Tuesday, November 30, 2010

Beating Up On Beleaguered BofA

Does WikiLeaks really threaten the banks?
Posted by Colin Barr    http://finance.fortune.cnn.com
November 30, 2010 1:18 pm

It's tough to see how the banks' reputation can get much worse -- which suggests this Wikithreat is probably illusory.

Julian Assange (right), Internet document leaker and publicity seeker extraordinaire, told Forbesin an interview published this week that he plans on releasing unauthorized documents about an unnamed big U.S. bank early next year.
But consider that the main effect of the previous WikiLeaks episodes was to expose official hypocrisy. When you consider what bad actors the banks have already shown themselves to be, it is sort of hard to imagine what damage Assange might actually expect to do.Given the hubbub Assange has provoked with his previous releases on the U.S. military and diplomatic corps, this seems to have the makings of a big story.
"What else can you possibly do to embarrass these guys?" asks FusionIQ's Barry Ritholtz, who spent much of the last few months chronicling how the banks have defrauded homeowners and investors in mortgage securities. "The bar is so high. We may find out some stuff about their lobbying before the bailouts, but that doesn't look bad for them as much as for the government."
Then there's the question of which banks, if any, should be worried about this supposed bombshell. When Assange's comments started making the rounds of the Internet last night, conspiracy theorists immediately concluded that the target would be everyone's favorite doer of God's work, Goldman Sachs (GS).
But Peter Cohan, who teaches business at Babson College and writes books about investing, questions that conclusion, citing the cohesive culture at Goldman.
This isn't to say Goldman necessarily has smooth sailing ahead. The firm notes in its most recent quarterly filing with regulators that it is subject to investigations on subjects such as its dealings with AIG in the financial crisis and its research practices. New fodder there could keep the mill grinding for some time."That's an interesting question, who within one of these banks is going to leak this stuff," said Cohan. "My gut reaction is it wouldn't be Goldman, as much as I might like it to be."
But Cohan said he thinks a more likely target is Bank of America (BAC), which is considered far less cohesive and well managed. Adding to possible leak outlets, in recent years BofA rolled up controversial acquisitions of deeply troubled mortgage lender Countrywide and broker-dealer Merrill Lynch.
A comment Assange made in an interview last year with ComputerWorld says WikiLeaks has access to some BofA data, Business Insider notes, though whether the data are actually in any way incriminating is obviously another question.
At the moment, for example, we are sitting on 5GB from Bank of America, one of the executive's hard drives. Now how do we present that? It's a difficult problem. We could just dump it all into one giant Zip file, but we know for a fact that has limited impact. To have impact, it needs to be easy for people to dive in and search it and get something out of it.
Bank of America, which fans note already trades below book value, was off 1% at midday Tuesday. Another ill-managed, dysfunctional behemoth that is being mentioned in WikiLeaks chatter, Citigroup (C), was actually up 1% Tuesday.

Wednesday, November 24, 2010

The Non-Monetary Costs of Bank Failure

Bank Failures – It’s More than Money

By Michele Yates on Nov 8 2010  http://newshawksreview.com
Bank Failures – It’s More than Money
Michele Yates - Scottsdale Banker

The FDIC closed 4 banks in 3 states on Friday, that brings the total for 2010 to 143. That is a record high for the last decade.
K Bank of Randallstown, Md., which had $538 million in total assets and $500 million in deposits was closed. Western Commercial Bank of Woodland Hills, CA was shut down. Pierce Commercial Bank of Tacoma, WA, was closed and the FDIC was appointed receiver and sold the failed bank’s total deposits. First Vietnamese American Bank in Westminster, CA was closed.  The cost to the FDIC insurance fund is $245.5 million.
There are other costs and consequences to these bank failures.
When these banks are closed by the FDIC and their assets acquired by other institutions many, if not most of the employees at the closed bank are out of a job. Since 20% of the people in the US are unemployed or underemployed almost everyone knows the cost in emotions losing a job brings. Then there is the cost to the economy. People without jobs have much less to spend on anything. Whether it’s necessities or that once in a while splurge, someone else’s paycheck will be effected.
That brings it around to the cost to business owners. People buying less certainly effects businesses and its owners. There are ancillary costs also. When a bank is closed the credit lines a business had with that bank do not automatically transfer to the acquiring bank, in fact in most cases that business owner is out of luck and the credit line is gone.
One of the most serious costs is that of relationships. A business owner or depositor may have built a relationship with the people at that bank. Balance sheets, Income statements and all the other necessary documents are always important to the people at the bank. But, when a customer can look their banker in the eye the numbers become more real and help and support for that customer can be more confidently given.
Relationships at a bank flow in both directions. Excellent bankers will give advice, connect people and even pull together other professionals such as lawyers, CPA’s, and even a Business Coach to help and support a business owner who could use such a “Power Team,” to build their business.
Even though the FDIC says that no depositor has ever lost a penny, up to the insured amount, when these banks are closed there is loss. The loss is on both sides, the customer as well as the bank and it’s people.
Michele Yates
Scottsdale Banker

