Bank of America may get by without big asset sales

Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) has put a private bank it inherited from Merrill Lynch & Co on the block, and the largest U.S. bank may try to sell other assets as well.

But unlike rival Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), which is planning a radical overhaul, Bank of America may not need capital so badly that it has to swallow hard and sell key assets it would rather keep, industry experts said. That may be just as well, given the dearth of buyers and difficulty of getting financing.

"I haven't got the impression that they're close to doing much of anything of a reasonable size," said Jeff Harte, an analyst at Sandler O'Neill & Partners LP.

Since Citigroup last month received a second government bailout, Bank of America has tried to fend off investor fears that it could be next to need more help.

Bank of America has taken $45 billion from the government's $700 billion Troubled Asset Relief Program, including $20 billion in a January bailout that also included the government sharing in losses on some toxic assets, mainly at Merrill. Its stock has fallen about 67 percent since the start of the year.

Last month an industry banker told Reuters that Bank of America was trying to sell First Republic Bank, which Merrill bought in 2007 for $1.8 billion. The banker did not want to be identified because the sale process is private.

Were Bank of America to need more capital, it could try to dispose of other assets such as its 16.6 percent stake in China Construction Bank Corp (601939.SS: Quote, Profile, Research, Stock Buzz) and a nearly 50 percent interest in asset manager BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz), or businesses such as asset manager Columbia Management, experts said.

Bank of America sold part of its Construction Bank shares in January for $2.83 billion, and has said it plans to sell more when a lock-up period expires in August 2010 -- but not sooner. Its stake is worth about $19 billion now.

BlackRock has a market value of around $12 billion. Columbia Management, meanwhile, said it had $386.4 billion in assets under management as of December 31. That could make it worth $7.7 billion, assuming a price of 2 percent of managed assets, which one analyst said could be used as a ballpark estimate.

Getting rid of some or all of those holdings would stop short of a true restructuring involving the offloading of capital-heavy businesses such as mortgage lender Countrywide Financial Corp and credit card issuer MBNA Corp, said Seamus McMahon, a partner in Booz & Co's banking practice.

Shedding First Republic may simply be an effort to dispose of non-core businesses rather than a bid to raise capital, he said.

"If they really want to restructure, they have got to get major lending businesses off their books," McMahon said. "This is housekeeping."

Bank of America declined to comment.

DISTANCE FROM CITI

The bank has tried to demonstrate that its financial health is better than that of Citigroup, which said in January that it will split into two operating units, selling or winding down non-core assets.

Citigroup also agreed to give a controlling stake in its Smith Barney brokerage to Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) for an initial $2.7 billion payment. Morgan Stanley may take over the entire business after five years.

"Bank of America is in reasonably good condition with a strong capital base and a very positive cash flow," said Richard Bove, an analyst at Rochdale Securities. "If you believe that to be the case, there's no reason for them to do asset sales."

Still, one analyst said Bank of America may need more capital to absorb credit-related losses tied to Countrywide and Merrill.

"They have a better franchise than Citi relative to the deposit base," said Paul Miller, an analyst at FBR Capital Markets. "But they are very weak on their capital levels and they took on portfolios -- Merrill Lynch, Countrywide -- that are going to cause some problems.

"I think you're going to see more and more sales of other things throughout these next weeks," Miller added.

Unfortunately, market conditions may leave Bank of America facing the same difficulty selling assets that other financial companies, including Citigroup and the insurer American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), are having.

Indeed First Republic, also a specialist in luxury home lending, may fetch a lower price than the $1.8 billion Merrill paid, experts said.

"You can justify a full price for that entity," said New York-based Park Avenue Bank Chairman Donald Glascoff, who has an expertise in real estate finance and mortgage securitization. "But I think the markets are so roiled that to find somebody who will pay a full price will be difficult."

Bon-Ton posts $87.7M net loss

Boston Store parent The Bon-Ton Stores Inc. said it recorded a net loss of $87.7 million in its fiscal fourth quarter and sales decreased 9.4 percent.

The retailer said Wednesday that its fourth-quarter net loss was $5.22 per share, compared with a net income of $75.2 million, or $4.43 per share, in fiscal 2007. The net loss included charges of $7.39 per share for non-cash asset impairment charges to reduce the reported value of long-lived and intangible assets and to provide a valuation allowance for deferred tax assets.

For the fourth fiscal quarter ending Jan. 31, Bon-Ton (NASDAQ: BONT) said its comparable-store sales decreased 9.7 percent and total sales declined to $1.03 billion.

Bud Bergren, who is Bon-Ton’s Milwaukee-based president and CEO, said fiscal 2008 earnings and cash flow were “negatively impacted by the difficult economic environment and waning consumer confidence.”

