Wednesday, December 30, 2009

Tilson's Response To Hovde's Response To Pershing Square's Response To Hovde's Response To Pershing Square's Views On Mall REITS And GGP Specifically

Whitney Tilson (T2 Partners) re-inserts himself into the Pershing Square vs. Hovde debate on GGP. To be fair, Hovde did take a shot at Tilson's GGP analysis on page 63of its Dec. 29th presentation. For those wondering, T2's analysis is largely a derivation of Pershing Sqaure's, which is not surprising given the two firms' histories of sharing research and investment ideas (and Tilson and Ackman's long friendship).

Tilson emailed the following to his regular distribution list:
Hovde Capital yesterday released its response (link here) to Pershing Square’s rebuttal (link here) (and, to a minor extent, and our rebuttal (link here)) of Hovde’s initial report on GGP (link here).

Our quick take is that it’s more of the same – like Hovde’s first report, there are a few good points (nothing we hadn’t already considered) mixed in with many arguments that are either factually incorrect or misleading, or with which we simply disagree. In short, there’s nothing new that changes our view regarding the attractiveness of GGP (it remains by far our largest position).

Before proceeding, we want to make clear how much we enjoy the debate and think our markets would be much healthier if there were a similarly detailed exchange of viewpoints for EVERY stock!

To some extent, the debate is now about different views of the future: Hovde believes that consumer spending will be terrible for an extended period and that bankruptcies among mall-based retailers will continue or worsen, which will translate into severely declining NOI for GGP over time. Pershing believes that the worst is behind us: that unemployment has peaked, consumer spending has stabilized and may even be picking up a bit, and that retailers are in remarkably good shape in light of what they’ve been through over the past 18 months, all of which will translate into approximately stable NOI. Whether Hovde or Pershing is right about GGP over time will, to some extent, depend on future macro factors, which are obviously impossible to predict with certainty.

That said, good analysis matters and we think Hovde’s is sorely lacking, primarily in the following areas:

1) Hovde’s most serious mistake is misunderstanding (or misrepresenting) what will likely happen to GGP’s unsecured debt. Hovde assumes that it either remains outstanding (throughout its presentation, Hovde calculates GGP’s leverage and interest payments assuming that the debt remains outstanding, which is the main reason its analysis differs from Pershing’s and ours – see page 63, for example) or that it converts to equity, which will result in “significant dilution” (page 72). Hovde makes explicit this assumption when it claims that Pershing “does not use consistent assumptions” regarding what happens to the unsecured debt on page 35 of its report.

Hovde doesn’t appear to understand bankruptcy law and what will likely happen to the unsecured debt. There is almost no chance that it will remain outstanding: it will either be refinanced or, more likely, be converted into equity (this is what Pershing assumes – there is no inconsistency). But here’s the key: it will NOT BE DILUTIVE because it will convert AT FAIR VALUE, as determined by the bankruptcy judge. Of course, if the judge determines that fair value is $1/share, then it would be massively dilutive, but that’s not going to happen. The judge has a great deal of discretion in determining fair value, but will certainly take into consideration the current stock price, comps and the price of any equity offering(s) GGP might do.

For example, as soon as GGP exits bankruptcy and its stock is relisted (it currently trades on the pink sheets, which means most institutional investors can’t own it), it will be a must-own stock for every REIT fund (a big catalyst Hovde misses). To meet this demand and pay down some debt, GGP might issue equity – and the negotiated price at which this stock is sold would likely weigh heavily on the judge’s determination of fair value (and would not be dilutive). Of course, if someone like Simon were to buy GGP at, say, $20, the debt would convert at this price – and again, it wouldn’t be dilutive.

2) Hovde takes seven pages (6-12) arguing for its definition of NOI, but there’s no right answer here. NOI is like free cash flow: different people calculate it in different ways. But however one calculates it, it’s important to be consistent – which Hovde is not. It uses the most conservative assumptions to minimize GGP’s NOI, but then fails to do so for Simon, making its comp analysis deeply flawed.

3) Speaking of comps, Hovde writes: “to suggest GGP should trade at the LOWER cap rate than SPG is LAUGHABLE in our view” (pages 22-23). Hovde can laugh all it wants, but there are very good arguments for why Simon is, in fact, the best comp for GGP. For starter, both have very similar mall portfolios with a national footprint (unlike Macerich, which Hovde cites as a better comp on page 63; MAC also has debt issues that are more significant than what GGP will likely have post-bankruptcy). In addition, GGP will likely have a BETTER liability profile post-bankruptcy, with no maturities until January 2014. Finally and most importantly, GGP is for sale and Simon isn’t, so there should be a premium for GGP reflecting a possible sale of this strategic asset.

4) Hovde’s analysis treats GGP as a collection of assets, but it’s more than that. The fact that GGP is in bankruptcy has put it into play, so there is a once-in- a-lifetime opportunity for Simon, Brookfield or someone else to acquire a national platform, as highlighted in this quote from the WSJ:
The opportunity “is a potentially transformational event that doesn’t come along very often,” says Steve Sakwa, an analyst with International Strategy and Investment Group Inc.

5) Hovde dismisses the likelihood that GGP might be acquired (pages 51-55), focusing only on Simon and not even mentioning Brookfield, which may in fact be the more likely acquirer due to fewer anti-trust concerns and the need for a national platform (which Simon already has). As noted above, Hovde misses the value of GGP as a strategic asset – no doubt, there’s lots of distressed inventory out there, but only one national platform for sale like GGP.

Finally, Hovde finds it “telling” that Simon and Brookfield bought GGP’s unsecured debt, but not the equity, even when the equity was at a much lower price. But it’s not as telling as Hovde thinks for a number of reasons. First, it’s possible that Simon and/or Brookfield do in fact own the equity – if either bought less than 5% of GGP, it wouldn’t have to file (in any case, for anti-trust reasons, they couldn’t acquire more than 7.5%). Also, at the time they bought GGP’s debt it was very cheap and they might have reasonably concluded that it represented a better risk-reward than the equity.