Resource:  Michele Yates has been a banker for over 20 years. Currently she is the Assistant Vice President and Banking Center Manager at the Scottsdale branch of a National Bank. Through her service and leadership on non-profit organizations and tireless networking she has developed a great many relationships and friendships throughout the Phoenix Valley. She calls on those relationships to connect, assist and help her wide and deep network.

Cut to Junk

Bloomberg News

Regions Cut to Junk by S&P on Concern Over Funding

Nov. 23 (Bloomberg) -- Regions Financial Corp., the Alabama bank that replaced its risk managers last week, was downgraded to junk status by Standard & Poor’s Ratings Services on concern that more loan losses will erode the firm’s capital.

“The company’s financial flexibility has decreased somewhat in recent weeks, which could hurt its ability to access the debt and equity markets on favorable terms,” Robert Hansen, an S&P credit analyst, said in a statement today.

S&P cut Regions to BB+/B from BBB-/A-3, with a negative outlook, which means the rating could be lowered again. Regions Bank, the holding company’s main subsidiary, was cut to BBB-/A-3, S&P’s lowest investment-grade level. Last week, the Birmingham-based lender removed three managers who oversaw risk and troubled assets, prompting downgrades by Fitch Ratings and Moody’s Investors Service.

Regions last reported an annual profit in 2007, and since the start of last year has written off more than $3 billion in loans, mostly tied to developers, home builders and mortgage borrowers in Georgia and Florida. The shares fell 14 cents, or 2.6 percent, to $5.21 at 4:15 p.m. in New York Stock Exchange composite trading after an 11 percent decline last week.

“It looks like S&P swung the high-yield hatchet and did some damage to Regions’s financial flexibility in the process,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott in Philadelphia. “Once a financial firm transitions from investment grade to crossover or high-yield, funding costs increase substantially, which in turn can impair a firm’s ability to earn income.”


Shares of Regions, Alabama’s biggest bank, are near their lowest levels this year after reaching $9.33 in April. Chief Risk Officer Bill Wells resigned and two other executives retired and left, Regions said last week.

“Regions has a ton of cash at the holding company level and they are about as flush in liquidity as any bank you could run up the flagpole,” said Marty Mosby III, an analyst at Guggenheim Securities LLC who has a “hold” rating on Regions. “They have $5 billion in excess capital before they would hit the minimum ratios.”

“The company is still seeing declines in commercial property valuations within its geographic footprint,” the S&P report said.

The bank had no comment on the S&P report, spokeswoman Evelyn Mitchell said.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net .

Sunday, November 21, 2010

'Big Short' Star Talks His Book

Bloomberg News

Lippmann Focuses Hedge Fund Buying on Subprime Debt

Nov. 18 (Bloomberg) -- Greg Lippmann, the former Deutsche Bank AG trader who gained fame for his bets against subprime- mortgage securities, focused his hedge fund’s buying on the debt in its first month.

LibreMax Capital LLC’s fund gained about 1.67 percent in October as it invested 44.4 percent of its portfolio in bonds backed by subprime home loans to borrowers with the worst credit, according to a letter to investors obtained by Bloomberg News. Hedge funds returned 1.5 percent on average last month, Bloomberg data show.

Lippmann, 41, started the New York-based firm with Fred Brettschneider, the former head of global markets in the Americas at Deutsche Bank, after they departed the German lender this year. Lippmann’s team made almost $2 billion for the bank in 2007 wagering against subprime debt through credit-default swaps as homeowner delinquencies soared, according to “The Greatest Trade Ever” (Broadway Books, 2009) by Greg Zuckerman.

“Returns were driven by the rally in the overall mortgage market as well as strong trading gains during the month,” the firm said in the letter.

