The universe of publicly-traded companies continues shrinking and the IPO pipeline remains sluggish despite U.S. stock market indexes moving relentlessly higher in recent years. Both are important issues that we'll explore in depth soon. In the meantime, that hardy perennial Dole Food Company filed for an IPO this spring, apparently aiming to go public this fall. Fresh out of Harvard's School of Horticulture & Agriculture, James Dole in 1899 moved to Hawaii and within two years founded the Hawaiian Pineapple Company (HAPCO) to grow pineapples on Oahu; the enterprise ultimately evolved into today's Dole Food Company, the largest producer of fruit and vegetables in the world.
Dole Food Co. actually traces its history back to 1851, when the trading company Castle & Cooke (C&C) was established in Hawaii by Samuel Castle and Amos Cooke, both originally from Boston. C&C eventually became one of the Big Five companies that dominated sugarcane growing and processing in the Territory of Hawaii during the early 20th century. In 1930, C&C acquired a 21% interest in HAPCO, which had successfully promoted its pineapples via American magazine advertisements in one of the first nationwide advertising campaigns; only in 1933 did the company start stamping "DOLE" on cans of pineapples and pineapple juice.
In 1961, C&C purchased the remaining shares of HAPCO and also acquired Columbia River Packers, which was renamed Bumble Bee Seafoods (which was sold off in 1985). In two tranches, 1964 and 1968, it acquired the Standard Fruit Company, a major grower and distributor of bananas and other tropical fruit. (Standard Fruit and other fruit companies from the U.S. famously wielded outsized influence in Latin America throughout much of the 20th century.) In 1976, C&C acquired Bud Antle Inc., a large California-based lettuce and celery grower.
After experiencing financial difficulties in the ensuing years, in 1985 C&C merged with Flexi-Van Corp., a NYSE-traded transportation leasing company controlled by David Murdock, who became CEO of the combined entity, which retained the C&C name. In 1991, shareholders approved changing the company's name to Dole Food and in 1995 spun off to shareholders C&C, its subsidiary that owned and developed real estate. Garnering headlines worldwide, C&C in 2012 sold 98% of the total acreage on Lanai, the sixth largest of the Hawaiian islands, to Larry Ellison, the founder and then-CEO of Oracle Corp. (ORCL), for $300 million; until 1992, the island had been home of one of the world's largest pineapple plantations, but which was no longer viable due to overseas producers driving down prices.
Since the turn of the century, the company has continued to expand the
depth and breadth of its product line through acquisition, absorbing JR Wood (frozen fruit
products) and Coastal Berry (strawberries and bushberries) in 2004, SunnyRidge Farm (mainly blueberries) in 2011, Mrs. May's Naturals (healthy snacks) in 2012 and Chile's TucFrut Farms (apples, blueberries and kiwifruit) in 2016. Among its divestitures, the company in 2012 sold its worldwide packaged foods and Asia fresh produce businesses to Japan's Itochu Corp. for $1.7 billion in cash, which was applied to paying down debt. Dole now operates plantations throughout Central and South America and in the Asia-Pacific region, including on the Hawaiian island of Oahu.
A venerable institution in his own right, the nonagenarian Mr. Murdock this spring disclosed his intention to take the company public for the third time. And since he expects to live to 125, this may not be the last round-trip for Dole Food Co. under his stewardship. To spread his vision of the benefits of a plant-based diet, Mr. Murdock continues to fund a major research institute dedicated to the "advancement of nutrition, agriculture and human health." He's not afraid to dole out advice on longevity, as one wag put it.
On June 5, 1964, Dole Food's predecessor Castle & Cooke, then the largest company in Hawaii, went public, trading on the New York Stock Exchange under the ticker symbol CKE. The New York Times noted that it was best known for food products such as Dole pineapple products, Bumble Bee seafoods and Royal Hawaiian macadamia nuts, but also had interests in land development, shipping, merchandising, insurance and a cemetery.
It wasn't until 2003 that Mr. Murdock, then the chairman and CEO of Dole Food, won shareholder approval (with a 77% "FOR" vote) to purchase the 76% of the company shares he did not already own for $33.50, plus the assumption of approximately $1 billion in debt, for a total enterprise value (including the debt assumed) of approximately $2.5 billion. Mr. Murdock explained at the time that taking the company private would allow him to expand Dole's operations around the globe and develop new products without having to answer to investors. Moreover, "[i]t takes capital and we will be spending capital to teach people how to eat," Mr. Murdock said at the time.
On October 23, 2009, Dole Food went public for the second time, raising $446 million. Below the estimated range of $13-15, the shares priced at $12.50 giving the company a market capitalization of approximately $1.1 billion; the shares closed at $12.28, down 1.7% that day. The depressed opening price and subsequent trading were attributed to concerns over the company's heavy debt load of $2 billion, which the proceeds of the offering were intended to pay down.
On August 12, 2013, Dole Food announced signing an agreement by which Mr. Murdock would purchase the 60% of the company's shares he did not already own for $13.50 in cash each, placing the total enterprise value (including the assumption of debt) at approximately $1.6 billion. The company's press release stated that the price represented an increase of $1.50 per share over Mr. Murdock's original proposal, and a premium of 32% over the $10.20 per share price immediately prior to such proposal. When proposing the takeover, Mr. Murdock wrote to the board: "Operating Dole Food Company as a private enterprise is the best alternative given the public-market focus on short-term earnings and predictable quarterly results. This will give the company greater flexibility to make investment and operating decisions based on long-term strategic goals."