“Consistent with the retail industry in general, the highly promotional climate and soft holiday season led to higher net markdowns and a decline in our gross margin rate as compared with the same period last year,” Bergren said.

Bergren said Bon-Ton executives believe consumer spending in 2009 will continue to be impacted by the weak economy, rising unemployment and low consumer confidence. The company’s management projects a decline in comparable-store sales and plans to reduce inventory receipts. The company also is reducing capital expenditures to $40 million.

Bon-Ton’s earnings before interest, income taxes and depreciation and amortization (EBITDA) decreased $58.2 million in the fourth quarter, to $116.7 million.

Keith Plowman, who is Bon-Ton’s executive vice president and chief financial officer, gave guidance for full-year fiscal 2009 EBITDA in a range of $140 million to $155 million and a loss per diluted share in a range of $3.40 to $4.30. The company’s estimated cash flow will allow further reduction in year-end debt levels, he said.

Bon-Ton Stores is based in York, Pa., and operates 280 department stores and furniture galleries under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates. It also operates Parisian stores in the Detroit area.

National Semiconductor to Cut More Than 1,700 Jobs

National Semiconductor Corp. plans to cut more than 1,700 jobs, about a fourth of its workforce, as the recession eats into sales at the maker of mobile-phone chips.

The company will eliminate 850 positions now and 875 over the next few quarters, according to a statement today. The reductions will occur in areas including manufacturing, sales and marketing, National said. The company also will shut plants in China and Texas.

Sales this quarter will drop as much as 10 percent from the previous period as customers curb spending to cope with the economic slump, National said. The global economy may shrink for the first time since World War II as trade declines, according to a report this week from the World Bank. National’s chips are used by companies such as Nokia Oyj, the world’s biggest maker of mobile phones.

“The worldwide recession has impacted National’s business as demand has fallen considerably,” Chief Executive Officer Brian Halla said today in a statement. “The actions we announced today will help us remain competitive.”

The chipmaker indicated today that sales may fall as low as $263.2 million in the current quarter from $292.4 million in the period ended March 1. Analysts predict sales of $292.5 million on average, according to a Bloomberg survey.

National, based in Santa Clara, California, fell 27 cents to $11.43 at 12:15 p.m. in New York Stock Exchange composite trading. The stock had risen 16 percent this year before today.

Net Income

Net income in the fiscal third quarter fell to $21.1 million, or 9 cents a share, from $72.9 million, or 29 cents, a year earlier, the company said today. Sales dropped 36 percent in the three months ended March 1.

Analysts expected a loss of $12.4 million, according to the average of estimates in a Bloomberg survey. National said profit was helped by a tax benefit of $11 million. The job cuts will cost between $160 million and $180 million, according to the statement. Some $130 million to $145 million of those expenses will be recorded this quarter, it said.

Expected Madoff plea troubles victims

Some former customers of financier Bernard Madoff despise him for his fraud, but they are also angry with their government and a financial system they say robbed them of their savings.

Just a few of the thousands of bilked investors have the right to speak in a New York court on Thursday when the 70-year-old former Nasdaq chairman is expected to plead guilty to 11 criminal charges that could put him in prison for the rest of his life.

Investors said in telephone interviews Madoff's potential 150-year sentence means little to them because they want more details of the scheme he confessed to in December and where the money went.

Madoff will not face a jury trial, which would provide more evidence of his financial crimes and co-conspirators going back 20 years, and catharsis for some.

"They want this to be over so badly, it's stunning," said New York retiree Miriam Siegman, who worked for nonprofit organizations and lost her retirement money. "In a jury trial the truth has a chance of coming out."

Madoff was arrested just three months ago and has been living in his luxury apartment under house arrest. At Thursday's plea proceeding in U.S. District Court in Manhattan, the government may ask Judge Denny Chin to remove him from house arrest and jail him until sentencing.

Prosecutors now estimate that the once-respected trader and money manager's unprecedented worldwide Ponzi scheme cost investors $64.8 billion, up from the $50 billion fraud they said Madoff acknowledged.

The Ponzi scheme, in which investors were paid with the money of new clients, collapsed with last year's market meltdown.

Madoff has become to many one of the symbols of the Wall Street crisis that laid bare his crimes and those of other alleged swindlers across the United States in the past year.

"He understood to the infinitesimal detail how corrupted the system was and how easy it was really, to work it, and it remains so," Siegman said.

CHARITIES

Madoff's fraud touched hedge funds, big banks, wealthy individuals, Jewish charities and middle-class people investing for retirement in North and South America and Europe.