John Curran, director of marketing at LibreMax, declined to comment. Lippmann is the firm’s chief investment officer.

LibreMax Partners LP bought 82 securities and sold 9 last month, according to the letter. “Our investment team had an active first month,” the firm said.

Foreclosure Issues

The fund found “attractive investment opportunities” in junior-ranked slices of older subprime securitizations, as well as junior pieces of repackaged prime-loan securities and mortgage bonds whose principal will never be repaid, according to the letter.

In addition to subprime debt, the firm also has 13.9 percent of the fund’s portfolio in other home-loan securities that lack government-backed guarantees, according to the letter.

LibreMax is dismissing concern that foreclosure issues, created by loan servicers acknowledging in September that they used false affidavits in court cases, will harm bondholders by increasing how long it takes to liquidate soured debt.

Investors in residential mortgage-backed securities, or RMBS, shouldn’t adjust what they pay, the firm said.

“While the press about foreclosure risks has been prevalent, the RMBS market has largely shrugged off these headlines,” the firm said. “We agree with this sentiment and believe that current prices, broadly speaking, have already factored in the possibility of extended foreclosure timelines.”

Falcone, Paulson

Lippmann was among the Wall Street traders who helped create the standardized default-swap contracts that made it easier for hedge funds including John Paulson’s Paulson & Co., Philip Falcone’s Harbinger Capital Partners and Hayman Advisors LP to bet against housing.

In 2006 and 2007, Lippmann encouraged money managers to make the wagers and handled their trades, according to Zuckerman’s book and Michael Lewis’s “The Big Short” (Norton/Allen Lane), in which he was also featured. Paulson and Hayman, run by Kyle Bass, are among investors who later began buying mortgage bonds at beaten-down prices.

A Markit ABX index of credit-default swaps tied to 20 subprime-loan bonds rated AAA when created in the second half of 2006 has climbed almost 33 percent this year, according to administrator Markit Group Ltd. An increase generally indicates less pessimism about the value of subprime debt.

Index Levels

The index’s levels are typically similar to the prices being paid for the underlying securities in cents on the dollar. The index rose to 56.13 yesterday after falling as low as 28.46 in April 2009. It lost about 1 percent last month after rising to almost 60, the highest since October 2008, during the period.

Prices for the most-senior securities backed by fixed-rate so-called Alt-A mortgages gained 1 cent on the dollar last month to about 79 cents, according to Barclays Capital data. The debt, tied to loans to borrowers who often failed to document their incomes or didn’t plan to live in properties, advanced another cent last week, after ending last year at about 72 cents. Holders also receive interest payments.

Seer Capital Management LP, the hedge fund led by Philip Weingord, is also buying subprime-mortgage securities, Weingord said in a Sept 30 interview. He oversaw Lippmann at Deutsche Bank while the trader made the bets against subprime. Weingord left Deutsche Bank in 2008 and was replaced by Brettschneider.

LibreMax Partners last month also bought “highly seasoned” securities tied to manufactured-housing loans, as the debt category made up 20.7 percent of investments, according to the letter. It also bought bonds backed by private-student loans; subprime credit-card accounts; and high-yield, high-risk corporate loans, known as collateralized loan obligations.

The fund lost money last month on hedges involving high- yield corporate debt, according to the letter.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net Saijel Kishan in New York at skishan@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net Christian Baumgaertel at cbaumgaertel@bloomberg.net

Friday, November 19, 2010

Pimco Bravo Fund: Bank Recapitalization and Value Opportunities

Bloomberg News

Pimco Said to Seek $1 Billion to Buy Troubled Assets From Banks

Nov. 19 (Bloomberg) -- Pacific Investment Management Co., manager of the world’s largest mutual fund, is raising at least $1 billion for a private fund to buy troubled loans from banks divesting assets to meet new rules, said two people briefed on the plans.

The Pimco Bravo fund, short for Bank Recapitalization and Value Opportunities, will acquire commercial and residential mortgage loans and other debt, according to a prospective investor who asked not to be named because the capital raising is private. Pimco plans to work with a loan servicer to renegotiate the terms of the acquired debt directly with creditors, the client said.

Financial institutions are selling assets after the 27- nation Basel Committee on Banking Supervision adopted standards in September that will more the double the ratio of capital banks must hold in relation to the amount of risk on their balance sheets. Pimco, the Newport Beach, California, firm best known for its fixed-income mutual funds such as those run by Bill Gross, has raised at least $5 billion from institutional clients to buy distressed mortgages and bonds backed by real estate loans since the global credit crisis began in late 2007.

