As the bail-outs grow, so does the number of ways to get in on the action. Clearly, one appealing option for a cash-strapped financial company is to metamorphise into a regular US bank, a la Amex, Morgan Stanley and Goldman, in a move that gives you permanent access to Federal Reserve funds, enhanced status, the ability to solicit savings deposits and a host of other convenient ways to make more money and lose even more of it.
First, it can open the door to further riches. Amex CEO Kenneth Chenault said it all in explaining Amex’s surprise move on Monday:
We want to be best positioned to take advantage of the various programmes the federal government has introduced or may introduce to support US financial institutions. We will continue to build a larger deposit base to broaden our funding sources. With Federal Reserve oversight we should gain greater access to the capital on offer under the current and any future government-sponsored programmes.
Second, it’s simple. Just cite “emergency conditions” and “the unusual and exigent circumstances” in financial markets - Fed speak for being over a barrel.
It’s quick: AIG, like it did with its original bailout in mid-September, managed to get the government to agree a brand new, bigger, better, rescue scheme in a hurry, warning that its deteriorating financial condition would prompt credit rating agencies and investors to take drastic action. Goldman and Morgan Stanley also did it virtually overnight (”unusual and exigent circumstances”, of course).
Third, it’s simple, too. Consider the words of Amex’s Chenault on Monday: “The move doesn’t fundamentally change the company’s core focus on the payments industry, nor will it require any significant divestitures.”
So simple, in fact, that KKR Financial seems to be preparing the ground to go that route. As Nino Fanlo, chief executive of KKR Financial said on Monday, the changing environment was leading the company to consider moves that would enable it to take deposits – such as transforming itself into a bank or making acquisitions.
And better still, you then get the Fed going into bat for you, as noted in a recent FT report on Goldman and Morgan Stanley’s rapid switch:
Bankers say the Fed has also been making calls to rival banks telling them not to take advantage of the precarious position of Goldman and Morgan Stanley to poach business. The Fed declined to comment.
Sunday night’s announcement that the Fed had approved their application to become bank holding companies and ensure they had full access to emergency loans during the transformation process was rushed out in time for the start of trading in Asia on Monday.
Officials feared Goldman and Morgan Stanley would come under renewed attack in the markets this week if there was no news on a way forward for the investment banks. The Fed is trying to help to shield them from the sudden collapse of their funding model - using short-term collateralised loans in the repo market - and help them to make the transition to another business structure.
However, if you don’t quite qualify as a bank, you can then just threaten the government with financial catastrophe in order to extract a handsome bailout package - like AIG, General Motors, or Fannie Mae and Freddie Mac. Although the last two, although publicly traded and owned by private shareholders, were, admittedly, government-sponsored enterprises - under a public charter and an implicit guarantee that they would be rescued in the event of collapse. So the regulatory “conservatorship” they were put under in August is a little different to the AIG bailouts.
If GM succeeds in its new and desperate push for government funds, other automakers - not to mention an array of other companies - may be understandably inspired to follow suit. GM on Monday spelt out its situation painfully clearly: after reporting a $2.5bn third-quarter loss last week, it warned it was in danger of running out of cash in the first half of 2009.
If you’re pursuing this strategy, however, it is a great help if you have some conveniently dire warnings from analysts:
Rod Lache, analyst at Deutsche Bank, said in a report that GM’s shares were worthless and that the carmaker had few options beyond government intervention. Brian Johnson at Barclays Capital added that any government bail-out would probably significantly dilute GM’s equity.
Echoing others, Mr Lache said that Washington would have little choice but to extend a helping hand to the biggest Detroit carmaker. Refusing a bail-out, he said, ‘would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers and sectors of the US economy’.
It also helps, as noted, if, like AIG’s Edward Liddy, you warn that your failure will create “mayhem in the global financial system. “The Federal Reserve and the US Treasury now understand they are dealing with systemic risk rather than one company’s problems,” Liddy said Monday.
Interestingly, Liddy, a former chief executive of the insurer Allstate, was a board director of Goldman Sachs until he stepped down late September, so clearly has expertise in developing ingenious solutions to funding problems (like turning an investment bank into bank holding company).
Last but not least: don’t forget, after the government has ridden to the rescue, keep telling the public that the taxpayer will benefit hugely from your bail-out.
Mr Liddy also said that most of the gains from a rise in the value of AIG’s toxic assets over the next few years would be retained by the Fed, not the company. A special vehicle is being set up to take over the billions of dollars in illiquid credit default swaps and mortgage-backed assets owned by AIG.
The taxpayer is going to do very well out of this deal._________
