Wednesday, October 28, 2009

Seven Bank Failures - Sheila, Sheila, Sheila

Well, after a few weeks of sitting on their hands costing tax payers money, the FDIC decided to continue slowly doing their job and shut seven more banks this past Friday.

You may say, "TILB, they shut seven banks, how can you say they are slowly doing their job?" Well, it was three months ago that - using some simple back of the envelope math - we predicted 250 banks would close in the ensuing 15 months. That would have meant about 300 failures through October of 2010(obviously with more to come afterwards), which was well above consensus.

Since then, loan performance has worsened and we've learned that the FDIC has ramped its staff by 10,000 - 15,000 employees. We suspect they will not sit idly be as a total waste of taxpayer money (simply a partial waste). Our current view is that ultimately we could have closer to 1,000 failures than 500, with several hundred (500+ coming before the end of 2010). It is our opinion that one dark, cold Friday, rather than the 3-6 weekly failures we've become accustomed to over the past few months (itself a step function up from the 1-2 we were used to pre-June 09), we will witness 10-15 failures. That should serve as a clarion call that it is go-time.

In any case, this was one of the largest failure weeks in nearly two decades (measured by number of banks). Seven failures.

So, let's go to this week's stats:

Red Jersey of Shame Leaderboard - Florida picks up three points, Georgia one and Illinois one. Cali picked up one last week. As an aside, much like Bill Poole, Illinois's state banking regulator is SHAMEFUL, he should be ashamed!:
Georgia 20, Illinois 17, California 10, Florida 9.

Weekly Failure Summary:
Partners Bank, FL
Assets: $66mm, FDIC Losses: $28.6mm, Losses as a Percentage of Assets: 43.7%

American United Bank, GA
Assets: $111mm, FDIC Losses: $44mm, Losses as a Percentage of Assets: 39.6%

Hillcrest Bank Florida, FL
Assets: $83mm, FDIC Losses: $45mm, Losses as a Percentage of Assets: 54.2% (that's not a typo)

Flagship National Bank, FL
Assets: $190mm, FDIC Losses: $59mm, Losses as a Percentage of Assets: 31.1%

Bank of Elmwood, WI
Assets: $327mm, FDIC Losses: $101mm, Losses as a Percentage of Assets: 30.9%

Riverview Community Bank, MN
Assets: $108mm, FDIC Losses: $20mm, Losses as a Percentage of Assets: 18.5%

First DuPage Bank, IL
Assets: $279mm, FDIC Losses: $59mm, Losses as a Percentage of Assets: 21.1%

Straight Average Losses as a Percentage of Assets: 34.2%
Weighted Average Losses as a Percentage of Assets: 30.6%
So, another ho-hum week: seven failures, continued ugly trending in loss levels, more obfuscating loss sharing agreements, etc.

Actually, the loss sharing agreements, while massive gifts to their recipients are not totally crazy (just mostly crazy). It basically equates to the FDIC paying the asset acquiror to manage the assets so that the FDIC doesn't have to. The FDIC already has $40-50 billion of inherited toxic assets to deal with, so it's basically giving sweetheart deals to acquirors to avoid adding to its already overwhelming burden. As an aside, this is in essence one of the reasons that banks are choosing not to foreclose on effectively defaulted CRE assets (in addition to defering the magnitude of the writedown): it allows the banks to outsource the property management while they get their own house in order.

Green shoots.

Friday, October 23, 2009

Sheila Spreads Calm And Sweet Words

This is too f'ing funny. "In short, we cannot run out of money." "For the insured the depositors, a bank failure is a non-event." Love it!

She also lays the groundwork for borrowing from the Treasury.

From the FDIC's website:

Man, we're gonna miss this crisis when it's finally past us in 2017 or so. The unintentional comedy meter is just so high these days.

For instance, watch how her head bobs and weaves with every word. Also, watch and listen to the big "I know I'm lying to you" gulp she takes a 1:20 when she tries to say that we won't have as many failures as the S&L crisis.


Thursday, October 22, 2009

Corrections Corporation Of America - Value Investing Congress Presentation By Bill Ackman Of Pershing Square

As with many other things, TILB is the first or one of the first to bring interesting investment related documents to the public internet. Mr. Ackman's firm, Pershing Square, often circulates his presentations a few days after the actual public talk with the tacit acknowledgement of its subsequent public dissemination. We hold Bill in high regard and believe his case for CXW is compelling (as disclosed earlier: we have been owners of CXW at various times over several years including now and the past few months).