“Valuation is in Pimco’s wheelhouse, and valuation is really the main challenge to this type of investing,” Geoff Bobroff, an independent fund consultant in East Greenwich, Rhode Island, said in a telephone interview.

The Pimco Distressed Mortgage Fund LP, opened before the peak of the crisis in October 2007, returned 54 percent in the year ended Sept. 30 after losing almost a third of its value in 2008, the investor said. The Pimco Distressed Senior Credit Opportunities Fund climbed 28 percent in the year through September, according to the investor.

‘Problem’ Banks

The number of banks considered “problem” lenders by the Federal Deposit Insurance Corp. rose even with the economic recovery, as bad loans remained on balance sheets. The FDIC’s list increased 7 percent in the second quarter to 829 banks.

Pimco’s institutional fund will target smaller lenders and community banks, and won’t buy consumer debt such as credit-card and auto loans, the investor said. Mark Porterfield, a Pimco spokesman, declined to comment.

“Pimco is using a very wise combination of strategies to take advantage of dislocations in the banking system,” Eric Petroff, director of research at consulting firm Wurts Associates in Seattle, said in a phone interview.

Dozens of money managers have opened funds to invest in mortgage-related credit to take advantage of cheap prices since that market started unraveling three years ago. Most, like Pimco Bravo, are targeted to institutional investors such as pension funds and endowments.

Cargill, DoubleLine

An investment unit of Cargill Inc., the Minneapolis-based food producer, said last month it raised $373 million to buy debt assets from banks. DoubleLine Capital LP in Los Angeles, started by former TCW Group Inc. investment chief Jeffrey Gundlach, gathered $79 million for a fund to invest in mortgage- related assets, according to Nov. 2 filing with the U.S. Securities and Exchange Commission. Ken Griffin’s Chicago-based Citadel LLC collected $225 million for a residential-mortgage opportunities fund, according to an August regulatory filing.

Distressed securities are mostly loans and low-rated, high- yield bonds whose issuers are having trouble meeting interest and principal payments. They typically sell below face value, and investors can profit if prices rebound or the securities are swapped for equity in a restructuring.

The instruments plunged in value two years ago, when investors shunned all but the safest government-backed debt after the failures of Bear Stearns Cos. and Lehman Brothers Holdings Inc. Bank of America Merrill Lynch’s U.S. High-Yield Distressed Index fell 45 percent in 2008, followed by a record gain of 117 percent in 2009 as the markets rebounded. In the 12 months ended Sept. 30, the index gained 29 percent.

Pimco’s Expansion

Pimco, started in 1971 mainly as a U.S-oriented traditional bond shop, has expanded into emerging markets and hedge fund- style strategies. Under Mohamed El-Erian, who was named chief executive officer in late 2007, the firm has opened long-term funds that try to minimize risks from systemic shocks and opportunistic funds that aim to take advantage of temporary market disruptions, such as the distressed-debt vehicles.

Last year, the firm made a push into actively managed equities and exchange-traded funds. The firm’s Pimco EqS Pathfinder fund, which invests in undervalued global stocks, will also devote a portion of assets to distressed debt.

Pimco added an advisory arm in 2009 to help clients value mortgage-related investments and other bonds. The division, Pimco Advisory, has won assignments from the National Association of Insurance Commissioners to help assess home-loan investments held by insurers and the Federal Reserve, for which it runs the Commercial Paper Funding Facility program.

PPIP Departure

Pimco, with about $1.2 trillion in assets, was a leading contender to manage the U.S. Treasury’s Public-Private Investment Plan before it dropped out last year, citing “uncertainties” about the program’s design. PPIP, overseen by eight managers including New York-based BlackRock Inc., is intended to purchase devalued real estate assets to speed the recovery of financial markets.

A unit of Munich-based insurer Allianz SE, Pimco runs the $255.9 billion Pimco Total Return Fund, managed by Gross. The fund had 39 percent of assets in mortgage-related debt as of Oct. 31, according to the fund company’s website.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net .

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net .

Don't Touch the Junk?


NOVEMBER 19, 2010

What's Really Behind Bernanke's Easing?

My guess is that the Fed chairman knows that we still have too many banks overstuffed with toxic real estate loans and derivatives.

