IF YOU are looking to buy a property, beware of potential pitfalls, including those related to getting a housing loan.
In the past, most home buyers would pay the one per cent option to secure the property before looking for a housing loan. If you do this now, you might regret it and here's why.
It has been clear over the past few months that property prices in Singapore have turned down. And with global economies expected to weaken further, the trend for property prices is more likely to be down than up in the months ahead.
So, even before you put money down on your option, check the market valuation of the property. There have been instances where buyers checked the market valuation of a property with the bank only to get a nasty surprise some weeks later when they finally write out a cheque for the option. That's when they find out that the bank's valuation of their property has gone down.
Latest valuation
We know an instance where someone purchased a property for $2 million and then found out some months later that the valuation had fallen by about 10 per cent to $1.8 million. In other words, he ended up having to fork out an additional $160,000 in cash as the bank was only willing to grant a loan of $1.44 million, or 80 per cent of the revised valuation of $1.8 million, rather than the original loan of $1.6 million.
The buyer could have avoided this pitfall if he had gotten a mortgage broker to check the latest indicative valuation within a few days of buying the property.
Another problem can arise with deferred payments. In 2007, properties were selling like hot cakes and many people had bought them from developers under the deferred payment scheme. That's where buyers were only required to come up with 10-20 per cent of the purchase price and pay nothing more until the property obtains its temporary occupation permit (TOP) about three years later.
According to estimates, more than half the buyers who bought property under the deferred payment scheme have yet to apply for a housing loan. In the past year or so, many properties have seen their values fall by 10 per cent to 30 per cent, so when these buyers finally apply for a home loan, they are likely to have to cough up an additional 10-25 per cent of the purchase price.
For example, someone who bought a property for $1 million in 2007 would see the current valuation of the property drop to about $800,000. In other words, he would probably be able to get a maximum loan of 80 per cent of $800,000 - or $640,000. That's $160,000 extra that he would have to foot in cash or CPF savings. In effect, he is putting up 36 per cent of his purchase price upfront.
With global stock markets falling further in recent weeks as economic conditions deteriorate, property valuations might drop further. Thus, if you have bought a property under a deferred payment scheme but have yet to apply for financing, I strongly advise you to get financing as soon as possible.
There are housing loan packages out there which offer free loan conversions. If you apply for a housing loan now and a better loan package comes along when the property reaches TOP, you can always convert to a more attractive package without penalty.
Getting financing earlier is safer too, should there be any adverse change in a home buyer's financial position, such as a pay cut, or deteriorating credit standing due to delays in paying existing loans. Then, the home buyer might not be able to obtain any financing for his property at all!
To mitigate the risks of falling collateral value, banks have become more cautious in granting financing for properties. Very few banks are willing to offer 90 per cent financing, and if they do it would primarily be for first-time home buyers.
Banks are also more stringent in assessing the borrower's ability to service and repay debt. There are instances where property speculators might only obtain financing of 70 per cent for properties bought for investment purposes. For borrowers who have a slightly weaker credit profile, financing might even be capped at 60 per cent of the purchase price or valuation, whichever is lower.
Prudent step
To be prudent, property buyers should approach a mortgage broker to help secure a prior bank loan approval before committing to a property. By doing so, you would avoid the danger of being unable to obtain sufficient bank financing for your property.
The silver lining in all this is that interest rates are also dropping. Over the past year, the Singapore inter-bank offered rate (Sibor) - the interest rate at which banks borrow from one another - has fallen from over 2 per cent to about 0.7 per cent currently.
If you had taken a home loan one to two years ago, chances are you might be paying an interest rate of 3-4 per cent. It is possible for you to refinance your loan today and end up paying as low as 1.65 per cent, from say, 3.5 per cent. Assuming an outstanding loan of $300,000 and a remaining loan period of 20 years, by refinancing, you might save as much as $5,500 in the first year alone! Even after deducting the cost of refinancing of about $1,000, you are still $4,500 better off.
Thus, refinancing your existing housing loan now might be one of the best ways to 'create money' for yourself by cutting down on your interest expenses.
