Archive for the ‘Vertical: Financial Svcs’ Category

MF Global Files for Bankruptcy and Plunges in First Day of OTC Trading

Wednesday, November 2nd, 2011

November 2, 2011 - MF Global (NYSE: MF) tumbled in its first day of over-the-counter trading after the futures brokerage filed for bankruptcy, prompting the New York Stock Exchange to delist the shares.  MF Global’s bankruptcy is the 8th largest bankruptcy of all time.

The stock, quoted under the symbol “MFGLQ,” declined 83 percent to 21 cents at 12:45 p.m. New York time on trading volume of 170.9 million shares. MF Global plunged 67 percent last week as the New York-based firm reported a record $191.6 million quarterly loss.

MF Global stock hasn’t changed hands during a regular trading session since Oct. 28. NYSE Euronext suspended the stock before the New York Stock Exchange opened on Oct. 31. MF Global filed the eighth-largest U.S. bankruptcy this week after failing to find a buyer over the weekend. The futures broker suffered a ratings downgrade and loss of customers after revealing it had investments related to $6.3 billion in European sovereign debt.

The night before MF posted its biggest quarterly loss, triggering a 48 percent stock plunge, Chairman and Chief Executive Officer Jon Corzine appeared at a steak dinner at New York’s Helmsley Park Lane Hotel for a speech to a group of bankers and traders.

“There was no sense at all that there was impending doom,” Kenneth Polcari, a managing director of ICAP Corporates, said of Corzine’s Oct. 24 address to the National Organization of Investment Professionals. “He gave a spectacular speech” about his decades at Goldman Sachs, life as a U.S. senator and New Jersey governor and his return to the private sector. “He’s had a full life, up until now.”

Corzine, 64, excused himself before the main course was served, saying he had to prepare for an earnings call the next day, said David Shields, vice chairman of New York-based brokerage Wellington Shields & Co. and a former chairman of the organization. The group seeks to foster “a favorable regulatory environment,” according to its website.

Timothy Mahoney, CEO of New York-based Bids Trading LP, said Corzine’s speech was “delightful.”

The next day, MF Global reported a $191.6 million net loss tied to its $6.3 billion wager on European sovereign debt. On Oct. 27, after the company’s bonds dropped to 63.75 cents on the dollar, Moody’s Investors Service and Fitch Ratings cut the firm to below investment grade, or junk. Unable to find a buyer, the company filed for bankruptcy on Oct. 31, the first major U.S. casualty of the European debt crisis.

‘Serve the Public’

At least two dozen U.S. lawmakers and regulators, including Representative Joe Barton, a Texas Republican, Carolyn Maloney, Democrat of New York, and former Securities and Exchange Commission Chairman Harvey Pitt have addressed the group, according to its website.

“There are many people in the group that do lobby and talk to regulators,” Shields said. “You talk to regulators, you talk to lawmakers and you try to get the points forward, things that will help the marketplace, that will serve the public.”

The group’s board includes head traders at firms such as Waddell & Reed Financial Inc., whose futures trade triggered the flash crash of May 6, 2010, according to a study by the SEC and the U.S. Commodity Futures Trading Commission.

Its members’ firms “trade approximately 70 percent of the institutional volume transacted daily in the New York and Nasdaq markets,” according to the website.

‘Difficult’ Day

The group’s current chairman, Dan Hannafin of Boston-based investment manager Wellington Management Co., declined to comment on the dinner. Corzine and Diana DeSocio, an MF Global spokeswoman, didn’t reply to an e-mailed request for comment.

Mahoney said he appreciated Corzine’s ability “to compartmentalize” and speak engagingly last week. Mahoney’s firm, Bids, runs a private trading venue known as a dark pool, and is a joint venture of banks including Goldman Sachs.

Before the speech, Moody’s cut MF Global’s credit ratings to the lowest investment grade. Polcari said there was one reference to Corzine’s “difficult” day.

While he was “cordial” and “positive,” the MF Global chief lacked his typical “sharp bounce,” Shields said. Corzine is “a member of the community,” and could be invited back after the bankruptcy, he said. “People go through bad times.”

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

Bank Stocks Beware: Bernanke & Fed Support Increasing Capital Requirements

Tuesday, June 7th, 2011

U.S. bank indices fell 2% yesterday after fears that capital requirements would increase as much as 7%.  Bank of America (NYSE: BAC), fell below $11.00, the lowest since last year.  The discussion came about after the Basel Committee on Banking revealed how levered large financial institutions still were, and tried to reconcile levels with future recession risks.  A 7% equity capital raise for most banks would be catastrophic and dilute equity by 50%+, but a 3% raise seems manageable in a functioning economy.  The problem is that the U.S. economy is on life support, and that life support is called Quantitative Easing 2.  Once this support fades on June 30th, how will U.S. banks (at their already low valuations due to real estate risk and put backs) raise new equity capital?  A replay of 2009?  You be the judge.

