Interesting dinner last with Martin Barnes of BCA, Scott Frew of Rockingham Capital, and Chris Whalen of Institutional Risk Analytics.
Its an interesting crew: Frew has been bearish for a long time, Barnes is a recent convert to the Bear camp, and Whalen has been unapologetic about forecasting a large number of bank failures. I was the lone bull at the table, thought Frew is longer than shor these days.
I see Frew and Whalen pretty often, but not together — We don’t do this often enough, and its a fun group — we should do this more often.
One of the things we each discussed was "What is unknown by the bulk of Investors/Traders/Public."
The most interesting of the four of us was Whalen’s comments: "Read the fine print — The $250 billion bank recapitalization effectively ends divdiends. If they took the cash — and they all needed it — there are no divvies paid until the money is paid back. No common dividends, no preferred either (though they will accumulate)."
I had no idea . . .
UPDATE: October 24, 2008 5:45pm
Scott writes in:
Go to this link — http://www.ustreas.gov/press/releases/hp1207.htm
— at the bottom the Public Term Sheet.
Here’s the relevant section of the term sheet, Restrictions on Dividends:
Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.
So no dividends may be declared or paid on junior preferred, preferred ranking pari passu with the Senior Preferred, or common shares. … unless (i) in the case of cumulative Senior Preferred all past dividends are fully paid, or (ii) in the dase of the non-cumulative Senior Preferred etc etc.
Note no (iii) in the case of the common.
Pretty cut and dried. Chris is dead on here, and for the record, I knew this from Joanie’s (McCullough) work. Just so you have the full story, the next paragraph addresses common dividends, and reads as follows:
Common dividends: The UST’s consent shall be required for any increase in common dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties.
But Joanie’s take on this, with which I concur, is that it’s misdirection, an attempt to hide what’s in plain sight in the paragraph above.