You can find some of our prior discussions of Ackman here.

See below for his Corrections Corp. thesis.

Prisons' Dilemma - FINAL (10!21!09)

[link to our scribd in case the embedding doesn't work]

Tuesday, October 20, 2009

Bill Ackman's Value Investing Congress Pitch: Corrections Corp. of America (CXW)

Pershing Square's Bill Ackman is in the middle of a presentation entitled: Prisons' Dilemma about CXW. Details to follow.

Update with more detail from the presentation:

Long CCA (Ticker "CXW")

Rehashing the same ole private prison thesis:
Only 7.8% of nationwide inmates are housed in private facilities.
CCA does it cheaper, and "better".
In 2007, private prisons took ~50% of incremental industry "growth". (Trend is sloping up and to the right).
Currently industry (public + private) is operating at 94% occupancy. Doesn't see that declining as states can't afford to build new, current are overcrowded, and nationwide # of prisoners trends up and to the right [not sure why I'm channeling Dennis Gartman right now].

1) Recession is good for prison operators • More Crimes • States/Munis constrained to build new facilities
2) Operating Leverage from incremental prisoners is very high
3) Stock Buyback

Bought 8% of stock back in Feb / March (at $10.61, now trading at $24.50)
After-tax ROIC are 20-30% (low/high case). # of beds has increased from 46k to 61k in last 3 yrs, should be very accretive as occupancy on new beds increases.

5% of equity held by the Board.

##Bill made the point that he views this as a passive investment.

13x FCF, 12.2% Cap Rate (above where he thinks Realty Income will trade - Bill thinks its a good pair trade - see prior TILB post on Ackman's O short here)

Key Qualitative Investment Factors:
CRE Business
Govt is sole tenant
Triple-Net Lease (sorta)
LT Secular Growth
Low Maintenance Capex (~2%)
Local Monopoly/Nationwide Oligopoly
Best comp is a Healthcare REITs (trade at 7% cap rate)

From 1997 to 1999 operated as a REIT. Had to give up REIT status as a result of a large acquisition at the time. But at least it created a lot of NOLs.

Company makes much higher margins on owning & operating than just management contracts. Recently expanded # of beds in owned facilities. Increasing margins. 25-

33% of contracts roll each year, so decent predictability [TILB note: also allows for replacing in an inflationary environment].

All in all very simple.
Clearly a lot of regulatory risk, but Bill thinks its mitigated by supply / demand dynamics in incarceration industry.
Pershing owns 9.5% of company.

Professor Niall Ferguson On The Decline Of America

The ever bombastic Niall Ferguson says that the U.S. is "an empire in decline. There are no solutions." Long time readers know that we love Ferguson's thoughts. He's in agreement with TILB's Singularity (coming soon to a blog post near you) that interest payments for Federal deficit alone could easily be 20% of all federal tax receipts. He's also a long-term China bull (he's not opining on their stock market, rather on the geopolitical strength).


Friday, October 16, 2009

Let The Pigeons Loose: We Got A Bank Failure

After the FDIC decided - apparently - to give its people a few weeks off despite a backlog of several hundred banks, we finally have a another official bank failure: San Joaquin Bank in California. Every week the FDIC chooses to relax at home and not takeout banks costs the U.S. taxpayers another few hundred million dollars. But, as we noted yesterday, nobody seems to care about the government's wasteful ways.

San Joaquin Bank had $775 million of assets and $103 million of estimated losses (including a big loss-sharing agreement).

Link to the press release.

Sorry, but we just have to mention again how much we dislike the FDIC. Fuckers.

Straight Out Of Midtown: Hedge Fund Galleon Group Commissioned Its Own Rap Song

All the good stuff on Galleon is coming out after Raj Rajaratnam and several others were criminally charged with insider trading by the SEC this morning.

Galleon was what I refer to as a datapoint hedge fund (as distinct from long-term value investing, technical trading, quant, risk arb, CTAs, etc.). They probably called themselves event driven long/short or some BS description like that, but in reality they were trying to gain a near-term information edge and use it to make assessments about whether a company will beat or miss, etc. This is perfectly legal, but if pursued too aggressively can easily lead you to a hazy line (or beyond, as alleged in Galleon's case).