By ANDY KESSLER, Wall Street Journal

Federal Reserve Chairman Ben Bernanke's $600 billion quantitative easing program has been roundly criticized in this country and around the world. So why is he doing it? Does he know something the rest of us don't?

Mr. Bernanke claimed earlier this month in a Washington Post op-ed that "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." But, as Mr. Bernanke must know, the Japanese have been trying to influence their stock market for 20 years, with little effect on their economy. It is also unlikely, as some claim, that the Fed chairman is whipping up a stealth stimulus or orchestrating a currency devaluation. He knows these have been tried and are more likely to destroy jobs than create them.

I have a different explanation for the Fed's latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.

The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way.

Because of unexpectedly bad construction loans, the staid Wilmington Trust was sold to M&T Bank earlier this month in a rare "takeunder"—what Wall Street calls a deal done below a company's stock value, in this case by 40%.

In other words, real estate is at risk again. But Mr. Bernanke would create a panic if he stated publicly that, if not for his magic dollar dust, real estate would fall off a cliff.

In a normal economic recovery, the stock market rises in anticipation of higher corporate profits. Companies then use their higher stock prices to raise capital and hire workers, who buy homes and remodel kitchens.

Before growth can occur, however, we have to fix what caused a recession in the first place. Often that means drawing down inventory that built up in the last boom, or tightening credit to whip inflation, as then-Fed Chairman Paul Volcker did in 1981. In late 2010, though, we still have banks overstuffed with toxic real estate loans and derivatives. But what about the trillion in bank reserves sitting at the Fed and earning 0.25% interest? Why isn't it being lent out? Perhaps because it's needed to offset unrealized losses on these fouled loans.

Like it or not, banks are still weak, and another panic may be on its way. Bank of America is the best example. As of Sept. 30, its balance sheet claimed a book value (assets minus liabilities) of $230 billion. But the stock market values the company at just $118 billion. Who's right? Usually the stock market is ahead of bad news and write-offs. Citibank is selling at 20% below its book value. The market wasn't gloomy enough on Wilmington Trust—hence the takeunder.

Mr. Bernanke is clearly buying time with our dollars. If real estate drops, we're back to September 2008 in a hurry. On Wednesday, the Fed announced that all 19 banks that underwent stress tests in 2009 need to pass another one. This suggests central bankers are nervous about real-estate loans and derivatives on bank balance sheets. In 2009, even with TARP money injected directly into their balance sheets, banks faced a $75 billion capital shortfall. Mr. Bernanke orchestrated a stock market rally so they could sell equity for much needed capital.

My sense is the stock market is less likely to cooperate this time. Since the QE2 announcement, the Dow is down 254 points and bond yields have backed up, exactly the opposite of what Mr. Bernanke was trying to achieve. If the latest boost doesn't work, we may see real estate seek its true lower value, causing a sell-off of bank stock that requires them to begin paying more for short-term debt.

The Fed may have to act quickly. It can't reprise the 2009 bailouts, which failed when banks wouldn't sell their distressed mortgage-backed securities because they didn't have enough capital to stay solvent. No politician would agree to bailouts anyway. This time, the Fed should do what it didn't do in 2008-09: detoxify and recapitalize the big banks. The Dodd-Frank banking reform provides the authority for the Fed and the Federal Deposit Insurance Corp. (FDIC) to do this.

Think of it as what the FDIC does on Fridays (taking over failed banks), but on a huge scale. First, guarantee deposits so lines don't form at branches, and provide short-term loan guarantees as a backstop to short-term lenders. Then move the toxic debt onto the balance sheets of the FDIC and the Fed, and refloat the banks with fresh capital to open on Monday morning. Also, fire management. And get the banks public again so that the market can properly value them and provide an early warning of bad loan portfolios.

All that's missing is a mechanism to make sure foreclosures continue in a fair and measured way so real estate prices stay accurate. But the freshly capitalized banks, free of nonperforming loans, will help fund an economic recovery. The stock market will fly based on prospects for future corporate profits, rather than on unsustainable Fed goosing.

As commercials for Fram oil filters used to say, "You can pay me now or pay me later." In our case today, "pay me later" is a perpetuation of weak banks, substandard growth, persistent unemployment and stymied productivity. Better to do takeunders of banks now than to hire an undertaker for the whole U.S. economy later.

Mr. Kessler, a former hedge-fund manager, is the author of "Eat People—And Other Unapologetic Rules for Game-Changing Entrepreneurs," due out from Portfolio next February.