6) Hovde argues that GGP’s rental rates and leasing spreads are very poor and will likely get worse (pages 15-18). They have indeed been under pressure, but Hovde is making the classic investing mistake of projecting the immediate past indefinitely into the future. What Hovde is missing is that GGP over the past year, knowing that it was in a poor negotiating position due to the macro environment and its own bankruptcy, has been renewing leases mainly on a short-term basis. These renewals have indeed been done at low rates, but this isn’t likely to be a permanent state of affairs. The macro environment has at least stabilized and may be improving and GGP will soon either be acquired or exit bankruptcy, so its negotiating position will strengthen and therefore rental rates and leasing spreads will likely improve.

7) On pages 28 and 33, Hovde repeats the charts from its first presentation (pages 33-34), showing that “Commercial Real Estate Prices Have Dropped 43% Since the Peak” and that cap rates are moving higher under the heading: “Despite Speculation to the Contrary, Cap Rates for All Property Types Are Moving Higher, Not Lower. Does Pershing Square Believe These Transactions Did Not Happen?” But the CRE chart doesn’t include mall real estate and the cap rate chart, while showing cap rates for virtually every other type of commercial real estate, is MISSING data for malls! (The cap rate for mall REITs has fallen dramatically from earlier this year.)

8) Hovde paints a very bearish picture of retail sales (page 61), but the latest data contradicts this – for example, an article in the NYT earlier this week noted:
Over all, retail sales from November through Dec. 24 rose 3.6 percent from last year, according to SpendingPulse, an information service of MasterCard Advisors that estimates sales for all forms of payment, including cash, checks and credit cards.
That number — which does not include sales of automobiles and gasoline — was helped this year by an extra shopping day between Thanksgiving and Christmas. Adjusting the results for that extra day cuts the retailing industry’s sales increase to about 1 percent, in line with what many retailing professionals expected.
While the numbers do not suggest a turnaround for the industry, they signal an improvement over last year’s 2.3 percent sales decline…
… “Last year was just a storm and retail was all about dropping prices to get rid of inventory,” said Mr. Katz of AlixPartners. “This year it was much more of a planned strategy: low inventories and tight expenses. And controlled promotions.”
That means most stores did not erode their profit margins the way they did in 2008, though in the days before Christmas, Mr. Katz said, some chains discounted more deeply than they should have.
Perhaps the best news is that the double-digit declines that plagued nearly every retailing category last year are gone.

9) Hovde spends many pages (38-43) questioning whether GGP’s Master Planned Community Segment has any value – but Pershing already assigns no value to it so it’s not clear who Hovde is disagreeing with. Another note: on page 39, Hovde makes this ominous statement: “The heirs of the Hughes estate hold a contingent claim related to the valuation of these assets. If there is significant value in these assets, the resolution of this claim could result in a substantial unfunded liability, which Pershing Square has failed to include in its analysis.” This is a red herring: the only claim by the Hughes estate is for half of any profits. Thus, the only way there could be a claim, leading to a “substantial unfunded liability”, is if there are profits, which would be wonderful for GGP (even if GGP only received half of the profits, this is more than zero, which is what both Hovde and Pershing expect).
This is a great debate and it will be very interesting to see how this plays out.

Happy new year to all!
TILB is on record as saying we love to see the debate. It's healthy for markets and educational.

Tuesday, December 29, 2009

Hovde's Response To Pershing Square's Response To Hovde's Response To Pershing Square's Views On Mall REITS And GGP Specifically

Well, Hovde seems to be enjoying the publicity that Bill Ackman's Pershing Square is providing them. They have crafted a response to Ackman's response to Hovde's response to Ackman's views (Ackman's prior response linked here).


In any case, we think this is one of the healthier debates that exists. Two thoughtful participants going back and forth in a public forum on their in depth views on a business. We honestly look forward to the next volley in the debate - Pershing Square, it's your turn.

Enjoy. [HatTip: BobBob]

General Growth Properties - 2 - Hovde


Updated with this Hat Tip video pick from Max Headroom. Cat Fight! Is Hovde the blonde in the pink bra?

Help Solve The Federal Debt - Timothy Geithner Has It Licked

Good news, the U.S. Treasury has figured out how to solve the problem of runaway deficits (and thus runaway debt and ultimately currency collapse). On the Treasury Direct website, under the FAQ section, you'll find the below gem within the Financing the Debt subheading:
How do you make a contribution to reduce the debt?
Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept G
Bureau of the Public Debt
P.O. Box 2188
Parkersburg, WV 26106-2188
We're sure that P.O. Box is an extra large, to handle the volume of inbound mail.

Another gem from the same Financing the Debt subheading is this question:
Why does the debt sometimes decrease?
The Public Debt Outstanding decreases when there are more redemptions of Treasury securities than there are issues.
What we appreciate most about this is that it's so shocking that the U.S. debt might actually decline that it demands a frequently asked question to reassure people that, no, the debt is not actually declining. It's simply a timing issue on when the Treasury issues and redeems notes.

Phew! Glad we don't have to worry about the debt actually decreasing.

Tuesday, December 22, 2009

Bill Ackman's Pershing Square Rebuts Hovde's Short GGP Thesis

Many of you know that we are fans of Bill Ackman and his firm Pershing Square. We brought you his prior presentation on the attractive economic merits of mall REITS. In response to that presentation and Ackman's prior discourse on why Pershing Square is long General Growth Properties (GGP), Hovde published a bearish response.

Today, we bring you Pershing Square's dismantling of Hovde's response. Enjoy.

As an aside, this has all the makings of a classic cat fight. Purrrrrrr.

A Detailed Response to Hovde's Short Thesis on GGP (12!22!2009)


Updated with this Hat Tip from Max Headroom. Cat Fight! Is Hovde the blonde in the pink bra?