According to Bloomberg, “The Fed supports a proposal at the Basel Committee on Banking Supervision that calls for a maximum capital surcharge of three percentage points on the largest global banks, according to a person familiar with the discussions.

International central bankers and supervisors meeting in Basel, Switzerland, have decided that banks need to hold more capital to avoid future taxpayer-funded bailouts. Financial stock indexes fell in Europe and the U.S. yesterday as traders interpreted June 3 remarks by Fed Governor Daniel Tarullo as leaving the door open to surcharges of as much as seven percentage points.

“A seven percentage-point surcharge for the largest banks would be a disaster,” said a senior analyst at Barclays Capital Inc. in NY. “It will certainly restrict lending and curb economic growth if true.”

Basel regulators agreed last year to raise the minimum common equity requirement for banks to 4.5 percent from 2 percent, with an added buffer of 2.5 percent for a total of 7 percent of assets weighted for risk.

Basel members are also proposing that so-called global systemically important financial institutions, or global SIFIs, hold an additional capital buffer equivalent to as much as three percentage points, a stance Fed officials haven’t opposed, the person said.

Bank Indexes Fall

The Bloomberg Europe Banks and Financial Services Index fell 1.45 percent yesterday, while the Standard & Poor’s 500 Index declined 1.1 percent. The KBW Bank Index, which tracks shares of Citigroup Inc., Bank of America Corp., Wells Fargo. and 21 other companies, fell 2.1 percent.

In a June 3 speech, Tarullo presented a theoretical calculation with the global SIFI buffer as high as seven percentage points.

“The enhanced capital requirement implied by this methodology can range between about 20% to more than 100% over the Basel III requirements, depending on choices made among plausible assumptions,” he said in the text of his remarks at the Peter G. Peterson Institute for International Economics in Washington.

In a question-and-answer period with C. Fred Bergsten, the Peterson Institute’s director, Tarullo agreed that the capital requirement, with the global SIFI buffer, could be 8.5 percent to 14 percent under this scenario. A common equity requirement of 10 percent is closer to what investors are assuming.

‘Across the Board’

“I think 3 percent is where everyone expected it to come out,” Simon Gleeson a financial services lawyer at Clifford Chance LLP, said in a telephone interview. “If it is 3 percent across the board then it will be interesting to see what happens to the smallest SIFI and the largest non-SIFI” on a competitive basis, he said.

U.S. Treasury Secretary Geithner, in remarks yesterday before the International Monetary Conference in Atlanta, said there is a “strong case” for a surcharge on the largest banks. Fed Chairman Bernanke is scheduled to discuss the U.S. economic outlook at the conference today.

“In the US, we will require the largest U.S. firms to hold an additional surcharge of common equity,” Geithner said. “We believe that a simple common equity surcharge should be applied internationally.”

Distort Markets

Financial industry executives are concerned that rising capital requirements will hurt the economy, which is already struggling with an unemployment rate stuck at around 9 percent.

Higher capital charges “will have ramifications on what people pay for credit, what banks hold on balance sheets,” JPMorgan Chase & Co. chairman and chief executive officer Jamie Dimon told investors at a June 2 Sanford C. Bernstein & Co. conference in New York.

The Global Financial Markets Association, a trade group whose board includes executives from GS and Morgan Stanley, said the surcharge may apply to 15 to 26 global banks, according to a May 25 memo sent to board members by chief executive officer Tim Ryan.

Dino Kos, managing director at New York research firm Hamiltonian Associates, said the discussion about new capital requirements comes at a time when banks face stiff headwinds. Credit demand is weak, and non-interest income from fees and trading is also under pressure.

Best Result

U.S. banks reported net income of $29 billion in the first quarter, the best result since the second quarter of 2007, before subprime mortgage defaults began to spread through the global financial system, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile.

Still, the higher profits resulted from lower loan-loss provisions, the FDIC said. Net operating revenue fell 3.2 percent from a year earlier, only the second time in 27 years of data the industry reported a year-over-year decline in quarterly net operating revenue, the FDIC said.

“You can see why banks are howling,” said Kos, former executive vice president at the New York Fed. Higher capital charges come on top of proposals to tighten liquidity rules and limit interchange fees, while the “Volcker Rule” restricts trading activities. Taken together these imply lower returns on equity, he said.