You can also take advantage of cheaper mortgage rates by borrowing more if your property has appreciated from its original price. If you had bought your property a few years ago, chances are its current valuation is still much higher than your purchase price.
Say, you had bought a property costing $1 million five years ago and have an outstanding loan of $500,000 on it. The current valuation might be $1.5 million. Thus, even if you take out an additional loan of $500,000, bringing the total loan amount to about $1 million, it works out to just 67 per cent of the property valuation and well within the 80 per cent financing limit for a property.
The good news is that the additional loan of $500,000 comes at a low interest rate of about 2 per cent, which is possibly the cheapest loan a typical consumer can obtain.
Securing a housing loan has become more tricky with fast-changing circumstances in terms of property valuation and loan-approval criteria. One's financial situation might also change due to pay cuts and threat of retrenchments. So to be safe, get your home loan approved before you commit to buying your property.
The writer is a Certified Financial Planner with 15 years of experience in bank lending. He co-founded an independent mortgage consultancy portal www.HousingLoanSG.com in 2003.
Sunday, March 29, 2009
Monday, March 16, 2009
Jim Rogers on US aid and future oil prices
March 17 (Bloomberg) -- The U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, investor Jim Rogers said.
“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”
The U.S. government should let American International Group Inc., whose fourth-quarter loss was the worst in corporate history, go bankrupt, Rogers added in a Bloomberg Television interview today. Congress approved a $700 billion bank bailout package in October, and President Barack Obama’s administration has suggested it may need an additional $750 billion.
The U.S. is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under, Rogers said.
New York-based AIG has received $173 billion in government aid, and had earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave.
The Treasury this week intends to provide more information about a $1 trillion plan to remove distressed mortgage assets from banks’ balance sheets. The Federal Reserve is also scheduled this week to start the first phase of a $1 trillion program to revive the market for securities backed by consumer and business loans.
Oil Prices
Oil prices may rise to record levels in the future because of depleting reserves and a lack of major field discoveries, Rogers said. Crude oil in New York hit a record $147.27 a barrel in July and traded at $46.98 at 12:13 p.m. Singapore time.
“Reserves of oil are going down all over the world,” Rogers said. “The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”
People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.
“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”
Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.
“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”
The U.S. government should let American International Group Inc., whose fourth-quarter loss was the worst in corporate history, go bankrupt, Rogers added in a Bloomberg Television interview today. Congress approved a $700 billion bank bailout package in October, and President Barack Obama’s administration has suggested it may need an additional $750 billion.
The U.S. is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under, Rogers said.
New York-based AIG has received $173 billion in government aid, and had earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave.
The Treasury this week intends to provide more information about a $1 trillion plan to remove distressed mortgage assets from banks’ balance sheets. The Federal Reserve is also scheduled this week to start the first phase of a $1 trillion program to revive the market for securities backed by consumer and business loans.
Oil Prices
Oil prices may rise to record levels in the future because of depleting reserves and a lack of major field discoveries, Rogers said. Crude oil in New York hit a record $147.27 a barrel in July and traded at $46.98 at 12:13 p.m. Singapore time.
“Reserves of oil are going down all over the world,” Rogers said. “The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”
People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.
“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”
Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.
Monday, March 2, 2009
How Banks are assessed for financial soundness
Bank Stocks Are Hated, So Here Are Four I Like: John Dorfman
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Commentary by John Dorfman
March 2 (Bloomberg) -- Banks are unpopular these days, as President Barack Obama observed in his address to Congress last week. Even more despised are bank stocks.
In the 12 months through Friday, the diversified banks group within the Standard & Poor’s 500 Index fell 54 percent. Regional banks fell 49 percent.
For investors courageous enough to swim against the tide, now may be a good time to pick up bargains in the rubble of the banking industry. How can you tell which banks are on the safest footing?
The newly mandated federal stress tests for banks haven’t been run yet. Still, investors can get a pretty good idea of a bank’s viability based on two traditional financial-strength measures.
