returnonmycapital

And, of course, capacity constraints.

The recent rise in government bond yields will certainly have an impact on many insurers/reinsurers. Those who swore off equity holdings in favour of government guaranteed debt over the last year will continue to suffer from 'deer in the headlights' decision making.

That and the preferreds grant no voting rights. With regard to TCE. Was it not the Treasury/Fed that put pressure on the healthier banks to find Wachovia a new home? And wouldn't it be magic if you could get one of them to show some value in the purchase price as a calming force for all investors. Along comes WFC, manages to rig up some way to show goodwill in the purchase (despite writing down Wachovia assets by 17%), much to the Treasury's delight. Now WFC is being penalized in the TCE calculation by the fact that they show some questionable goodwill on their balance sheet from the transaction. They should be showing massive negative goodwill, which would actually boost their TCE ratio to the highest ranking in the banking business today. Arbitrary?

What I think Ackman meant was that by swapping debt (tier 2) into equity (tier 1), a bank could go out and try to raise more tier 2 capital, given that there would be room for it if tier 1 was increased. I'm not sure it would work out but that is probably his assumption.

But I think he said capital, not specifically equity capital. According to regulations, a simplified definition of bank capital includes: common/preferred (tier 1) plus debt (tier 2) plus investments in unconsolidated subsidiaries (tier 3 or total regulatory capital). At least half of a bank's capital must be in the form of tier 1 capital, as I understand it. This defines how much leverage a bank can implement. Equity capital is not by itself considered total capital from a regulatory standpoint. So, I didn't really understand what Ackman was saying.

I think Jack makes a valid point. Ackman is talking his book. Debt/preferred to common swaps do nothing to augment capital in and of itself - it is all capital. It just changes the 'overhead' on some of it from fixed cost to variable. What it does for sure is create a credit event in the debt that is swapped (and triggers the full impact of holding CDS contracts). Can someone explain what Ackman was trying to say about how swapping $1 of debt to equity creates $2 of capital - that one went right over me.

Doesn't the exchange offer on the 2 Gannett bonds (5.75% June 2011s & 6.375% April 2012s), assuming a good deal of acceptance of the offer, make these money good (to borrow a term from my trader friends)? Is it possible to keep the bonds, even if a majority of holders take the offer? If so, does anyone know where I can get some and at what price? The last price I was offered was 67 & 60, respectively (pre-exchange offer announcement).

I read "Investing the Templeton Way" and thought it was a very good biography.

They are probably generating more than $440 million in operating income in their digital and broadcasting businesses. That's more than $1.28 per share in after tax operating profit. How you get rid of the $3.8 bln in debt is the trick. Publishing produced more than $900 million in operating profit over the entire year (almost $600 million in after tax operating profit). How that changes this year? Assuming publishing doesn't expire before 2012, there could be some value in the unsecured notes, trading at 60 for the 2012s and 67 for the 2011s. If you assume publishing goes to zero and debt does not change by 2012, the enterprise value of the digital and broadcasting businesses might fetch $3 bln. Take away the revolving credit facility, which will be about $2.5 bln and you have $500 million of value to be divided between the two unsecured notes (aggregate value of $1 bln) and the pension fund members ($891 million liability at year end 2008). Worst case, maybe 25% on the notes, assuming noteholders and pension members are treated equally (-58% capital loss offset by whatever interest gets paid at 10.625% current yield until re-org. on the 2012s). Best case, debt gets whittled down by continued cash flow generation in the publishing assets, maybe $300 million a year over the next 3 years. Debt ends up around $2.9 bln in 2012, all in the revolver (assuming they can increase their lines by approx. $200 million). That suggests a 67% capital gain augmented by 10.625% current yield until April 2012 on the 2012s. Assign your probabilities...

I too believe ORH offers better predictability. Underwriting has been consistently better than FFH since 1998 (when I started following their operations) at 105% vs. 113% (including all operating costs as expenses). ORH has the edge in ROA and ROE over that same timeframe (3.4% vs. 1.5% and 15.9% vs. 10.4%). However, FFH has the advantage in leverage (assets to equity of 4.5X vs. 3.5X). So, any marked improvement in FFH underwriting and the tables turn. Using the average ROA for ORH over the last 10 years, I get a 2009 BV (including investments at equity revalued to market less taxes) of around 51.50, suggesting ORH is trading at .71X BV today. Using a ROA of 2% for FFH (0.5% higher than their 10 yr. average), I get a 2009 BV of 307.40, suggesting 0.75X BV. ORH looks slightly better value than does FFH on these assumptions/metrics. I have a question with regard to LEAPS. Where do I find LEAPS on ORH? I have a position in ORH pref-A and would like to attach some long-dated calls to them for a quasi-convertible. With a dividend yield of less than 1% on the common, I give up little on the calls. Add to that the real prospect of the pref-A being redeemed as early as October 2010, given how expensive it is to the company on a tax-equivalent basis, and I think this could be a Big Idea.