Buffett Provides A Video Interview On His Thoughts On the Burlington Northern Business

What follows is the transcript from a recent (12/21/09) Edgar filing from Burlington Northern. It has some illuminating thoughts from Buffett on his expectations from BNI as well as his views on the way America will develop and why BNI is thusly well positioned to benefit. Everything that follows is a cut-and-paste from that filing:

On December 21, 2009, Burlington Northern Santa Fe Corporation (“BNSF”) posted on its intranet a video of CEO Matt Rose interviewing Warren Buffett, CEO of Berkshire Hathaway Inc. (“Berkshire Hathaway”), on matters related to the acquisition by Berkshire Hathaway of BNSF. A transcription of the interview follows:

Interview with Warren Buffett
Interviewer: Matt Rose
December 3, 2009

MKR: Hi, I’m Matt Rose. Welcome to this special edition of BNSF Video News. As you all know, we’ve been in the news a lot with the major announcement that we have the future ownership position of BNSF being acquired by Berkshire Hathaway. So I’ve been asked a lot of questions around, what does this mean for BNSF, what does it mean for the individuals that work for BNSF, what does it mean for customers, and what does it mean for the communities in which we operate? And so I thought, who better to ask these questions to than Warren Buffett, chairman, chief executive officer of Berkshire Hathaway. We have a great treat. We’ve got Warren with us today at this taping, so we’re going to get right into it. I’ve asked about 20 people to send in a number of questions, of “ask-Warren” questions, and they did. They sent in about 150 questions. We’re only going to ask about 15 to 20. We’ll see how we do on time. So let’s get right into it. Again, Warren, welcome, thank you for joining us. The first one is, why BNSF, and why now?

WB: Well, uh, you know, I love railroads. I mean, you go back 70 years when I used to be going down to Union Station every Sunday, and so I’ve watched it for years. And, and we couldn’t have done this 20 years ago, in terms of the size of Berkshire. But Berkshire piles up. We don’t pay out any dividends, so we pile up 8 or 9 or 10 billion dollars a year, and, and, you know, this is a dream for me, you know, getting a chance to buy a wonderful railroad like this, and uh, uh, you know, I couldn’t be happier about it.

MKR: So, the next one. In announcing the acquisition, you said it’s an all-in wager on the economic future of the United States. Buffett, who has been building up his rail holdings for several years, said in the statement, I love these events. So would you please just share your perspective and thoughts on the future of the rail industry?

WB: Well, it has to do well if the country does well, and the country is going to do well. So, you know, I don’t know about next week or next month or even next year, but if you look at the next 50 years, this country is going to grow, it’s going to have more people, it’s going to have more goods moving, and rail is the logical way for many of those goods to travel, and probably a greater percentage all the time, just in terms of, of cost efficiency, in terms of fuel efficiency, in terms of environmentally-friendly. So there’s no way rail is going to lose share, and I think the pie is going to grow, and I think the rail share of the pie is going to grow.

MKR: So the next question. You said in the past, you’d rather buy a great business at a fair price than a fair business at a great price. What does BNSF meet the definition of a great business?

WB: Well, it’s a great business in that you know it’s going to be here forever, to start with. I mean, the hula-hoop business came and, you know, went, and then, you know, the pet rocks and all that kind of thing. And even television set manufacturers have, you know, moved over to Japan. All of that sort of thing. The rail business is not going to go anyplace. It’s going to be right here in the United States. There’s going to be four big railroads that are moving more and more goods. So it’s, it’s, it’s a good business. It, it can’t be, it can’t be something like Coca Cola or Google, because it’s, you know, it’s a public service type business, too, and it has, it has a fair amount of regulation that is part of the picture. But it’ll be a good business over time. It will make sense for this country to want railroads to continue to invest more and more money, in terms of expanding and becoming more efficient. So you’re on the side of society, and society will largely be on your side. Not every day, but most of the time.

MKR: Well, I think our 40,000 employees definitely agree with that. Alright, so the next one. Historically, are companies more profitable after joining Berkshire Hathaway, and if so, why?

WB: Well, you can run the business exactly as you see fit. You don’t have to please banks. You don’t have to please Wall Street. You don’t have to, you know, you don’t have to please media or anybody else. Basically, it frees up the managers of our businesses to do exactly what they love to do, which is to run their businesses. And, and, and there’s no home really like Berkshire that can offer that.

MKR: Alright. The next question is, and I didn’t ask this, will Berkshire directly be involved in the management of BNSF, and will the management structure change?

WB: No, it won’t. It’s very simple. We’ve got 20 people in Omaha, and there isn’t one of them that knows how to run a railroad.

MKR: Alright, next question. Will this transaction impact employment levels positively or negatively?

WB: Well, I don’t think it changes anything, really, in that respect. I mean, you’ll be running the railroad, and you’ll run it in an efficient way, and when times are good, you’re going to have more people employed than when times are bad. But nothing in our ownership really has any effect on employment.

MKR: Okay. So, this came from one of our locomotive engineers. He said, will rail labor have access to you regarding issues? How do you balance negotiating fair wages, health care, and a good work environment with Berkshire Hathaway earnings?

WB: Well, you’ll do it just like you’ve managed it in terms of BNSF earnings. And there will be no involvement by me or anybody else in Omaha in terms of labor or in terms of purchasing or in terms of what locomotives you buy, anything of the sort. It’s — we bought it because it was well-managed. If, if, if we had to bring management to BNSF, both of us would have been in trouble.

MKR: Okay. The next question came from our finance group. Will there be a significant, will there be significant BNSF asset sales to pay down the eight-billion-dollar acquisition debt?

WB: Not a dime. Not a dime.

MKR: Next question. Will Berkshire continue to invest the capital needed to maintain the BNSF infrastructure?

WB: Well, it’d be crazy if we didn’t. You know, we’re not going to, we’re not going to buy a business and starve it. You got where you are because you were willing to make the investments ahead of time to pay it off 3, 5, 10 years down the road, and that’s, that’s part of the railroad business, and it’ll stay part of the railroad business.

MKR: You’ve heard me talk about regulatory risk. We’ve been talking to our employees about that for a number of years. And the question is, uh, what’s your perspective on the regulatory risk in our industry, from what you know about it?

WB: Well, Matt, it’ll never go away, in the sense that, people, you know, you will always have people that are bothered by what you’re charging, and you know, whether it’s in some farmer in a pasture or wherever. And the very fact that it has a utility aspect to it. Now it has an entrepreneurial aspect to it, too, but it has a utility aspect to it. So it’s always going to be regulated. There always will be some tension between shippers and railroads, and they will all, there will always be some people who will try and use political influence to affect rates. But in the end, the country needs railroads to spend lots and lots and lots of money merely to stay in the same place, but then beyond that, to grow, and, and it would be crazy of society to deny you a reasonable rate of return.