Tuesday, November 16, 2010

Assessing Mortgage Documentation Damage

Watchdog: Foreclosure Mess Could Threaten Banks

The Associated Press - November 16, 2010

The disarray stemming from flawed foreclosure documents could threaten major banks with billions of dollars in losses, deepen the disruption in the housing market and hurt the government's effort to keep people in their homes, according to a new report from a congressional watchdog.

Revelations that several big mortgage issuers sped through thousands of home foreclosures without properly checking paperwork already has raised alarm in Washington. If the irregularities are widespread, the consequences could be severe, the Congressional Oversight Panel said in a report issued Tuesday. The full impact is still is unclear, the report cautions.

Employees or contractors of several major banks have testified in court cases that they signed, and in some cases backdated, thousands of certifying documents for home seizures. Financial firms that service a total $6.4 trillion in mortgages are involved, according to the new report. Big banks including Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC Mortgage have suspended foreclosures at some point because of flawed documents.

Federal and state regulators, including the Federal Reserve and attorneys general in all 50 states, are investigating whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes.

"Clear and uncontested property rights are the foundation of the housing market," the report says. "If these rights fall into question, that foundation could collapse."

It lays out the possible scenarios: Borrowers may not be able to ascertain if they're sending their mortgage payments to the right party. Judges may block all foreclosures. Prospective buyers and sellers could be in left in limbo.

For major banks, if they discovered that they still owned millions of bad mortgage loans they assumed had been sold, the losses could reach billions.

"Serious threats remain that have the potential to damage financial stability," Sen. Ted Kaufman, D-Del., the watchdog panel's chairman, said in a conference call with reporters on Monday. "This is an incredibly complex problem. It could turn out to be nothing. It could turn out to be a big deal."

The Treasury Department's foreclosure prevention program could be crimped if mortgage companies taking part in it find their legal right to begin foreclosure proceedings is challenged, affecting their ability to modify home loans. Treasury should actively monitor the effect of the so-called "robo-signing" controversy on the program, the report urges.

Despite the problems, the Obama administration has maintained there is no need to halt foreclosures in all 50 states.

Treasury officials say a review has been undertaken of the procedures for certifying documents for foreclosures of the 10 biggest mortgage companies participating in the program.

"We strongly believe that the reported behavior within the mortgage servicer industry is simply unacceptable, and (companies that) have failed to follow the law must be held accountable," Treasury spokesman Mark Paustenbach said in a statement. Treasury, various regulators, the Justice Department and the Department of Housing and Urban Development are investigating, "and we will continue to monitor the situation closely," Paustenbach said.

Phyllis Caldwell, who heads the department's homeownership preservation office, last month told a hearing by the oversight panel that so far no evidence has emerged of risk to the financial system from the documents scandal - or from efforts by mortgage investors to force banks to buy back problem loans because of alleged misrepresentations of their risk.

That brought protests from some members of the panel, such as Damon Silvers, policy director for the AFL-CIO labor federation, who told Caldwell: "It is not a plausible position that there is no systemic risk here." The report says the position appears "premature."

"Treasury should explain why it sees no danger" and regulators should subject Wall Street banks to new stress tests to gauge their ability to deal with a potential crisis, the report states.

In legal moves by mortgage investors against banks, one action alone could seek to force Bank of America to buy back and take partial losses on as much as $47 billion in soured loans, the report notes.

The oversight panel was created by Congress to oversee the Treasury's $700 billion rescue program that came in at the peak of the financial crisis in the fall of 2008. Of the total, $75 billion was earmarked for mortgage assistance programs.

The Associated Press

Sunday, November 14, 2010

Dividend Tap Set to Open

NOVEMBER 13, 2010
Fed to Issue 'Conservative' Guidelines for Banks Soon
By LUCA DI LEO,  Wall Street Journal

