GLG News by Kamala Worthington

Implications: Rumors had been swirling over the last few weeks that WAMU was shopping for a buyer, however, the OTS (the Office of Thrift Supervision) couldn't allow WAMU to continue its operations under constraints of deposit outflows exceeding $16 billion in the last week or so and JP Morgan Chase becomes the benefactor of WAMU's collapse and acquires WAMU's deposits for a low ball amount of $1.9 billion. WAMU may have staved off a collapse if the proposed $700 billion bailout plan had been approved, however, what we witnessed this week was alot of grandstanding and political posturing but no agreement to pass and legislate the proposed $700 billion bailout plan. WAMU becomes the latest news headline and the largest FDIC-insured institution on the list of bank failures in 2008. The FDIC fund wasn't impacted by WAMU's collapse, however, other S&L's and thrifts that have failed to meet their fiduciary responsibilities have only added to the downward spiral of the U.S. economy. 

Analysis: While we watched politicians from the left, the right and somewhere in the middle bicker and pose for photo opps this week, WAMU, the largest S&L collapsed under the strain of an economy that has all but choked the credit system breathless and from WAMU's risky mortgage-backed investments. With no viable buyers who could raise the capital to acquire WAMU, the OTS (the Office of Thrift Supervision) was compelled to step in and close WAMU's doors and Chase's CEO, Jamie Dimon saw this as an opportune time to acquire WAMU on the cheap, while expanding its branch and ATM operations, gain market share and move its competitive positioning ahead of its rival, Bank of America, at least for the short-term.

1.  WAMU's collapse may be indicative of what's to come in the future for the Banking Sector. Potentially, more bank failures could occur as an erosion of equity occurs and consumers' confidence to deposit funds investors willingness to invest in this sector erodes. In fact, the FDIC saw the handwriting on the wall and began calling back retirees last year to assist in receivership of bank failures that were imminent in 2007-2008 and into 2009

2.  WAMU suffered from risky investments and took a costly risk on subprime mortgages and their Mortgage Unit drug down profits and with the run on of deposit outflows exceeding $16 billion in less than two weeks, WAMU collapsed and the OTS and the FDIC facilitated the sale of WAMU to Chase for $1.9 billion

TAKEAWAY:  Chase's CEO, Jamie Dimon "Chased What Matters," acquiring WAMU on the cheap, an increase of deposits, branches, ATMs, market share and competitive positioning. "Whoo hoo!" (WAMU's tagline). Perhaps our elected officials could take a page out of Dimon's "playbook" and cease with all of the partisan politics and posturing before we read about another major financial institution's collapse.

Implications: TRM's $11 million "lifeline" from LC Capital Master Fund Ltd. helps the troubled ATM owner pay off its debts and gave TRM the seed money to acquire its rival, ATM deployer "Access to Money." When TRM acquired eFunds ATM Portfolio of 17,200 ATMs in 2004 for $150 million, TRM had over 22,000 ATMs and owned the largest international ATM network by a U.S. company. Since that time TRM has restructured its ATM Operations and its ATM Network fell to less than 9,300 ATMs and forced TRM to sell its international ATM Operations and what use to be its "core" business, its "Photocopier Unit" to remain in business. TRM grew way too fast through acquisitions and the acquisitions didn't generate significant cashflows or decent ROI. Since 2Q07, TRM has focused on its current assets rather than growing through acquisitions, reduced its expenses, simplified business operations, cleaned out those low transacting ATMs acquired from eFunds and added units to their legacy ATM fleet.   

Analysis: TRM got an $11 million financial "lifeline" to avoid bankruptcy and to pay down its debt. TRM used a portion of the loan to acquire "Access to Money," an ATM deployer with a strong sales and service infrastructure, who should complement TRM's ATM Operations and create cost synergies to help TRM make a turnaround. TRM's plan to restructure its operations, reduce expenses and streamline costs to make its ATM Portfolio more profitable again could pay off dividends with the "Access to Money" acquisition. TRM saw a huge decline in its ATM Portfolio and net losses as a result of growing too fast through acquisitions and paying too much for some ATM portfolios they acquired in the last four years.

1.  TRM was plagued by low transacting ATMs that were "merchant owned" contracts that they lost due to attrition when they acquired the portfolio from eFunds in 2004. A lot of the 17,200 machines were older machines and required more service and maintenance and TRM incurred the expense of upgrading the ATMs to ensure compliance with the card networks 

2.  In an effort to reduce its ATM service and maintenance expenses, TRM has outsourced service and maintenance of its ATMs to NCR, rather than utilizing several service providers. Since 2007, TRM added over 1,000 ATMs to its legacy fleet , which typically generates a higher gross margin, per unit than "merchant owned" ATMs

Takeaway:  TRM made it through a rocky 2007 and managed to stave off bankruptcy with a $11 million loan and acquisition of "Access to Money." The ATM portfolio acquired by eFunds has proved to be a "heavy weight" on TRM's balance sheet. Access to Money should bring synergies and cost efficiencies to TRM to help TRM reduce its debt, strengthen its competitive positioning and position TRM for future growth and expansion.

Implications: It's hard to fathom that "Fred the Shred's" (known for his brutal cost-cutting in the past) role in the battle for ABN-Amro between Barclays may have led to RBS's plans to raise the largest cash call of British banks of $20 billion+ in a 1-for-2 basis "rights issue" to raise capital and shore up its balance sheet. RBS may also sale its business unit Angel Trains for $6.9 billion to raise capital. RBS has already wrote down over $3.3 billion on the value of mortgage-backed securities, loans to private equity groups and securities guaranteed by bond insurers who are cash strapped. RBS finds itself in a peculiar predicament with low capital levels in part due to the massive acquisition of ABN-Amro in 2007, which ate up a lot of its cash. RBS's Tier 1 Capital Ratio is 4.5%, (the number regulators look for to determine a bank's financial strength) which is the lowest of any British bank and falls under the threshold where regulators can intervene and force banks to recapitalize.