Although 62% of disinterested shareholders voted "FOR" the deal in October, certain shareholders filed suit against the company, Mr. Murdock and C. Michael Carter, COO and general counsel, in the Court of Chancery of Delaware, where the company is incorporated, alleging that the buyout price was too low. Having lost at trial, the company and the executives settled the litigation with shareholders for $115 million at the end of 2015. Dole reincorporated from Hawaii to Delaware in 2001 and Mr. Murdock is not the first executive to express dissatisfaction with the latter state's inhospitality to business (a contention we'll delve into one day soon). In March of this year, the company and the executives settled for $74 million separate litigation in federal court with shareholders who accused them of providing "false, negative information designed to artificially depress the price of Dole's common stock."
On April 24, 2017, the company filed with the SEC a registration statement on Form S-1 for an initial public offering. Although the filing indicates that the company will raise $100 million (likely as a placeholder in the document), Bloomberg reports that the company is seeking to raise about $400 million. According to the S-1, the company will use the proceeds of the offering to pay down indebtedness, which stood at $2.5 billion at December 31, 2016. For the year, the company showed a net loss of $23 million on $4.5 billion in revenues. While Mr. Murdock remains chairman of the board, Johan Lindén, who had held various management positions in the company's European operations, was named president and CEO earlier in April.
For the prospective investor, there's plenty of - even recent - history
to unpack before trying to get in on the IPO. If IPOs are rather scarce
these days and some execs find
running a public company disadvantageous, Mr. Murdock seems to have no
qualms entering the public arena again. Perhaps Dole Food's public
offering could enliven the IPO market while bucking the trend of U.S. companies opting out of the publicly-traded realm.
Robert Stead
Thursday, July 27, 2017
Tuesday, July 18, 2017
Revamped banks sailing into stormy seas?
Following up on our recent post on major banks' capital allocation plans all passing muster for the first time since the imposition of Fed-administered stress tests, let's try put in perspective how far these financial institutions have come since the depths of the financial crisis almost a decade ago. Clearing this hurdle, individually and collectively, happens perhaps not a moment too soon in light
of JPMorgan Chase (JPM) CEO Jamie Dimon's recent ominous comments on the changing terrain looming for these companies.
On July 11, at the Europlace International Financial Forum in Paris, Mr. Dimon, chairman and chief executive of the largest bank in the U.S., expressed concern that the Federal Reserve's unfolding plan to unwind it bond-buying programs, otherwise known as "quantitative easing", or QE, might not go as smoothly as many anticipate. Last month, the Fed announced that it would soon start selling some of its portfolio of $4.5 trillion of treasury bonds, $3.5 trillion of which has been amassed in several rounds starting late in 2008.
"We've never had QE like this before, we've never had unwinding like this before," said Mr. Dimon at the conference. "Obviously that should say something to you about the risk that might mean, because we've never lived with it before." All the main buyers of sovereign debt over the last ten years, i.e., financial institutions, central banks and foreign exchange managers, will become net sellers, Mr. Dimon noted. "When that happens of size and substance, it could be a little more disruptive than people think," Mr. Dimon continued. "We act like we know exactly how its going to happen and we don't" Central banks aim to provide certainty but you "cannot make things certain that are uncertain."
Of course, it is no coincidence that QE started a month or so after the passage of the legislation that authorized $700 billion to purchase "troubled" assets via the Troubled Asset Relief Program (TARP). Both were intended, in large part, to stabilize the critical financial sector. While QE boosted liquidity in the economy in part to promote lending, TARP was intended to shore up the balance sheets of financial institutions of all sizes. The initial proposal to purchase "troubled" assets, mainly mortgage-backed securities containing subprime mortgages, quickly gave way to the plan to purchase preferred shares in banking companies (coupled with warrants to purchase their common shares as an equity kicker) due the complexity of pricing the target assets and the need for expedience under the dire circumstances.
Some major financial institutions only reluctantly got with the program, so to speak. Having quipped that there's no "A, R or P" in the government's Troubled Asset Relief Program, U.S. Bancorp (USB) CEO Richard Davis went on to say back in February 2009 that "[w]e were told to take it so that we could help Darwin synthesize the weaker banks and acquire those and put them under different leadership." In June of the same year, BB&T (BBT) chairman John Allison said "[i]t was a huge rip-off for us," complaining that the bank was paying 9% on the TARP funds that "we didn't want in the first place." Because "TARP contributed to an unnecessary panic in the marketplace that still hasn't been fully restored[,...t]he decision by the U.S. Treasury and the Federal Reserve in October 2008 to make the banks take TARP money even if they didn't want it or need it was one of the worst economic decisions in the history of the United States," contended former Wells Fargo (WFC) CEO Dick Kovacevich at the Stanford Institute for Economic Policy Research in June of 2012.
Bank of NY-Mellon CEO Robert Kelly, on the other hand, asserted that TARP "helped avert a global calamity." To be sure, many banks of varying size were in dire need of the capital infusion to keep the doors open. The Treasury Department distributed a total of $313 billion in capital to financial institutions through these initiatives. The government came out ahead on TARP and the separate support of Citigroup (C) and Bank of America (BAC), showing a net gain of $24 million. The Congressional Budget Office (CBO) reported in June that, overall, TARP is in the red to the tune of $33 billion, owing mainly to losses on assistance for American International Group (AIG), the automotive industry and mortgage programs.
