital shortfall wouldn’t require more government investment in the banks, which should put some minds at ease.
BOE Governor Mervyn King said the shortfall “is not an immediate threat to the banking system and the problem is perfectly manageable.” He also said the recommendations won’t require additional government investment in banks.
Lenders will have to reach a common equity tier 1 capital ratio of 7 percent of risk-weighted assets by the end of 2013. While some banks already exceed this level, those that don’t will have to boost capital or restructure their balance sheets without hindering lending to the economy, the BOE said.
“It’s a relatively low bar,” said Cormac Leech, a banking analyst at Liberum Capital Ltd. in London. “They’re saying that the banks will continue to build capital to comply with that metric, so it doesn’t sound like there’s a massive pressure on the banks to exceed Basel III requirements.”
It’s clear that the world’s banks are still reeling from bad loans and struggling to maintain capital ratios up to the new standards. Here’s hoping they can figure it out and raise the money from the private market. I doubt that public sentiment anywhere in the world would support another bank bailout.