Analysis: RBS is scheduled to announce its "rights issue" to raise $20 billion or more to recapitalize. Questions loom whether RBS paid too much for ABN in 2007 when RBS issued 6.84 billion shares and paid $30 billion to finance its portion of the deal or whether federal regulators strong armed RBS to participate in the $99 billion government backed package to allow banks to swap assets to alleviate the strain on their balance sheets due to the mortgage crisis spillover to Europe. RBS is also shopping other business units, including Angel Trains, DirectLine and Churchill to recapitalize and shore up its balance sheet.

1.  Sir Fred Goodwin's about face and insistence in February 2008 that RBS wouldn't need to raise more capital has left some shareholders miffed and Goodwin will have to explain his actions at RBS's Annual Meeting on 4.23.08, to discuss RBS's planned "rights issue," among other things

2.  British banks are under a lot of pressure from the Government and the Bank of England is putting pressure on British banks to raise their capital levels and to come clean about the magnitude of their writedowns

Takeaway:  RBS's "rights issue" will be sold at a discount of 30-40% of its current share price and because RBS plans to raise more than 5% of its market value, RBS shareholders must approve the rights issue and Sir Fred Goodwin will seek approval at its Annual Meeting on 4.23.08. If the rights issue goes forward it will be Britian's largest cash call on existing investors and RBS may be raising so much to get it over in one go. Sir Fred Goodwin may be in the hot seat on 4.23.08, at RBS's Annual Meeting and for now he keeps his job!

Implications: Blackstone Capital Partners V L.P. may have had a case of "buyer's remorse" with its $7.8 billion deal including the assumption of certain debt of ADS. The deal valued ADS at $81.75 a share, representing a premium of about 30% over ADS's closing price of $62.96 on 5.16.07. However, since that time ADS's share price has fallen to $52.84 a share as of 4.18.08. ADS is alleging that Blackstone "refused to accept reasonable and customary regulatory requirements and prolonged negotiations with the OCC," which resulted in a breach of the deal. ADS is seeking the $170 million "breakup fee" Blackstone agreed to when it entered into the deal with ADS on 5.17.07. The deal was expected to close by year-end 2007, however, due to lack of liquidity at Blackstone, the deal was delayed for a second time and ADS is suing Blackstone for "breach of contract." The deal was touted as a marriage amongst a leader in card processing with Blackstone's investment expertise would create a powerful partnership.

Analysis: Blackstone's plans to acquire ADS for $7.8 billion (including certain debt) has collapsed and heads to N.Y. Supreme Court with ADS alleging "breach of contract" and seeks the $170 million "breakup fee." This is the second deal that has collapsed for Blackstone in 2008, as the buyout firm shifts its focus to doing more midsize deals and minority stakes. When Blackstone and ADS entered into a deal on 5.16.07, the deadline for the deal to close expired on 4.17.08 and with egos in toe, Blackstone and ADS will let the courts decide if Blackstone "breached" its obligations and if so, is ADS entitled to the $170 million "breakup fee"?

1.  ADS's clients use ADS's loyalty and marketing programs to grow their bottom line and ADS offers one of the most comprehensive database marketing services, including analytics services, database services, data services, interactive delivery services, strategic consulting and creative services to drive customer loyalty for its clients

2.  ADS was contacted by Blackstone on Friday 4.18.08, indicating they were terminating the proposed $7.8 billion purchase agreement, however, Blackstone's termination notice may be invalid and Blackstone could be in violation of the terms of the contract because the contract stipulates Blackstone would pay a "breakup fee" if the deal collapsed

Takeaway:  Blackstone may have used the regulatory issue as a smokescreen to terminate the deal with ADS. Perhaps Blackstone had a case of "buyer's remorse" and decided that the buyout was too expensive in the current global credit crisis, which has made it more difficult for private equity firms to obtain financing. However, Blackstone is placing blame at the front door of the OCC, which requires that parent companies of a bank agree to provide support to maintain the bank's minimum capital and liquidity levels in cases when the controlling owner of a national bank is not a regulated bank. Blackstone purports the OCC regulations would impose a liability to the company and its funds and Blackstone decided to terminate the deal.

Implications: The demand for mobile banking is growing and over the next 4-5 years, m-banking and m-payments will drive the boom in demand for wireless payments and banking. Banks, processors, card networks and mobile carriers are pushing two types of transactions with mobile devices, m-banking and m-commerce. The m-banking segment is projected to  grow to $50 billion by 2012 and m-payment transactions volumes will surpass $36 billion by 2012. Banks and credit unions have launched pilot programs to determine if SMS-Short Messaging Service, NFC-Near Field Communication or WAP-Wireless Application Protocol is the "killer application" for m-transactions. Consumers are interested in m-banking transactions that allow them to check balances (61%), account history (17%), transfer funds (11%), make bill payments and P2P payments (8%), password change (2%) and m-payment transactions enable consumers to download music, ringtones, games, access the Internet and conduct transactions at the POS.  

Analysis: m-banking and m-payments has caught the attention of stakeholders who are lining up to cash in on m-commerce (m-banking & m-payments) transactions. m-banking has picked up some steam in the U.S. as consumers' appetite for m-banking and as financial institutions, card networks, mobile carriers, hardware and software providers and other key players attempt to work in a fragmented payments infrastructure and determine who controls the transaction, the financial institution or the mobile carrier and perhaps come together to converge technologies to create mobile applications which may be adopted by the masses. There are three major platforms that have emerged over the last year, including SMS, (Short Messaging Service) NFC (Near Field Communication) and WAP (Wireless Application Protocol). 

1.  SMS-Short Messaging Service - tech exists on most mobile devices available in the market today and allows users to receive and send short text messages (from 150-160 characters) to other mobile devices and employ the use of an assigned PIN and confirmation

2.  NFC-Near Field Communication - is a short range (close proximity) wireless connectivity tech that supports SIM-Subscriber ID Module - where carriers charge a monthly subscriber fee or per transaction fee (NFC based mobile payments may experience growth related to payment terminals already deployed for use with contactless payment cards)

3.  WAP-Wireless Application Protocol - tech is an open,, international standard for applications that use wireless communication and is primarily used to enable web access from mobile devices, i.e. Internet access, music downloads, gaming, telecasts, etc. SMS & WAP technologies can be used in conjunction to configure mobile devices for short text messaging and Internet access to make purchases and downloads

Takeaway:  Asia is viewed as the leading region for m-commerce, followed by Europe and the U.S. However, the U.S. faces regulatory, technological and cultural differences because the existing e-payments infrastructure is expensive to replace, especially for merchants, which has impeded m-commerce adoption in the U.S. Financial institutions, card networks, mobile carriers, service providers and other players may need to structure a sound business model and value proposition to encourage the adoption of m-commerce in the U.S., to drive m-banking and m-payments into the payments mainstream to capture market share and shift consumers' purchasing behavior to their mobile devices.  2008 could be the "tipping point" for m-banking in the U.S.