MKR: Another question from the finance group. Will BNSF capital requests now have to compete internally with other Berkshire interests?

WB: Not in the least. No.

MKR: I thought it was a good question. Okay, next question. In 10 years, how will you evaluate the acquisition of BNSF, whether or not it’s been successful?

WB: Well, I — I’ll measure it against my own standard, which is that I have made a bet on the country doing well. And if I’m wrong on that, that’s my fault and not anybody at BNSF’s fault. But I will look at it how it does compared to other railroads. I’ll look at how railroads are doing versus trucking and all of that. But in the end, I don’t really worry about that very much. I, I’ve seen what’s been done here. I think I know how the country is going to develop. I think the west is going to do well. I’d rather be in the west than the east. So I really don’t have much of a worry about that.

MKR: The next question is, how should be BNSF support the long-term goals of Berkshire Hathaway, and what expectations have you established for the BNSF management team?

WB: You should, you should really be doing it as if you had the same 250,000 owners you have now. I mean, their interests are the same, you know, as Berkshire’s will be, and, and I don’t really see any difference. We want this railroad run as well as it can be. We’d love it every, every, every car you can steal away from the Union Pacific [unintelligible], but we want Union Pacific to do well, too. I mean, we’re both going to do well, too. I mean, we’re both going to do well, you know, in the years ahead. And, and, you know, if we thought it needed changing, we wouldn’t be here.

MKR: Okay, this was a question from one of the employees. I heard Berkshire’s eliminated company-sponsored pension plans at some companies. What are the plans for the BNSF pension plans, and what factors do you take into consideration when evaluating whether to maintain a pension plan at a company you acquire?

WB: Yeah. That will be up to the management. I mean, there may be changes in benefits that the government legislates. I mean, who would have guessed 401K’s would have come along 40 years ago or something of the sort. But you’ll make those determinations just like you make all other determinations.

MKR: BNSF has developed a pay structure that encourages employees to take ownership of the company by basing a portion of the compensation on corporate performance. How will this change after the merger?

WB: Well, the people who have been involved in any kind of a pay-for-performance-type arrangement, whether it’s stock or anything else, will undoubtedly have a pay-for-performance type of compensation, which, you know, you’ll work out, basically.

MKR: Okay, so there were just a lot of questions on your view of the national economy and philosophy around this. A couple of questions. One, it’s been said recently that the rising national debt may be the next economic crisis. Do you agree, and what should be done about it?

WB: Well, I actually wrote an article about that a few months ago. I mean, it is a problem, but if, if you sat down at the start of every year going back to 1776, you could have written down a bunch of problems in the United States. We aren’t perfect at avoiding them, but we’re pretty darn good at solving them. I mean, you know, we’ve even had a civil war in this country, you know, let alone a Great Depression, world wars, and flu epidemics and all that sort of thing. So the country always has problems. The country always solves them. And I don’t know whether business comes back in 3 months or 6 months, but I know this: in the next 100 years, we’re probably going to have 50 bad years, I mean 15 bad years in the United States, and we’re probably going to have, you know, another 15 so-so, and we’ll probably have 70 good ones, something like that. I don’t know the order in which they’re going to come, but overall, this country works. We started out with 4 million people in 1790, and look at what we’ve got now. And it’s because of the system.

MKR: Next question. Do you promote management collaboration among the subsidiary companies?

WB: Yeah, we, we tell them if they can find ways to do things among themselves that benefit both parties, go to it. But we don’t, we don’t force anything through Omaha. We’ve got, for example, a carpet company that worked out something with our insulation company, Johns Manville, in terms of back hauls, for example. And we’ve got other companies cooperated on getting special discounts by buying computers cause of mass purchasing power. But we’ve never ordered anything from Omaha. We don’t convene people to do that or anything. The managers do get to know each other, and sometimes they figure out things to their mutual advantage.

MKR: Okay, the next question is, it’s thought that Berkshire Hathaway has not previously invested in heavily-unionized companies. Given that, what are Mr. Buffett’s views of the role of unions in private-sector businesses generally, and at BNSF in particular?

WB: Yeah, we probably have, I’m sure we have more than a dozen businesses that are, are anywhere from moderately-unionized to very heavily-unionized. The Buffalo News we’ve probably got, I don’t know, 12 or 13 unions. In See’s Candy, we’ve got unions. We’ve got, we’ve got unions at CTB, our farm equipment company. We’ve got lots and lots of unions. And there, you know, we — it’s a question of the industry, to a great extent, and, and uh, and what the management has done in the past, and so on.

MKR: You’ve acquired some terrific private and family-run companies where the owners have great passion for their business. What traits have made those companies so successful, and how can the BNSF family of 40,000 employees apply those principles in our work and lives?

WB: Yeah, well, we, we do — we look for companies where the managers are passionate about the business. It makes a real difference. I mean, anybody that’s enthused about something just brings something extra to the decision-making and the work every day. So I wouldn’t, I really wouldn’t be here today unless I thought you were passionate about the business. I mean, it’s crazy to have some bureaucratic type going through the motions every day running a business. It won’t work in America. And, and it’s, it’s an important ingredient. You do find quite often in family businesses, and you probably find it a little less often in, in, in the professionally managed operation, but I’m sure it exists at BNSF.

MR: Closing comments?

WB: Closing comments is, I’m happy to be here. This — I had to wait until I was 79, but it’s still a boyhood dream come true.

MKR: Well, Warren, I get the question a lot, of how life will change. It’s been a little frustrating, I think, for some of our employees, because at the end of the day, truly, this is mainly about corporate structure. Instead of shareholders, we now have Berkshire Hathaway and yourself. What our employees continue to be focused on, of course, every day, is improving safety, getting more freight to the railroad, taking cost out, and, and going deeper into our customer supply chain. And we look forward to a great relationship with Berkshire Hathaway, and we’re delighted that you took this time to come and spend it on our video news, and I’m sure it means a lot to all of our employees. Thanks very much.