“How can you justify current compensation levels if returns on equity are much lower than in the past?” Kos said.

Wing Chau Sues Author of the Big Short!

Tuesday, March 1st, 2011

People have no SHAME.  Wing Chau, president of Harding Advisory is suing Michael Lewis, the author of The Big Short for “unfairly casting him as a villain.”  Listen Wing, you cheated investors and blatantly ignored your fiduciary responsibility.  Give it a break.

In his book, Lewis writes about a handful of Wall Street outsiders who realized the subprime mortgage business was a house of cards and found a way to bet against it, making billions for themselves.  He also discusses the perpetrators and poor underwriters that were the cause of the subprime collapse:

“Author Michael Lewis was sued by Wing Chau, president and principal of Harding Advisory LLC, who accused the writer of defaming him in his 2010 book “The Big Short: Inside the Doomsday Machine.”

Chau, a manager of collateralized debt obligations, according to a complaint filed Feb. 25 in NY federal court, claims the book unfairly casts him as one of the “villains” responsible for the 2008 financial collapse.

The book “depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of ‘Wall Street bond trading desks’ above those of his investors,” according to the complaint.

Also named in the suit, which seeks unspecified damages, are the book’s publisher, W.W. Norton and Steven Eisman, managing director of FrontPoint Partners LLC, whom Chau describes in the complaint as “one of the principal sources Lewis relied on in writing ‘The Big Short.’”

Lewis, a columnist for Bloomberg News, didn’t immediately respond to an e-mail seeking comment on the suit. Norton spokeswoman Elizabeth Riley had no immediate comment

The case is Chau v. Lewis, 11-cv-1333, U.S. District Court, Southern District of (Manhattan).”

To contact the reporter on this story: Bob Van Voris in New York.

Complaint Against Michael Lewis

NetSpend IPO Skyrockets 20% – Prepaid Cards Serving the Underbanked

Wednesday, October 20th, 2010

NetSpend Skyrockets After IPO

Who would have thought that a prepaid card manufacturer could reach a $1.2 billion valuation?

IPO Details

On October 19th, NetSpend Holdings (NASDAQ: NTSP), a marketer and distributor of prepaid debit cards, was able to complete a successful $204 million initial public offering, rising over 18% in its first day of trading.  The IPO was one of the most successful of the summer.  Shares of NetSpend jumped to almost $14 on October 20th from their initial $11 IPO price.  The IPO proceeds were used by Oak Investment Partners to cut the investment firm’s stake in the company from 47% to 39%.

The company sold 18.5 million shares on the 19th, after pushing back the date of its debut due to the investigation of its customer Metabank by the U.S. Office of Thrift Supervision.   Competitor Green Dot Corp., the largest provider of prepaid debit cards has rallied 35% since July.  On the other hand, Meta Financial has fallen 60% since it was forced to shut down one of its credit card programs.

Valuation

According to Rolfe Winkler of the Wall Street Journal, investors were paying $550+ apiece for each share of NetSpend purchased through its IPO.  Netspend has an enterprise value (BEV) of about $1.2 billion, which implies a $590 valuation on its cards, whereas competitor Green Dot is valued at $630+ per card.   One reason for the high valuation may lie in the fact that pre-IPO investors cannot sell their stakes until April 2011.

Risks

The risk in investing in NetSpend lies in the fact that the company’s processing fees per card provide only $11 in revenue per month.  Marketing and distribution expenses are fairly high as well, and customers also only use cards for 1 year before cancelling.  Churn is a significant issue for the company.  This is why the company’s EBIT or operating margin is only about 15%.  Due to the emergence to competitors and market saturation, NetSpend’s growth has decelerated from 50% in 2006 to 20% in 2009.

Business Model

Since 2005, there have been a number of prepaid card providers that have emerged and have been targeting low income consumers underserved by banks.  NetSpend has about two million active cards and is the second largest player in the United States with 40% market share.  It attracts customers by promising no overdraft fees and minimum balances.  As more banks turn away from low income customers, there may be potential for continued growth in this market.  The company claims that $7.6 billion in transactions were made using its cards in 2009.

NetSpend cards are sold at 39,000 retail store locations and are used by 800 corporate employers who use NetSpend cards to pay employees without bank accounts.  The cards are also FDIC-insured and are Visa & Mastercard branded.

Market

Approximately 25% of households in the United States are underbanked, and are searching for alternatives to traditional bank accounts.  The industry has growth at a CAGR of 49% from 2005 to 2009 and has reached a market size of approximately $300 million.  The business is also scalable, with industry average EBITDA margins at 25%.

