Dispatch: STRS, OPERS, & money down the drain!?

From John Curry, April 23, 2008

Subject: STRS, OPERS, & money down the drain!?

National City Shareholders say bank mismanaged interests

April 23, 2008
By Mike Pramik
THE COLUMBUS DISPATCH

The decision by National City Corp. to sell a major stake to private investors might have angered the bank's shareholders, but the move was one of two distasteful choices the company had available, industry analysts said yesterday.

The Cleveland-based financial-services company, which employs nearly 1,900 people in Columbus, agreed this week to sell a $7 billion stake to a group of investors led by New York buyout firm Corsair Capital.

The deal allowed National City to retain its independence, its headquarters and its management team.

That could be a mixed blessing, said Gerard Cassidy, an analyst with RBC Capital Markets. Since Peter Raskind took over as chief executive in July, National City's stock price has tumbled to $6.26 from $31.59, an 80 percent plunge.

The company posted a $171 million loss in the first quarter. That followed a $333 million loss in the fourth quarter of 2007, reflecting the bank's overexposure to a portfolio of subprime and other risky mortgage loans. Shareholders have filed multiple class-action lawsuits, alleging executive mismanagement.

"I think it's a sad situation for the shareholders of this company to have as many of these senior people involved in it that got them into this struggle, whether board members or senior management," Cassidy said. "If they really wanted to do what was right for shareholders, more heads would be rolling."

National City employees might be among the biggest losers. For years, the company made contributions to employee retirement funds in National City stock. And although employees were free to sell the stock and seek a more-balanced portfolio, many likely were counting on nest eggs layered with company shares.

"A lot of people have lost a ton of money just via holdings in 401(k) and stock options," Cassidy said. "It's painful. It's a tragedy that something like this could happen."

Two of Ohio's biggest pension firms say they have been trying to rid themselves of National City stock.

The State Teachers Retirement System of Ohio sold 800,000 National City shares in March at $13 each, while retaining 700,000 shares, spokeswoman Laura Ecklar said.

National City shares traded generally between $20 and $37 between 2001 and fall 2007.

The Ohio Public Employees Retirement System reduced its exposure to National City to about 800,000 shares, equal to one-fiftieth of 1 percent of the system's $32.7 billion U.S. equity portfolio, spokesman Richard Baker said.

According to terms of the deal, National City will issue 126.2 million shares of common stock at $5 each, and it will offer institutional investors about 63,000 shares of convertible preferred stock.

In a research report written yesterday, JPMorgan Chase called the capital issue "surprisingly large," one that "dilutes existing shares by a whopping 70 percent."

National City might have been pressed by federal regulators to make a deal, said Fred Cummings, president of Elizabeth Park Capital Management in suburban Cleveland.

"They were in desperate straits," he said. "I think it's the best step to realize the most value over time."

National City said early this month that it was seeking to either sell the company or seek investors. Fifth Third Bancorp and Key Bank were among the rumored suitors.

Cummings said the word was that any bids that surfaced were "very low," meaning that shareholders wouldn't have been better off in the short term if another bank bought National City.

"We can only speculate they were in that $4 to $5 (per-share) range," Cummings said.

Andrew Karolyi, a finance professor at Ohio State University, thinks the deal is the best shareholders could expect and wonders why they punished the stock on Monday, when the share price fell 28 percent. Shares yesterday closed up 23 cents, or 3.8 percent. "I don't think there was much choice," he said. "Capital infusion among these banks that have been particularly exposed to this subprime lending seems to be a matter of course."

Cassidy thinks National City faces a tough road to recovery. After the new investors exercise preferred stock options, the company will have more than 2 billion outstanding shares, up from about 600,000.

That will dilute their value, making it difficult for management to increase earnings per share. But perhaps more important, Cassidy said, is that there's no certainty that National City's "good" mortgage portfolio would survive an economic recession.

mpramik@dispatch.com