Start with the Tier 1 capital ratio, sometimes called the core capital ratio. Tier 1 capital is basically a bank’s book value, or corporate net worth. Banks are required to have Tier 1 capital equal to at least 4 percent of their assets. Assets for a bank usually consist mainly of the loans they have outstanding and can also include Treasury notes, bills and bonds held by a bank, and other investments.
While 4 percent is the required Tier 1 capital ratio, some banks have considerably more. Of the 119 publicly traded banks in the U.S. with a market value of $250 million or more, 73 have a Tier 1 capital ratio of 10 percent or better.
Grading on Risk
Next, turn to the risk-based capital ratio. In assessing this ratio, regulators grade the safety of assets held by a bank. The safest assets such as cash and Treasury bills are given a multiplier of zero. Those deemed to be moderately safe such as (ironically) mortgage loans have a multiplier of 0.5. Those considered riskier, such as commercial loans, carry a multiplier of 1.0.
If Gravel City Bank hypothetically had $30 million in Treasury bills, $40 million in mortgage loans, and $50 million in commercial loans, its risk-weighted assets would be $70 million (zero times $30 million, plus 0.5 times $40 million, plus 1.0 times $50 million).
A bank’s total capital is supposed to be at least 8 percent of the risk-weighted asset total. Total capital includes Tier 1 capital plus loan-loss reserves and certain types of debt.
Among the 119 publicly traded banks mentioned above, 22 have a risk-based capital ratio of 16 percent or better, as of their latest filings.
If one takes the intersection of the 73 banks that have better than a 10 percent Tier 1 capital ratio, and the 22 that score 16 percent or better on the risk-based capital ratio, the field narrows to 17.
Four Good Banks
Last week I looked at those 17 banks to select a handful that I think are good investment candidates now.
The ones I like are not household names, and many of them are small. They include the likes of Republic Bancorp Inc. of Louisville, Kentucky (with a market value of $392 million), SVB Financial Group of Santa Clara, California ($547 million) and Washington Federal Inc. of Seattle ($1 billion).
Republic Bancorp traded above $30 a share as recently as September. Lately the stock is about $19, trading at 12 times earnings and 1.4 times book value. No Wall Street analyst follows it; the only brokerage house that does is a Louisville regional firm, Hilliard Lyons, which rates it a “buy.” SVB Financial Group is the parent to Silicon Valley Bank. With its Silicon Valley location, it is heavily exposed to the ups and downs of the technology industry. In the fourth quarter it earned only 9 cents a share, down from 96 cents a year earlier.
Attractive Fundamentals
I like SVB nevertheless, partly because it trades at less than $17 a share, down from more than $50 as recently as October. That is only seven times earnings and 0.7 times book value.
Washington Federal is participating in the U.S. Troubled Asset Relief Program. It sold preferred stock and warrants to the Treasury Department in return for about $200 million. The stock, trading below $12, has been cut in half from a year ago. It trades at nine times earnings and 0.7 times book value.
For those who prefer a somewhat larger bank, I recommend BB&T Corp. of Winston-Salem, North Carolina (market value $10 billion). So far, BB&T has weathered the recession well. For example, earnings in the fourth quarter were 55 cents a share, down from 76 cents last year.
BB&T stock fetches about $16 a share, down from about $31 a year ago. It trades at 6 times earnings and 0.55 times book value. The dividend may need to be cut this year, but in the meantime the stock yields more than 11 percent in dividends.
The banking crisis seems as if it will go on forever, but it won’t. I suspect investors will make good money in selected bank stocks purchased now and held for two years or more.
Disclosure note: Neither I nor my clients currently own the banks discussed in this column.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
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Commentary by John Dorfman
March 2 (Bloomberg) -- Banks are unpopular these days, as President Barack Obama observed in his address to Congress last week. Even more despised are bank stocks.
In the 12 months through Friday, the diversified banks group within the Standard & Poor’s 500 Index fell 54 percent. Regional banks fell 49 percent.
For investors courageous enough to swim against the tide, now may be a good time to pick up bargains in the rubble of the banking industry. How can you tell which banks are on the safest footing?