WB: Thanks for inviting me.


FDIC's Booty From Failed Banks Includes "Marijuana-Reeking Tour Bus"

TILB is so pleased the FDIC has socialized the capitalist function that depositors should play: it enables banks to make such unusually wonderful loans. We wish that instead of selling or auctioning properties off, the FDIC undertook a lottery system. Even better, a "dibs" system. Dibs on the eight foot palm tree!

Marijuana-Reeking Tour Bus, Red Ferrari Are FDIC’s Crisis Booty
2009-12-22 05:01:01.0 GMT

By James Sterngold
Dec. 22 (Bloomberg) -- The financial crisis that popped the
real estate bubble and pushed U.S. bank failures to a 17-year
high landed the Federal Deposit Insurance Corp. a rapper’s tour
bus that reeked of marijuana.

“It smelled so bad of pot after one tour that they had to
completely pull out most of the interior and replace it,” said
Jerry Jenkins, who sold the bus at Penny Worley Auctioneers
after the FDIC acquired it in the collapse of an Atlanta bank.
“By the time we got it, it was almost brand-new.”

Worley Auctioneers, based in Maineville, Ohio, has the FDIC
to thank for the bus, not to mention a red 2001 Ferrari, an
eight-foot palm tree and stacks of unwanted office furniture --
the detritus of 140 banks closed by the agency this year. Worley
Auctioneers, Rick Levin & Associates and Tranzon Asset
Strategies, the three firms hired by the FDIC to sell
furnishings from shuttered branches and warehouses stuffed with
repossessed collateral, are having a banner year.

The FDIC has reaped $6.2 million from the sale of so-called
other assets in 2009, six times the total last year, according
to the agency. While that’s a sliver of the $38.3 billion of
failed bank assets that the FDIC held as of Sept. 30, any cash
is useful after the surge in crippled lenders sent the FDIC’s
deposit insurance fund into the red.

“Business has been good,” said Penny Worley, who opened
her firm in 1993. “This can be a daunting task, because there
are so much and so many different things. There’s an occasional
Dali. There are rare gold coins.”

ATM Machine, Microwaves

Worley’s Web site offers a snapshot:
-Laptops, desk chairs and an ashtray, complete with
stubbed-out cigarettes, from First Priority Bank of Bradenton,
Florida, which failed in August 2008, and Freedom Bank, also in
Bradenton, shut three months later.
-A Diebold ATM machine -- empty, presumably -- courtesy of
Cooperative Bank of Wilmington, North Carolina, shuttered in
June 2009.
-Ten refrigerators, plus assorted toasters and microwave
ovens, from Vineyard Bank, the Rancho Cucamonga, California-
based lender that lost more than $100 million last year as
builders defaulted on construction loans. It was shut in July [TILB readers should be quite familiar with Vineyard].

Then there was the tour bus, acquired by Omni National Bank
in repossession from a leasing company before the Atlanta-based
lender went bust in March, Jenkins said. The vehicle, which
sported 12 coffin-like bunks, each with flat-panel televisions,
sold for $310,000 to a company in Nashville, Tennessee, that
leases buses to touring musicians.

Drive-Away Purchase

Financial assets such as real-estate loans are sold
separately through auctions that can involve complex financing
and profit-sharing arrangements. “Other assets” sales are as
straightforward as old-fashioned live auctions.

When the electronic hammer comes down, a process conducted
online, the deal is done and the auctioneers try to get the
merchandise, and the customers, out the door as swiftly as
possible. “PLEASE DO NOT BID if you are unable to remove your
items during the scheduled removal times,” the auction company
warns bidders.

“People get what we call auction frenzy,” Jenkins said.
“We don’t want to give them a week to think about it
afterwards, so items usually have to be picked up within one

Most come prepared. That was the case with the Ferrari, a
360 Spider F1 with 27,363 miles that sold earlier this year. The
buyer paid $61,000 for a car that New Frontier Bank of Greeley,
Colorado, had repossessed from an auto dealer that had defaulted
on a loan. The buyer arrived on a red-eye flight, paid cash, and
drove away, Jenkins said.

Drag-Racing Truck

New Frontier, which cost the insurance fund $670 million,
also left the FDIC with a 1,000-horsepower drag-racing Chevrolet
pickup truck, and almost 1,000 milking cows. Sales from assets
of other failed banks have included armored trucks, industrial
equipment and Thomas H. Benton lithographs. The palm tree
fetched $105.

The savings-and-loan and banking crisis of the 1980s
produced even more unusual auctions, said Tom Moran, the FDIC’s
resolutions and closing manager, based in Dallas. Back then, the
FDIC ended up with items that ranged from yachts, antiques and
luxury homes to paintings and sculptures, he said.

“I personally went in and found safety deposit boxes with
things like collector-type guns,” Moran said.

Some of the one-of-a-kind items can provide special
challenges. The FDIC is trying to unload a framed 10-by-70-foot
watercolor mural by California artist Millard Sheets, Moran
said, a sort of graphic history of California. It was seized
when PFF Bank and Trust, a $3.7 billion bank in Pomona,
California, failed in November 2008, leaving the insurance fund
with $700 million in losses.

“It’s framed right to the wall, and we’re not sure how to
get it off and protect it,” Moran said. “This is going to take
a unique-type buyer.”

For Related News and Information:
Stories on FDIC: NI FDIC
Stories on bank failures: NI BANKFAIL
On the credit crisis: NI CRUNCH BN
Rescue programs: RESQ
Stories on banks: NI BNK
Today’s top financial stories: FTOP

--Editors: Alec McCabe, William Ahearn.

To contact the reporter on this story:
James Sterngold in New York at +1-212-617-4946 or

To contact the editor responsible for this story:
Alec D.B. McCabe at +1-212-617-4175 or

[HT: TW]

Tuesday, December 15, 2009

Our Peter Schiff Man Crush Grows

Watch Connecticut's refreshing senate candidate Peter Schiff just absolutely embarass this poor Columbia professor David Epstein that espouses mainstream "Keynesian" economics in this excellent debate. Epstein plays a perfect foil to Schiff in this long, thoughtful debate. I think the main lack of understanding of mainstream economists is a fundamental lack of understanding of what "money", productivity, and the pricing system really are and what they serve. This leads to all sorts of decisions to promote government deficit spending as "cures" for economic ills without the understanding that the government does not have a capital base to invest from without first taking it from the private market. This perpetuates and compounds the problem, preventing healing.