American Express' (AXP) TARP preferred stock and warrants provide an example of a profitable transaction for the Treasury. In June of 2009, the company repaid the $3.39 billion it had received for issuing the previous January preferred stock carrying a 5% annual interest rate; it had also paid $74.4 million in accrued interest. A month later, the company agreed to repurchase the associated warrants held by the Treasury for $340 million. All told, the Treasury's return on investment was over 12%.
Less than a year after receiving the funds, Bank of America finished repaying the U.S. Treasury $45 billion after having paid $2.54 billion in dividends on the preferred stock. In connection with this repayment late in 2009, the company issued Common Equivalent Securities, which subsequently required it to seek shareholder approval to increase BAC's authorized shares outstanding from 10 to 11.3 billion, eliciting some opposition due to shareholder dilution. Because the company and the government could not agree on price, the Treasury Department auctioned off the associated warrants for $1.54 billion, bringing its total return on the BAC capital infusion to 9%.
The table below lays out the TARP principal disbursements to each of the 34 major financial institutions recently given a clean bill of health by the Fed. The eight institutions below that received no funds via TARP are U.S. subsidiaries of foreign entities, and thus were not eligible for this program. However, several of the institutions, e.g., HSBC, benefited significantly from other Fed funding. CIT Group, which emerged from bankruptcy in 2013, was the only recipient in this group that was unable to redeem the preferred stock and repay the Treasury. If Mr. Dimon is correct that the normalization of Fed policy, i.e, shrinking its balance sheet along with lifting interest rates, means that banking sector is heading into uncharted - and perhaps rough - waters, then the stabilization of its flagship institutions comes at an opportune time.
Named CEO of Bank One in 2000 and then JPMorgan in 2005, the estimable Mr. Dimon has sounded a warning to the financial sector - and perhaps to the nation as a whole - that "the tide is going out;" only then, his friend Berkshire Hathaway (BRK.A) CEO Warren Buffett has observed, do you "find out who is swimming naked."
Robert Stead
* In June 2011, completed acquisition of Marshall & Isley, which had received TARP funds.
On July 11, at the Europlace International Financial Forum in Paris, Mr. Dimon, chairman and chief executive of the largest bank in the U.S., expressed concern that the Federal Reserve's unfolding plan to unwind it bond-buying programs, otherwise known as "quantitative easing", or QE, might not go as smoothly as many anticipate. Last month, the Fed announced that it would soon start selling some of its portfolio of $4.5 trillion of treasury bonds, $3.5 trillion of which has been amassed in several rounds starting late in 2008.
"We've never had QE like this before, we've never had unwinding like this before," said Mr. Dimon at the conference. "Obviously that should say something to you about the risk that might mean, because we've never lived with it before." All the main buyers of sovereign debt over the last ten years, i.e., financial institutions, central banks and foreign exchange managers, will become net sellers, Mr. Dimon noted. "When that happens of size and substance, it could be a little more disruptive than people think," Mr. Dimon continued. "We act like we know exactly how its going to happen and we don't" Central banks aim to provide certainty but you "cannot make things certain that are uncertain."
Of course, it is no coincidence that QE started a month or so after the passage of the legislation that authorized $700 billion to purchase "troubled" assets via the Troubled Asset Relief Program (TARP). Both were intended, in large part, to stabilize the critical financial sector. While QE boosted liquidity in the economy in part to promote lending, TARP was intended to shore up the balance sheets of financial institutions of all sizes. The initial proposal to purchase "troubled" assets, mainly mortgage-backed securities containing subprime mortgages, quickly gave way to the plan to purchase preferred shares in banking companies (coupled with warrants to purchase their common shares as an equity kicker) due the complexity of pricing the target assets and the need for expedience under the dire circumstances.
Some major financial institutions only reluctantly got with the program, so to speak. Having quipped that there's no "A, R or P" in the government's Troubled Asset Relief Program, U.S. Bancorp (USB) CEO Richard Davis went on to say back in February 2009 that "[w]e were told to take it so that we could help Darwin synthesize the weaker banks and acquire those and put them under different leadership." In June of the same year, BB&T (BBT) chairman John Allison said "[i]t was a huge rip-off for us," complaining that the bank was paying 9% on the TARP funds that "we didn't want in the first place." Because "TARP contributed to an unnecessary panic in the marketplace that still hasn't been fully restored[,...t]he decision by the U.S. Treasury and the Federal Reserve in October 2008 to make the banks take TARP money even if they didn't want it or need it was one of the worst economic decisions in the history of the United States," contended former Wells Fargo (WFC) CEO Dick Kovacevich at the Stanford Institute for Economic Policy Research in June of 2012.
Bank of NY-Mellon CEO Robert Kelly, on the other hand, asserted that TARP "helped avert a global calamity." To be sure, many banks of varying size were in dire need of the capital infusion to keep the doors open. The Treasury Department distributed a total of $313 billion in capital to financial institutions through these initiatives. The government came out ahead on TARP and the separate support of Citigroup (C) and Bank of America (BAC), showing a net gain of $24 million. The Congressional Budget Office (CBO) reported in June that, overall, TARP is in the red to the tune of $33 billion, owing mainly to losses on assistance for American International Group (AIG), the automotive industry and mortgage programs.