The newly mandated federal stress tests for banks haven’t been run yet. Still, investors can get a pretty good idea of a bank’s viability based on two traditional financial-strength measures.
Start with the Tier 1 capital ratio, sometimes called the core capital ratio. Tier 1 capital is basically a bank’s book value, or corporate net worth. Banks are required to have Tier 1 capital equal to at least 4 percent of their assets. Assets for a bank usually consist mainly of the loans they have outstanding and can also include Treasury notes, bills and bonds held by a bank, and other investments.
While 4 percent is the required Tier 1 capital ratio, some banks have considerably more. Of the 119 publicly traded banks in the U.S. with a market value of $250 million or more, 73 have a Tier 1 capital ratio of 10 percent or better.
Grading on Risk
Next, turn to the risk-based capital ratio. In assessing this ratio, regulators grade the safety of assets held by a bank. The safest assets such as cash and Treasury bills are given a multiplier of zero. Those deemed to be moderately safe such as (ironically) mortgage loans have a multiplier of 0.5. Those considered riskier, such as commercial loans, carry a multiplier of 1.0.
If Gravel City Bank hypothetically had $30 million in Treasury bills, $40 million in mortgage loans, and $50 million in commercial loans, its risk-weighted assets would be $70 million (zero times $30 million, plus 0.5 times $40 million, plus 1.0 times $50 million).
A bank’s total capital is supposed to be at least 8 percent of the risk-weighted asset total. Total capital includes Tier 1 capital plus loan-loss reserves and certain types of debt.
Among the 119 publicly traded banks mentioned above, 22 have a risk-based capital ratio of 16 percent or better, as of their latest filings.
If one takes the intersection of the 73 banks that have better than a 10 percent Tier 1 capital ratio, and the 22 that score 16 percent or better on the risk-based capital ratio, the field narrows to 17.
Four Good Banks
Last week I looked at those 17 banks to select a handful that I think are good investment candidates now.
The ones I like are not household names, and many of them are small. They include the likes of Republic Bancorp Inc. of Louisville, Kentucky (with a market value of $392 million), SVB Financial Group of Santa Clara, California ($547 million) and Washington Federal Inc. of Seattle ($1 billion).
Republic Bancorp traded above $30 a share as recently as September. Lately the stock is about $19, trading at 12 times earnings and 1.4 times book value. No Wall Street analyst follows it; the only brokerage house that does is a Louisville regional firm, Hilliard Lyons, which rates it a “buy.” SVB Financial Group is the parent to Silicon Valley Bank. With its Silicon Valley location, it is heavily exposed to the ups and downs of the technology industry. In the fourth quarter it earned only 9 cents a share, down from 96 cents a year earlier.
Attractive Fundamentals
I like SVB nevertheless, partly because it trades at less than $17 a share, down from more than $50 as recently as October. That is only seven times earnings and 0.7 times book value.
Washington Federal is participating in the U.S. Troubled Asset Relief Program. It sold preferred stock and warrants to the Treasury Department in return for about $200 million. The stock, trading below $12, has been cut in half from a year ago. It trades at nine times earnings and 0.7 times book value.
For those who prefer a somewhat larger bank, I recommend BB&T Corp. of Winston-Salem, North Carolina (market value $10 billion). So far, BB&T has weathered the recession well. For example, earnings in the fourth quarter were 55 cents a share, down from 76 cents last year.
BB&T stock fetches about $16 a share, down from about $31 a year ago. It trades at 6 times earnings and 0.55 times book value. The dividend may need to be cut this year, but in the meantime the stock yields more than 11 percent in dividends.
The banking crisis seems as if it will go on forever, but it won’t. I suspect investors will make good money in selected bank stocks purchased now and held for two years or more.
Disclosure note: Neither I nor my clients currently own the banks discussed in this column.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
Citibank - GIC cuts loss by converting preferred share to common stock
THE Government of Singapore Investment Corp (GIC) will convert all its preferred shares in Citigroup into common stock to cut its losses. The swop will give it an 11.1 per cent stake in the troubled US bank, which yesterday announced a sweeping plan to boost its common equity base. The conversion will pare GIC's paper loss on its original US$6.88 billion investment in Citi from 80 per cent or US$5.5 billion to 24 per cent, or US$1.67 billion, based on Thursday's closing price of US$2.46 for Citi shares.