Implications: The Internet, Biotech and Cleantech are the sectors that benefited the most from venture capitals (VC) investments in 1Q08, despite a drop in VC investments to $7.1 billion in 1Q08. The economic slowdown has caused VC's to all but close their wallets to IPOs and M&As, which is the two most common avenues VC firms use to cash in on their investments. In an attempt to put a positive spin on the latest data, VC experts are saying that "investment activity still remains relatively high compared to the last economic slowdown in 2001." Seed/startup financing totaled $1.64 billion during 1Q08, however, its down from the $2.24 billion in seed/startup deals from 4Q07. VC's invested over $29 billion in total deals in 2007, which marked the highest yearly investment total since 2001. As in 1Q08, 2007 record investment levels by VCs were in the "Cleantech, Biotech and Internet specific companies, however, in 1Q08, VC's pulled back a bit as they too fell the strain of an economic slowdown.

Analysis: In 2007, venture capitalists investments is projected to succeed $27 billion, however, 1Q08 saw a decline in VC investments, which is down to $7.1 billion in 1Q08 from $7.5 billion in 1Q07. The "Cleantech" sector is expected to attract the highest levels of VC financing in 2008 and in 1Q08 VCs invested over $625 million in the sector. The Biotech and software sectors accounted for the largest share of venture capital funding in 1Q08. Media, entertainment, medical devices and wireless telecoms are other sectors VCs will pour funding into in 2008, and the IPO market may experience some recovery, while M&A activity may see a lift before year-end.

1.  The U.S. economic slowdown has put a strain on VCs wallets and could hinder their ability to raise capital to fund seed/startups, expansions, developments and late stage companies seeking venture capital to grow in 2008

2.  Valuations on startups could be lower as the economy slows down and IPO startups may decline, as well as M&A activity at larger corporations, however,  Biotech, Cleantech and Internet specific companies are projected to receive the "lion's share" of venture capital funding in 2008

Takeaway:  2007 was a good year to be an entrepreneur as venture capitalists poured more capital into seed/startup companies than any other category. Later stage companies also fared well in 2007, however, 1Q08 is getting off to a slower start than in 2007. Silicon Valley is still the dominant geographic region for VC investments, followed by New England and the Southeast. In 2008, VCs may look abroad to global markets to diversify their portfolio holdings and look at markets where tech startups could see VCs putting up seed capital over the next 18-24 months to fund what could turn out to be the next great investment.

Implications: Market volatility, lack of liquidity and banks' unwillingness to take on more risks has hampered global M&As activity in 1Q08. Global M&A deals have tumbled to a four year low from $962 billion down to $661 billion. The private equity sector which is known for "over the top" blockbuster deal making, saw a 77% slump in the global value of deals in 1Q08 from $195 billion down to $43.5 billion. In 1Q08 the Top M&A deal makers by value was Goldman Sachs, Citigroup, Lehman Brothers, Morgan Stanley, UBS, China International Capital, Credit Suisse, Merrill Lynch, JP Morgan, and HSBC Holdings, with M&A deals total value exceeding $131 billion. Because liquidity is scarce some M&A deals have stalled, fell through or are log jammed. 2007 was a record year for global M&A deals. Private equity's share of M&As grew substantially; however, 1Q08 data suggest that M&A deals in the private equity sector may have reached its peak after years of record growth.

Analysis: In 2006 & 2007, major blockbuster deals were made by private equity firms during a time when they consistently beat the market and money poured in by the billions, however, 1Q08 has bought a "chill" over global M&A deals due to the credit crunch and liquidity drying up. 2Q08 & 3Q08 could bring a much needed boost in global M&A activity. To put into perspective the sharp decline in global M&A activity in the private equity sector, we can look back at 3Q07, when during the 4th of July week private equity firms raised $64 billion in M&A deals and in 1Q08 the global value of M&A deals in the private equity sector has slumped to $43.5 billion.

1.  In the 80's the private equity boom ended when interest rates rose and the economy slumped and in 2008, the credit crunch, losses in subprime related investments and lack of liquidity may cause a retreat by private equity firms over the next few years, however, after the tide has ebbed, more business will be in private hands and with the fall in interest rates, private equity firms may see a bounce in M&A activity

2.  Private equity firms feasted on their spoils and gobbled up companies that were perceived to be undervalued on the cheap in 2006 and 2007. M&A volume rose to its highest peak in 2006 to $3.8 trillion, when cash was king and blockbuster deals were announced almost weekly

Takeaway:  Private equity still accounts for only a small portion of corporate ownership and much of the industry's activity is among small and medium-sized enterprises and there could be plenty of room for private equity firms to expand, however, the peak of the cycle may be close because inevitably private equity is a feast or famine business so when one fund raises a lot of capital they all probably can too.  Consequently, in the current environment liquidity has been difficult to raise to get deals done.

Implications: Another spin-off product of the Check 21 Act, Back-Office Conversion (BOC) launched in March 2007 and one year out of the gate, BOC is viewed as a more user-friendly electronic check conversion tool than POP (Point-of-Purchase) transactions, because POP requires that all or most of the merchant's checkout lanes be equipped with check scanners, which are expensive and because checks are returned to the customer during the sale, which slows down the checkout process. In contrast, BOC checks can be converted in the back-office, which speeds up the checkout time and eliminates the need for check scanners at the register. In 4Q07, BOC transactions totaled 3,083,682, which was a 266% increase from 3Q07 with 840,743 transactions. Total BOC transactions in 2007 was 4,189,465, representing three quarters of transaction volumes. Although uptake has been slow because merchants and banks had to put the infrastructure in place to process BOC transactions, BOC is poised for growth in 2008.