Monday, December 14, 2009

Hermitage Capital's Tribute To Sergei Magnitsky

As we discussed serveral times before, Russia is corrupt and sad outcomes regularly happen. What follows is Bill Browder and Hermitage Capital's tribute to their murdered legal counsel, Sergei Magnitsky. We provide our full sympathy, as he seems like an honest, dedicated, professional patriot.

Tribute to Magnitsky

Saturday, December 12, 2009

Warren Buffett Maintains His Midas Touch

The WSJ reflects back on Berkshire Hathaway's decisions during the crisis, concluding that he made a series of skillful decisions.

Here's a link to the article that prompted this video and a few highlights. It's really a great timeline of the crisis and we recommend you go to the and read the whole thing [emphasis added]:

Warren Buffett believes his best deals during the economy's biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn't do.

Mr. Buffett slammed the door on one opportunity after another during the most harrowing stretch of his storied career. That impulse, he says, left him with the financial firepower he needed last month to strike the biggest deal he has ever done -- Berkshire Hathaway Inc.'s $26.3 billion purchase of railroad Burlington Northern Santa Fe Corp.

"I bought my first stock in 1942, and this roller coaster surpassed anything that I've seen," says the 79-year-old investor. "We didn't do all the smartest things. We didn't do anything really dumb."


On March 28, 2008, Mr. Buffett, Berkshire's chairman, took a call from Richard Fuld, then head of Lehman Brothers Holdings Inc. Mr. Fuld wanted to know whether Mr. Buffett would inject about $4 billion into the investment bank to stanch losses.

That night, in his offices in Omaha, Neb., Mr. Buffett pored over Lehman's annual financial report. On the cover, he jotted down the numbers of pages where he found troubling information. When he was done, the cover was dotted with numbers. He didn't bite. Six months later, Lehman filed for bankruptcy protection.

"Everybody was looking for money in those days," Mr. Buffett recalls.

He didn't say no to everyone. He invested $5 billion in Goldman Sachs Group Inc. and $3 billion in General Electric Co. But for Berkshire shareholders, the bigger story may be the deals that he passed up.

"I don't think Buffett gets enough credit for all the pitches he doesn't swing at," says Paul Howard, an analyst at Janney Montgomery Scott. "And he gets a lot of pitches."


The requests for bailout financing began March 15, 2008, a Saturday. Mr. Buffett received a call at Berkshire's headquarters from New York private-equity investor J. Christopher Flowers. Mr. Flowers and a team of bankers were trying to arrange a last-minute buyout of Bear Stearns Cos., the struggling investment bank.

After listening to a pitch for about 10 minutes, Mr. Buffett said he wasn't interested. The next day, J.P. Morgan Chase & Co. struck its own deal to take over Bear.

Two weeks later, Mr. Buffett rebuffed the request from Lehman's Mr. Fuld. Mr. Fuld didn't respond to requests for comment.

As the housing market cratered, companies laden with securities backed by home mortgages were teetering. Later that spring, Morgan Stanley bankers representing Freddie Mac, the mortgage giant, reached out to Mr. Buffett for an investment. He thought Freddie Mac's troubles were too severe.


Mr. Buffett remembers September 2008, when the financial crisis came to a head, as one of the most hectic months of his career. It started with a request from Robert Steel, then the chief executive of Wachovia, for an investment of as much as $10 billion. Mr. Buffett, who thought Wachovia had recklessly dived into subprime mortgages during the housing boom, turned him down.

Wachovia eventually was purchased in a fire sale by Wells Fargo & Co., in which Berkshire is a stockholder. A spokesman for Wachovia declined to comment.

On Oct. 6, 2008, Warren Buffett sent a letter to then Treasury Secretary Henry Paulson outlining a plan to pool public and private assets to purchase toxic assets from troubled banks.

On March 27, 2008, working late in his Omaha office to review Lehman Brothers' 10K for a potential investment, Mr. Buffett jotted down on the 10K cover a list of pages where he found troubling financial information. Then, on Sept. 12, a Friday, Robert Willumstad, then the chief executive officer of troubled insurer American International Group Inc., called to ask Mr. Buffett for an investment of about $5 billion.

Mr. Buffett says he was aware AIG needed to raise capital quickly. "Don't waste your time on me," he recalls telling the AIG chief.


Mr. Buffett did, however, agree to consider making an offer for some of AIG's property-and-casualty businesses. Later that evening, Mr. Willumstad called back. "How about the whole thing?" he recalls asking Mr. Buffett, referring to all of AIG's property-and-casualty businesses. He said the price was $25 billion.

Mr. Buffett said he would look over information about the deal. He swiftly concluded it was too big. Berkshire would have to borrow a lot of money, potentially threatening its coveted AAA credit rating.


That same weekend, another AIG deal was in the works. Berkshire executive Ajit Jain, who runs its massive reinsurance unit, held discussions with an investment group led by Mr. Flowers and Kohlberg Kravis Roberts & Co., the New York private-equity giant. They were trying to line up a deal to provide reinsurance for some AIG operations, which would have eased some of the company's capital constraints.

If the commercial-paper market had frozen completely, more major financial institutions and possibly even household names such as GE would have failed, Mr. Buffett says, "because their checks would have failed to clear." That would have triggered panic in the nation's money-market funds, which held about $3.5 trillion in assets, because some of them held commercial paper. The resulting chaos, Mr. Buffett concluded, could have crashed global financial markets, threatening Berkshire.

"I felt that this is something like I've never seen before, and the American public and Congress don't fully understand the gravity" of the problems, he recalls. "I thought, we are really looking into the abyss."

At a birthday party for a wealthy friend in Omaha, several guests asked Mr. Buffett if their money-market funds were safe. He found the questions worrisome: They suggested widespread fears about the safety of funds long perceived to be invulnerable to losses.