Blackstone, THL Bid More Than $15 Billion for Fidelity National Information Services, Reminiscent of KKR’s First Data $29B Buyout

Wednesday, May 12th, 2010

Ever since the First Data buyout by KKR, the BPO industry has been a target for large cap private equity funds across the United States.  The First Data deal was a $29 billion deal, and at the time, the company was largest publicly traded American electronic transaction processing company.  Fiserve has an enterprise value of over $13 billion, and about $750 million in EBITDA.  This gives an EV/EBITDA multiple of 17.0-18.0x, even higher the multiple paid for First Data.

Silver Lake and Warburg Pincus also recently bought IDC, Interactive Data Corp., seeing revenue growth potential in the need for market transparency across financial institutions.  IDC provides reference data, markets pricing and trading infrastructure services to customers, including mutual funds, asset managers and banks.  The IDC deal, a carve out from Pearson valued at $3.4 billion, would have been the largest deal this year.

According to Reuters, Fidelity National Information Services, Inc. (FIS) is a global provider of banking and payments technology solutions, processing services and information-based services. It offer financial institution core processing, card issuer and transaction processing services, including the NYCE Network, a national electronic funds transfer (EFT) network. As of December 31, 2009, FIS had more than 300 solutions serving over 14,000 financial institutions and business customers in over 100 countries spanning segments of the financial services industry. Additionally, the Company provide services to numerous retailers, through the check processing and guarantee services. The Company operates in four business segments: Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and other. On October 1, 2009, FIS completed the acquisition of Metavante Technologies, Inc. (Metavante).

According to Mr. Miller of Bloomberg, ” Blackstone Group LP, Thomas H. Lee Partners LP and TPG Capital are in talks to pay more than $15 billion including debt for Fidelity National Information Services Inc., said a person with knowledge of the matter, a deal that would value the company at about $32 a share.

Fidelity National Information may reach an agreement with the buyout group as soon as May 16 if talks don’t collapse, this person said, speaking on condition of anonymity because the discussions are private. Marcia Danzeisen, a spokeswoman for Fidelity National, didn’t return a call after regular business hours yesterday.

A $15 billion deal would be about three times as big as the largest leveraged buyout since the credit markets crumbled in July 2007, showing how private-equity firms are again putting capital to work after more than a two-year drought in transactions. LBO funds worldwide have about $500 billion of unspent committed capital, according to researcher Preqin Ltd.

Private-equity firms announced about $24 billion of company takeovers so far this year, compared with $5.7 billion during the same period in 2009.

For Fidelity National Information, a Jacksonville, Florida- based payment-processing company, a deal in the $32 a share range would represent more than a 20 percent premium to the $26 closing stock price on May 5, the last day before the Wall Street Journal reported the company was in buyout talks.

Other private-equity firms have recently held talks about joining the group bidding for Fidelity National Information, said two people with knowledge of the matter. With banks preparing about $10 billion in debt financing, the private- equity group would have to put up more than $5 billion, one of the people said.

Financing Group

Bank of America Corp., Barclays Plc, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG and JPMorgan Chase & Co. are among the banks that have been working on financing the takeover, said other people with knowledge of the matter.

Credit-market turmoil in 2007 led banks to pull back on leveraged loans used to finance buyouts. Since July of that year, the largest LBO was that of IMS Health Inc., acquired in February for about $5 billion including debt.

Fidelity National Information had about $2.9 billion of net debt and noncontrolling interest as of March 31. With about 377 million shares outstanding as of April 30, a deal at $32 a share would value the company’s stock at $12.1 billion.

Thomas H. Lee, also known as THL Partners, already owns about 4.4 percent of Fidelity National, according to data compiled by Bloomberg. Private-equity firm Warburg Pincus is the company’s largest shareholder, with about 11 percent.

Fidelity National Information processes payments and issues cards for more than 14,000 institutions globally. The company had profit of $105.9 million in 2009 on revenue of $3.77 billion.

Spokesmen for Blackstone, THL, and TPG declined to comment or didn’t immediately respond to calls seeking comment.”

BNC Bancorp Buys Beach First, South Carolina Based Lender, $585 Million in Assets

Sunday, April 11th, 2010

The most recent fatality in the commercial banking sector was a South Carolina based bank, the 42nd of the year.  Beach First had $585 million in assets and cost the FDIC fund over $100 million.  Defaults on residential and commercial loans are still driving up bank defaults.  Defaults may reach 140 for 2008 and 2009.

According to Bloomberg,  BNC Bancorp, the North Carolina- based lender with $1.6 billion in assets, purchased a Myrtle Beach, South Carolina bank as the number of U.S. bank failures this year climbed to 42.