Anyway, apparently Raj commissioned a rap song about Galleon. Lord willing Raj expensed this to the fund too. We hope against hope...

[Hat tip: CK]

Bill Ackman Of Pershing Square Presentation On Shorting Realty Income (O)

"O" No!

As we did with Ackman's long GGP presentation, we are the first to bring you Bill Ackman's short "O" presentation. His PowerPoint speaks for itself. Enjoy:

O No! - October 6, 2009 _Final Distribution Copy

[link to our Scribd in case it's not working]

Thursday, October 15, 2009

Obama Offers Senior Citizens Some Backdoor Stimulus, not that kind of backdoor stimulus, you sick bastards.

I guess $13 billion doesn't mean anything these days. Unfortunately, the more that money doesn't mean anything means the more that money won't mean anything. Beware.

Anyway, despite the White House saying they aren't even contemplating contemplating a new stimulus package, this clearly is a backdoor stimulus.

Nobody cares though, so, whatever. What's $13 billion of wealth transfer among friends anyway? What's mine is your's and what's your's is...well, no, somehow we at TILB always seem to be on the "giving" rather than the "receiving" end. Now, if somehow we can loop that last sentence back into the double entendre from this post's title...

Here's the link to some more excellent reporting by the Wall Street Journal. Highlights from the article follow, but I highly recommend reading the whole thing and supporting the online -WSJ. [emphasis added]

WASHINGTON -- President Barack Obama said he will press Congress to provide $250 payments to 57 million seniors, veterans and people with disabilities next year, a $13 billion effort to offset an expected announcement this week that there will be no cost-of-living increase in Social Security payments.

The proposed $250 payment is equivalent to a 2% increase for the average retiree receiving Social Security benefits, the White House said. Notably, it would act as additional economic stimulus at a time when the government is concerned about rising joblessness.

A decline in the rate of inflation precluded any cost-of-living increase next year.

"These payments will provide aid to more than 50 million people in the coming year, relief that will not only make a difference for them, but for our economy as a whole," Mr. Obama said.

Administration officials said in a briefing that they had no plan to offset the $13 billion cost [TILB - of course not, why would they, just ask The Helicopter to turn those machines back on]


The new proposal comes as the Senate prepares to introduce legislation that would extend existing unemployment insurance benefits by 14 weeks for unemployed people in all 50 states, and by an additional six weeks in the 27 states with three-month unemployment rates running higher than 8.5%. [TILB - hell, that sounds awesome. If I you can clear $21k per year after taxes without working vs. maybe $30k before taxes with working, why work?]

People who receive the $250 payments proposed by Mr. Obama would be prohibited from receiving money from other stimulus-related programs next year. [HA! Fucking laugh line, that one. Drew Carey, is that you?]The White House said the cost of the proposal wouldn't damage the solvency of Social Security or other social insurance programs.[TILB - you can't damage what doesn't exist...]

[Hat Tip: LB]

Wednesday, October 14, 2009

Stuy Town Teeters; SL Green, Tishman Speyer And Others To Get Poleaxed

Big, looming CRE default. Acquired for $5.4 billion, estimated to be worth $2.1 billion. Oops.

The WSJ does a great job reporting. Here are our favorite parts of the article [emphasis added]:
One of the biggest, most high-profile deals of the commercial real-estate boom is in danger of imminent default, say people familiar with the matter, signaling the beginning of what is expected to be a wave of commercial-property failures.

The sprawling Manhattan apartment complex known as Peter Cooper Village and Stuyvesant Town -- acquired for $5.4 billion in 2006 by a venture of Tishman Speyer Properties and a unit of BlackRock Inc. -- is running out of cash. As of the end of September, it had $33.7 million left of the $400 million in interest reserves set up to service its debt, according to the people familiar with the matter. At its current burn rate of about $16 million per month, the reserve could be depleted before the end of the year, the people said. Others have said the venture could avoid default until February.

The spokesman for Tishman Speyer declined to comment on behalf of the partnership.

