Wednesday, February 9, 2011

After the Crisis Smaller Banks Find Their Niche

‘That which does not kill you makes you stronger.’ Neitzsche

Many tough lessons were learned by the US financial community in the past three years. Now that the worst may be over, our attention has turned away from counting the countless bank failures of 2009 and 2010.

After peering over the edge into the abyss in the darkest days, some community and regional banks have roared back from the brink of extinction and have grown to rival their more conservative regional competitors (who never veered off the road).

Lest we forget the learned lessons of pain, let’s be honest and admit that, at the bleakest point, nearly all banks (large and small) were fair game for closure by the regulators. Since then, banks have been given ample time and the many tools necessary to heal themselves.

It is no secret that survival and newly found financial strength sprang from healthy government assistance, flexible & favorable banking policies, superior scrappy salesmanship by those banks on the edge and an exceptionally large dose of new found internal risk management discipline. Like rediscovering religion, the last of this list is the best thing for the long term health of banking.

Unfortunately, in today’s hyper-competitive environment, the weak may not inherit the earth; community and regional bank survival is a take-no-prisoners multi-front all out war.

In a hyper-regulated world it will be difficult to duplicate the efficiencies of larger competitors. Real estate will be less and less necessary. Thousand of branches are going to close. Before we knew it the old bank branch has been replaced by an app on your smartphone.

Big bank consolidation of market share in the aftermath of the crash is not done but, if they have their wish, has just begun. The small bank of the past, sad to say, is an endangered species unless it can differentiate itself from the big bank mass market approach via new, competitive and customer-smart algorithms.


Friday, February 4, 2011

FDIC Structured Sales: Timing (and Leverage) Is Everything



Since 2008 the FDIC has sold an estimated $22.02 billion in failed bank loans in 19 structured sales transactions.
 
Loan type seems to be much less a factor on the price paid for the failed bank loans


Loan Type
Book Value (Millions)
Price/Book Value
% of Total Sales Activity
Subtotal
Acquisition Development or Construction Loans (SFR,CRE etc.)
$15,559
40%
71%
Subtotal
Commercial Real Estate Loans
$2,877
54%
13%
Subtotal
Single Family Residential Loans
$3,584
48%
16%
Total/Avg

$22,020
44%


than the timing and leverage of the transactions.  Early deals closed in early 2009 were done in the midst of the crisis and were not yet financed by the FDIC.

Date Sold
Loan Type
Book Value (Millions)
Leverage
Price/Book Value
5/6/2008
Single Family Construction and Lot Loans
$146
N/A
32.80%
12/29/2008
Single Family Residential
$561
N/A
38.60%
1/12/2009
Acquisition Development and Construction ("ADC") Loans
$1,120
N/A
9.00%
2/5/2009
Residential Construction
$733
N/A
22.00%
2/20/2009
Commercial Construction
$702
N/A
29.20%
3/19/2009
Consumer Construction, Homebuilder Construction, Lot Loans
$1,652
N/A
16.40%
Total/Avg: First Deals (All Cash)

$4,914

20.40%
9/30/2009
Single Family Residential
$1,320
6 to 1
64.80%
10/16/2009
Commercial Construction
$4,451
1 to 1
62.50%
1/7/2010
Commercial Real Estate
$1,028
1 to 1
44.70%
2/9/2010
Residential ADC
$2,253
1 to 1
38.60%
2/9/2010
Commercial ADC
$799
1 to 1
45.70%
4/1/2010
Single Family Residential
$491
2 to 1
42%
5/18/2010
Commercial RE, Construction and ADC
$421
1 to 1
82.30%
6/25/2010
Single Family Residential
$314
1 to 1
35.40%
7/2/2010
Commercial Real Estate
$1,849
1 to 1
59.90%
7/9/2010
Single Family Residential
$898
1 to 1
37.40%
7/21/2010
Commercial ADC
$1,703
1 to 1
40.80%
8/26/2010
Residential/ Commercial ADC
$762
1 to 1
34.70%
Announced, Not Closed
Residential/ Commercial ADC
$817
 1 to 1
23.60%
Total/Avg: Financed Deals

$17,106

50.22%

Thursday, February 3, 2011

Commodity Bubble Next to Burst?

Davos Déjà Vu View

Some voiced the suspicion that not enough has been done to improve the system after the global financial system melted down and was re-formed. Another system crash may occur sooner than we think.

Such bearish views, however, were not heartily embraced this year at Davos.

In an imagined meltdown envisioned in  "The Financial Crisis of 2015: An Avoidable History" white paper set to occur mid-decade, "The new wave of regulations had proved ineffective at stopping another bubble from forming." 

"As with any bubble, our scenario contains a compelling narrative that allows investors to convince themselves that “this time is different”. In this case it is a story of strong economic growth coming from China creating a sustainable increase in demand for commodities."

"Our scenario builds on these historical observations and has a commodity price bubble at its center. The fallout from such an emerging markets crisis could be even more severe than in previous crises, with the biggest losers coming from the developed world. Western monetary policy is looser than ever, so the bubble could be unprecedented in size. And the high levels of indebtedness in developed economies means that they are in no position to absorb a rapid monetary tightening without experiencing a massive rise in insolvencies, including perhaps the insolvency of several developed world sovereigns."

"Our worst-case scenario assumes that default rates move back up to their historical peak based on the 200 years of data....This would represent the culmination of trends that amount to a complete global rebalancing of economic power: most likely from the US and European economies to the emerging markets. From this perspective, the sub-prime crisis was merely the start of a period of economic instability engendered by this realignment."


Right back where we started from.

The sound of bearish talk, however, was drowned out in the noisy recovery euphoria of the Davos world stage. The bears were told to crawl back into their caves and go back to sleep.