May 15 (Bloomberg) -- Michael Price, president of MFP Investors LLC, talked with Bloomberg’s Tom Keene and Ken Prewitt yesterday about U.S. equity markets and the newspaper and banking industries.

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

TOM KEENE, BLOOMBERG NEWS: Michael Price, of course, of Mutual Shares for years onto a take up by Franklin Templeton, he is here with his New York Yankee cufflinks on. We’re going to be Yankee-free though.

But let’s talk value investing, you have been doing this for a few years, how do you adapt to this combination of financial crisis and real economic contraction? How has your day changed?

MICHAEL PRICE, PRESIDENT OF MFP INVESTORS LLC: It hasn’t. This is what you wait for. This is being prepared on valuations and waiting for the market to hand you things at big discounts. So this is an ideal time for a stock picker.

KEENE: Let us take a basic industrial company, no sex to it, no nothing like that, it used to be at eight times Ebitda, it’s four times Ebitda, can you get a dialog going with their owners at this time, are they so shell shocked by the valuation they won’t talk?

PRICE: You mean engaging other shareholders?

KEENE: Engaging other shareholders, engaging operating -

PRICE: I don’t think you have to go that way. I think you just buy the stock.

KEENE: Just buy the stock.

PRICE: I think whether it is Dow Chemicals, Ingersoll- Rand, Newell Rubbermaid, you name it, Johnson & Johnson, 3M, some of the finest companies -

KEENE: Let’s talk 3M, that model is a great stock, it is down -

PRICE: From $90 a few years ago.

KEENE: Yes. That is amazing. 6.23 times Ebitda, they’re giving it away. I mean what is the norm there, 10?

PRICE: Well, here is the way to do it. They have got six segments. Look at each segment. They are number one or two in each market share of a segment. So some of those segments are worth 10 times, some are worth less than 10 times, clean as a whistle, almost debt free.

KEENE: Ken?

KEN PREWITT, BLOOMBERG NEWS: It does still matter what business they are in, right? You can’t just look at numbers?

PRICE: Sure. Some are more economically sensitive than others, but by and large, these guys are of course subject to the general flows of the economy. But this is a fine company at a bargain basement price.

PREWITT: Yes, 3M you’re talking about? 3M, which is pretty much a GDP play, right, so -

PRICE: It is better than that. It is better than that.

KEENE: When you look at General Electric, do you look at it as an industrial company with a bolt-on financial, or you try to look at the whole thing?

PRICE: It is a bigger version of Textron. There is a fine, well run - it was well-run under Jack Welch; it is well run under Jeff Immelt. They are great managers. They have a little bit of a cancer there in the finance company, and it’s a question mark as to how much capital the parent is going to have to fund into the credit company to keep ratings and solvency.

KEENE: The basic guy out there, they don’t have the advantages of intellect or capital that you have, should they be in the markets now?

PRICE: Yes.

KEENE: You and I talked about the Class-A, Class-B share structure before, really the representation and the battling between substantial institutional shareholders. Once again, we’re there this time with the New York Times, is that all that really is about again is the Class-A, Class-B structure?

PRICE: Well, many newspapers have it, as well as other companies. New York Times has a financial problem, obviously. You know the newspapers are no longer an economic industry. It’s sad.

But A and B is going to come into play if the family tries to extract a premium for their B-controlled shares from Carlos Slim. I mean that is the way it is going to go. The law says you can sell control for a premium, but there’ll be a hell of a stink.

KEENE: When you look at this, there is Mr. Slim, the trump card, I mean and Mr. Geffen is involved again, and you say they are financially challenged. How should Carlos Slim react to what he is seeing within New York and, for that matter, with the New York Times shareowners?

PRICE: You know, we’re not talking about a lot of money, you know -

KEENE: That is important.

PRICE: At the end of the day, it is much smaller than what Dow Jones traded for, and it’s really a leap across a valley of losses. So you have to make an assumption as an investor what are they going to lose the next year or two, until both the economy and the industry kind of find a way to make money.

KEENE: When you look at this, and you look at what Mr. Zell experienced at the Chicago Tribune, I mean does Michael Price want to dive into the journalism business?

PRICE: We own no newspapers.

KEENE: Media properties?

PRICE: We lost 20 or 30 points in McClatchy after the Knight-Ridder merger and that was so painful.

KEENE: What did you learn from that? That is important, what you learn from that, besides you didn’t want to do it again?

PRICE: Even first-rate management in an industry that has these kinds of headwinds and these kinds of burdens of employees and just the sheer cost of running a newsgathering enterprise and printing it down on paper, it is just too tough.

PREWITT: You were saying earlier that as a value investor, this is the kind of the market you live for.