"All those charities? Someone is gonna die because they are not getting help from that charity," said Bennett Goldworth, a Manhattan real estate broker in his 50s who said he lost several million dollars and is no longer financially independent.

In the three months since Madoff's arrest, at least two people have been reported taking their own lives in distress over their losses with Bernard L. Madoff Investment Securities LLC.

Goldworth said the U.S. Securities and Exchange Commission (SEC) and Internal Revenue Service did not respond adequately to Madoff and other fraud.

He called Madoff "a sick, cruel man" and bemoaned the lack of a plea deal with prosecutors.

"It makes no sense ... not cooperating means he doesn't want to implicate anyone else and he does not want to give back any money," Goldworth said. "What's in it for him to do it this way?"

Over the years, the SEC received reports that Madoff was a fraud, but none of its inquiries led to charges.

"Mr. Madoff has stolen 20 years of my life," said another investor, Yale Fishman, who worked with charities that believed they were benefiting from his firm. "I worked very hard. I paid a great deal of taxes. I trusted in the system.

"It is mind-boggling to me that he kept opening charitable accounts knowing that he was robbing the weakest in society."

foreign currency registration of retailers (Foliwars)

DESPITE the recent ‘acting’ National Budget and ‘acting’ Monetary Policy Statement (MPS) being a progressive return to market economics, there still is a certain degree of ambivalence in the orthodox thinking on exchange rate policy which needs clarification.

Should we adopt full dollarisation and abandon the illusion of the local currency circulating alongside the dollar? Should the Rand be used as a nominal anchor? To what extent has the Foreign Exchange market been liberalised and is there an economically cogent justification for maintaining the foreign currency registration of retailers (Foliwars) scheme and yet claim a liberalised exchange rate regime?

The task of reviving the Zimbabwean economy from a state of collapse will no doubt be a herculean one. The success or failure, however, of any of the revival policies will largely depend on the new government committing to clear, concise and synchronous economic policies.

This article briefly analyses the logic behind dollarisation, the liberalisation of the foreign exchange market and the diametrical contradiction in the extension of the Foreign Currency Licensed Warehouse and Retail Shops (Foliwars) scheme by the Governor of the central bank and suggests how this can be harmonised.

Whilst dollarisation or randisation is symptomatic of monetary policy failure, if implemented properly, there are many expected economic benefits from it. These include low inflation, low and stable interest rates, low cost of external borrowing and, the ability to borrow abroad in the currency circulated domestically.

Dollarisation can also be expected to deepen the financial sector, extend the maturities of domestic assets and encourage long-term financing. It is no surprise that dollarisation is favoured by private businesses because it increases predictability and reduces the cost of transactions.

In some cases, the potential benefits of dollarisation may offset the potential costs of a central bank no longer being able to use interest and exchange rates in response to domestic and external shocks and to manage business cycles as well as the loss of seigniorage from printing money. Many economic observers would be happy that dollarisation has reduced the central bank’s relevance in printing more money, long identified as the catalyst for stratospheric inflation.

Not only does dollarisation remove the nominal exchange rate as an instrument of external adjustment, it subordinates all other policy objectives to that of maintaining multiple currencies. The process provides the credibility needed for the success or stabilisation of the economic policy since it indirectly implies that the government is prepared to be disciplined by external forces, particularly by a foreign central bank with a record of credible monetary policy.

However, although dollarisation may help to quickly restore credibility after a long history of monetary disorder, fiscal indiscipline and rapid inflation, for most developing countries including ours, it is not a viable alternative in the long term. A desirable stabilisation outcome would be a return to the use of the Zimbabwe dollar as the medium of exchange.

The use of multiple currencies was officialised by the liberalisation of the foreign exchange market by the Acting Finance Minister in the Budget which committed to a free movement of goods and capital and the removal of all economic distortions.

However, one of the major policy contradictions between the budget and the MPS appears to be the liberalisation of the foreign exchange market on one hand and the extension of the Foliwars scheme (wherein participating operators are allowed to charge for goods in foreign currency) on the other. These two policies are inherently inconsistent and should be rationalised.

When you legalise the use of multiple currencies for business transactions in the whole country, the assumption is that foreign denominated currencies have become legal tender in all transactions with all the businesses. A policy such as Foliwars which then suggests that businesses should register for separate licensing to trade in foreign currency seems in conflict with liberalisation if not with realism.

In my opinion, the central bank’s Foliwars scheme contradicts the very purpose of liberalisation and should be abolished. A quick perusal of the broadened licensing framework of the scheme and the published list of who is allowed to apply for these licenses is particularly confusing. Almost all the sectors of the economy are allowed to sell goods in foreign currency including hawkers and street vendors. Which begs the question, why have a special scheme when everyone is invited?