Federal Reserve governor Daniel Tarullo said the U.S. central bank would soon issue "conservative" guidelines on how banks will be able to change their dividend policy, marking the first time since the financial crisis the Fed might allow banks to increase their dividends.
Bloomberg News
Fed governor Daniel Tarullo said 'convincing capital plans' are a must.
Big U.S. banks will need to show they meet high capital hurdles to restore or increase dividends they slashed during the crisis, Mr. Tarullo said in a speech Friday at a George Washington University Law School conference.
The first batch of approvals is expected during the first quarter next year. Before the crisis, banks would inform the Fed about their dividend policy, but didn't need explicit approval to raise dividends.
"We will expect firms to submit convincing capital plans that demonstrate their ability to absorb losses over the next two years under an adverse economic scenario that we will specify, and still remain amply capitalized," Mr. Tarullo said.
To lure investors and after posting strong profits recently, many U.S. banks have been itching to boost payments to shareholders. But their ability to increase dividends has essentially been frozen as regulators scrutinized their use of capital in the wake of the crisis.
Wells Fargo & Co. shrank its quarterly payout by 85% last year. Citigroup Inc. hasn't paid a quarterly dividend since February 2009. Regulators allowed J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and some other financial firms to buy back their own stock recently, suggesting federal officials were softening their resistance to dividend increases.
Dividend payments are especially important for banks now that the financial industry's outlook is clouded by the sluggish economy, toughened regulation and looming capital requirements.
Mr. Tarullo said U.S. banks also must have a sound estimate of any significant risks that may not be captured by the Fed when it tests their ability to pay dividends, including potential costs from investors demanding their money back from soured mortgage investment. Mr. Tarullo said U.S. banks also must show they can meet new global capital rules and the requirements of the Dodd-Frank regulatory overhaul.
Leaders from the Group of 20 leading economies Friday approved rules to limit risk at the world's largest banks by requiring companies to hold capital reserves that are at least double what was needed in the past.
Big global banks like Bank of America Corp. and HSBC Holdings PLC will have to hold capital levels equivalent to 7% of their assets. Governments also have made it harder for banks to find loopholes around the rules by moving assets off their balance sheets.
Write to Luca Di Leo at luca.dileo@dowjones.com

Saturday, November 13, 2010

BankUnited IPO and the Value of the Loss Sharing Indemnification Asset

As Felix Salmon asks in his Shedding no tiers blog "When bankers make windfall profits from the FDIC" posted on November 11, 2010:

"How is this (windfall) possible, when banks elsewhere are dropping like flies? 
The simple answer is that Kanas and the other BankUnited investors are taking money straight from US taxpayers*: the FDIC lost $4.9 billion when it sold BankUnited, it’s guaranteeing more than 80% of the bank’s assets, and the future income stream from the FDIC to the bank is worth a whopping $800 million."

Here is how the FDIC reimbursement that Salmon refers to works. As part of the deal cut by the FDIC at the time of the failure of BankUnited, the FDIC is covering future losses associated the BankUnited failure. These losses translate into a $2.9 billion asset on the BankUnited balance sheet called the "Indemnification Asset".

As detailed in the Edgar BankUnited IPO Profile:
"Pursuant to the terms of the Loss Sharing Agreements, the Covered Assets are subject to a stated loss threshold whereby the FDIC will reimburse the Bank for 80% of losses up to the $4.0 billion stated threshold and 95% of losses in excess of the $4.0 billion stated threshold, calculated, in each case, based on UPB (or, for investment securities, unamortized cost basis) plus certain interest and expenses. The carrying value of the FDIC indemnification asset at June 30, 2010 was $2.9 billion. The Bank will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid the Bank a reimbursement under the Loss Sharing Agreements. The FDIC's obligation to reimburse the Company for losses with respect to the Covered Assets began with the first dollar of loss incurred. We have received $863.3 million from the FDIC in reimbursements under the Loss Sharing Agreements for claims filed for losses incurred as of June 30, 2010." 

Our Explainer: 
The FDIC provides coverage or a guaranty to an acquiring bank for possible additional losses on the acquired, failed bank assets. FDIC-assisted banks (or a new bank like BankUnited) carry on their balance sheet the FDIC “indemnification asset”, a receivable or "IOU" from the FDIC for the Loss Sharing Agreement obligation due from the agency over time. The indemnification asset value will adjust over time as the condition or "collectability" of the individual assets is determined and changes due to borrower and market conditions. The individual values are “rolled up” into what become the potential cumulative losses of the Loss Sharing Agreement portfolio.

An FDIC indemnification asset represents the present value of the estimated losses on covered loans to be reimbursed by the FDIC based on the applicable terms of the loss sharing agreement.

Despite the intent of "Loss Sharing" to bring order and calm  to the commercial credit markets via long term asset management, some FDIC-assisted banks have raced to recognize and convert to cash loan impairments, liquidating assets as quickly as possible in order to be reimbursed by the FDIC for Loss Sharing losses. 