Analysis: BOC (Back-Office Conversion) electronic check conversion has captured the interests of transactions processors, banks and their clients, who are interested in reducing high volumes of paper checks and BOC offers merchants and billers faster transaction processing, reduced transportation costs, reduced processing costs and a cost-effective tool for converting imaged checks to ACH debits, which provides faster settlement and posting of funds to the merchant's account(s). BOC is also bringing banks back into the arena of selling electronic transaction services to merchants, which is a market banks gave up years ago to ISOs (Independent Sales Organizations) and transactions processors who dominate the space today.

1.  Converting checks to e-payments may help reduce the number of insufficient funds checks merchants have to contend with and processing checks electronically is also cheaper than traditional paper check processing

2.  One drawback to BOC conversion is that merchants can't convert all checks they accept for payment. Only checks that are drawn on consumers' accounts are eligible and the merchant assumes the risk of signature fraud on checks they convert, whereas with paper checks and image exchange, liability rests with the paying bank

Takeaway: BOC gives merchants, billers and corporate clients 24/7 access to their bank and quicker access to their deposited funds, while eliminating the need for merchants, billers and corporate clients to make frequent trips to their bank. Financial institutions view BOC as a competitive, value-added service for their corporate and merchant clients, and believe they must offer BOC to their clients to remain competitive or face the possibility of losing these clients to competitors who offer BOC services.

 
 

Implications: Pay By Touch fades to black after filing Chapter 11 Bankruptcy reorganization in December 2007 and enduring contentious boardroom battles to decide the fate of the company. Pay By Touch used biometrics to authenticate consumers at the POS (Point-of-Sale) for secure check cashing and ACH based purchases. Pay By Touch was successful at bringing biometric technology to the retail payments space, however, processing fingerprint payments didn't take off as expected and the once POS (Point-of-Sale) biometric payments leader officially closes shop. Pay By Touch grew primarily through acquisitions with the help of hedge funds and venture capitalists and went on to raise over $300 million to acquire at least six companies between 2005-2007, however, the company still needed more cash to fund operations. Pay By Touch's owners was also some of its biggest creditors. In court filings Pay By Touch indicated it owed its 30 largest unsecured creditors over $39 million.

Analysis: Pay By Touch uses biometrics to authenticate consumers at the POS (Point-of-Sale) for secure check cashing and ACH based purchases, however, because consumers are accustomed to using credit and debit cards that offer rewards, there wasn't much of a value proposition for the consumer to use its fingerprint for payment. Pay By Touch raised an additional $163 million in capital from Plainfield Asset Management, Och-Ziff Capital Management and Farallon Capital Management to help fund operations. Consequently, Plainfield's $50 million loan was secured with shares owned personally by founder John P. Rogers. Plainfield's stake amounted to a 20% ownership with a "supermajority" voting rights that gave Plainfield a 64% control of the voting shares, which was enough to control the company.

1.  The loan agreement with Plainfield called for Plainfield to assume control of Rogers' shares in the event of a default. Plainfield took Pay By Touch to court alleging that Pay By Touch defaulted because it failed to deliver its 2005 audited financial results by the agreed upon deadline. This led to numerous lawsuits and Plainfield ousted Rogers and created a new board of directors. Eventually, the two sides settled and Plainfield kept Rogers on as a Director only, without any executive responsibilities

2.  In December 2007, Pay By Touch voluntarily filed for Chapter 11 Bankruptcy reorganization after some of its employees tried to bring the company into involuntary bankruptcy. Court filings paint a picture of a company that burned through a vast amount of funding and still managed to face severe cash shortages after reorganizing and liquidating its non-core assets

Takeaway:  Pay By Touch's grandiose plans to build a huge network of fingerprint-ready checkout lines around the globe was ambitious but came up short of expectations. Pay By Touch was viewed as an alternative payments provider who could authenticate and process transactions in real-time. Alternative payment providers such as the defunct Pay By Touch and others are anxious to bring alternative payments to market and they look for ways to reengineer the payments infrastructure to provide faster, better and cheaper payments because  consumers and merchants aren't waiting for banks to fill the product gaps. Although Pay By Touch "fades to black," other competitors are willing to take its place in the biometric payments space.

Implications: Since the passage of the Check 21 Act in October 2004, significant changes have occurred in traditional check processing. Banks, credit unions, image networks and the Federal Reserve are working to build the infrastructure to transition banks and credit unions to 100% electronic check imaging/exchange from traditional check processing, which could save banks and credit unions as much as $2 billion annually by reducing transportation costs, float time, check fraud and check processing costs. Additionally, consumers' shift in payment preferences from cash and checks to e-Payments has accounted for over 66% growth of all noncash payments in 2006, contributing to the sharp decline in check volumes annually. Check volumes began declining in 1995, when approximately 49.5 billion checks were paid. ACH payments has also trumped check payments as ACH e-Check conversion programs has expanded with billers and merchants who convert checks at the POS (Point-of-Sale) and POP (Point-of-Purchase).

Analysis: More than eight billion check payments totaling over $11.5 trillion have moved from traditional paper based processing to electronic image/exchange processing since the passage of the Check 21 Act (The Check Clearing For the 21st Century). Paper checks are transitioning to electronic images of checks at an unprecedented pace, resulting in a decline in paper check volumes of -6.4% annually. Substitute checks (a.k.a. IRDs - Image Replacement Documents - paper printouts of check images authorized under the Check 21 Act in lieu of the original check) are also assisting in the evolution of traditional paper check processing to electronic image clearing of checks, prompting the Federal Reserve to speed up infrastructure changes at its processing facilities throughout the U.S.

1.  As image/exchange volumes increase the cost of check processing will increase by an average of 5-6% annually.  Essentially, the lower the volume of checks processed the higher the costs will be to process those checks

2.  Image/exchange enables institutions to streamline paper check processing. By sending images electronically rather than transporting the physical paper checks, banks and credit unions can reduce transportation costs, check fraud, float time and check processing costs

Takeaway:  The Federal Reserve is also participating in image/exchange of paper checks and has built incentives into its new fee structure for check processing in 2008. If banks and credit unions process electronic images of checks, the Fed will reduce processing costs and will raise paper processing fees and IRD fees (Image Replacement Documents) for those institutions who still use traditional check processing and IRDs because they haven't made or either can't afford to make infrastructure investments to benefit from cheaper electronic check processing.

