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Economy

How many banks are too big to fail?

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Week in review 042009 – 042509

According to Obama administration‘s stress test, the magic number is 19. Basically they are saying the US gov will do whatever necessary to keep the big ones afloat because they are systematically important. Or in laymen’s words, they are too big to fail. Sorry, those smaller ones, I mean not so small regional banks such as Regions Financial, SunTrust, and Keycorp.

How many banks seized by FDIC this year so far?
29 (according to CNNMoney). But this is not the point, the point is many banks are taken over by stronger ones (such as First Idaho bank branches taken over by US bank), before the seizure of FDIC. As explained in CBS 60 minutes (video) couple weeks ago, FDIC will try to sell a bank asset and deposit (secretly) when it finds the bank cannot survive. If it cannot find a buyer, then it will take over. In this case, FDIC will not run a bank forever. Like in the case of IndyMac, it sold the operations to private investors after certain period. So, the right question is, how many banks failed this year? I guess only FDIC and OTS (Office of Thrift Supervision) knows.

Who is the next Sun Microsystem
People in Barrons like to mention NetApp (Nasdaq: NTAP), I think PTC (Nasdaq: PMTC), the CAD/PDM software maker, is more likely. Like Sun, PTC was a leader in CAD industry in late 1980s/early 1990s, with its parametric modeling. But its flagship product ProEngineer has not done very well lately, due to company’s lack of investments over the years, and intense competition in the market. Like Sun Micro bought StroageTek and MySQL for no good reason except to waste precious cash, PTC did couple big deals (relative its size) in recent years too (Arbortext and MathSoft). Both PTC and Sun did a stock reverse split in recent years (note reverse split is just like stock split, it does not change anything except stock price per share).

Buffett USG stake
USG is a building material (formerly called US Gypsum) company. Buffett started buying USG stocks in late 2000 (businessweek). But he failed to sell in 2006 when it briefly exceeded (at the top of US housing market). The company had trouble to make debt interest payments as the housing and financial markets tumbled after Lehman bankrupcy in Sept 2008. The stock closed at $5.66 on Nov 20, 2008 before Buffett came to rescue on Nov 21. Last week it reported Q1 2009 earning: better than expected. The stock jumped 24% in a week.

Another interesting point is the converting price of convertible notes Buffett and Fair Fax provided on Nov 21 2008 “Assuming the notes do become convertible, they will allow Berkshire and Fairfax to convert their debt into USG stock at a price of $11.40 a share.” (source: Chicago Tribune)

Reference:
Wiki: USG Corp
Seekingalpha

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