Back in mid-February, I wrote in Transparency: "The current financial crisis, which has resulted in the worst recession since World War II, will come to an end when confidence is restored in our global financial institutions. Treasury Secretary Tim Geithner learned very quickly last week that the markets want more than a blueprint, they want a specific plan that will lead to the balance sheets of our largest money center banks being healthy and the subprime toxic assets isolated." Part of the specific plan that emerged was the "stress test" for 19 large banks around the country. At this point it not clear to me whether Secretary Geithner or Larry Summers or someone else within the Obama administration came up the idea of a stress test to determine if the banks' balance sheets were strong enough to weather a continuing and deepening recession, but I am willing to give credit to the Obama team for finally demonstrating to everyone that the worst is behind us.
The back and forth between the Treasury Department and several of the banks, for example Wells Fargo (WFC), reminded me of the process that those of us on the deal side often experience in finding a common ground for valuation of a company prior to an acquisition or investment. In other words, I think it was a healthy process and in the end all of the banks worked within the guidelines and are now going forward raising additional capital where necessary. It is clear that of the largest bank holding companies, JPMorgan Chase (JPM) and Goldman Sachs (GS) are very strong and will be able to pay back the government before the end of this year. Bank of America (BAC) and Citigroup (C) still have some work in front of them, but they are clearly in stronger shape than some analysts would have had us believe, which was reflected in the significant share increase they both realized this past week. In the case of Bank of America, it would appear that the Merrill Lynch acquisition, while problematic, should play out in a positive way over the next several years.
With confidence restored in our major banks, I trust that we will start to see more signs of recovery in June and into the third quarter. We will also start to see more signs of consolidation within several sectors, including media, as the strongest companies look to take advantage of the current low valuations to improve their market share. Will Microsoft (MSFT) make one last run at Yahoo (YHOO) to improve its fortunes in search?
As we enter mid-May the second round of the NBA playoffs are starting to give us a hint of what the finals, in early June, will look like. Can any team in the east stop LeBron James and the Cavaliers? The defending champion Celtics without Kevin Garnett do not look like they have the bench to pull it off, particularly after a long struggle in the first round with the Chicago Bulls. In the west, it is clear that the Lakers, once again, will be the team that someone will have to beat to make a trip to the finals. Could we end up with that made-for-TV finals of LeBron vs. Kobe?
While taking some R&R last week, Mary Claire and I had the pleasure of dining at Spago on Maui. While trying to decide on a red wine to accompany a Kobe style flank steak, I noticed a Syrah from a small winery out of Washington state, DeLILLE Cellars. A friend and colleague from earlier in our careers, John Koenigs, had dropped me a note recently about DeLILLE's Syrahs. While I was familiar with them, I had not had the pleasure of trying their Doyenne Syrah. We went with the '05 Doyenne Syrah (RP 91) and found it to be an excellent full-bodied wine with hints of cassis, blackberries, pepper and espresso. It is 97% Syrah and 3% Viognier. DeLILLE's current '06 release is available through their website for $49. www.delillecellars.com