Implications: CIT Group drew down emergency credit lines totaling $7.3 billion in March 2008, after being cut off from customary sources of cash, forcing CIT to scrap its government-backed student loan program on 4.3.08. Due to its weak position, CIT may be a prime takeover target. The lack of investor demand has made it harder for student lenders such as CIT to raise money to finance their operations. In 4Q07, CIT reported a $302.5 million "goodwill impairment" charge against its student loan division, which reflected an erosion in the value of the business. New legislation was enacted in 2007 that slashed private lending subsidies by about $20 billion and higher costs to securitize assets for student loans proved to be less profitable for CIT. CIT has also offloaded some of its riskier operations including mortgage and private student lending. To add salt to CIT's wounds, the NY Attorney General has subpoenaed CIT's "Student Loan Express,"  for allegedly mailing fake checks and rebates.

Analysis: Most student loans are backed by the federal government, such as the Stafford and Federal Family Education Loan Program (FFELP), which reimburses lenders up to 97% of losses if students default on their loans. In March 2008, CIT had to tap its entire $7.3 billion emergency credit line. Both CIT Group and NorthStar Education Finance Inc. announced last week that they would stop making new loans to U.S. students because lending costs had skyrocketed and on concerns that defaults may rise as the economy could potentially enter a recession.

1.  About 40 lenders have ceased to write some form of student loans as the cost to raise money in the asset-backed market has skyrocketed and sales of bonds backed by student loans have dropped by 65% in 2008, compared to 1Q07

2.  Congress enacted changes in September 2007, that increased the costs for student loan companies to originate new loans under the Federal Family Education Loan program (FFELP)

Takeaway:  Students  borrow approximately $85 billion annually to finance the costs to attend college and the demand for private education loans surged by 27% over the last six years, however, the tide has shifted and investors appetite for this type of debt is drying up as student lenders scrap or downsize their student loan programs as a result of legislation passed during September 2007, that cut federal subsidies by approximately $20 billion to student lenders. In addition, the industry received a black eye when allegations surfaced of improprieties among student loan lenders and financial aid directors at major institutions in the U.S. Allegedly, student loan lenders wooed financial aid directors with trips, gifts and payouts to encourage them to direct students applying for student loans to specific lenders and some student lenders paid out millions in fines after the NY Attorney General launched a probe of deceptive loan practices.

Implications: Writedowns at global banks has surpassed $291 billion and the "writedown" meter continues to tick and could reach $460 billion or as high as $1.2 trillion by year-end 2008. U.S. financial institutions will account for about 40% of losses. Credit losses has prompted leveraged institutions to raise new capital of approximately $100 billion from domestic and foreign investors and the side effects is a decrease in dividend payouts and record job losses which could exceed 200,000 in 2008. Subprime writedowns from leveraged institutions include UBS's $19 billion writedown; Citigroup $18 billion; Merrill Lynch 14.1 billion; Morgan Stanley $9.4 billion; Deutsche Bank $7.1 billion; HSBC $3.4 billion; JP Morgan $3.2 billion; Bear Stearns $3.2 billion; BofA $3.0 billion; Barclays $2.6 billion; RBS $4.1 billion; Freddie Mac $2 billion; Credit Suisse $1 billion and Paribas $197 million. It's too soon to determine if the markets has bottomed out and 3Q08 & 4Q08 will be the litmus test. 

Analysis: As writedowns from subprime investments drag down the entire banking system, one in ten jobs in the U.S. commercial banking industry will be cut. In the past 40 years, the banking industry has never seen a downturn in its revenue growth, however, in 2008 it appears this trend will shift and revenues will decrease for the first time and the end result will be severe cost cutting measures and staff cuts seem to be one of the top remedies for cutting costs. In the next 12-18 months, commercial banks will slash a record 200,000 U.S. jobs to reduce costs as the credit crunch continues to pummel the "bottom lines" of some of the world's most prestigious financial institutions.

1.  In 2007, a record 153,000 jobs were cut in the U.S. financial services industry and more than 50% of those job cuts were mortgage related jobs. In 2008, job losses are projected to exceed 2007 figures to surpass 200,000. In March 2008, financial firms cut 5,000 jobs to contribute to the 5.1% increase in unemployment figures released with the U.S. job report and across the board, employers across all industries cut over 80,000 jobs

2.  U.S. banks have cut thousand of jobs since the credit crunch began its descent last summer, with Citigroup staff among the biggest casualties. Citigroup has announced over 20,000 job cuts and an additional 2,000 cuts may occur in 2008 

Takeaway:  The U.S. financial services industry is putting controls in place to try to stop the bleeding from record writedowns, shore up their balance sheets with additional capital and calm the fears of investors. 2Q08 may bring additional writedowns as financial institutions work to stabilize their risks with asset back securities and other investment vehicles. 3Q08 & 4Q08 could bring a welcome turnaround in the industry and possibly restore investors confidence and give the U.S. economy a much needed boost.

Implications: National City Corporation (NCC) share price was up 6% on 4.3.08 on news that crosstown rival KeyCorp and cross-state Fifth Third BanCorp may be courting NCC for a possible merger and/or acquisition, however, this could be a bad time to sell due to current market conditions. NCC may need to do some additional house cleaning before considering a possible sale. NCC earned only $314 million in 2007, which is a sharp decline from the $2.3 billion it pulled in during 2006. The weak position of NCC and its suitors KeyCorp and Fifth Third BanCorp may not result in the best price for NCC's shareholders. NCC's suitors have been mulling over NCC's books for weeks and either potential buyer would need to be comfortable with NCC's residential real estate portfolio and would also be willing to pay a fair price, without months and months of due diligence. NCC is scheduled to report its 1Q08 earnings soon and could be interested in inking a deal before reporting earnings for 1Q08.