Notably however, under Foliwars, businesses have to fork out annual licensing fees from as high as US$12,000 per outlet to US$25 for street vendors, money which could be better spent as working capital to re-stock shops or paying employees and get the economy working again.

Firstly, the attempt to license the entire business sector is unrealistic and unenforceable and may result in companies ignoring the directive. This may lead to unnecessary confrontation between business and the regulators at a time when all stakeholders need to be in perfect sync with each other.

Secondly, the licensing fee where tax is already levied in foreign currency amounts to an unacceptable double taxation. Thirdly, Foliwars registration only makes sense when the main trading currency is the Zimbabwe dollar and only a few shops are monitored or given registrable dispensation to trade in foreign currency. If the residual justification for such schemes is to access fees through registration, the government can surely recover this lost revenue through taxation and not licensing.

Abolishing Foliwars will be critical in aligning businesses to the budget and the MPS, with the capacity to stimulate growth through industrial competitiveness. Doing away with Foliwars will remove market distortions and policy conflicts.

The new finance team should avoid the mistakes of previous dirigist economic policies of too many policies or special schemes under so many tongue twisting names and acronyms which ended up being full of sound and fury, but signifying nothing especially where one concise policy will suffice.

China urged to make yuan international

China should speed up reforming its financial system to make the yuan an international currency, said political advisors Saturday.

"A significant inspiration to draw from the global financial crisis is that we must play an active role in the reconstruction of the international financial order," said Peter Kwong Ching Woo, chairman of the Hong Kong-based Wharf (Holdings) Ltd.

The key to financial reform is to make the yuan an international currency, said Woo in a speech to the Second Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC), the country's top political advisory body.

That means using the Chinese currency to settle international trade payments, allowing the yuan freely convertible on the capital account and making it an international reserve currency, he said.

China's yuan, or Renminbi, can be freely convertible on the current account but not on the capital account, preventing it from being a reserve currency or a choice in international trade settlement.

China has announced trial programs to settle trade in the yuan, a move analysts say will facilitate foreign trade as Chinese exporters might face losses if they continue to be paid in the US dollar. The dollar's exchange rate has become more volatile since the global financial crisis.

Economists say the move will increase the acceptance of the currency in Asia, which will help it become an international currency in the long run.

The status of the yuan as an international currency will benefit China by giving it a bigger say in world financial issues and reducing the reliance of its huge foreign reserves on the US dollar, some analysts say.

Other analysts argue a fully convertible yuan will hurt China as it would allow massive capital outflow during a financial crisis.

Meanwhile, Chinese authorities remain cautious.

It's possible that the global financial crisis will facilitate the process of making the yuan internationally accepted, but there's no need to push for that, Yi Gang, vice central bank governor, told Xinhua earlier this month.

That process should be conducive to all sides, he said.

Xu Shanda, former vice director of the State Administration of Taxation and a CPPCC National Committee member, urged for faster paces in making the yuan an international currency as a way of increasing national wealth.

He said the United States and the European Union have obtained hefty royalties from the international use of their currencies while China has become the biggest source of that income.

A royalty, or seigniorage, results from the difference between the cost of printing currency and the face value of the money.

"China's loss due to royalty payment has far exceeded the benefit of not making the yuan an international currency," he said in a speech to the annual session of the CPPCC National Committee, without elaborating.

China's State Council, or Cabinet, said last December it would allow the yuan to be used for settlement between the country's two economic powerhouses -- Guangdong Province and the Yangtze River Delta -- and the special administrative regions of Hong Kong and Macao.

Meanwhile, exporters in Guangxi Zhuang Autonomous Region and Yunnan Province will be allowed to use Renminbi to settle trade payments with ASEAN (Association of Southeast Asian Nations) members.

What Is Seigniorage?

Where is all the U.S. currency?

In it we mention that the U.S. government profits from the fact that people all over the world love our green pieces of paper.

How does the government actually profit? Through something called seigniorage, which is as hard to explain as it is to spell.

In the old days, seigniorage was the revenue the government earned because it costs less than a dollar to print a dollar. Say it costs 2 cents to print a $1 dollar bill. Then, poof, the government has gained something like 98 cents when it prints that dollar and uses it to buy something. That's overly simple but it's a good starting place.

Today the Federal Reserve controls the money supply. And one of the ways it does this is by buying or selling treasury bills. If the Fed wants to increase the money supply, it buys some treasury bills (government bonds) from banks. So a treasury bill is taken out of circulation and replaced, basically, with dollars. Presto. More dollars in the world.