In one of the rare instances of transparency into the Loss Sharing process as value proposition, we see that BankUnited "has received $863.3 million from the FDIC in reimbursements under the Loss Sharing Agreements for claims filed for losses incurred as of June 30, 2010" and has at least $2.9 billion (in present value) to go.

US Bank Failures This Year Reach 146

Ameris Buys Two Banks, Third Closed as U.S. Failures This Year Reach 146

Ameris Bancorp purchased two shuttered Georgia banks and regulators closed a third in Arizona as the 2010 failure toll climbed to 146.
Ameris, based in Moultrie, Georgia, added almost $730 million in deposits, according to statements on the Federal Deposit Insurance Corp. website. The three lenders closed today had combined assets of $1 billion. The seizures cost the agency’s deposit-insurance fund $204.4 million.
“It is exciting to gain new locations in and near established offices that will further complement our existing presence in these markets,” Ameris’s chief executive officer, Edwin W. Hortman Jr., said in a separate statement. “Customers can be confident that their deposits are safe and readily accessible.”
Bank failures are mounting at the fastest pace since 1992, surpassing last year’s total of 140. The FDIC’s tally of “problem” banks climbed to 829 lenders with $403 billion in assets at the end of the second quarter, a 7 percent increase from the 775 on the list in the first quarter.
Ameris added eight branches by acquiring the operations of Darby Bank & Trust Co., of Vidalia, and Tifton Banking Co., of Tifton, according to the FDIC. The lender, formed in 1971, picked up $521 million in loans, according to the company’s statement. The two failed Georgia banks were not associated with one another, the FDIC said.
Ameris has purchased four banks this year. In October, the lender acquired First Bank of Jacksonville, in Florida, and in May, Ameris bought Satilla Community Bank of Saint Marys, Georgia. Ameris had about $2.4 billion in assets at the end of September.
Copper Star
The third failed bank, Copper Star Bank of Scottsdale, Arizona, was purchased by St. Cloud, Minnesota-based Stearns Bank, the FDIC said. Stearns paid a 1 percent premium to acquire $190.2 million in deposits, and added three branches.
The FDIC this week began to overhaul the assessment process for its deposit insurance fund in response to the Dodd-Frank legislation. On Nov. 9, the FDIC board approved a proposal that would base the fees on banks’ liabilities rather than their domestic deposits. The plan would increase assessments on banks with more than $10 billion in assets.
To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net
To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

Friday, November 12, 2010

The Inland Empire: A Canary in the California's Economic Coal Mine

Beacon Economics 

Employment Recovery Sluggish

While surrounding areas have started to show employment growth, the Inland Empire's labor market remains relatively flat. This is an indication, however, that the region has finally reached bottom and job growth should begin again soon. The Inland Empire's peak-to-trough job losses were much bigger than those in Los Angeles, San Diego, and California overall, even though they began at the same time (July 2007). Riverside and San Bernardino Counties lost 14.4% of all jobs, more than the losses posted in Los Angeles (8.8%), San Diego (8.1%), and California overall (9.2%). Starting in the latter half of 2011, Beacon Economics expects job growth in the region to accelerate and overtake the state rate. The Inland Empire's relative affordability is what drove growth before the recession and that is still in play. In fact, relative affordability has increased since the housing market collapsed. Still, Beacon Economics does not forecast total employment to reach pre-recession peaks within the life of its forecast (through 2015). The unemployment rate will continue to decline, driven in the short-term by job growth in the surrounding counties, and then, when economic activity picks up, by local job growth. While the overall growth of jobs in Southern California will help the unemployment rate in Riverside and San Bernardino Counties fall faster than in the state, the rate will remain above 8% through the end of 2015.

Dark Clouds Still Hang Over Real Estate Market

The Inland Empire has not yet emerged from the broader economic downturn for one major reason: the housing crisis. Riverside and San Bernardino Counties suffered huge losses of equity when the housing market collapsed and have ended up with large numbers of vacant homes. The region was indeed one of the hardest hit in the nation. According to a recent report by CoreLogic, 55% of all mortgages in the Inland Empire are underwater. And while most of the nation is less underwater than they were at the end of last year, the Inland Empire's situation has worsened on this front. The large number of distressed properties loom over the two Counties, and there are almost certainly more foreclosures to come in the near future. Beacon Economics expects the continuation of foreclosures to push the region's median home price downward again next year, but only very slightly. Expect moderate price growth to begin again in 2012.