Analysis: NCC is the fifth largest bank in terms of deposits and holds 7.2% in deposits. However, National City Corporation (NCC) may be running out of options and may only have two options; seek a merger or sale and/or raise capital to strengthen its balance sheet. Approximately $21 billion of NCC's total loan portfolio includes subprime mortgages, home equity loans and residential construction loans. NCC's mortgage related losses prompted the bank to scale back its mortgage business, reduce its dividend and lay off numerous employees.

1.  Combining NCC & KeyCorp would include $150 billion in total assets from NCC, 1,400 branches in Ohio, Florida, Illinois, Kentucky, Michigan, Missouri, Pennsylvania and Wisconsin and KeyCorp's total assets are $100 billion, over 985 branches in 14 states and KeyCorp was initially viewed as an acquisition target by NCC, however, the smaller KeyCorp is better capitalized and may be the suitor to acquire NCC with the backing of KKR

2.  NCC and Fifth Third BanCorp would combine $150 billion in total assets from NCC and approximately $111 billion in total assets from Fifth Third BanCorp. Fifth Third BanCorp operates over 1,227 branches and over 2,200 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri and Georgia. Fifth Third BanCorp's 2007 full year revenue was $5.7 billion, an increase of 12.5% over 2006. This potential merger and/or acquisition would expand NCC's market share in Tennessee, West Virginia and Georgia

Takeaway:  If a merger or sale of NCC takes place, it would be another indication of how much pressure regional banks are under due to the effects of the mortgage meltdown, subsequent credit crunch and slowdown of the U.S. economy. However, on the flip side, if NCC is bought, the buyer would acquire NCC at a cheap price and take on a regional bank with the potential for growth and a turnaround. Either scenario could result in synergies, reduction in expenses and duplicity and capital to shore up balance sheets. We'll have to wait and see if NCC will join forces with its crosstown rival KeyCorp or cross-state bank Fifth Third Bank or if another "strategic alternative" will present itself to NCC.

Implications: At UBS's Annual Shareholders Meeting the topics of discussion included UBS's $19 billion writedown, its $14.8 billion rights issue to raise capital and the replacement of Chairman Ospel by UBS's current Legal Counsel, Peter Kurer. UBS's huge bet on subprime investments has led to the largest bank writedown so far and UBS has moved to segregate the bulk of its subprime related investments via a mortgage escape route to reduce its exposure and shield its core businesses. UBS's subprime troubles led to its first loss in 2007, since UBS first became a bulge-bracket firm about 10 years ago. UBS's $14.8 billion rights issue should bolster their capital base so they can get lending again and plug a hole in its balance sheet due to the $19 billion writedown in 1Q08. Under intense pressure Chairman Ospel reversed his decision to seek re-election at the Annual General Meeting on April 23, 2008, even though Ospel contended that he was the "best placed person to rescue UBS." 

Analysis: UBS plans a $31 billion mortgage escape route in an attempt to stop the bleeding from its subprime related losses and $19 billion writedown in 1Q08.  UBS has $15 billion of subprime mortgage related positions and $16 billion Alt-A mortgages on its books. UBS's remaining exposures to high risk residential mortgages will be moved into a new on-balance sheet investment vehicle. UBS has not outlined how the new investment vehicle will be setup, its structure or how soon outside capital may be injected into the vehicle.

1.  UBS plans to sell stakes in the vehicle to hedge funds and other investors to potentially save UBS from having to conduct a fire sale of its assets, which could result in UBS incurring even greater losses

2.  UBS offloaded over $23 billion worth of U.S. mortgages in December 2007, to buyers who were interested in distressed assets and questions are now swirling whether UBS will spin off its investment bank that was created by outgoing Chairman Ospel

Takeaway:  UBS's most significant fund outflows began in February and March of 08, when the media began scrutinizing UBS, which could have scared investors away. In another twist in the UBS saga, UBS's former President, Luqman Arnold, who was forced out in 2001 and now heads up the investment firm Olivant, has secured about a one percent stake in UBS and wrote a letter to UBS's Board outlining his recommendations to split up the bank. Perhaps UBS could fare better if the bank was split up. 

Implications: Sovereign Wealth Funds (SWF) grew by 18% in 2007, with a global share of 36% and early projections suggest SWFs could grow to $5 trillion by 2010. In 2007, SWFs invested $49 billion in M&A deals, which is an increase of 165%. Russia, Asia and the Middle East has played a key role in bailing out banks and other businesses from the escalating subprime woes in the U.S. and Europe. GIC, the investment arm of the Singapore Government invested $8.9 billion into UBS in December 2007 and Singapore based Temasek rescued Merrill with a $5 billion investment. Other benefactors of SWFs include a $5 billion investment into Morgan Stanley by China Investment Corp. and Abu Dhabi's SWF invested $7.5 billion into Citigroup in November 2007. During the first three months of 2008, SWFs invested more than $24 billion in the U.S., Europe and the U.K. and could exceed 2007 investment totals, with plans to add roughly $1 trillion or more in sovereign investments each year over the next three years.

Analysis: Sovereign Wealth Funds has acquired a special taste for banks, brokers, stock exchanges and asset managers who may be looking for partners who can open global doors. In 2007, sovereign wealth funds invested more than $3.3 trillion in the U.S., Europe and the U.K., which is up by 18%. Sovereign Wealth Funds based in China, Russia and the Middle East are injecting billions into the financial services industry and other sovereign investments. With the increase in investments by sovereign wealth funds in the U.S. and Europe, comes increased scrutiny in Europe by regulators and by U.S.  lawmakers who want to ensure sovereign wealth funds aren't driven by political decisions.

1.  The IMF (International Monetary Fund) has endorsed plans to develop "best practice guidelines" for sovereign wealth funds and will meet with wealth funds this month to address concerns about the increasing size of wealth funds and perhaps to gain greater transparency into sovereign wealth funds' investment strategies and assets 

2.  Revenue from oil exports in the Middle East and an increase in foreign exchange reserves in some Asian countries has contributed to sovereign wealth funds growth over the last year. Sovereign Wealth Funds funded by oil and gas exports totaled $2.1 trillion in 2007

Takeaway:  The U.K. views Sovereign Wealth Funds as an opportunity to shore up investments, however, in the U.S. lawmakers are concerned about the billions of dollars that have been poured into Wall Street banks and other businesses and fears have surfaced that the U.S. could be losing control of its dominant position.