Separately, Citi said yesterday that it plans to swop up to US$52.5 billion of its preferred stock, including US$25 billion of the US$45 billion held by the US government, for ordinary shares.
Citi also recorded a massive US$10 billion charge for impairment of goodwill and other intangible assets in the fourth quarter, resulting in an additional net loss of US$9 billion for the final three months of last year.
For GIC, the decision to convert its shares appears to have been the lesser of two unpalatable choices. Citi yesterday suspended dividend payments on its preferred shares as well as common stock, which means that GIC would lose the 7 per cent annual dividend that it has been receiving if it chose not to convert its holdings.
The conversion will make GIC the second-biggest shareholder in Citi with a stake of about 11 per cent, compared to about 4 per cent at the time of its original investment. The US government will be Citi's largest shareholder, owning 36-38 per cent of Citi's common equity. The final stakes will depend on how many investors in the publicly held tranche of Citi's preferred stock decide to participate in the share conversion.
One thing is certain: Existing ordinary shareholders will suffer massive dilution of more than 70 per cent. Citi shares plunged 37 per cent to US$1.55 at the start of US trading yesterday after the bank's announcement. At that price, GIC's unrealised loss on its Citi investment would be US$3.6 billion. The profitability of US banks 'is likely to be impaired in the next two years', said Ng Kok Song, GIC's group chief investment officer in a statement.
'GIC's view is that with this latest move, Citigroup's capacity to weather the severe economic downturn will be strengthened.'
Before yesterday's announcement, the market value of the preferred shares held by GIC had already slumped 80 per cent to just US$1.376 billion since its initial investment in Citi, as mounting losses made it less likely that the bank would be able to keep up its dividend payments.
The US government, GIC and other investors that bought Citi preferred stock alongside GIC in January last year will receive common stock at a price of US$3.25 a share. Those investors, including Saudi Arabia's Prince Al-Waleed bin Talal, have agreed to the exchange, said Citi.
At the conversion price of US$3.25, GIC will get some 2.12 billion common shares in exchange for its US$6.88 billion in preferred stock. Based on Thursday's closing price of US$2.46 a share, GIC's stake after conversion is worth US$5.21 billion.
That puts GIC's unrealised loss on its original US$6.88 billion investment in Citi at US$1.67 billion after the conversion, compared to US$5.5 billion before.
Under the original terms of GIC's investment in Citi, it would have had to pay a much higher conversion price of US$26.35 for each common share, GIC said. That would have translated into a stake of just 261.1 million shares, worth a mere US$642 million at Thursday's closing price for Citi shares.
But the conversion also means that GIC will now bear greater risk than before, as an ordinary shareholder. It also gives up for good the 7 per cent annual dividend that it previously earned on its preferred shares.
Citi chief executive Vikram Pandit said that the conversion plan had just 'one goal' - to increase the bank's tangible common equity or TCE. Converting its preferred shares into ordinary equity will boost its TCE ratio - the focus of stress tests by US regulators starting this week as a key measure of the bank's ability to withstand further losses if the recession is worse than expected.
Ordinary shareholders are the first to suffer any losses, so common equity is seen as the highest quality of capital that a bank holds, and the size of a bank's common equity base relative to its assets is considered the purest measure of its buffer against losses.
The hope is that by raising its TCE ratio, Citi will be able to weather the worst recession that the US has seen in decades. The plan is expected to increase its TCE as a proportion of its risk-weighted assets from less than 3 per cent now to 7.9 per cent.
Crucially, it does so without the need to inject more money from the public purse. That makes it unnecessary for the US government to seek the approval of lawmakers for more funds amid growing public fury over the use of taxpayers' money to bail out large banks.
But the US government could still inject more capital into Citi - in the form of mandatory convertible preferred shares - if the stress tests show that the bank's capital cushion still needs bolstering. That would mean further dilution for ordinary shareholders, including GIC, when the shares are eventually converted to common stock.