American Express' (AXP) TARP preferred stock and warrants provide an example of a profitable transaction for the Treasury. In June of 2009, the company repaid the $3.39 billion it had received for issuing the previous January preferred stock carrying a 5% annual interest rate; it had also paid $74.4 million in accrued interest. A month later, the company agreed to repurchase the associated warrants held by the Treasury for $340 million. All told, the Treasury's return on investment was over 12%.
Less than a year after receiving the funds, Bank of America finished repaying the U.S. Treasury $45 billion after having paid $2.54 billion in dividends on the preferred stock. In connection with this repayment late in 2009, the company issued Common Equivalent Securities, which subsequently required it to seek shareholder approval to increase BAC's authorized shares outstanding from 10 to 11.3 billion, eliciting some opposition due to shareholder dilution. Because the company and the government could not agree on price, the Treasury Department auctioned off the associated warrants for $1.54 billion, bringing its total return on the BAC capital infusion to 9%.
The table below lays out the TARP principal disbursements to each of the 34 major financial institutions recently given a clean bill of health by the Fed. The eight institutions below that received no funds via TARP are U.S. subsidiaries of foreign entities, and thus were not eligible for this program. However, several of the institutions, e.g., HSBC, benefited significantly from other Fed funding. CIT Group, which emerged from bankruptcy in 2013, was the only recipient in this group that was unable to redeem the preferred stock and repay the Treasury. If Mr. Dimon is correct that the normalization of Fed policy, i.e, shrinking its balance sheet along with lifting interest rates, means that banking sector is heading into uncharted - and perhaps rough - waters, then the stabilization of its flagship institutions comes at an opportune time.
Named CEO of Bank One in 2000 and then JPMorgan in 2005, the estimable Mr. Dimon has sounded a warning to the financial sector - and perhaps to the nation as a whole - that "the tide is going out;" only then, his friend Berkshire Hathaway (BRK.A) CEO Warren Buffett has observed, do you "find out who is swimming naked."
Robert Stead
| Institution | Investment |
| Ally | $17,200,000,000 |
| American Express | $3,390,000,000 |
| BankWest | |
| Bank of America | $45,000,000,000 |
| Bank of NY-Mellon | $3,000,000,000 |
| BB&T | $3,100,000,000 |
| BBVA Compass | |
| BMO * | $1,700,000,000 |
| Capital One | $3,570,000,000 |
| CIT | $2,330,000,000 |
| Citigroup | $45,000,000,000 |
| Citizens | |
| Comerica | $2,250,000,000 |
| Deutsche Bank Trust Co. | |
| Discover | $1,200,000,000 |
| Fifth Third | $3,400,000,000 |
| Goldman Sachs | $10,000,000,000 |
| HSBC | |
| Huntington | $1,400,000,000 |
| JPMorgan Chase | $25,000,000,000 |
| Keycorp | $2,500,000,000 |
| M&T | $750,000,000 |
| Morgan Stanley | $10,000,000,000 |
| MUFG Americas | |
| Northern Trust | $1,576,000,000 |
| PNC | $7,600,000,000 |
| Regions | $3,500,000,000 |
| Santander | |
| State Street | $2,000,000,000 |
| SunTrust | $4,850,000,000 |
| TD Group | |
| U.S. Bancorp | $6,600,000,000 |
| Wells Fargo | $25,000,000,000 |
| Zions | $1,400,000,000 |
| TOTAL | $233,316,000,000 |
Monday, July 10, 2017
Corp exec latest nominated for Trump Admin.
President Trump nominated Janet Dhillon to chair the Equal Employment Opportunity Commission (EEOC), the forceful federal agency that administers and enforces civil rights laws against workplace discrimination. Ms. Dhillon is currently Executive Vice President and General Counsel of Burlington Stores (BURL) and previously was EVP and GC of J.C. Penney Co. (JCP) and SVP and GC of US Airways Group, which merged with American Airlines (AAL) in 2013. She is the latest corporate executive nominated to serve in the Trump Administration. Secretary of State Rex Tillerson, former CEO of ExxonMobile (XON), and Small Business Administration (SBA) Administrator Linda McMahon, former CEO of World Wrestling Entertainment (WWE), are among the most well-known execs who have joined Mr. Trump's cabinet, although the EEOC chair ranks just below the cabinet-level.
According to Bloomberg, Sen. Lamar Alexander (R- TN), chairman of the Health, Labor and Pension Committee, said that he's "hopeful" the nominee "will help restore" the agency to "its core mission of protecting American workers from discrimination." In general, the corporate community continues to anticipate that the Trump administration will usher in an improved business climate, manifested by tax reform, deregulation and a massive infrastructure plan. Treasury Secretary Steve Mnuchin is leading the effort to pass a package of business and personal tax cuts, which he hopes can get done this year. In 2009, after leading the investor group that purchased failed IndyMac Bank from the Federal Deposit Insurance Corp., Mr. Mnuchin became CEO of OneWest Bank, the new name for the bank. In 2015, Mr. Mnuchin became vice chairman and board member of CIT Group (CIT), upon the $3.4 billion acquisition of OneWest by the financial holding company. When nominated, Mr. Mnuchin also stepped down as a director of Sears Holdings Corp. (SHLD) and as CEO of Dune Entertainment, a private company that finances Hollywood films.