Implications: "Innovate or die" is a common phrase tossed around IT Departments as they determine how to allocate their budget dollars towards data security, regulatory compliance, customer centric projects and front-office applications. Core banking systems are running 24/7 to support internet banking, global operations and real-time transactions via the ATM, Internet, phone, debit and credit cards and mobile banking. Many large Tier 1 banks with assets greater than $631 billion are running homegrown solutions and taking another look at solutions from vendors as their old systems show the strain of many years of maintenance.  Old tech is slowing the flow of communications between the "core" and other systems, which is making new product development cumbersome.  Tier 1 banks will increase their IT budget by 10% in 2008; Tier 2 banks with assets between $158-$631 billion will make the largest IT investments of 11-30%. Global banks IT spending is projected to surpass $351 billion in 2008.

Analysis: Retail banks must innovate to compete!  Many large Tier 1 banks (assets greater than $631 billion) are running homegrown solutions and taking another look at solutions from vendors as their old systems show the strain of many years of maintenance. Old systems are impediments to achieving optimum operational efficiency as well as new product development. Financial institutions have relied on technologies that are nearly 30 years old or more and realize the competitive advantage of modernizing antiquated core systems. Modern systems offered by global technology vendors such as Accenture, Callatay & Wouters, Delta Informatique, FIS (Fidelity National Information Services, Fiserv, Infosys Technologies, SAP, Sungard, Temenos, TietoEnator, T-Systems Enterprise Services and TCS Financial Solutions are promising the flexibility and agility that come with youth.

1.  Increased pressure on old core systems has many banks exploring alternatives to keep their "core" system running smoothly and to gain a competitive edge

2.  SOA (Service Oriented Architecture) is seen as a critical element in how banks address their IT challenges. Banks are adopting SOAs to help create an enabling infrastructure that is agile and can be maintained effectively and at a lower cost than the more siloed and brittle infrastructures they are replacing

Takeaway:  Global retail banks are seeing efficiencies from emerging SaaS (Software as a Service) solutions. Technology vendors offering SaaS solutions could experience a financial windfall in 2008 and beyond as retail banks build and/or upgrade their portals, make improvements in time to market, real-time processing and a single view of the customer across all lines of business. Technology vendors could benefit from their emphasis on channels integration and customer centricity, as retail banks focus on cutting costs to find efficiencies and to invest in new products and services to gain a competitive edge.

Implications: Banks boosted revenues by charging over $36 billion in ATM and Overdraft fees in 2007. Banks and credit unions are netting a stream of fee revenue from ATM and debit transactions in ATM and overdraft fees as consumers continue to pay steeper penalties and fees for not having sufficient funds in their checking account or when they use another bank's ATM to withdraw cash. Debit card transactions at the POS (Point-of-Sale) and ATM transactions trigger over 43% of overdrafts, while paper checks trigger 27% of overdrafts and banks and credit unions are charging fees for each overdraft occurrence and raking in huge fee revenue at the same time. As recent as 2004, 80% of banks declined debit and ATM transactions without charging a fee when consumers' didn't have sufficient funds in their account, however, this trend has shifted and banks and credit unions now charge an overdraft fee to generate fee revenue when consumers' overdraw their accounts when conducting ATM & debit transactions.

Analysis: Punitive fees have historically posted the most consistent increases and with the average cost for a bounced check increasing and withdrawals from another bank's ATM has reached new highs. In the past, banks would not cover ATM and debit transactions unless the customer had overdraft protection or a line of credit linked to their account, however, today its customary for banks and credit unions to pay for ATM and debit transactions that would cause an "overdraft" on the account and in turn, banks and credit unions penalize the consumer for each overdraft transaction, which could pile up over time and as a result banks and credit unions raked in huge fee revenue in excess of $36 billion in 2007.

1.  Banks and credit unions increase their fee income by implementing overdraft loan programs and practices that may be unfair to consumers, such as holding deposits, manipulating the order in which they clear checks and debits or failing to alert account holders before they overdraw their account

2.  Banks and credit unions routinely process the largest check(s) or debit transactions first and may hold deposits for as long as 11 days, which may unfairly stack the deck against the consumer when they make ATM and debit transactions, which could result in overdrafts and other fees

Takeaway:  The trend towards banks and credit unions charging higher fees doesn't show any signs of a slow-down. Banks and credit unions will likely continue to charge their customers' with penalties and fees for overdrawing their account, having insufficient funds in their account and charge them a "convenience fee" when they use another bank's ATM to withdraw cash. The U.S. House of Representatives has introduced the "Consumer Overdraft Protection Fair Practices Act," and if it passes in the House and the Senate, the Act would force banks and credit unions to alert consumers' before they overdraw accounts with ATM withdrawals or debit purchases and would also give consumers' a chance to abandon the transaction. Perhaps banks and credit unions will reverse or modify their overdraft policies to avoid regulation by Congress.

Implications: Visa beats expectations to raise $17.9 billion in its IPO and makes the record books as the largest U.S. IPO, amidst a shaky US financial market. Visa's long awaited IPO sparked a great deal of interest from investors  seeking a potential growth opportunity amid a bearish economic climate. In 2006, Visa's global consumer volume surpassed 59 billion transactions valued at $4.4. trillion. Approximately $828 billion of this volume occurred in the US and trends show volume is up by 14% over 2005 and continues upward. Visa is hoping that consumers' will continue to bring their Visa debit and credit cards for everyday purchases as higher transaction volumes and higher transaction fees are expected to drive Visa's growth over the next 5-8 years and Visa plans to capitalize on the trend of consumers shifting their payment preferences from cash and checks to debit and credit cards. Visa and MasterCard has been the biggest drivers of consumers' shifting from paper to plastic purchases.