'As a shareholder, GIC supports the initiative by Citigroup and the US government to strengthen the quality of the bank's capital base in view of the challenging economic environment,' GIC said in a statement.
Separately, Citi said yesterday that it plans to swop up to US$52.5 billion of its preferred stock, including US$25 billion of the US$45 billion held by the US government, for ordinary shares.
Citi also recorded a massive US$10 billion charge for impairment of goodwill and other intangible assets in the fourth quarter, resulting in an additional net loss of US$9 billion for the final three months of last year.
For GIC, the decision to convert its shares appears to have been the lesser of two unpalatable choices. Citi yesterday suspended dividend payments on its preferred shares as well as common stock, which means that GIC would lose the 7 per cent annual dividend that it has been receiving if it chose not to convert its holdings.
The conversion will make GIC the second-biggest shareholder in Citi with a stake of about 11 per cent, compared to about 4 per cent at the time of its original investment. The US government will be Citi's largest shareholder, owning 36-38 per cent of Citi's common equity. The final stakes will depend on how many investors in the publicly held tranche of Citi's preferred stock decide to participate in the share conversion.
One thing is certain: Existing ordinary shareholders will suffer massive dilution of more than 70 per cent. Citi shares plunged 37 per cent to US$1.55 at the start of US trading yesterday after the bank's announcement. At that price, GIC's unrealised loss on its Citi investment would be US$3.6 billion. The profitability of US banks 'is likely to be impaired in the next two years', said Ng Kok Song, GIC's group chief investment officer in a statement.
'GIC's view is that with this latest move, Citigroup's capacity to weather the severe economic downturn will be strengthened.'
Before yesterday's announcement, the market value of the preferred shares held by GIC had already slumped 80 per cent to just US$1.376 billion since its initial investment in Citi, as mounting losses made it less likely that the bank would be able to keep up its dividend payments.
The US government, GIC and other investors that bought Citi preferred stock alongside GIC in January last year will receive common stock at a price of US$3.25 a share. Those investors, including Saudi Arabia's Prince Al-Waleed bin Talal, have agreed to the exchange, said Citi.
At the conversion price of US$3.25, GIC will get some 2.12 billion common shares in exchange for its US$6.88 billion in preferred stock. Based on Thursday's closing price of US$2.46 a share, GIC's stake after conversion is worth US$5.21 billion.
That puts GIC's unrealised loss on its original US$6.88 billion investment in Citi at US$1.67 billion after the conversion, compared to US$5.5 billion before.
Under the original terms of GIC's investment in Citi, it would have had to pay a much higher conversion price of US$26.35 for each common share, GIC said. That would have translated into a stake of just 261.1 million shares, worth a mere US$642 million at Thursday's closing price for Citi shares.
But the conversion also means that GIC will now bear greater risk than before, as an ordinary shareholder. It also gives up for good the 7 per cent annual dividend that it previously earned on its preferred shares.
Citi chief executive Vikram Pandit said that the conversion plan had just 'one goal' - to increase the bank's tangible common equity or TCE. Converting its preferred shares into ordinary equity will boost its TCE ratio - the focus of stress tests by US regulators starting this week as a key measure of the bank's ability to withstand further losses if the recession is worse than expected.
Ordinary shareholders are the first to suffer any losses, so common equity is seen as the highest quality of capital that a bank holds, and the size of a bank's common equity base relative to its assets is considered the purest measure of its buffer against losses.
The hope is that by raising its TCE ratio, Citi will be able to weather the worst recession that the US has seen in decades. The plan is expected to increase its TCE as a proportion of its risk-weighted assets from less than 3 per cent now to 7.9 per cent.
Crucially, it does so without the need to inject more money from the public purse. That makes it unnecessary for the US government to seek the approval of lawmakers for more funds amid growing public fury over the use of taxpayers' money to bail out large banks.
But the US government could still inject more capital into Citi - in the form of mandatory convertible preferred shares - if the stress tests show that the bank's capital cushion still needs bolstering. That would mean further dilution for ordinary shareholders, including GIC, when the shares are eventually converted to common stock.