The ownership, which includes a roster of high-profile investors from the Church of England to the California Public Employees' Retirement System, has no current plans to inject more capital into the venture, according to the people. Lenders who financed the deal first projected the complex's net operating income would triple to $336 million in 2011 from $112 million in 2006, according to Deutsche Bank AG. But net income is projected to be $139 million this year, according to Realpoint LLC, a credit-rating agency.

Investors who bought into the deal were confident that real-estate manager Tishman Speyer would be able to greatly boost profits by raising rents in Manhattan's sizzling apartment market. But today, the 56-building, 11,000-apartment property is suffering from a slowing New York economy, a lawsuit that has hindered the owner's ability to convert rent-controlled units to market rentals, and the debt load.

Realpoint estimates that the property is worth only $2.1 billion now, less than half of the purchase price. By that measure, all the equity investors and many of the lenders, including Government of Singapore Investment Corp., or GIC; Gramercy Capital Corp.; and SL Green Realty Corp., are in danger of seeing most, if not all, of their investments wiped out. Hartford Financial Services Group, which bought $100 million of the debt tied to the property, said it has "sufficiently reserved for ths asset in the first half of this year."


These projections convinced Calpers and the pension funds of several other states to make large equity investments in the deal. Meantime, the Tishman/BlackRock venture put a $3 billion first mortgage on the property and another $1.4 billion of so-called mezzanine debt[TILB - donut].


But even a victory by the Tishman/BlackRock partnership likely won't save the deal from a default. One indication: a "special servicer" is in the process of taking over the deal's CMBS debt, say people familiar with the matter. Special servicers are experts in dealing with troubled loans. The transfer to the special servicer, CW Capital, could occur as soon as this month, the people said.

Major players in these talks will likely be Fannie Mae and Freddie Mac, which together own more than $1.5 billion of the most highly rated, triple-A slices of the CMBS debt, according to people familiar with the matter. They would likely benefit from a fast foreclosure because, as senior lenders, they would be paid back first. [TILB - Let's hope it's worth $2.1 billion and not less as the AAA is probably already modestly impaired at that valuation...]

Saturday, October 10, 2009

Warren Buffett At Fortune Magazine CEO Conference

[Hat Tip: TD]

We were sent this video a few weeks ago and just stupidly didn't post it until today. Warren Buffett recapping the past year.

He tells the same story that we are hearing from businessmen everywhere: things have finally stopped getting worse, but they're also not getting better. TILB can't help but wonder how things would be right now if the government was not actively debasing the money supply to help "support" the system. We suspect we'll find out...


Thursday, October 08, 2009

Russia Is A 7

Many years ago, we spoke with a renowned investor in Russian equities, whose name we will keep to ourselves for the time being. At that point (Fall 2003), he announced that on the corporate governance spectrum of 1-10 with 1 being horrible and 10 being great, the US was maybe an 8 and Russia was a 7.

Now, we don't want to say the US is perfect, but the story you'll watch below is of the top competitor of the aforementioned Russian manager - Bill Browder of Hermitage Capital. After years of being an outspoken activist against corrupt corporate governance in Russia, Bill was denied entry to the country without explanation. He subsequently modified Hermitage's investment mandate to be "global ex-Russia."

The shell corporation that he left behind in Russia, which had no assets, was later used by corrupt Russian government officials to steal almost a quarter of a billion dollars. When Browder found this out - after the crime occurred - he blew the whistle and, well, you can watch the video to find out what happened next.

While Russia may not be a 7 on the corporate governance scale, it's a 10 on the places most likely to murder you for public dissent.

[Hat Tip: Max Headroom]

Wednesday, October 07, 2009

Liberty Quote Of The Day: Anonymous

As Howard Marks of Oaktree Capital recently said, "the fear of loss is to capitalism as fear of hell is to Catholicism." TILB couldn't agree more and today we deliver the below quote to you:

We live in a world where our politicians have forgotten what religion has taught us: that without the real possibility and perception of both "good" and "bad" outcomes, you end up with only bad outcomes.
- Anonymous

Monday, October 05, 2009

Hayman Capital's Kyle Bass Waxes Philosophical On The Debacle That Is U.S. Macro

Kyle made his name for crushing it hard on the subprime short trade. If you're a fiat currency fan and you don't like dissent, do not read below.