Meantime, Transportation Secretary Elaine Chao is working on formulating a $1 trillion infrastructure plan that relies heavily on public-private partnerships. Ms. Chao formerly served as CEO of United Way, a worldwide nonprofit network of community service organizations, and has been a member of the boards of directors of C.R. Bard (BCR), Clorox Co. (CLX), Dole Food Co. (DOLE, prior to being taken private by CEO David Murdock), HCA Healthcare (HCA), Ingersoll-Rand (IR), Lotus Development (prior to its acquisition by IBM), Millipore Corp. (prior to its acquisition by Germany's Merck), News Corp. (NWSA), Northwest Airlines (prior to its acquisition by Delta), Protective Life Insurance (prior to its acquisition by Dai-ichi Life), Raymond James Financial (RJF), Twenty-first Century Fox (FOXA), Vulcan Materials (VMC) and Wells Fargo & Co. (WFC). It could be edifying to track an index or ETF comprised entirely of companies on whose boards Ms. Chao has served.
Just today, the Senate confirmed Neomi Rao as Administrator of Office of Information and Regulatory Affairs, a role otherwise known as the regulatory czar. OIRA, part of the Office of Management and Budget (OMB), is often referred to as the "most important office you never heard of" because it must review all significant regulations issued by all federal agencies before they become legally binding on the citizenry, in essence the "cockpit" of the regulatory state. Since 2006, Ms. Rao has been an associate professor of law at George Mason University and director of its Center for the Study of the Administrative State.
Ms. Rao is expected to spearhead the administration's drive to overhaul the regulatory environment for American business. "I applaud my colleagues in the Senate for confirming Professor Rao's nomination," said Sen. Ron Johnson (R-WI), chairman of the Senate Homeland Security and Governmental Affairs Committees, in a statement. "We can all agree that federal regulations should achieve their aim without imposing unnecessary costs on the country's economy and job creators. I look forward to working with Professor Rao to reduce the burden of regulations - by our estimates as high as $2 trillion a year - that weigh on the American economy."
Although her confirmation, by a 54-41 vote largely along party lines, was never in doubt, Senator Elizabeth Warren (D- MA) strongly objected to her suitability for the job. "If confirmed, Professor Rao will be perfectly positioned to put her theories into practice," Sen. Warren said. "She will head the Trump administration's efforts to toss out the rules that big businesses don't like." Sen. Warren's position could have been swayed by a coalition of consumer, small business, labor, good government, financial protection, community, health, environmental, civil rights and public interest groups that wrote to urge the committee chairman and ranking member, Sen. Claire McCaskill (D- MO), to vote against Ms. Rao's confirmation. The coalition contends that '[t]he Trump Administration has taken a strong deregulatory stance and used their selection of individuals, such as Scott Pruitt as the Environmental Protection Agency (EPA) Administrator, Betsy DeVos as the Secretary of Education and Ajit Pai as the Federal Communications Commission (FCC) Chairman, who are actively hostile to the missions of the agencies they run to start the roll back of public protections from within [...and that P]rofessor Rao's nomination to head OIRA is another piece of the Trump deregulatory agenda."
The degree to which the administration will achieve its overarching aims, i.e., tax reform, deregulation, and infrastructure modernization, and the time line to do so, remains to be seen. Although the President last month touted the "just-about record-setting pace" his administration has set, the sluggish rate of staffing it has surely hindered the implementation of its agenda so far. By May 20th, President Trump had sent only 94 nominees to Capitol Hill, 35 of whom had been confirmed by the Republican-controlled Senate. At a similar stage of Barack Obama's first term, the Democrat-controlled Senate had confirmed 130 of the 219 of the nominees sent its way. There are over 550 key positions requiring Senate confirmation. To enable governance, some Republican senators have suggested installing temporary or "acting" officials who could serve without Senate approval for up toe 210 days or, in some cases, for up to 420 days, per the Congressional Research Service. Sen. James Inhofe (R-OK) believes that temporary appointees may be more willing to implement Mr. Trump's ambitious agenda than more moderate appointees who would be able to withstand the scrutiny of the Senate confirmation process.
Since it has lately picked up the nomination pace, there's no indication at this point that the Trump administration intends to embark on such a course. By the end of June, Mr. Trump had formally submitted 178 nominees for Senate consideration, 46 of whom had been confirmed. On average, the Senate has taken 43 days to confirm candidates from formal receipt of their nominations, a longer period than for the previous four presidents. Perhaps part of the explanation for the slow pace is that the Trump administration is selecting candidates from a broader pool than was the case for the Obama administration.
Back in 2009, at the outset of the Obama administration, Michael Cembalest, J.P. Morgan Asset Management's chief investment officer analyzed the composition of presidential cabinets dating back to 1900 when the Secretary of Commerce position was created. He assessed the prior private-sector experience of all 432 cabinet members, focusing on those positions most pertinent in this regard: Secretaries of State; Commerce; Treasury; Agriculture; Interior; Labor; Transportation; Energy; and Housing & Urban Development. Many of the individuals filling these positions, he notes, started a company or ran one, with first-hand experience in hiring and firing, domestic and international competition, red tape, recessions, wars and technological change. Their industries included agribusiness, chemicals, finance, construction, communications, energy, insurance, mining, publishing, pharmaceuticals, railroads and steel - a cross section of American commercial activity. His analysis makes clear that the Obama administration, compared with past Democratic and Republican ones, marked a departure from the traditional reliance on a balance of public- and private-sector experience.