Here's the key part: more dollars in circulation means more treasury bills at the Fed. And unlike dollars, the treasury bills earn interest. So the Fed profits. It's holding onto those treasury bills, which pay off with interest. Basically, when you hold onto U.S. cash, you're giving the Federal Reserve an interest-free loan.

Check out the wikipedia entry.

And here's a good explainer on what it's like to be the institution that can basically create money out of thin air.

Bank of England Buys Government Bonds, Opening New Policy Front

The Bank of England opened a new front in its effort to ward off deflation today as it bought government bonds with newly created money.

The central bank today purchased 2 billion pounds ($2.8 billion) of gilts, its first deployment in a three-month plan that may see it spend 75 billion pounds. Investors offered more than five times as much as the bank said it would buy.

The move marks a departure for British monetary policy after officials cut the interest rate to a record low of 0.5 percent on March 5, requiring them to seek new tools to stop the economy’s downward spiral. While Governor Mervyn King hopes that pumping money into the financial system will work, he’s relying on banks battered by the crisis to pass it onto lenders.

“For the economy, this is money that can now be spent elsewhere,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “The risk is that it’s not used to lend but is kept in reserves. We don’t know what this is going to do because we don’t know where the money goes.”

The bank unveiled the plan after last week’s rate cut. Policy makers such as Andrew Sentance are concerned a “prolonged and deep recession” will stoke deflation and the National Institute of Economic and Social Research said today that the slump deepened in the quarter through February.

Shopping List

King, criticized at the start of the crisis for not doing enough, argues that the new measures “will work in the long run.” The central bank offered to buy six different kinds of government bonds in today’s operation, whose maturities range from 2014 to 2018. They included the 5 percent bond maturing in September 2014, the 4.75 percent bond maturing September 2015 and the 8 percent bond maturing December 2015.

The bank’s operations, which will take place twice a week, happen in two stages. Until 12 p.m. in London, investors can offer gilts for sale to the bank without specifying a price. At 1 p.m., the bank announces the result of its purchases and says how much it then plans to buy from bondholders who wish to name their price in competitive bidding. That stage takes place from 2:15 p.m. until 2:45 p.m.

The bank received no bids in the first stage today and then investors offered 10.5 billion pounds of gilts in the second part, giving a cover ratio of 5.25, according to a statement from the central bank in London.

U.K. government bonds erased gains and then rebounded. The 10-year gilt yield fell four basis points to 3.08 percent as of 3:42 p.m. in London. The 4.5 percent note maturing in March 2019 rose 0.33, or 3.3 pounds per 1,000-pound face amount, to 112.16. The yield rose as high as 3.12 percent

Assessing Progress

“The first few weeks will tell us a lot about how it’s going to go,” said John Wraith, head of sterling interest-rate strategy at RBC Capital Markets in London. “The market is now at a level where yields are much lower now than fundamentals would justify, so they have to back this up by actually buying the bonds at these levels.”

As well as increasing the money available to banks to lend to companies and homebuyers, the Bank of England wants to push down yields on gilts, so that investors start to diversify into higher-yielding products, such as corporate debt, said Wraith.

The yield on 10-year gilts posted its biggest two-day drop since at least 1989 in the final two days of last week, shedding 58 basis points, after policy makers announced the asset-buying program on March 5. The rally continued March 9, when the yield dropped to the lowest level in at least 20 years.

King said last week he’s confident that the bond purchases will help return inflation to the 2 percent target. The central bank’s forecasts, published last month, show the inflation rate dropping to 0.3 percent in early 2011.

Recession Signals

The U.K. economy shrank 1.8 percent in the quarter through February, the National Institute of Economic and Social Research estimated today. That’s faster then the 1.5 percent contraction in the final three months of 2008, the biggest since 1980.

Nigel Lawson, the longest-serving finance minister under Margaret Thatcher, said yesterday that the Bank of England must be “very vigilant, very watchful” to prevent a resurgence of inflation should the new money kick-start the economy.

“The difficulty they have is that there’s a lag in time in doing it and it starting to feed through,” said Ian Williams, chief executive officer of Charteris Portfolio Managers in London. “You may end up with the proverbial brick on the end of a bit of elastic, where they’re tugging and tugging nothing appears to be happening, and all of a sudden the brick hits them in the face.”

The central bank said last week it will buy the following
government bonds today:
The 5 percent bond maturing in September 2014
The 4.75 percent bond maturing September 2015
The 8 percent bond maturing December 2015
The 4 percent bond maturing September 2016
The 8.75 percent bond maturing August 2017

The 5 percent bond maturing March 2018