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May 22, 2009
Obama Set to Approve New Rules for Credit Cards
New rules for the credit card industry that are designed to protect consumers from surprise charges, such as over-the-limit fees and costs for paying a bill by phone, are part of a bill President Obama is set to sign into law today, the Associated Press reported today. Obama plans to sign an overhaul of credit card regulations that he blames in part for the economic downturn. Despite opposition from financial companies, the bill cleared Congress with broad support. The new rules, which would go into effect in nine months, would prohibit credit card companies from giving cards to people under 21 unless they can prove they have the means to pay the debt or a parent or guardian co-signs for the card. Under the bill, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance. Even then, the lender would be required to restore the previous, lower rate if the cardholder pays the minimum balance on time for six months. Consumers also would have to receive 45 days' notice and an explanation before their interest rates increased. Read more.
name='2'>Ion Media Gets Bankruptcy Court Funding Approval
Ion Media Networks, the owner and operator of 60 TV stations in the U.S., said Thursday it has received approval to use its cash on hand and access $25 million in new funding to keep operating while in bankruptcy, the New York Times reported today. Ion filed for chapter 11 bankruptcy protection on Tuesday in the U.S. Bankruptcy Court for the Southern District of New York, citing more than $2.7 billion in debt. Equityholders, including General Electric subsidiary NBC Universal, will have their investments wiped out in the restructuring. The West Palm Beach, Fla.-based company was taken private in 2007 due to a large investment from Chicago hedge fund Citadel Investment Group. Ion said its top existing creditors agreed to capitalize the company with $150 million in loans that will convert into equity when the company emerges from bankruptcy. The loans will come in the form of a debt-for-equity swap. In total, Ion aims to emerge with $300 million in equity financing. Read more.
name='3'>GM in Deal with Union as Deadline Approaches
General Motors (GM) reached a deal with its union on concessions on Thursday and is now racing the clock to persuade its bondholders to eliminate $27 billion in debt and avoid a bankruptcy filing, the New York Times reported today. GM has until Tuesday to persuade thousands of bondholders to agree to swap their debt for equity, which would fulfill its last significant requirement for restructuring ordered by President Obama. But there appears to be little chance that the required 90 percent of bondholders will agree to its terms, making the prospect of bankruptcy increasingly likely for GM, the nation's largest automaker. Analysts said that the United Automobile Workers' deal with GM, which followed similar concessions to Chrysler, will increase pressure on bondholders to accept the company's offer. A coalition of small bondholders protested the terms of GM's offer in Washington yesterday. Larger, institutional bondholders have also opposed the deal, which calls for them to receive 225 shares of GM stock in exchange for each $1,000 worth of debt. GM, which is subsisting on $15.4 billion in government loans, has until June 1 to meet the broad criteria for restructuring spelled out by a special presidential auto task force. Read more.
name='4'>U.S. Said to Be Weighing Financial Consumer Agency
The Obama administration is considering a new agency to better protect consumers from practices like those that led to the current financial crisis, Treasury secretary Timothy Geithner said on Thursday, the New York Times reported today. Geithner said during his testimony before a House Appropriations subcommittee that a broad set of regulatory change proposals should be ready to unveil soon, and a new entity to protect consumers of financial products could be part of that effort. Government efforts to bolster the financial system were bringing 'immediate stability,' Geithner said, and it was now time to turn attention to badly needed regulatory reforms to create a system that would be less vulnerable to collapse. Lawmakers have shown strong interest in adopting a consumer-oriented approach to rewriting rules for banks and the financial markets. Capitol Hill aides said earlier this week that some type of financial product safety commission was moving to the forefront of fast-moving efforts to overhaul regulation. Read more.
name='5'>American Express, Discover May Face Downgrades on New Card Law
CreditSights Inc. reported that American Express Co., Discover Financial Services and Capital One Financial Corp. may face ratings downgrades after new U.S. credit-card regulations reduce profits for the lenders, Bloomberg News reported yesterday. The rules passed by Congress yesterday limit companies' ability to impose fees and increase rates, hurting profits of firms that get at least half of their revenue from credit card lending, analyst David Hendler said today. Card companies have said that the proposal may reduce profit, increase costs for responsible customers and reduce reward program perks. Consumer advocates have said that the rules will cut back on deceptive practices designed to ensnare users in debt. President Barack Obama plans to sign the legislation, White House spokesman Robert Gibbs said yesterday. Read more.
name='6'>Florida's BankUnited Fails, Will Cost FDIC $4.9B
The federal seizure of struggling Florida thrift BankUnited FSB is expected to cost the FDIC $4.9 billion, representing the second-largest hit to the FDIC's insurance fund since the financial crisis began felling banks last year, the Washington Post reported today. The costliest was last year's seizure of California lender IndyMac Bank, on which the bank insurance fund is estimated to have lost $10.7 billion. The Office of Thrift Supervision, a Treasury Department agency, said Thursday that BankUnited FSB reported $1.2 billion in losses last year as defaults on loans piled up. The thrift 'was critically undercapitalized and in an unsafe condition to conduct business,' the agency said in a statement. Coral Gables, Fla.-based BankUnited FSB is the 34th federally insured institution to be closed this year, and the biggest. Florida's largest banking institution, with about $13 billion in assets as of May 2, was sold for $900 million to an investor group led by former North Fork Bancorp Chairman and CEO John Kanas. It will reopen as a newly chartered savings bank called BankUnited on Friday, with Kanas at the helm. The new bank will assume $12.7 billion in assets and $8.3 billion of its total $8.6 billion in deposits. In addition, the FDIC and the new bank agreed to share losses on about $10.7 billion in assets. Read more. (Free subscription required.)