Mr. Cembalest pointed out that it was no surprise at the time that private-sector engagement struck some as pointless, if not counterproductive. The prevailing sentiment was captured by one of Treasury Secretary Tim Geithner's deputies: "Why would we consult the very executives who got us into this mess?" With his trademark combative flair, House Financial Services Committee Chairman Barney Frank added: "The private sector got us into this mess. The government has to get us out of it." Mr. Cembalest conceded that, to a large extent, this cynicism was a byproduct of the colossal mismanagement of many financial and automotive firms. Nevertheless, mainly because critical U.S. job creation would have to come from the private sector Mr. Cembalest saw as detrimental the shortage of private sector experience in the Obama administration, i.e., 21% versus 52% for the G.W. Bush administration and 46% for the Clinton administration. The Trump cabinet registers approximately 50% on the private-sector scale.
The Trump administration has sketched out promising policies for improving the business climate for corporate America, which would perhaps boost lagging GDP growth over time. Despite the slow pace of staffing the administration, there has been an uptick in appointees with private-sector experience, and specifically publicly-traded company executives, who bring to the table their perspective on policy making. In lieu of legislation, President Trump has aggressively issued executive orders advantageous to certain commercial interests, e.g., directives to advance oil pipeline construction and to reconsider automobile fuel standards. Moreover, on January 30, the President signed Executive Order 13771 requiring that two regulations be eliminated for every new one issued by federal departments or agencies; as yet, there's no known instance of this so-called 2-for-1 order put into practice. At this point, however, a clear-eyed assessment reveals minimal headway made on broader policy objectives important to corporate America.
Robert Stead
According to Bloomberg, Sen. Lamar Alexander (R- TN), chairman of the Health, Labor and Pension Committee, said that he's "hopeful" the nominee "will help restore" the agency to "its core mission of protecting American workers from discrimination." In general, the corporate community continues to anticipate that the Trump administration will usher in an improved business climate, manifested by tax reform, deregulation and a massive infrastructure plan. Treasury Secretary Steve Mnuchin is leading the effort to pass a package of business and personal tax cuts, which he hopes can get done this year. In 2009, after leading the investor group that purchased failed IndyMac Bank from the Federal Deposit Insurance Corp., Mr. Mnuchin became CEO of OneWest Bank, the new name for the bank. In 2015, Mr. Mnuchin became vice chairman and board member of CIT Group (CIT), upon the $3.4 billion acquisition of OneWest by the financial holding company. When nominated, Mr. Mnuchin also stepped down as a director of Sears Holdings Corp. (SHLD) and as CEO of Dune Entertainment, a private company that finances Hollywood films.
Meantime, Transportation Secretary Elaine Chao is working on formulating a $1 trillion infrastructure plan that relies heavily on public-private partnerships. Ms. Chao formerly served as CEO of United Way, a worldwide nonprofit network of community service organizations, and has been a member of the boards of directors of C.R. Bard (BCR), Clorox Co. (CLX), Dole Food Co. (DOLE, prior to being taken private by CEO David Murdock), HCA Healthcare (HCA), Ingersoll-Rand (IR), Lotus Development (prior to its acquisition by IBM), Millipore Corp. (prior to its acquisition by Germany's Merck), News Corp. (NWSA), Northwest Airlines (prior to its acquisition by Delta), Protective Life Insurance (prior to its acquisition by Dai-ichi Life), Raymond James Financial (RJF), Twenty-first Century Fox (FOXA), Vulcan Materials (VMC) and Wells Fargo & Co. (WFC). It could be edifying to track an index or ETF comprised entirely of companies on whose boards Ms. Chao has served.
Just today, the Senate confirmed Neomi Rao as Administrator of Office of Information and Regulatory Affairs, a role otherwise known as the regulatory czar. OIRA, part of the Office of Management and Budget (OMB), is often referred to as the "most important office you never heard of" because it must review all significant regulations issued by all federal agencies before they become legally binding on the citizenry, in essence the "cockpit" of the regulatory state. Since 2006, Ms. Rao has been an associate professor of law at George Mason University and director of its Center for the Study of the Administrative State.
Ms. Rao is expected to spearhead the administration's drive to overhaul the regulatory environment for American business. "I applaud my colleagues in the Senate for confirming Professor Rao's nomination," said Sen. Ron Johnson (R-WI), chairman of the Senate Homeland Security and Governmental Affairs Committees, in a statement. "We can all agree that federal regulations should achieve their aim without imposing unnecessary costs on the country's economy and job creators. I look forward to working with Professor Rao to reduce the burden of regulations - by our estimates as high as $2 trillion a year - that weigh on the American economy."
Although her confirmation, by a 54-41 vote largely along party lines, was never in doubt, Senator Elizabeth Warren (D- MA) strongly objected to her suitability for the job. "If confirmed, Professor Rao will be perfectly positioned to put her theories into practice," Sen. Warren said. "She will head the Trump administration's efforts to toss out the rules that big businesses don't like." Sen. Warren's position could have been swayed by a coalition of consumer, small business, labor, good government, financial protection, community, health, environmental, civil rights and public interest groups that wrote to urge the committee chairman and ranking member, Sen. Claire McCaskill (D- MO), to vote against Ms. Rao's confirmation. The coalition contends that '[t]he Trump Administration has taken a strong deregulatory stance and used their selection of individuals, such as Scott Pruitt as the Environmental Protection Agency (EPA) Administrator, Betsy DeVos as the Secretary of Education and Ajit Pai as the Federal Communications Commission (FCC) Chairman, who are actively hostile to the missions of the agencies they run to start the roll back of public protections from within [...and that P]rofessor Rao's nomination to head OIRA is another piece of the Trump deregulatory agenda."