Federal bank regulators closed Beach First National Bank yesterday and named the Federal Deposit Insurance Corp. as receiver, according to a statement on the FDIC Web site. BNC’s lender, Bank of North Carolina, purchased Beach First and most of its $585.1 million in assets. The collapse cost the FDIC’s deposit-insurance fund $130.3 million.

“Beach First’s excellent customer base was a significant attraction to our company in considering this transaction,” BNC Bancorp Chief Executive Officer W. Swope Montgomery Jr. said in a statement. Bank of North Carolina picks up seven branches in the transaction.

Lenders are collapsing amid losses on residential and commercial real estate loans. U.S. “problem” banks climbed to the highest level since 1992 in the fourth quarter and FDIC Chairman Sheila Bair warned Feb. 23 that the pace of failures may exceed last year’s total of 140.

BNC counts as a board member Charles T. Hagan, husband of Senator Kay Hagan, a North Carolina Democrat. Beach First is the only South Carolina bank to have failed since Oct. 1 2000, the FDIC said.

Pali Capital Files for Bankruptcy – Bankruptcy Filings Attached

Friday, April 2nd, 2010

Pali Capital, a well known boutique investment bank and underwriter recently filed for bankruptcy after a failed merger attempt.  The firm was founded in 1995 by former MDs at Merrill Lynch.

According to Bloomberg, “Pali Holdings has filed for bankruptcy protection after failing to sell its boutique securities firm, Pali Capital.

Pali’s Chapter 11 petition, filed in federal Bankruptcy Court in Manhattan on Thursday, listed $716,300 in assets and $31.8 million in debts.”

More from Bloomberg:

“Pali Holdings filed the instant Chapter 11 bankruptcy case to obtain protection from its creditors while it continues to liquidate and wind down Pali Capital,” Gerald Burke, a director of Pali Holdings, said in an affidavit filed with the bankruptcy petition.

The privately held company was in talks to sell the brokerage business to ex-Bear Stearns Companies finance chief Samuel Molinaro and had told shareholders it might go out of business without a sale or cash infusion.

The parent company, based in New York, had an estimated loss of $18.3 million in 2009 and said in a Jan. 14 letter to shareholders obtained by Bloomberg News that it could run out of money by the end of February. The broker-dealer Pali Capital, with expertise in derivatives, fixed income, and investment banking, said Feb. 16 that it would begin to wind down operations.

According to the SF Chronicle “When a brokerage fails, the Securities Investor Protection Corp. names a trustee to protect assets and return customers’ cash and securities. When Lehman Brothers Holdings Inc. filed Chapter 11 in 2008, the SIPC appointed lawyer James Giddens as brokerage trustee. The bank’s North American brokerage business and associated real estate were then sold to London-based Barclays Plc for $1.54 billion.

The largest unsecured creditor named in the Pali Holdings filing was Panama-based Mandeville Holding Ventures Co.

Four CEOs

Pali Holdings has had four chief executive officers or co- CEOs in the past 17 months and its chairman stepped down in December. The firm focused on equity and fixed-income sales, trading and research for institutional clients such as money managers and hedge funds. The company had offices in London, San Francisco, Newport Beach, Chicago and five other U.S. locations, according to its Web site.

Pali Holdings received $3 million of “emergency bridge financing” in November and has lost about $40 million in the past two years, according to the company’s letter, signed by directors Kevin Fisher and Burke.

Pursue Alternatives

Shareholders, including former Pali CEO Bradley Reifler, wrote in response that the company should pursue alternatives to a sale, such as a recapitalization. In their undated letter, signed by Reifler, Wolfgang Stolz and John Staddon and also obtained by Bloomberg News, the shareholders requested a special meeting be held to elect a new board.

Molinaro, the former Bear Stearns executive, was helping Braver Stern Securities Corp. negotiate the potential purchase of Pali Capital and was to become CEO of the combined firm, overseeing about 250 people, people familiar with the talks have said. Molinaro was Bear Stearns’s chief financial officer from 1996 until 2008, when JPMorgan Chase & Co. purchased the company to save it from bankruptcy.

Separately today, New York-based JPMorgan filed a $4.5 million lawsuit in New York State Supreme Court in Manhattan against Pali and Reifler, alleging a loan default.

“Pali was responsible” for the debt, Reifler said in a telephone interview. “When I left in October 2008, there was $66 million in cash, and the loan should have been paid from those funds.”

