The Wall Street Journal scoops on A1 that Washington Mutual is about to get a $5 billion capital fix from outside investors, something the paper says is a “humbling hand-in-hat moment for the 119-year-old Seattle stalwart. Having parlayed the country’s housing boom to a nationwide reputation and immense profits, it is now paying dearly for delving into subprime mortgages.”
The deal, led by private-equity giant TPG, would heavily water down the value of current investors’ shares, and would help WaMu keep from being taken over, something JPMorgan Chase has been eyeing, the WSJ says. TPG’s holdings would be in part preferred stock, which is safer than common shares.
WaMu has lost so much money on mortgages that it has had problems keeping up federally mandated levels of capital. Those capital levels are what allow a bank to have the cash to give to depositors who want their money back. The Seattle bank has already cut jobs, its dividend, and issued other shares, and its stock is down three-fourths from its peak last year. But the WSJ doesn’t give us much information on the bank’s capital levels. We understand they’re in trouble, but just how much trouble?
TPG’s effort could be viewed as an encouraging sign for the nation’s ailing banking system, and Wall Street will be watching to see whether it is an indication that the worst is over. It comes as virtually every large mortgage company in the country has hit financial distress. Countrywide Financial Corp. had to seek an emergency sale to Bank of America Corp. earlier this year, while others have gone bust amid mortgage losses.
Still, an investment could expose TPG and its partners to a financial hit if the mortgage-market shakeout continues.
The Journal notes that Warburg Pincus made an ill-advised half-a-billion dollar investment in monoline bond-insurer MBIA in December that’s already lost more than half its value.
The paper also says in a separate story on A11 that the deal allows WaMu CEO Kerry Killinger to keep his job, despite the fact that he diluted his shareholders all to heck, after already dropping the stock to levels not seen since the mid-1990s—all this in only a couple of years as WaMu’s top dog.
Balanced right off the rails
The New York Times on its front page has an on-the-one-hand-but-on-the-other-hand story on the effects of globalization, and specifically foreign ownership, in the Midwest.
The paper tells the story of two Michigan factories bought by foreigners. One doubled jobs, the other shipped them to Mexico. This seems to strain evenhandedness: We’re free-trade “skeptics” (to put it mildly), but we’d bet that most Michiganders don’t see free trade and its litany of effects as good for them, and they oughta know. The “good company” the Times profiles is one that was owned by another foreign company before Siemens bought it.
And the Times doesn’t tell us if foreign-owner companies are more or less likely to ship American jobs overseas once they buy their operations. It does say foreign-owned companies pay a third higher on average than American-owned, but doesn’t attempt to explain why that is—if for instance, foreigners own less retail, which pays far less than factory jobs.
Still, the NYT gets our Quote of the Day for something which is either embarrassing or awesome, we’re not sure. Ladies and gentleman, the governor of Michigan, talking about a fridge-maker’s run for the border:
Gov. Jennifer M. Granholm, a Democrat, was bitterly disappointed by Electrolux’s decision to abandon Greenville…
“They said, ‘There is nothing you can do to compensate for the fact that we are able to pay $1.57 an hour in Mexico,’” Ms. Granholm recalled during a recent interview.
“That’s when I started to say, ‘Nafta and Cafta have given us the shafta,’ ” she added, using the acronyms for the North American and Central American free trade agreements.
Bailouts, all around!
The Financial Times fronts an interview with the head of the International Monetary Fund, who calls for a global public intervention to mitigate the economic downturn. In plain English, he’s talking government bailouts here.
Until now authorities, particularly in the US, have employed increasingly aggressive measures to support market liquidity but stopped short of intervention in the financial system—with the exception of the rescue of Bear Stearns last month.
That’s a pretty big exception!
And your point is?
In other globalization news, Bloomberg stretches to compare what’s going on in world rice markets to the credit crisis.