PRICE: Oh, yes.

PREWITT: I’m assuming you were even more enthusiastic a couple of months ago before this 30 percent or so -

PRICE: Couple of months ago, enthusiastic, but no guts. Now we have even little more guts.

PREWITT: Well, do you - you make a case for value investing, is there also a case for buy-and-hold investing? I mean you just buy them now and just keep them?

PRICE: Yes, that is a great question. I think in some cases, yes. But this is a market with companies re- capitalizing themselves, selling new equities, selling bonds to refinance balance sheets, pay back banks and all, you’ve get some move some stocks that you have to take your profits and pretty quickly, because they get ahead of themselves.

KEENE: Michael, we’ve got to turn to Citigroup, the banking shares. You’ve had your own stress test in value investing. How is Citigroup, and can they survive?

PRICE: Well, look, Citigroup’s going to survive. The government’s going to walk it through this period. You are right at the beginning of a one-month period where they’re exchanging, as everyone knows, common for preferred.

But it’s unique. It’s the largest exchange offer I can ever remember. I’m sure it’s probably the largest ever. $70 billion of new capital comes on to that balance sheet, from the preferred giving up their senior rights -

KEENE: Right.

PRICE: - to become common, A. And B, don’t forget there’s a loss sharing. The company takes the first $40 billion of losses and after that, they only take 10 percent of the losses on $180 billion loan book.

KEENE: And the straw hats in winter and with your experience with the chief executive officers, Mr. Pandit is perceived as a quant, but is he the right guy here right now?

PRICE: No. Look, that’s just - he’ll drift off. There are probably - and I don’t know because I’m not inside - units within Citicorp that are very well run. There are units in Citicorp that are going to be sold and joint ventured. Proceeds will come in and basically you’ve got a four and a half - pro forma this exchange offer. You’ve got a stock at around three and a half with a $4.50 book.

I’m assuming that book drops from four and a half to two and three quarters -

KEENE: Yes.

PRICE: The common drifts down from three and a half during the exchange offer to three. At around $3.00, it’s probably not going to be a bad shot. You’ve got $40 billion of tax credits - that’s $0.50 a share. You’ve got real estate assets. You’ve got $7 billion or $8 billion coming in in cash from Morgan Stanley and the Smith Barney joint venture.

Everywhere you look you’re going to find another $0.10 or $0.20 a share. And in a $3.00 stock, it doesn’t take much.

PREWITT: So. Citi survives, but not in its present form, which is another way of asking, is the Sanford Weill business model completely discredited now?

PRICE: Totally.

PREWITT: It didn’t work with Sears-Roebuck and Dean Witter and it’s not going to work anyway.

PRICE: No. It’s too big. You can’t run effectively huge conglomerates in financials.

KEENE: When you see an essay or an op-ed piece by Henry Kaufman when he talks about this fear of concentration of banks, if we assume fewer banks out there and if we assume we get through this and life goes on, how does Michael Price define a utility bank? What will be the new financial services?

PRICE: Very focused, starting community and regional bank where they know their customers, they really watch over their balance sheets carefully, and are much more well- capitalized, so less leverage.

KEENE: Less leverage, more capitalized. Where will the entrepreneurial’s financial innovation come? Does it come out to a new shadow-banking system?

PRICE: Banks are allowed to run at 12 or 15 times leverage. You don’t have to get too creative when you can lever up your equity 12 times safely.

KEENE: I want to change gears - Ken, you got something, Ken?

PREWITT: Yes. I just wanted to ask, why don’t they just go and buy community banks then?

KEENE: Yes, great idea.

PRICE: Well, we are long community banks. We’re long a little bigger banks - the community. We just bought BB&T. On their deal last week, they’ve recapped and I think their deposit franchise is worth a lot.

KEENE: Well -

PRICE: You look at these banks that are making these moves - Wells Fargo’s big recap. Wells Fargo is - you don’t have better-run banks. You want to place some bets, you can place them right after the recap like BB&T and Wells Fargo, or you can start nibbling on the way down in Citicorp now, which is very liquid. Or you can put money into smaller, less-liquid banks that are not in TARP.

KEENE: The TARP -

PRICE: Let me just make a point. TARP front ran value investors. We missed big opportunities because of the TARP program because the banker would rather take the government’s money, even with their strings attached, then my money, diluting the common.

KEENE: With that, do you shift gears like a Wilbur Ross? Does Michael Price go in quietly and take out a Florida bank and do it in a venture capital?

PRICE: No. We looked at IndyMac; we looked at BankUnited. We’ve looked at these and I want liquidity and I want to trade in these things.

PREWITT: One more banking question.

KEENE: At least one more banking question over here.