Bass Provides Sleep Demons

Hat Tip: Wild West

Saturday, October 03, 2009

John Mackey Of Whole Foods Gives Great WSJ Interview

The Saturday Wall Street Journal continues to be our favorite news publication.

In today's version, John Mackey, CEO of Whole Foods, comes back to the WSJ and gives the weekend interview. His last foray at the Journal was his spirited and logical dismembering of the so-called public option for health care (hopefully more successful than public options that already exist in mortgage underwriting and deposit insurance). That OpEd was roundly criticized by democrats (thouugh praised by TILB).

This week he returns with a long and thoughtful interview about his conversion from a corporate and profit hating 70's youth to someone who understands that capital and the aggregation of the free, individual day-to-day decisions of men are liberating forces to humanity.

Some highlights:
"President Obama called for constructive suggestions for health-care reform," he explains. "I took him at his word." Mr. Mackey continues: "It just seems to me there are some fundamental reforms that we've adopted at Whole Foods that would make health care much more affordable for the uninsured."

What Mr. Mackey is proposing is more or less what he has already implemented at his company—a plan that would allow more health savings accounts (HSAs), more low-premium, high-deductible plans, more incentives for wellness, and medical malpractice reform. None of these initiatives are in any of the Democratic bills winding their way through Congress. In fact, the Democrats want to kill HSAs and high-deductible plans and mandate coverage options that would inflate health insurance costs.

The Whole Foods health-care story has been largely ignored by proponents of a government-run system. But it could be a template for those in Washington who want to drive down costs and insure the uninsured.


I ask if he thinks the attacks were instigated by unions. While many other grocery chains are unionized, Whole Foods is not. "Well, the unions have had an adversarial relationship with us," he replies. "I don't think all the protests are strictly union-based, but I do think the unions have contributed to that. I think they've piled on and in some cases are orchestrating some of it." He says he can't divulge private information about whether the boycott hurt sales, but the stock hasn't taken any hit.

"I sometimes think that unions don't understand that we live in a free society and people have the right to not select union representation if they don't want it. I oftentimes hear things like 'Whole Foods is preventing people from unionizing,' which is a lie. That's illegal. We can't prevent anyone from unionizing," Mr. Mackey says.

So why aren't they choosing it? "Because it's not in their best interest," he insists. "We have better benefits and higher pay" than Whole Foods' unionized competitors. "We wish the unions would respect people's right to not have a union." Do they keep agitating? "Yeah, they do."


"Before I started my business, my political philosophy was that business is evil and government is good. I think I just breathed it in with the culture. Businesses, they're selfish because they're trying to make money."

At age 25, John Mackey was mugged by reality. "Once you start meeting a payroll you have a little different attitude about those things." This insight explains why he thinks it's a shame that so few elected officials have ever run a business. "Most are lawyers," he says, which is why Washington treats companies like cash dispensers.


Then he adds: "And we provide jobs. And we provide capital through profits that spur improvements in the world. And we're good citizens in our communities, and we take our citizenship very seriously at Whole Foods."

I ask Mr. Mackey why he doesn't collect a paycheck. "I'm an owner. I have the exact same motivation any shareholder would have in the Whole Foods Market because I'm not drawing a salary from the company. How much money does anybody need?" More to the point, he says, "If the business prospers, I prosper. If the business struggles, I struggle. It's good for morale." He hastens to add that "I'm not saying anybody else should do what I do."

Well, that's not exactly true. Mr. Mackey has been vocal in his opposition to recent CEO salaries. "I do think that it's the responsibility of the leadership of an organization to constrain itself for the good of the organization. If you look at the history of business in America, CEOs used to have much more constraint in compensation and it's gone up tremendously in the last 30 years."


But there's one other institution John Mackey thinks needs a makeover—and that's government. He describes what the Federal Reserve has done with massive money creation as "debauchery of the currency." He thinks the bailouts were a travesty.

"I don't think anybody's too big to fail," he says. "If a business fails, what happens is, there are still assets, and those assets get reorganized. Either new management comes in or it's sold off to another business or it's bid on and the good assets are retained and the bad assets are eliminated. I believe in the dynamic creativity of capitalism, and it's self-correcting, if you just allow it to self-correct."
[emphasis added]
Link to WSJ interview here.

[Hat Tip: Big Earn]