From Cairo to New Delhi to Shanghai, the run on rice is threatening to disrupt worldwide food supplies as much as the scarcity of confidence on Wall Street earlier this year roiled credit markets.
The Berg says rice is up double from a year ago and 400 percent from 2001. It quotes a farm marketing guy as saying rice, now at $20.91 per 100 pounds, may reach $22 by November. A whole 5 percent increase in seven months when just today it’s jumped 2 percent? Don’t go too far out in that rice paddy there, guys.
But there’s little to nothing here that backs up the story’s thesis.
The upheaval parallels turmoil in global capital markets that seized up nine months ago when subprime mortgages collapsed. The difference between what it costs the U.S. government to borrow and the rate banks charge each other for three month loans ended last week at 1.36 percentage points. A year ago the gap was 0.33 percentage point.
Well, okay. What does that have to do with the price of rice in China?
Bill Gates, corporate raider
Microsoft is threatening to turn its “friendly” $45 billion bid for Yahoo into a hostile one at a lower price if the Internet portal doesn’t accept its bid within three weeks, the Journal says on B1. Yahoo has already rejected the bid, which Microsoft made to help it challenge Google.
The FT leads its front-page story with Yahoo directors “huddling” to discuss the newly aggressive Microsoft tack, but doesn’t get to the hostile news until the fifth paragraph.
Thorn in your board
The WSJ says on C1 that company boards of directors are allowing shareholder activists onto boards at a sharply increased pace.
The paper says the number of companies who caved to activists and gave them board seats was up more than triple last quarter from the same time in 2006. It notes how rival New York Times Company gave two seats to a hedge fund.
“You will see more large shareholders being invited on to boards” without proxy fights, says Richard Breeden, a former Securities and Exchange Commission chairman and now an activist investor. His $1.5 billion Breeden Partners fund has won board seats at three companies, two through negotiated settlements.
Several forces are behind the shift. Changing corporate-governance rules give investors a bigger say on the election of directors and make proxy challenges more credible. Activists, meanwhile, are more selective, seeking a handful of board seats instead of trying to oust a full board and focusing on battles they think they can win, says Damien Park, a consultant who advises companies on dealing with activists.
This is a welcome development. Too many corporate boards have been too insider-y—too chummy with executives and each other and thus too willing to give CEOs exorbitant pay packages, and too unwilling to exercise oversight of their decisions and operations.
Will Warren wield the axe?
The WSJ scoops on C1 that the feds are pushing Warren Buffett to fire the CEO of his General Re Corporation subsidiary, which insures insurers. Four General Re execs were convicted of a “sham deal” that falsely boosted AIG’s earnings.
Defense lawyers say it isn’t unheard of for prosecutors to suggest personnel changes as part of a settlement of a government investigation. The practice has increased, lawyers say, in conjunction with the rise of agreements between prosecutors and companies to avoid prosecution, typically in exchange for paying a fine and meeting certain conditions.
The father of our bailouts
The Los Angeles Times puts a thumb-sucker on page one, asking “Who should get mortgage aid?” in the bailouts it says Congress is about to take up on a “massive scale.”
Many of those who bought or refinanced their homes with sub-prime loans were victims of overzealous loan brokers paid on commission. But many others knowingly took out mortgages they couldn’t afford, betting that home prices would keep rising and that they could easily refinance.
Whether all these borrowers are deserving or not, political leaders are being forced by events to take increasingly pragmatic approaches to the crisis at hand.
The paper spends much of its run going back into history (even back to George Washington’s administration!) to illustrate how the government has ended up helping speculators and the like in its efforts to shore up the economy and markets.
In the 1790s, the newly formed federal government finally decided to pay off most of the debts accumulated by the states during the Revolutionary War, despite complaints that speculators in war bonds would benefit.
Distasteful as many found it, paying off the debts was deemed crucial to establishing the new government’s credit at home and abroad.
If George Washington bailed out the speculators, so can we.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.