Banks, once seen as the bedrock of the American economy, proved uncharacteristically shaky, as the credit crunch on U.S. mortgage markets caused the collapse of several such lending institutions in September, forcing both public and private sectors to leap into action to head off a crisis of confidence reminiscent of those events leading up to the Great Depression.
The crisis played havoc with the presidential election, as candidates on both sides battled about whether to continue or suspend the campaign pending the outcome of the crisis. It also caused lawmakers to pass a bailout package totaling in the hundreds of billions, as equity markets big and small squirmed in anguish over how quickly their salvation would come.
The once mighty investment banker Lehman Brothers proved the first casualty, filing for Chapter 11 bankruptcy protection in mid-September, the result of unprecedented losses from sub-prime mortgages. London-based Barclays Bank came to Lehman’s rescue within a matter of days, agreeing to pick up its core business, absorb tens of billions of dollars in securities and still more billions in trading liabilities.
Soon after, the tottering Goldman Sachs found its own white knight in the person of Berkshire Hathaway chair Warren Buffett, who rushed in with a purchase of $5 billion (all figures in U.S. funds unless specified otherwise) in preferred shares to show his faith in the future of that investment banker.
Still, as September drew to a close, the cries of “Timber” echoed throughout the markets, as Seattle-based Washington Mutual (WM) also collapsed under the weight of its enormous bad bets on the mortgage market. The largest bank in America to fail, so far, ($307 billion) was seized September 25 by the Federal Deposit Insurance Corporation, who then sold it to JPMorgan Chase for $1.9 billion. WaMu, as it’s colloquially known, had seen its share price drop without a parachute, from the $36 mark of last October to the small-cap levels below $2. (WM might have been a focus of this piece, but for its takeover by Morgan.)
The recent history of American International Group (NYSE: AIG, Stock Forum), the beleaguered financial services and insurance firm trading under its acronym of AIG, is well documented. Its price has retreated to small-cap levels, around the $1.25 mark on September 16, after surmounting $70 in September 2007. By the end of the month, AIG had wiped enough egg off its face to rally just below $4, something to arouse small-cap investors, who see light at the end of a long tunnel for this former behemoth.
AIG, taken over by the U.S. government the previous week, plans to sell businesses to repay an $85-billion government credit line. Its former chief executive officer, Maurice “Hank” Greenberg, who said Sept. 16 he was considering buying AIG units, may face less scrutiny from the New York Insurance Department with a stake of less than 10%. Greenberg, who ruled the AIG roost for nearly 40 years, had sold as many as 40 million AIG shares in recent months. The value of the stake he controls declined by more than $5 billion in September as the insurer was overwhelmed by losses tied to the U.S. housing market.
Certainly, it’s a deep hole out of which to climb. The last fiscal year, which ended in June for AIG, noted a loss of $15.3 million ($6.04 a share), on revenues of more than $82 million; a stark contrast from the untroubled days of fiscal 2007, when revenue neared $121 million, and profit exceeded $16 million ($6.14 per share).
The proud and the mighty have tumbled, but as the Congressional tug of war over the bailout continued, smaller lenders took their share of lumps over the last trading month. Cleveland-based regional bank National City Corporation (NYSE: NCC, Stock Forum) shed nearly 30% of its value on October 6 alone, to levels around $2.40, leading the banking sector lower that day. NCC’s 52-week high registered above $27 as October 2007 dawned.
Ironically, National City was in a buying mood of its own at this time last year, picking up the assets of MAF Bancorp, out of Chicago and Milwaukee, following on the heels of its purchase of Florida-based Fidelity Bankshares, and before that, Harbor Florida Bancshares. The previous year saw NCC pick up St. Louis-headquarter Forbes First Financial Corporation.
National City, boasting more than $100 billion in assets, has as its core businesses commercial and retail banking, mortgage financing and servicing, consumer finance and asset management, much of its in the Midwest. How much of the mortgage meltdown has affected NCC’s bottom line will likely be revealed in October, via conference call, when its third-quarter financial results are released.
NCC remains confident in its future, and it’s that kind of confidence that may catch the eye of smaller-cap investors who may be interested in latching onto that future when this storm blows over. Nor is the damage limited to south of the 49th parallel. Canadian investors felt the fallout over the last few weeks, where the S&P/TSX index alone had days when it was down over 1,000 points. It must have been particularly unnerving for politicians in Canada’s governing Conservative Party, who watched a surplus evaporate in two-and-a-half short years in office, leading some to question whether Prime Minister Stephen Harper was effectively shepherding the economy.
Burlington, Ontario-based Copernican International Financial (TSX: T.CIR, Stock Forum) has had difficulty of late coping with the winds of change, but investors casting their nets for something diversified and flexible may find this little stock attractive. Indeed, those behind this financial services community, which provides exposure to the world’s leading retail banks, life insurance and investment management companies, note that its price may have bottomed out in mid-September at $1.32 Canadian, after achieving a price of $8.25 Canadian last October – hardly champagne and caviar territory, but too rich for the blood of small-cap investors. The price was around the $1.55 Canadian mark as October started up.
CIR is still in its infancy - it hadn’t even come into being until the winter of 2007 – but its first year saw the company achieve assets topping $132 million, even to the point of paying out dividends of 43 cents per share as a New Year gift to its initial investors. While total revenue surpassed $3.7 million, positive earnings are a function of the soundness of the companies in which CIR invests. CIR has nearly eight million shares outstanding, and trading in recent days has consistently been in six figures.
The last small-cap in this sector to which we turn is Pinetree Capital (TSX: T.PNP, Stock Forum), a bargain-basement issue at 78 cents on October 6. This company, which calls Toronto home, gazed out over the investment community from a perch of $7.35 last November, before being swept up in the general market hysteria.
Pinetree is a diversified investment and merchant-banking firm focused on the small-cap market. However, rather than cast its nets too wide, Pinetree invests primarily in the still solid resources sector, most notably uranium, oil and gas, precious and base metals.
PNP is also boldly ignoring the doom and gloom that bedevils many financial services stocks. When it appeared all hell was about to break loose on the markets, Pinetree went a-buying, picking up two million shares of rival Vesta Capital, following its purchase of 14.5 million shares of Mega Moly, a mining company specializing in the production of molybdenum, and a $1-million debenture in Nearctic Nickel Mines to be converted into common shares and warrants.
The latter two companies are convinced they’ll be able to weather the storm, however long and severe, and that smaller investors will join them on the ride away from the disaster. While the jury is still out on AIG, there appears enough resolve in the upper echelons of the smaller NCC to spark confidence in investors whose gaze is not quite so high.
The Chinese word for “crisis” is reportedly written with two characters: one meaning “danger”, the other meaning “opportunity”. The survivors of this crisis are the companies who meet this danger courageously and sagely, and can then take advantage of the opportunities that result.
