C.M.O. 4.24.2009

Credit Market Overview
April 24, 2009

In writing this piece every day I always try to envision it from the reader’s perspective. This includes never saying things like: “Back on such and such a date we highlighted the problems with XYZ and today they went bankrupt”. Additionally, when necessary I have no qualms about taking myself to task about information that, although always well intended, I might have misinterpreted or a statistic I might have gotten wrong, even going so far as accepting grammatical help from a British friend and reader. After all, we are all just human.

With that in mind, I wrote yesterday about the widening CDS spreads and declining stock price in COF since their earnings announcement and the negative outlook proffered by their CEO when he said: “U.S. credit card charge-off rates are going cross 10% in the next couple of months, up from 8.4% in Q1.” Since I don’t give recommendations or opinions here I’m not going to climb into the stockade but I do think the COF situation requires a little more space this morning.

It would seem that in the face of what the company itself describes as “higher charge offs” in the months to come the management at COF decided to institute a $0.05 quarterly dividend yesterday. With the stock closing at $16.93 that works out to a yield of about 1.18% In the same breath it also announced that it would cut 58 employees from its credit card division. This is the same bank that sold $3.55BN worth of preferred stock and warrants which amounted to 26% of its market cap at the time to Uncle Sugar under the TARP.

I am as “free markets” oriented as the next person but something here just doesn’t seem to jive. The world is waiting on pins and needles for the Treasury’s Stress Test results; every pundit in the world is expecting unemployment in this country to cross over into double digit land and the Government has just spent the $1.197BN between the stimulus and the Omni-pork bill to stem the flood tide of out of work workers. COF itself said it expects worsening business conditions.

Even with the comment yesterday by KBW that “COF can avoid a capital raise even in an adverse scenario”, does it make sense to institute a dividend and layoff people on the same day? Evidently it does to the market place as the stock rose $2.55 or 15% yesterday while the CDS came in 13bps or 3.75%.

Isn’t this the kind of stuff that should get the boys and girls in D.C. blustering about wasting hard earned tax payer money meant to save the banks not profit the shareholders? Has COF used all of the commotion surrounding BAC’s acquisition of MER to slip by the bouncer unnoticed? Where is Barney Frank when you need him most?

Enjoy the week.

Jim Delaney