'As a shareholder, GIC supports the initiative by Citigroup and the US government to strengthen the quality of the bank's capital base in view of the challenging economic environment,' GIC said in a statement.
Outlook on the economy
March 2 (Bloomberg) -- Billionaire Warren Buffett said the economy will be “in shambles” this year, and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.
The economy and stocks will rebound, and the best days for the U.S. are ahead, said Buffett, chairman of Berkshire Hathaway Inc., in his annual letter to shareholders Feb. 28. Buffett said he’ll spend the recession shopping for new investments for Omaha, Nebraska-based Berkshire.
“The economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond,” said Buffett. “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so.”
Buffett, an informal adviser to President Barack Obama, said the consequences of the U.S. housing bubble are now “reverberating through every corner of our economy.” Gross domestic product shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department said last week.
Late last year, “the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country,” said Buffett, 78. “Fear led to business contraction, and that in turn led to even greater fear.”
Berkshire’s fourth-quarter net income fell 96 percent to $117 million, the firm said Feb. 28. Book value per share, a measure of assets minus liabilities, slipped 9.6 percent for all of 2008, the worst performance under Buffett’s watch, on the declining value of derivatives and the stock portfolio. Berkshire shares have plunged 44 percent in the 12 months through Feb. 27.
‘Socks or Stocks’
The Standard & Poor’s 500 Index will probably gain in three-fourths of the next 44 years, just as it did in the period since Buffett took over Berkshire in 1965, he wrote. The benchmark dropped 38 percent last year, the most since 1937.
“We enjoy such price declines if we have funds available to increase our positions,” Buffett wrote. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Berkshire’s cash hoard was about $25.5 billion at year-end, down from $33.4 billion on Sept. 30.
Buffett disclosed increased holdings of Posco, Asia’s third-largest steelmaker, and Sanofi-Aventis SA, France’s biggest drugmaker. Berkshire sold $4.77 billion of equities in the fourth quarter to help fund private deals for preferred shares in Goldman Sachs Group Inc. and General Electric Co. The sales included shares of Johnson & Johnson, Procter & Gamble Co. and ConocoPhillips, holdings that, Buffett wrote, “I would have preferred to keep.”
‘Major Mistake’
Buffett said he made a “major mistake” in buying shares of oil producer ConocoPhillips when oil and gas prices were near their peak last year. Berkshire paid $7.01 billion for its remaining stake, which was valued at $4.4 billion as of Dec. 31.
Among his other errors for the year, Buffett listed the purchase of shares in two Irish banks that he didn’t name for $244 million. Berkshire wrote down the stake by 89 percent.
Buffett’s analysis and wit earn attention from professional money-managers and individual investors alike because of his success as a stockpicker and businessman. Named the richest American by Forbes magazine in October, he transformed Berkshire from a failing textile maker into a $120 billion company with businesses ranging from ice cream to power plants.
Berkshire’s profit was hurt by writedowns on derivative bets tied to four of the world’s stock markets, while the insurance and utilities businesses fared well because their prospects aren’t correlated with the economy, Buffett said. Liabilities on the derivatives widened 49 percent to $10 billion in the fourth quarter, though the contracts don’t require Berkshire to pay out until at least 2019, if at all.
‘Venereal Diseases’
Buffett decried the way financial companies allowed their derivatives to make them too dependent on each other, and said Berkshire’s contracts are different -- in part, because his firm usually isn’t required to post collateral when assets drop.
For others, “a frightening web of mutual dependence develops among huge financial institutions,” he wrote. “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal diseases: It’s not just whom you sleep with, but also whom they are sleeping with.”
Firms with too many derivatives can “infect the entire neighborhood,” he said, and require government help to avoid a wider collapse.
Strong Action
Buffett endorsed efforts by the U.S. to prevent the failure of financial firms including Bear Stearns Cos., which was sold to JPMorgan Chase & Co. The U.S. is being called to commit more capital to ailing companies after the $250 billion in aid it originally allocated last year failed to staunch losses on soured loans at regional lenders and the biggest banks.