PREWITT: Is this also, Michael, a bet that dividends are going to be restored eventually, sooner or later?

PRICE: Yes, in a while. Yes. They should not be paying dividends, okay? Just think about this exchange offer. There’s no Citicorp dividend, right? But all of these preferreds, and some of them were just sold in January of ‘08 are being forced into a non-dividend-paying common.

One of the big preferred issues, the $3 billion, the AA issue with an 8.125 percent coupon sold in January of ‘08 at $25.00 a share is being forced into common today.

KEENE: Where is your best-quality dividend stream right now?

PRICE: You know I think you have got to be real careful with dividends. If the company has a clean-as-a-whistle balance sheet, their dividends make it through. But companies in this environment need to bring dividends down. I like it when they don’t pay a dividend because that’s going to deliver a stock price to me that doesn’t have the yield in it, so it’s going to be cheaper.

KEENE: Michael Price, I want to go back into this idea of TARP investment where you guys were pushed out. Expand on that.

PRICE: Well, you know what we did in the early ‘90s was we went into the banks or banks would come to us looking for capital, which was very needed as they wrote their loans down, and we would make them bids. They come in when their stock was trading at five. We said, no, we will pay a dollar, they would laugh, leave, and a month later they were back and sold the stock at a buck.

So this time around, they went to Washington where you know they opened their wallet, they brought capital in in the level of preferred senior to common, got warrants as we all know the story, with a coupon, and we were shut out of the process.

KEENE: You were shut out of the process. We were also talking about TARP and how some of the substantial investors in the nation, indeed the world, were shut out of the process. When you say shut out of the process, what is - so what there? Why do we care if Michael Price was pushed aside by Tim Geithner?

PRICE: Well, in some cases, okay, the capital needs were so great, the Citicorps of the world, that you needed the government. But in most of the cases, 85 percent of the cases, those banks could have gone to the private markets in another six months.

PREWITT: We have been talking of stock so far, Michael, but your mentor in the business, Max Heine, made a name for himself by weighting into the market for railroad bonds back in the ‘60s when they were all going bankrupt and settling up labor and bankruptcy courts for a multiple of what he paid. Similar opportunities today?

PRICE: Look Penn Central filed. Actually it was Goldman Sachs that issued Penn Central commercial paper that defaulted in 1970, and that was a crisis like beyond all crisis. I was still at OU then, but I mean that bankruptcy took 10 years. We are there today again. Unfortunately, a lot of that corporate debt out there that is going into the default doesn’t have the indenture provisions that loans had back then.

KEENE: Would we have a change in relationship here on so-called provisions when we see the Chrysler bondholders that were negotiating pushed aside - I mean Peter Weinberg had a bad week just to mention one week. Does this forever change that trust relationship between investors and the government?

PRICE: I think you’ve got to basically say, maybe Detroit’s different, but this cannot go on. You need the protection of those indenture rights as the lawyers have pointed out in Chrysler. We are owners by the way of the first lien Chrysler CarCo debt and the second lien Chrysler FinCo debt.

KEENE: So where does that place you right now?

PRICE: We got pushed down and they gave significant value to people who were junior to us.

KEENE: Give us a name of a security we haven’t talked about in this time, just name it, you know really focused, something you are focused on right now?

PRICE: Well, fixed income, on the fixed-income side, some of the stressed bonds whether it is Nieman Marcus bank debt and bonds, Huntsman Chemical, where we’re looking for a large legal settlement, a turn in the economy and their business, business is still tough. But we think the bank debt and bonds in some of these situations are just really oversold.

PREWITT: So this is a case where the perception of default is greater than the actual risk of default?

PRICE: And the risk return in the security is better in the bonds than the common.

KEENE: That is really important point-

PRICE: But you’ve got to weight it, because the bonds are less liquid. There is a bigger spread between the bid and the offer. So you know you commonly you can trade a million shares a day, a nickel apart, the bonds might be a two-point spread, which might be 4 percent -

KEENE: So how does the little guy playing that bond investment, that -

PRICE: Well, you go into some of these pretty savvy mutual funds who have a name like the old Mutual shares for instance, Franklin Mutual, you go into funds, Marty Whitman’s fund Third Avenue Value, some of the funds who have kind of carved out niches and have good flows in this stuff.

KEENE: Please come back, it’s been a lot of fun.

PRICE: It has been great.

KEENE: A lot going on here. I am sure there will be as much real economy and financial crisis out in a year that will keep us and Michael Price busy.

***END OF TRANSCRIPT***

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#<256906.589612.1.1.32.19884.25># -0- May/15/2009 16:55 GMT

Last Updated: May 15, 2009 12:55 EDT