The case is In Re Pali Holdings Inc., 10-11727, U.S. Bankruptcy Court, Southern District of New York (Manhattan)”

According to ZeroHedge,

The reason for the bankruptcy was provided in the filed affidavit as follows: “Pali Capital experienced consistent pre-tax losses commencing with the second quarter of 2008 and continuing through and including the fourth quarter of 2009, caused by among other things, a substantial slowdown in sales and trading by Pali Capital’s primary institutional clients. These losses are projected to continue into at least the first quarter of 2010. As a result, it was difficult for Pali Capital to maintain adequate levels of excess regulatory net capital to support normal business operations, although Pali Capital is in compliance with its minimum regulatory net capital requirements through February 28, 2010.” So after 4 CEOs in 17 months all Pali is left with is a list of secured and unsecured creditors. And in probably not the wisest move for the privacy of said creditors, the firm has listed the home addresses of Kevin Fisher, Ari Nathan, Leon Brenner and some other rather high profile financiers.

List of largest secured creditors (and home addresses):

Pali Bankruptcy

Pandit Getting Ready to IPO Sandy Weill’s Primerica

Tuesday, March 30th, 2010

Years after Sandy Weill built Citigroup, Vikram Pandit has been working day and night to divest all ancillary businesses in order to raise capital and pay back the U.S. government for one of the largest bailouts in history.  To date, Citigroup has already sold its Japanese brokerage, its commodities trading unit, and credit card assets.  The most recent divestiture/IPO  for Citi is its  insurance division, Primerica, the insurance company that Sandy Weill used to build Citigroup into the powerhouse it was in 2005/2006.  The IPO reflects improvements in the market.  There are 4 IPOs planned for this week. Primerica will be selling for a sharp discount of 7x PE compared to other insurers, which trade at about 9x P/E.  Warburg Pincus will be purchasing about 30% of the IPO with warrants to purchase more shares in the future.  The division has 100,000 representatives selling financial services to households with $30,000 to $100,000 in annual income.  It earned $495 million in 2009, almost 3x as much in 2008.  Primerica will trade under the symbol “PRI.”

According to Michael Tsang & Craig Crudell of Bloomberg, “Primerica Inc., the insurance business that Sanford I. “Sandy” Weill used to build Citigroup Inc., is selling shares in an initial public offering at a discount to its competitors.

Primerica plans to raise $252 million tomorrow, a filing with the Securities and Exchange Commission and Bloomberg data showed. At the middle of its price range, the Duluth, Georgia- based distributor of consumer-finance products from term-life insurance to mutual funds would be valued at 6.74 times earnings after accounting for its planned reorganization. That’s 29 percent less than the median for U.S. life and health-insurance providers, data compiled by Bloomberg show.

Citigroup Chief Executive Officer Vikram Pandit is dismantling the company Weill built spending about $50 billion on Travelers Corp., Salomon Inc. and Citicorp during the 1990s to offer everything from insurance to stock broking and branch banking. The sale comes after the Standard & Poor’s 500 Index’s rally to an 18-month high spurred a rebound in the IPO market.

“The Primerica deal reflects a shift from the financial supermarket model, where instead of being good at a lot of things, a company like Citigroup ended up being mediocre at everything,” said James Dailey, who oversees $140 million as chief investment officer at TEAM Financial Asset Management LLC in Harrisburg, Pennsylvania. “Primerica could fetch a reasonable price. It’s been around a long time, its brand is established.”

Primerica is one of four U.S. companies scheduled to sell shares through initial offerings this week.

IPO Rebound

All five IPOs since March 15 have priced within or above their forecast range as the S&P 500 extended a rebound from its 2010 low on Feb. 8 to 11 percent. The previous 14 deals since the start of the year had been cut by 24 percent on average, data compiled by Bloomberg show.

Carlyle Group’s Windsor, Connecticut-based SS&C Technologies Holdings Inc., which sells trading and investment management software to the financial industry, and Meru Networks Inc. of Sunnyvale, California, which makes Wi-Fi networking equipment, are scheduled to price their IPOs today. Carlyle, the Washington-based buyout firm that oversees $89 billion, won’t sell SS&C shares in the $161 million offering.

Tengion Inc., the East Norriton, Pennsylvania-based company trying to grow replacement organs and tissues, is also set to hold its IPO this week, according to Bloomberg data.

Primerica, which has 100,000 representatives selling financial services to households with $30,000 to $100,000 in annual income, earned $495 million in 2009, an almost threefold increase from a year earlier.

Relative Value

Net income rebounded after declining 72 percent in 2008, when Primerica wrote down some of its goodwill, or the amount paid above the net asset value in an acquisition.

As part of its reorganization, Primerica will transfer 80 percent to 90 percent of the “risk and rewards” from the life insurance policies that it sold and distribute $622 million in assets to Citigroup before the IPO, according to the filing. That includes a $454 million one-time dividend to Citigroup.