“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown,” Buffett said. “Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”
Buffett predicted bailouts will cause “unwelcome aftereffects” including inflation.
“Major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests,” he said. “Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
The economy and stocks will rebound, and the best days for the U.S. are ahead, said Buffett, chairman of Berkshire Hathaway Inc., in his annual letter to shareholders Feb. 28. Buffett said he’ll spend the recession shopping for new investments for Omaha, Nebraska-based Berkshire.
“The economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond,” said Buffett. “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so.”
Buffett, an informal adviser to President Barack Obama, said the consequences of the U.S. housing bubble are now “reverberating through every corner of our economy.” Gross domestic product shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department said last week.
Late last year, “the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country,” said Buffett, 78. “Fear led to business contraction, and that in turn led to even greater fear.”
Berkshire’s fourth-quarter net income fell 96 percent to $117 million, the firm said Feb. 28. Book value per share, a measure of assets minus liabilities, slipped 9.6 percent for all of 2008, the worst performance under Buffett’s watch, on the declining value of derivatives and the stock portfolio. Berkshire shares have plunged 44 percent in the 12 months through Feb. 27.
‘Socks or Stocks’
The Standard & Poor’s 500 Index will probably gain in three-fourths of the next 44 years, just as it did in the period since Buffett took over Berkshire in 1965, he wrote. The benchmark dropped 38 percent last year, the most since 1937.
“We enjoy such price declines if we have funds available to increase our positions,” Buffett wrote. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Berkshire’s cash hoard was about $25.5 billion at year-end, down from $33.4 billion on Sept. 30.
Buffett disclosed increased holdings of Posco, Asia’s third-largest steelmaker, and Sanofi-Aventis SA, France’s biggest drugmaker. Berkshire sold $4.77 billion of equities in the fourth quarter to help fund private deals for preferred shares in Goldman Sachs Group Inc. and General Electric Co. The sales included shares of Johnson & Johnson, Procter & Gamble Co. and ConocoPhillips, holdings that, Buffett wrote, “I would have preferred to keep.”
‘Major Mistake’
Buffett said he made a “major mistake” in buying shares of oil producer ConocoPhillips when oil and gas prices were near their peak last year. Berkshire paid $7.01 billion for its remaining stake, which was valued at $4.4 billion as of Dec. 31.
Among his other errors for the year, Buffett listed the purchase of shares in two Irish banks that he didn’t name for $244 million. Berkshire wrote down the stake by 89 percent.
Buffett’s analysis and wit earn attention from professional money-managers and individual investors alike because of his success as a stockpicker and businessman. Named the richest American by Forbes magazine in October, he transformed Berkshire from a failing textile maker into a $120 billion company with businesses ranging from ice cream to power plants.
Berkshire’s profit was hurt by writedowns on derivative bets tied to four of the world’s stock markets, while the insurance and utilities businesses fared well because their prospects aren’t correlated with the economy, Buffett said. Liabilities on the derivatives widened 49 percent to $10 billion in the fourth quarter, though the contracts don’t require Berkshire to pay out until at least 2019, if at all.
‘Venereal Diseases’
Buffett decried the way financial companies allowed their derivatives to make them too dependent on each other, and said Berkshire’s contracts are different -- in part, because his firm usually isn’t required to post collateral when assets drop.
For others, “a frightening web of mutual dependence develops among huge financial institutions,” he wrote. “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal diseases: It’s not just whom you sleep with, but also whom they are sleeping with.”
Firms with too many derivatives can “infect the entire neighborhood,” he said, and require government help to avoid a wider collapse.
Strong Action
Buffett endorsed efforts by the U.S. to prevent the failure of financial firms including Bear Stearns Cos., which was sold to JPMorgan Chase & Co. The U.S. is being called to commit more capital to ailing companies after the $250 billion in aid it originally allocated last year failed to staunch losses on soured loans at regional lenders and the biggest banks.
“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown,” Buffett said. “Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”
Buffett predicted bailouts will cause “unwelcome aftereffects” including inflation.
“Major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests,” he said. “Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
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