In late September, Mr. Buffett decided to strike.

Goldman Sachs, like Morgan Stanley, was in need of cash. The bank already had made several pitches to him. None had enticed him. But he remained open to offers, partly because he was familiar with Goldman's operations, having worked with the bank for many years on various deals.

On Sept. 23, Goldman banker Byron Trott, who had long worked closely with Mr. Buffett, called to ask what it would take to do a deal.

Mr. Buffett laid out his terms. Hours later a deal was struck. Berkshire purchased $5 billion of Goldman preferred shares with a 10% annual dividend, as well as warrants to buy $5 billion worth of Goldman shares for $115 apiece. The shares now trade at about $166.


Mr. Buffett has some regrets about his decisions during the financial crisis. He says if he'd waited to deploy his cash until March 2009, when the market hit bottom, he could have made a killing.

"I made plenty of mistakes," he says. "I didn't maximize the opportunities offered by the chaos. But in the end, it worked out OK."

Wednesday, December 09, 2009

The Singularity

We believe the world is walking a tight rope of low rates driven perceived safety. Reality is something uglier. Click here for our definitive take on The Singularity risk.

Liberty Quote Of The Day: Booker T. Washington

As we sit watching the great freedom that our forefathers granted to us melting at the hands of huge oppressive government, an administration that believes it is all knowing, sovereign debt loads spiraling upward, and a Federal Reserve that has manipulated price signals to disasterous outcomes, it is pleasant to think back on what it must have been like to have the chains of slavery fall to your feet and to take your first few free steps.

Booker T. Washington reflects back on that moment - when the Emancipation Proclamation was first read to him. While we're not big fans of Abe Lincoln in many ways, obviously ending slavery was a true moral good.
"As the great day drew nearer, there was more singing in the slave quarters than usual. It was bolder, had more ring, and lasted later into the night. Most of the verses of the plantation songs had some reference to freedom.... Some man who seemed to be a stranger (a United States officer, I presume) made a little speech and then read a rather long paper—the Emancipation Proclamation, I think. After the reading we were told that we were all free, and could go when and where we pleased. My mother, who was standing by my side, leaned over and kissed her children, while tears of joy ran down her cheeks. She explained to us what it all meant, that this was the day for which she had been so long praying, but fearing that she would never live to see."
- Booker T. Washington - Up From Slavery: An Autobiography

Tuesday, December 08, 2009

Bill Ackman Of Pershing Square Presents His Bullish View On Mall REITS To The ICSC

Below is a presentation from December 7th, 2009 by Pershing Square's Bill Ackman to the International Counsel of Shopping Centers (ICSC) on the current state of mall REITs. Suffice it to say, he's bullish across the board: GGP, Simon, Macerich.

As always, brought to you first by TILB. Please spread the good work. As you know, we are big Ackman fans and always have respect for his views. The man can produce Powerpoint like nobody's business.

ICSC Mall REIT Presentation 12-7-2009

China Builds A One Million Person City - Sadly, Nobody Lives There

This is phenomenal. We complain about a bridge to nowhere, well how about a city of nobody.

This video - from Al Jazeera of all places - highlights a city built in China from scratch in the last few years that has virtually no citizenry.

This is China's GDP.

Stimulus? No.

This is clear wealth destruction in the guise of jobs. It would have been a much better use of capital to just send the money back to citizens in cash.

Saturday, December 05, 2009

Bread Is Money And Money Is Bread

"We have free markets."

This mantra is unquestioned around the world in the context of The United States of America. Nobody prevents you from buying the vast majority of products you desire and nobody prevents you from selling the vast majority of products. In broad terms, you can generally do what you wish with your money.

So, the mantra is true: we have free markets.

Or, perhaps before answering the question, we should allow our mind to churn a bit.

When asked by Congress and when giving speeches, Chairman Bernanke affirms his belief in the need for free markets. I am certain if you asked if he was in favor of price fixing, he would laugh at you and say, "of course not. The freer the better, (with certain 'protections')."

And yet, as chairman of the Federal Reserve, he is of course the world's largest price fixer. He controls the monopoly printing control of U.S. dollars and he controls the price and availability of these dollars. He controls who gets newly printed dollars and who does not. These dollars are backed only by the Full Faith and Credit of the United States, rather than by anything tangible. As such, these unbacked currencies are referred to as "fiat" money, as they are commanded into society be fiat, rather than choice.

Bernanke controls the price of dollars through Fed Funds rate implementations (and other similar tools) and he controls the availability in any number of manners, but suffice it to say a dollar's legal name is a Federal Reserve Note, so each dollar is theoretically a liability of the Fed and thus created always and everywhere by the Fed (banks sort of also create dollars through fractional reserve banking, but this is with the Fed's explicit blessing and under the Fed's control).

The price and supply of dollars is not set via market forces, it is set via the collective decision of a dozen or so bureaucrats sitting in the Washington, DC headquarters of the Federal Reserve.

In practice, the majority of those bureaucrats has never dissented from the opinion of the Fed Chairman, so Bernanke effectively dictates the price and supply of money with the advice of mandarins.

Luckily, money's not a very important instrument, so this seems like it shouldn't cause problems.

Everyone knows that is a ridiculous statement, but have you ever thought about what "money" is? I don't mean "dollars," I mean "money," in all its forms.

Money is simply a store of value, of man's productive output. When man innovates and produces above his cost of capital, money becomes more valuable because the same amount of money can now acquire more, different, and/or better things.

Money is exchangeable for goods and services and thus money represents some amount of claim on goods and services. As such, things like bread, milk and financial advice are all embodied in money. It is a fractional claim on everything.

Each transaction in life represents two sides of the same coin. While we generally think of a transaction as money buying bread, another way to think of it is of bread acquiring money. As such, bread is money and money is bread. They are claims on each other. In essence, every good and service is a claim on some amount of other goods and services and money is simply the trusted lubricant in the transaction.

This brings us back to Chairman Bernanke's seemingly benevolent dictatorship of the price and supply of money.