At the middle of its $12 to $14 price range, the company is valued at 6.74 times its 2009 per-share income of $1.93, after taking into account a decrease in revenue and profit that would have taken place if the reorganization occurred on Jan. 1, 2009, according to its filing and data compiled by Bloomberg.

That’s less than the median 9.52 times price-earnings ratio for 23 publicly-traded U.S. life and health-insurance providers, Bloomberg data show.

Prudential, Ameriprise

Prudential Financial Inc. of Newark, New Jersey, the second-largest life insurer, and Ameriprise Financial Inc., the Minneapolis-based financial planning and services firm, command higher valuations, data compiled by Bloomberg show. Primerica lists the two companies among its biggest competitors.

Buyers of Primerica’s IPO will own 24 percent of the insurance firm after the offering.

They will also be investing alongside New York-based Warburg Pincus LLC, which oversees $30 billion. The private- equity firm agreed to buy 17.2 million shares, or a 23 percent stake, in a private sale at the IPO midpoint price, and warrants to purchase 4.3 million shares at a 20 percent premium. Warburg’s stake may increase to 33 percent if the firm exercises its right to buy additional shares from Citigroup.

“It’s a ‘fire sale’ by Citi,” Francis Gaskins, president of IPOdesktop.com in Marina del Rey, California, said in an e- mail. Also, “the IPO investor can get in on the same terms as Warburg. There appears little, if any, risk in this IPO at $13.”

Credit Markets

All proceeds will go to New York-based Citigroup, which is serving as the lead underwriter for the sale. Primerica is part of Citi Holdings, the collection of businesses that Citigroup’s Pandit said he would sell, wind down or restructure.

Pandit is dismantling Weill’s empire after loans and investments tied to the U.S. subprime mortgage market led to $47.6 billion in losses since the last quarter of 2007. Citigroup took a taxpayer-funded bailout after the credit markets froze, Lehman Brothers Holdings Inc. collapsed and Bear Stearns Cos. and Merrill Lynch & Co. were forced to sell themselves. All three companies were based in New York.

Weill used Primerica to build Citigroup through a series of acquisitions. In 1992, Primerica bought a 27 percent stake in Travelers, then took over the company a year later for $3.3 billion, keeping Travelers’ name and umbrella logo.

The company acquired Salomon in 1997 and in 1998 merged with Citicorp in a $37.4 billion deal to create Citigroup.

“This provides an important message that Citi is prepared to shed assets which clearly do not fit the current strategy, even if they have well-known brands,” said Richard Staite, a London-based analyst who covers financial institutions at Atlantic Equities LLP. “It’s a high-profile sale.””

According to Reuters, “Few other financial services companies cater to Primerica’s niche– lower-middle-class and middle-class families. And the offering’s valuation is relatively low compared to other life insurance companies.

Private equity firm Warburg Pincus will buy up to a third of the company, which is a vote of confidence in the business, analysts said.

“Warburg Pincus has put this thing together and they expect to make money. If people buy at the IPO price they’ll be buying right along with Warburg’s price,” said IPOdesktop.com President Francis Gaskins said on Friday.

There are definitely risks in buying Primerica shares. Primerica will not keep any of the proceeds from the offering, so the funds will not bolster the insurer.

Citi, which is leading the underwriters, is taking the IPO proceeds, and has taken substantial funds out of the business through dividends in recent years– nearly $1 billion since 2007. The bank will take another $622 million in dividends before the completion of the IPO, according to its prospectus. Those are funds that Primerica will not be able to invest in its growth.

“When there is a spinoff generally the parent extracts its pound of flesh, which is certainly the case here,” said Linda Killian, a portfolio manager with Connecticut-based Renaissance Capital.

But Primerica can still grow at a healthy clip, Killian said.

“The company is a very sales-oriented company that focuses on the really middle income America that doesn’t get a whole lot of financial services help from some of the larger companies that tend to focus on higher net worth individuals,” Killian said.

Most of the risk — and profit — from life insurance policies that Primerica has sold in recent years will be ceded to Citigroup, but Killian estimates that Primerica could replenish its book in as short a period as four to five years.

Primerica posted net income of about $495 million and revenue of $2.2 billion in 2009.

The group the firm serves is underinsured and needs to boost its investments, especially coming out of the financial crisis, said Clark Troy, a senior analyst at Aite Group.

The shock from the crisis has revealed to consumers that they might not be as well-prepared for retirement and other major milestones as they ought to be, Troy said. Middle class consumers may find Primerica’s pitch persuasive, he added.