The degree to which the administration will achieve its overarching aims, i.e., tax reform, deregulation, and infrastructure modernization, and the time line to do so, remains to be seen. Although the President last month touted the "just-about record-setting pace" his administration has set, the sluggish rate of staffing it has surely hindered the implementation of its agenda so far. By May 20th, President Trump had sent only 94 nominees to Capitol Hill, 35 of whom had been confirmed by the Republican-controlled Senate. At a similar stage of Barack Obama's first term, the Democrat-controlled Senate had confirmed 130 of the 219 of the nominees sent its way. There are over 550 key positions requiring Senate confirmation. To enable governance, some Republican senators have suggested installing temporary or "acting" officials who could serve without Senate approval for up toe 210 days or, in some cases, for up to 420 days, per the Congressional Research Service. Sen. James Inhofe (R-OK) believes that temporary appointees may be more willing to implement Mr. Trump's ambitious agenda than more moderate appointees who would be able to withstand the scrutiny of the Senate confirmation process.
Since it has lately picked up the nomination pace, there's no indication at this point that the Trump administration intends to embark on such a course. By the end of June, Mr. Trump had formally submitted 178 nominees for Senate consideration, 46 of whom had been confirmed. On average, the Senate has taken 43 days to confirm candidates from formal receipt of their nominations, a longer period than for the previous four presidents. Perhaps part of the explanation for the slow pace is that the Trump administration is selecting candidates from a broader pool than was the case for the Obama administration.
Back in 2009, at the outset of the Obama administration, Michael Cembalest, J.P. Morgan Asset Management's chief investment officer analyzed the composition of presidential cabinets dating back to 1900 when the Secretary of Commerce position was created. He assessed the prior private-sector experience of all 432 cabinet members, focusing on those positions most pertinent in this regard: Secretaries of State; Commerce; Treasury; Agriculture; Interior; Labor; Transportation; Energy; and Housing & Urban Development. Many of the individuals filling these positions, he notes, started a company or ran one, with first-hand experience in hiring and firing, domestic and international competition, red tape, recessions, wars and technological change. Their industries included agribusiness, chemicals, finance, construction, communications, energy, insurance, mining, publishing, pharmaceuticals, railroads and steel - a cross section of American commercial activity. His analysis makes clear that the Obama administration, compared with past Democratic and Republican ones, marked a departure from the traditional reliance on a balance of public- and private-sector experience.
Mr. Cembalest pointed out that it was no surprise at the time that private-sector engagement struck some as pointless, if not counterproductive. The prevailing sentiment was captured by one of Treasury Secretary Tim Geithner's deputies: "Why would we consult the very executives who got us into this mess?" With his trademark combative flair, House Financial Services Committee Chairman Barney Frank added: "The private sector got us into this mess. The government has to get us out of it." Mr. Cembalest conceded that, to a large extent, this cynicism was a byproduct of the colossal mismanagement of many financial and automotive firms. Nevertheless, mainly because critical U.S. job creation would have to come from the private sector Mr. Cembalest saw as detrimental the shortage of private sector experience in the Obama administration, i.e., 21% versus 52% for the G.W. Bush administration and 46% for the Clinton administration. The Trump cabinet registers approximately 50% on the private-sector scale.
The Trump administration has sketched out promising policies for improving the business climate for corporate America, which would perhaps boost lagging GDP growth over time. Despite the slow pace of staffing the administration, there has been an uptick in appointees with private-sector experience, and specifically publicly-traded company executives, who bring to the table their perspective on policy making. In lieu of legislation, President Trump has aggressively issued executive orders advantageous to certain commercial interests, e.g., directives to advance oil pipeline construction and to reconsider automobile fuel standards. Moreover, on January 30, the President signed Executive Order 13771 requiring that two regulations be eliminated for every new one issued by federal departments or agencies; as yet, there's no known instance of this so-called 2-for-1 order put into practice. At this point, however, a clear-eyed assessment reveals minimal headway made on broader policy objectives important to corporate America.
Robert Stead
Wednesday, July 5, 2017
No longer stressed, big banks open the vaults
Last week, the Federal Reserve released the results of its annual stress testing of bank holding companies (BHCs) and U.S. intermediate holding companies (IHCs), the latter owned by foreign entities, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Signed into law on July 21, 2010, the Dodd-Frank Act made the most significant changes to U.S. financial regulation since the regulatory reforms prompted by the Great Depression of the 1930s.
Under the framework it developed, the Fed evaluates whether financial firms with at least $50 billion in total consolidated assets are sufficiently capitalized o absorb losses during stressful conditions, while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses. Only Capital One Financial Corp. (COF) was asked to revise its plan, but the concerns were not significant enough to prevent the company from earning conditional approval pending re-submission of its filing. With that one caveat, for the first time in seven years, all 34 financial institutions' capital distribution plans, weighed in the context of financial condition, passed the test.
Once given the go-ahead, many of the financial institutions disclosed their plans to distribute capital to shareholders, delivering good news of dividend hikes, to levels not seen in a decade, and share buyback expansions. These developments drove up the aggregate market value of the biggest banks by $25 billion.