Because bread is money and money is bread, what is Bernanke actually controlling the price and supply of? Is he only price fixing dollars?

Obviously not. He is using an incredibly blunt (albeit convenient) mechanism - the dollar - to price fix everything in the economy.

If you've never thought of the nature of money before, this should scare the absolute shit out of you.

One guy is in charge of all of this?

Further, the Fed is a largely independent body of unelected officials with no meaningful transparency or accountability to We The People. We have handed the economic nuclear football to a bearded Princeton theoretician and told him it would be grand if he didn't use it, or at least use it responsibly.

This is truly insane.

It also means we live in anything but a free market. We live in a market that is manipulated at all times and in damnable ways. Not only are dollars not created and priced via natural supply/demand dynamics, they are a form of money that is manipulated and used to the benefit of certain special interests at the expense of everyone else in an opaque system.

Given this backdrop, in some sense it is almost amazing these United States have been as successful as they have.

I attribute the success we have had to a few things, not least of which is the reality that every country on Earth (that I am aware of) uses a similar or worse methodology for creating and pricing their imposed form of money, so the dollar has not served as a meaningful comparative disadvantage. In fact, its status as the global reserve currency - which is now waning - has been a substantial advantage as it imposed our price control structure onto many nations and global transactions and allowed us to export a good portion of our inflation.

We also have historically had greater freedom from governmental control in other aspects of life than most nations, giving us a further competitive advantage of more freedom, even if incomplete. That gap too is waning as certain other countries grow their freedom and we are actively and aggressively shrinking ours.

Importantly, we built our reputation as a nation of freedom during a time that predated the Federal Reserve and had a reasonably well enforced classical gold standard. We still lean on this reputation today.

The fact that other countries have been more evil than we have is not exactly the stand on which we should endeavor to hang our hat.

We should understand the long-term implications of what it means to live in a society that suffers from governmental imposed price fixing in every market. Some implications are as follows:
1) we suffer a drought relative to freedom that we should have;
2) we can know for a fact that our scarce resources are misallocated and scarce investment capital is maldirected as time and time again has shown the optimal system for directing resources and capital is a reliable price system;
3) the long-term governmental incentive to inflate the currency supply is overwhelming as this form of taxation is largely hidden from sight and fiat money allows it limitlessly. Monetary inflation thus leaves elected officials less accountable than if a more straightforward tax was required. This monetary system thus helps (in the short- to medium-term) the government finance things that are difficult to pay for with new taxes due to their unpopularity like war and freedom encroaching bureaucracy;
4) certain private industries and citizens benefit - these beneficiaries are in essence the early holders of newly printed dollars before they've cycled through the system and impacted prices (e.g., banks, bank borrowers, and wealthy investors) at the expense of holders that see the new money later in the process (e.g., fixed income retirees and middle class workers);
5) we risk our competitive advantage to countries that are willing to be more free than us. Increases in true freedom have everywhere and always improved the lot of the people (see modern day China, for example); and
6) someday we should expect that the build-up of problems caused by the system lead to the system's failure. What that entails is potentially awful. Historically massive wealth loss, poverty, political upheaval, class warfare and actual war are on the menu.

So, have we actually lived in a free market economy during the last few decades, waking every morning to an improving society?

No, we have not. The market will continue to fight against the current system until it breaks, as freedom once held cannot be suffocated, it can simply be constrained. Market freedom is a core freedom and it demands the right to carve its own path.

We now know that bread is money and money is bread - that money, is in fact a small part of everything that can be acquired. We know that as new money is brought into circulation, it dilutes the per unit (e.g., per dollar) claim we have on all goods and services. We know the perverse incentives of fiat money and the near certain direction that fiat money's supply will progress.

With those important pieces of information, you should perhaps ponder whether you prefer holding a money that is 38 years old (the fully unbacked dollar came into being in 1971, after the pseudo-gold backed dollar suffered its demise upon Nixon's command) or whether you prefer a form of money that has been freely selected by individuals in every geography on Earth in which it existed for the last 6,000 years.

Perhaps fiscal discipline will return and monetary discipline will follow. Perhaps government officials will choose to tax less and spend even less in the coming years, easing the pressure on the Fed to debase. Perhaps the Fed will see the folly of its ways and halt or reverse the printing press actions of the past year. Perhaps these things will all happen in the next two or three years before our debt gets past the point of no return.


But I know my preference:


[For more on the meaning of money, read Francisco D'Anconia's brilliant speech linked here]

Wednesday, December 02, 2009

David Rosenberg Calls For Gold $2600

To the moon.


Gold Hits $1215/Ounce

And we're off to the races. Luckily the Fed thinks gold is a "side show," so it's no big deal. Somewhere Bernanke smiles, so don't worry.

To the moon...

Tuesday, December 01, 2009

Ford Union Members Reject New Contract

This news is a month old and it's bothered us the whole time. At some level, how can this possibly surprise us?

Ford union members reject a contract that would have put their compensation inline with GM and Chrysler. The article begins with the following:
Autoworkers in Missouri and Michigan overwhelmingly rejected a new contract with Ford Motor Co., a sign that the automaker and the United Auto Workers union are having trouble convincing some workers to accept changes that would lower Ford's labor costs.
Think about this from the UAW's perspective: if you agree to Ford's demands, you end up with lower wages but Ford stays viable and value accrues to equity and debt holders. Instead, if you reject Ford's demands, one of the two following scenarios plays out:
1) You maintain higher wages yet somehow Ford remains solvent. This is better for you than agreeing to Ford's demands;

2) Ford goes bankrupt. You observe that in the Chrysler Traveschammockery the UAW ended up taking the lower pay but also owning 55% of the post-reorg equity and in GM's case the UAW ended up taking the lower wages and owning at least 17.5% of post-reorg equity. You easily assume that if Ford goes bankrupt, you'll then take lower wages and own 20% - 55% of post-reorg Ford equity. This is better for you than agreeing to Ford's demands today.
So Ford's reward for being the best managed of the Big Three? Emasculation. Ford's entire cost structure has been co-opted by the reality of the UAW's preferred position in The Administration. The unintended consequences of the government's disgusting actions continue to compound...