Analysis: Visa's shareholders will receive a financial windfall thanks to Visa's successful IPO, as Visa makes its debut on the NYSE on Wednesday, 3.19.08 and it couldn't come at a more opportune time for these banks, who suffered major writedowns in 3Q and 4Q07. JP Morgan Chase who owns 23.3%; Bank of America owns 11.5%; National City Corporation owns 8%; Citigroup owns 5.5%; U.S. Bancorp owns 5.1% and Wells Fargo owns 5%. The big banks priced the deal to sell because most of them are cash strapped due to recent writedowns and loss in market cap.
1.  Visa owns roughly 45% market share and the new Visa Inc. will include the Canadian, U.S. and International Operations and the European Unit will take a minority stake in Visa. Barclays, Visa's largest European card issuer is also expected to gain a huge windfall from Visa's IPO

2.  Visa priced its IPO higher than its rival MasterCard and doesn't expect to grow as fast as MasterCard has grown since its IPO in 2006. MasterCard's share price has grown by over 350% since its debut

Takeaway:  Although the IPO market has been soft since the beginning of 2008 due to fears of a recession and weak market conditions, Visa's brand and attractive valuation should bode well for a successful debut. Investors may have a huge appetite for Visa's shares thanks to Visa's growth in emerging markets coupled with its 45% market share and the continued growth of debit and credit cards transaction volumes, which are projected to more than double by 2010.  

Implications: MasterCard Europe filed an appeal of the European Commission's (EC) ruling that its non-negotiable interchange fees for cross-border transactions violated EC Treaty regulations. The EC's investigation found that interchange fees MasterCard charges on cross-border Maestro and MasterCard transactions violate European Union rules of fair competition and the fees didn't provide any efficiencies to the consumer or the economy. Roughly 45% of European payments cards carry the MasterCard or Maestro logo and MasterCard's full year cross-border volumes increased by 21.1% in 2007 and processed transactions increased by 16.2% to $18.8 billion and gross dollar volume growth increased by 14.4% to $2.3 trillion. With the potential loss of cross-border transaction volume and a loss in market share, MasterCard couldn't afford to let the European Commission's ruling stand without challenging the ruling. If the EC's ruling stands on appeal, European consumers could save about $14 billion annually.

Analysis: In December 2007, after a four year investigation into MasterCard Europe's multi-lateral interchange fees (MIF) by the European Commission Competition Commission, the European Commission (EC) determined that the interchange fees MasterCard charges on its MasterCard credit cards and Maestro debit cards for cross-border transactions violates EC Treaty regulations and because the fees does not provide any efficiencies for the consumer or the economy, MasterCard has six months to stop charging the fees or face daily penalties.

1.  Apparently, during the four year investigation by the EC, MasterCard failed to submit the required evidence to demonstrate any positive effects on innovation and efficiency that would allow passing on a fair share of the multi-lateral interchange fees (MIF) benefits to consumers

2.  Visa Europe is watching this case closely because the European Commission's Competition Commission is reinvestigating Visa's January 2007 fee structure to determine if Visa Europe interchange fees for cross-border transactions have violated any EC Treaty regulations. Prior to 12.31.07, Visa had negotiated an "antitrust exemption" agreement with the EC Competition Commission and agreed to reduce levels of interchange fees for processing card transactions in exchange for immunity from legal action, however, that "exemption" ended on 12.31.07

Takeaway:  European consumers and merchants are cheering over the European Commission's ruling against MasterCard Europe's cross-border interchange fees on transactions and the U.S. is also pushing for legislation in an attempt to stop MasterCard and Visa from charging interchange fees that are passed on to the merchants and their consumers, whether you pay for purchases with your credit or debit card or if you pay in cash, MasterCard and Visa has restricted its member merchants from disclosing the fees they charge in interchange that is ultimately passed on to consumers. The House Judiciary Committee introduced antitrust legislation on 3.6.08 under the "Credit Card Fair Fee Act," which could save consumers as much as $40 billion annually.

Implications: "Chase What Matters" is Chase's new tagline in its national ads. Chase's customers' are saying "surcharge free ATM access" is what matters to them, which is why Chase is expanding its ATM branding deal with Cardtronics to install Chase branded ATMs at Hess Express Gas Stations in NY and NJ. Surcharge fees have continued to rise since 1996 when the average surcharge fee was only $0.45 cents. The $2.00 surcharge fee is the most common, however, in the last year some banks have raised their surcharge fees to as high as $3.00 for non-bank customers. As of July 2007, U.S. consumers paid over $4.4 billion in ATM fees. Chase's ATM branding deal with Cardtronics is a great business case of how a bank can expand its ATM network without the investment of building more branches or locate prime space to install ATMs. Cardtronics owns and operates the machines and Chase's customers' gain "surcharge free" access at Duane Reade in NY, NJ & CT and now at Hess Express Gas Stations in NY & NJ.

Analysis: Chase is expanding its ATM Network through ATM branding deals with Cardtronics at Hess Express Gas Stations in NY and NJ. Cardtronics owns and operates the ATMs and will brand them "Chase" at Hess Express Gas Stations to provide Chase's customers' with "surcharge free" ATM access. Surcharging has been around since 1996 when Visa and MasterCard lifted the ban on "surcharging." Since that time surcharge fees have rose and  skyrocketed to $3.00 per transaction at some banks in 2007.

1.  Chase's ATM branding deal with Cardtronics has been profitable for Chase, who relies on Cardtronics to locate "high traffic" off-premise locations to deploy Chase branded ATMs and Chase's customers' gains an expanded ATM footprint without having to pay "surcharge fees" to access cash and Chase has experienced growth in ATM transaction volumes at Duane Reade

2.  Chase pays Cardtronics a fee to deploy the machines, brand the ATMs with Chase's brand, and replenish the machines with cash and service and maintenance of the ATMs. Cardtronics owns and operates over 33,000 ATMs and Cardtronics offers a full-service, turn-key placement of ATM machines for banks interested in expanding its ATM network via ATM branding, which is a trend in the industry

Takeaway:  In an effort to retain existing customers and acquire new customers, while expanding their ATM distribution, banks are participating in selective surcharge alliances, implementing surcharge reimbursement programs or offering "surcharge free" ATM access to  their customers, such as Chase's and Cardtronics ATM branding deals at Duane Reade and now Hess Express Gas Stations. Chase gains a larger footprint distribution and offers its customers more touch points at a lower cost than if Chase had deployed the ATMs on its own, while growing its ATM transaction volume. Chase is taking its own advice and "Chasing What Matters," volume, customer retention and customer acquisition.