The SAP, for lack of a better acronym, was a supervisory stress-test exercise performed on the nation's 19 largest, most systematically important institutions, and was the forerunner of the Dodd-Frank Act's "supervisory stress testing" of a slightly broader group of institutions. More contentious was the CPP, which, the Fed emphasizes, was designed to bolster the capital position of viable banks of all sizes and locations, though the program heavily supported banking organizations with less than $10 billion in assets. The AGP and TIP provided assistance to two institutions, Bank of America and Citigroup. CDCI provided funding for qualified community development institutions.
For a sense of progress - and perspective - we'll be following up with a look at the capital infusions that these companies received via the CPP initiative of TARP in the form of preferred stock investments by the U.S. Treasury in the midst of last decade's financial meltdown. Meantime, apparently we can rest easier knowing that our major financial institutions have stabilized and even strengthened, capable of weathering a severe recession, as the Fed embarks on the path of policy normalization regarding interest rates and its balance sheet, which will heavily impact the banking sector.
Robert Stead
Under the framework it developed, the Fed evaluates whether financial firms with at least $50 billion in total consolidated assets are sufficiently capitalized o absorb losses during stressful conditions, while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses. Only Capital One Financial Corp. (COF) was asked to revise its plan, but the concerns were not significant enough to prevent the company from earning conditional approval pending re-submission of its filing. With that one caveat, for the first time in seven years, all 34 financial institutions' capital distribution plans, weighed in the context of financial condition, passed the test.
Once given the go-ahead, many of the financial institutions disclosed their plans to distribute capital to shareholders, delivering good news of dividend hikes, to levels not seen in a decade, and share buyback expansions. These developments drove up the aggregate market value of the biggest banks by $25 billion.
- American Express (AXP) announced increasing its quarterly dividend to 35 cents a share from 32 cents and authorizing up to $4.4 billion in share repurchases.
- Bank of America (BAC) announced increasing its quarterly dividend to 12 cents from 7.5 cents and authorizing up to $12.9 billion in share repurchases.
- Bank of New York Mellon (BK) announced increasing its quarterly dividend to 24 cents a share from 19 cents and authorizing up to $2.6 billion in share repurchases.
- Capital One (COF), while maintaining its quarterly dividend at 40 cents a share, announced authorizing up to $1.85 billion in share repurchases.
- Citigroup (C) announced increasing its quarterly dividend to 32 cents a share from 16 cents and authorizing up to $15.6 billion in share repurchases.
- CIT Group (CIT) announced increasing its quarterly dividend to 16 cents a share from 15 cents and authorizing a $225 million share buyback.
- Comerica (CMA) announced increasing its quarterly dividend to 30 cents a share from 26 cents and authorizing up to $605 million in share repurchases.
- Discover Financial Services (DFS) announced increasing its quarterly dividend to 35 cents a share from 30 cents and authorizing up to $2.23 billion in share repurchases.
- Fifth Third Bancorp (FITB) announced increasing its quarterly dividend to 16 cents a share from 14 cents and authorizing $1.161 in share repurchases.
- J.P. Morgan Chase (JPM) announced increasing its quarterly dividend to 56 cents a share from 50 cents and authorizing up to $19.4 billion in share repurchases.
- Morgan Stanley (MS) announced increasing its quarterly dividend to 25 cents a share from 20 cents and authorizing up to $5 billion in share repurchases.
- Northern Trust (NTRS) announced increasing its quarterly dividend to 42 cents a share from 38 cents and authorizing up to $750 million in share repurchases.
- PNC Financial Services Group (PNC) announced increasing its quarterly dividend to 75 cents a share from 55 cents and authorizing up to $2.7 billion in share repurchases.
- Regions Financial (RF) announced increasing its quarterly dividend to 9 cents a share and authorizing up to $1.47 billion in share repurchases.
- Santander Holdings, part of Banco Santander (ADR: SAN), which had failed the stress test previously, announced a one-time dividend of 46 cents a share.
- State Street (STT) announced increasing its quarterly dividend to 42 cents a share from 38 cents and authorizing up to $1.4 billion in share repurchases.
- SunTrust (STI) announced increasing its quarterly divided to 40 cents a share from 26 cents and authorizing a $1.32 billion stock buyback.
- U.S. Bancorp (USB) announced increasing its quarterly dividend to 30 cents a share from 28 cents and authorizing up to $2.6 billion in share repurchases.
- Wells Fargo (WFC) announced increasing its quarterly dividend to 39 cents a share from 38 cents and authorizing up to $11.5 billion in share repurchases.
The SAP, for lack of a better acronym, was a supervisory stress-test exercise performed on the nation's 19 largest, most systematically important institutions, and was the forerunner of the Dodd-Frank Act's "supervisory stress testing" of a slightly broader group of institutions. More contentious was the CPP, which, the Fed emphasizes, was designed to bolster the capital position of viable banks of all sizes and locations, though the program heavily supported banking organizations with less than $10 billion in assets. The AGP and TIP provided assistance to two institutions, Bank of America and Citigroup. CDCI provided funding for qualified community development institutions.
For a sense of progress - and perspective - we'll be following up with a look at the capital infusions that these companies received via the CPP initiative of TARP in the form of preferred stock investments by the U.S. Treasury in the midst of last decade's financial meltdown. Meantime, apparently we can rest easier knowing that our major financial institutions have stabilized and even strengthened, capable of weathering a severe recession, as the Fed embarks on the path of policy normalization regarding interest rates and its balance sheet, which will heavily impact the banking sector.
Robert Stead
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