“Its a financial product that can be priced attractively and give (the consumer) a lot of comfort,” Troy said.

After the IPO Citi will own 32 to 46 percent of the stock and private equity investor Warburg Pincus LLC [WP.UL] will own 23 to 33 percent of the stock.

In a separate, private deal Warburg Pincus has agreed to buy about 17.2 million shares, and warrants to buy another 4.3 million shares at 120 percent of the IPO price, assuming Citigroup meets certain conditions. Warburg also has the right to buy up to another $100 million worth of shares at the IPO price.

Citi, which accepted $45 billion worth of U.S. government bailout funds, has not made a secret about wanting to divest itself entirely of Primerica. But that is because Primerica is not part of its main banking business, and does not mean the unit is a bad business

If Primerica PRI.N prices at the midpoint of the expected range it will have a price to book value of 0.7. By comparison Ameriprise Financial Inc (AMP.N) and Prudential Financial Inc (PRU.N) are over 1, said IPOdesktop.com’s Gaskins.”

Lehman Brothers Whistle Blower Letter

Tuesday, March 30th, 2010

The letter below is a shocking account of Matthew Lee’s findings at Lehman Brothers in May of 2008.  Enjoy the read.

Letter by Lehman Whistle Blower Matthew Lee, Dated May 16, 2008

U.S. Government to Earn $7B+ on Citigroup

Monday, March 29th, 2010

Months after the financial crisis and shadow banking fiasco that led the United States into a severe credit crunch and near depression, the U.S. government is making profits on selling warrants and shares of financial firms that received TARP funds.  The U.S. government could earn more than $7 billion in its $32 billion stake in Citigroup soon.  Morgan Stanley will be managing the sale of the government’s stake.  The investment bank is advising the U.S. to avoid a block sale at a discount to current prices to avoid forcing the price of Citi shares to fall quickly.

According to Mr. Smith and Ms. Solomon of the WSJ, “The U.S. government could earn a profit of more than $7 billion on its investment in Citigroup Inc. under its plan to sell off its $32 billion stake over about six months, people familiar with the matter said.

The government said it hired Morgan Stanley to manage the sale of its 27% holding in the bank, which is one of its last remaining stakes in a Wall Street banking giant. The government would sell 8% to 10% of the shares traded daily, according to people familiar with the plan.

At the current market price, the planned sale to investors would give the government a profit of about $7.19 billion on its original $25 billion investment under the government’s Troubled Asset Relief Program.

If that price level holds up, it would be the largest U.S. profit on any such TARP investment, exceeding $4.27 billion on dividends and sale proceeds from preferred stock and warrants in Bank of America Corp., according to Linus Wilson, a finance professor at University of Louisiana at Lafayette.

The Treasury’s sale plan applies only to its holding of 7.7 billion common shares. The U.S. also owns $5.3 billion of Citigroup trust-preferred securities and warrants to buy 465.1 million shares. Under the so-called dribble-out plan announced Monday, the government will initially sell the Citi shares steadily in the market rather than try a giant “block” sale at a discount to the market price.

The last big Citigroup sale in December, aimed at repaying a $20 billion government holding of preferred stock, came at a big discount to the market price after several other big bank stock sales, depressing the market price for Citi’s stock for two months.

At Citigroup’s current market price, the planned sale to investors would give the government a profit of more than $7.19 billion on its original $25 billion investment under the government’s Troubled Asset Relief Program. Above, a Citibank branch in San Francisco.

At the time of that sale, the Treasury agreed not to sell its remaining 7.7 billion shares until March 16. The agency has said it planned to sell the stock this year, and the price has recently been surging in anticipation that the overhang of government ownership would be eliminated.

The stock rose last week on reports that the government would avoid a block sale at a discount to the market, according to Jeffrey Harte, an analyst at Sandler O’Neill & Partners LP.

However, the Treasury didn’t rule out a block sale later, saying only that the sale would begin under “a pre-arranged written trading plan.” Citigroup shares fell 13 cents, or 3.02%, to $4.18 in 4 p.m. trading on the New York Stock Exchange.

Because of its low price and volatile fortunes, Citigroup stock has traded heavily over the past year. Since Dec. 17, it has accounted for 10% or more of NYSE volume on 31 different days. At its recent daily average volume of 500 million shares, the Treasury could sell 50 million shares daily at the 10% target, a pace at which the sale would take about seven months.

The government’s possible profit on the Citi stake represents an unexpected windfall from an investment originally designed “to prevent an even worse recession,” said Douglas Elliott, an analyst at the Brookings Institution, a Washington, D.C. policy research organization.”