name='7'>TARP Warrant Sale Shows Banks May Reap 'Ruthless Bargain'
Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program (TARP) money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner's first sale sets the pace, Bloomberg reported today. While 17 financial institutions have repaid TARP funds, only one has come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. That was Old National Bancorp in Evansville, Ind., which gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to the data. If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of profits taxpayers might have claimed. Under the Old National warrants formula, Bank of America Corp. would save $2.03 billion, followed by Wells Fargo & Co. at $1.48 billion and JPMorgan Chase & Co. at $1.46 billion. Morgan Stanley's benefit would be $983 million, Citigroup Inc.'s would come in at $965 million and Goldman Sachs Group Inc. would have $693 million, according to the data compiled by Bloomberg. For the 20 largest TARP recipients, the total savings would be $9.985 billion, the data show. Read more.
Analysis: Geithner Skeptical of California Bailout
California, America's most populous and cash-strapped state, is looking for a lifeline, the Washington Post reported today. But after bailing out banks, insurers and automakers, will the federal government provide it? Treasury Secretary Timothy Geithner didn't rule out the possibility yesterday, though he sounded less than enthusiastic about the prospect. 'We will have to do exceptional things, as we have done already, to fix this mess,' Geithner said. He stopped far short of suggesting that the administration would help repair California's financial problems, expressing the same ambivalence shared by others in the Obama administration. California voters this week rejected six ballot propositions that would have saved the state an estimated $6 billion, but their passage would have made only a small dent in the deficit. Faced with decreased tax revenue and an abysmal credit rating, California is facing an estimated $20 billion cash-flow shortage and the prospect that it could run out of money by July. Geithner yesterday said that the Treasury's Troubled Assets Relief Program isn't suited to help cities and states facing budget crises. He suggested that a better solution might come from Congress, as well as state fiscal responsibility. California Gov. Arnold Schwarzenegger has said he plans to cut the budget by laying off thousands of state workers, selling properties and slashing education funds, among other measures. Read more. (Free subscription required.)
name='9'>Some Stores May Not Make It to Recovery
The pace of store bankruptcies will pick up - even if consumer spending rebounds - in the next 12 months, industry experts say, according to CNNMoney.com today. Most retailers face a severe lack of credit availability, which is now almost on par with the recession as the biggest threat to merchants' survivability, according to financial advisory firm BDO Seidman. According to BDO Seidman's new ranking of the top risk factors facing the 100 largest U.S. retailers, the recession ranks as the No. 1 threat, up a spot from last year. However, access to financing, which ranked No. 11 in last year's list, jumped to No. 2. In order for retailers to improve their credit standing, Hart said sellers either have to reduce costs, leading to layoffs, or increase sales, which is dependent on consumer spending. The agency said that it currently rates about 20 percent of retailers at 'Caa1' or lower, 'indicating our view that the number of defaults in the retail industry will rise in the next 12 months as the recession deepens.' Barneys, Blockbuster, Eddie Bauer, Claire's Stores, Guitar Center, Michael's Stores and Rite Aid are among the retailers that Moody's has rated 'Caa1' or lower. This serious cash crunch will force more sellers into bankruptcy and subsequent liquidation. Read more.
name='10'>GMAC Receives More Aid as Treasury Gets Board Seats
GMAC, the troubled former finance arm of General Motors, confirmed Thursday that it would receive $7.5 billion from the Treasury Department to help fill holes in its balance sheet, the New York Times reported today. The lender also received permission to begin issuing up to $7.4 billion in debt backed by the FDIC, which would help give it lower-cost financing needed for daily operations. As part of an earlier agreement, GMAC said it would shake up its board, including appointing two new directors selected by the Treasury Department. The widely expected developments will help shore up GMAC, an important source of financing for GM car dealers. As part of Chrysler's expected sale to Fiat, GMAC will now provide financing for Chrysler's dealers as well as GM's. After the administration of government-mandated stress tests, GMAC was found to need $11.5 billion in capital to withstand a worsening economy. As a percentage of the firm's assets, that was by far the highest of the 19 institutions subjected to the government's stress tests. Adding further pressure, $9.1 billion of that needed to be new capital. The announcement was part of several steps the Treasury Department has taken to keep GMAC afloat. Amid the tumult of the financial crisis, the Federal Reserve agreed to convert GMAC into a bank holding company, giving it access to low-cost debt despite its inability to fulfill certain requirements. GMAC has until June 8 to present to the Fed a plan to raise the additional capital. Read more.
name='11'>Greenspan: Banks Still Have a 'Large' Capital Requirement
Former Federal Reserve Chairman Alan Greenspan signaled that the financial crisis has yet to end even as borrowing costs tumble, warning that U.S. banks must raise 'large' amounts of money. 'There is still a very large unfunded capital requirement in the commercial banking system in the United States and that's got to be funded,' Greenspan said. He also said that 'until the price of homes flattens out we still have a very serious potential mortgage crisis.' Bloomberg reported Thursday that Greenspan's comments suggest he sees a bigger capital shortfall in the banking system than reflected in regulators' stress tests on the 19 biggest U.S. lenders. Treasury Secretary Timothy Geithner told lawmakers that banks have issued more than $56 billion in new stock or debt since the tests found 10 firms needed to raise about $75 billion. Read more.
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