One on One with Richard Bove, Bank Analyst at Ladenburg Thalmann
Thursday, September 18, 2008
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SUSIE GHARIB: Joining us now to talk more about latest developments in the financial sector, Richard Bove, bank analyst at Ladenburg Thalmann. Hi, Dick.
RICHARD BOVE, BANKING ANALYST, LANDENBURG THALMANN: Hi, Susie.
GHARIB: Well, you heard our report about a possible comprehensive rescue plan by the government. Could this be the answer to clean up the banks and the bad assets on their books?
BOVE: Yes, I think it could. I think that basically speaking what we need is something to assure investors in banks or other financial institutions that the quality of the assets held by these institutions is sound. And in order to show them that the quality of the assets are sound, we have to have a buyer. And if it's going to be the RTC II, so to speak or if it's going to be some other government mechanism, I think that will do the trick. Because, you know, this cliche that everything is toxic out there, I just think is dead wrong. Bank stocks soared today. And a number of the stocks that we are recommending hit 52-week highs.
GHARIB: There was a lot of attention about Morgan Stanley (MS) and that it's in -- reportedly talking with Wachovia. We know that Wachovia has its own set of problems. Does that linkup make any sense if this were to happen?
BOVE: No, it makes no sense whatsoever. And therefore it will not happen. The reason why it makes no sense whatsoever is because Morgan Stanley has leverage of 30 to 1 to common equity. Wachovia has leverage of 12 to 1 to common equity. If you put the two firms together, Wachovia would have to, so to speak, do the mother of all capital raises. So it's just never going to happen.
GHARIB: Dick, you were on our program last week, and I asked you about the future of Lehman Brothers (LEH). And you said that it would survive and it would be around for a long time, something like 50 years. Well, given what happened to Lehman and Merrill (MER), when you look at Morgan Stanley and Goldman Sachs (GS), are they going to be forced into merger partners whether they like it or not?
BOVE: Well, the fact is that if you took a look at Lehman, basically in the third quarter they had $3.5 billion in revenues, and $600 million in pre-tax profits from their operations. From the markdowns of the securities that they held, they came in with this horrendous loss. And that is the core issue, because if there is a belief that the assets of these companies are basically all valueless, then the people who provide liquidity to the firms will take their money away. And that's what is happening to Morgan Stanley and Goldman Sachs. If they believe that these assets had any value, they would continue to provide the liquidity and these firm would stay forever.
GHARIB: What about Washington Mutual (WM)? It looks like nobody wants to buy it.
BOVE: Yes, because Washington Mutual does have too many problems. It has, you know, an overwhelming amount of troubled loans on its balance sheet. And in that case, the government has no choice, because FDIC insurance forces the government to step in to back up the $181 billion in deposits. And the fact that the Washington Mutual has borrowed $58 billion from the Federal Home Loan Bank, mostly in San Francisco, means that the government has to step up and protect that also. So in Washington Mutual's case, there is going to be an assisted acquisition whereby the government goes into a partnership with a private company to try and share what the losses might be.
GHARIB: These are complicated times. Thank you, Dick, for coming and on and giving us your views.
BOVE: Thank you, Susie.
GHARIB: My guest tonight, Richard Bove, bank analyst at Ladenburg Thalmann.
