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.

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.

Hilarious.

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]

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].

Catalysts:
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.

VALUATION
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%)
High ROIC
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).

Enjoy.

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]

Obama Offers Senior Citizens Some Backdoor Stimulus

...no, 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]

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...]

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...

Enjoy.

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]

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

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

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]

Liberty Quote Of The Day: Frederich Hayek

Amongst the collection of brilliant attendees of Mises's weekly seminars back in Vienna, Frederich Hayek would distinguish himself as first amongst equals when he later won a Nobel Prize for building on Mises's groundbreaking work in developing an understanding of the impact of credit creation in business cycles.

Hayek was a proponent of liberty and understood that the government could not solve man's inherent problems (they are inherent) and that in its efforts to do good, it would generally have a multiplier of negative unintended consequences. This is Hayek's second Liberty Quote of the Day.

"What our generation has forgotten is that the system of private property is the most important guarantee of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us, that we as individuals can decide what to do with ourselves."

- Frederich August Hayek - The Road to Serfdom: 1944

Guest Post: Max Headroom Brings The Rage To The FDIC

As your source for all things FDIC, we bring you a guest post from long time friend of TILB - Max Headroom - on the ongoing debacle that is the public "option" for deposit insurance. Don't worry though, we are sure a health care public option would be far sounder and less costly. The public options in mortgages (Fannie and Freddie) and deposit insurance (FDIC) are probably the outliers. Something as simple as healthcare (i.e., 16% of GDP and with all sorts of personal and moral decisions) would likely be much simpler.

In any case, Max brings the anger on the news the FDIC is going to borrow $45 billion from the banking system to support the banking system and that it expects to incur $100 billion of insured losses before all is said and done. Enjoy:

I can’t believe this isn’t getting more press. But I’ve been saying this for about 12 months now; finally the FDIC admits that it is a full-on insolvent sh!t show. It just ramped its loss estimates to $100 bn from merely $70 bn – that’s nearly an increase of 50% mind you – and says it will “go negative” this month (never mind the massive liabilities it has taken on and guaranteed too). So it officially has no money; actually, it officially has negative money.

But this is the shocker - to pay for this debacle, i.e. to do its job and protect depositors, Sheila is recommending that banks pay in advance 3 years of insurance premiums totaling $45 billion. What would you do if Allstate called you up and told you to pay 3 years of auto premiums in advance? An appropriate “go eff yourself” would no doubt be the response.

So while our “healthy” banks – which is hard for me to say with a straight face – continue to struggle (though not lend, i.e. do their job), our gubbernment chooses to further hinder their return to solvency (and hence lending) by placing this new $45 billion burden upon them. Keep in mind, this is direct thievery from the banks’ shareholders and can be seen as a penalty for prudence (or more correctly for being less insolvent).

“I do think this is a good balance,” Chairman Sheila Bair told reporters, and requires the industry to “step up” to spread the financial hit to banks (socialism, there, I said it).

Really, Sheila? You think that “stepping up” and stealing $45 billion from Americans to pay for your incompetency is “a good balance”? I recommend you “step down”, Sheila. You are a colossal failure of the largest proportions, only rivaled by AIG, US fiscal policy, and the Fed’s monetary policy. You are the Queen Joke of regulation in a time when it is really hard to be one because you are surrounded by so many regulatory jesters. Thanks, Sheila, for doing your part to destroy America.

Preach it M-M-M-Max.

Reversal of TARP

Best line of the morning from a friend of ours that runs Directive 10-289, "the FDIC forcing banks to lend it $36 billion is just a reversal of TARP."

Indeed, albeit unevenly meted out.

FDIC Contemplates Making Banks Prepay $36 Billion In insurance Premiums

Seriously?

Lajuan Williams-Dickerson, is this true? Can it be?

We are skeptics but even TILB never saw this coming.

According to this story, the FDIC is contemplating asking, nay, forcing its insureds (banks) to prepay three years worth of insurance premiums. When we posted last week about the rumors the FDIC might rob the rich banks to pay the poor banks, we thought "maybe one quarter's worth of fees". But three years?

Wow.

We can't even get our mind around the balls that Sheila Bair must have dangling. She must f'ing hate Tim Geithner. Pure hate. She apparently prefers further imperiling the entire banking system to asking him to provide the FDIC with fresh cash that he (the Treasury) is legally bound to provide.

And why?

Ego is almost certainly the answer.

As long time TILB readers know, the issue the FDIC is facing is multifold:

1. The Deposit Insurance Fund (DIF) is negative. It brings in maybe $200-250 million of "revenue" per week but losses have substantially exceeded that. Using the FDIC's own numbers, we put the DIF at negative $1 billion before Georgian Bank's failure this weekend ripped another $892 million (perhaps $670 million net of revenue) out of the FDIC's already negative coffers. Our estimate is that the FDIC's Deposit Insurance Fund now has worse than negative $1.5 billion in its equity position (unless the FDIC chooses to fraudulently manipulates its reserving, which now is clearly on the table - TILB is basically expecting it at this point);
   
2. Much of the negative position is caused by reserving, so while the FDIC is insolvent and would have been taken over our failed if it were not a socialized insurer to begin with, it actually has plenty of "assets" to deal with its losses for the coming year;
   
3. However, an enormous portion of those "assets" are not cash. In fact, the largest line item on the DIF's balance sheet - by far - is toxic mortgages and other toxic loans that the FDIC could not sell when it took over a given bank. TILB's estimate is this number is currently in the $30-35 billion range. And to date, they have basically refused to sell these "assets" so we can safely opine those loan values are rapidly deteriorating in value as the delinquencies accelerate and servicing is limited or non-existent.
   
   

As we noted last week, charging premium before it's actually due does not fix the solvency problem. Borrowing money does not plug a hole that is fundamentally and "equity" problem. The DIF will still be negative and thus the FDIC will still be functionally insolvent. However, it does temporarily solve the "cash" problem that the FDIC was facing.

With that "solution" comes several potentially ill outcomes, most importantly the FDIC would be sucking $36 billion of much needed capital out of the banking system all at once in order to shore up the same banking system (bend your noodle on that for a bit), ironically making strong banks much weaker while not helping weak banks. This effectively will raise the cost of funds for strong banks (Sheila may as well go kick Helicopter Ben straight in his tiny balls). This capital is needed by banks to protect their own balance sheets or, God Forbid, to make new loans. But alas...

Next, she's kicking the can down the road: Sheila Bair will not be running the FDIC when it comes time to pay the piper as she's already announced that she likely won't stand for reappointment. This is creating a shitstorm for her successor.

Three, think of what this is signalling as to the scope of pending bank failures. The FDIC needs an immediate $36 billion infusion? Using the FDIC's own numbers, we know that the in the third quarter alone (6/30 - 9/30) losses for insured banks have been $14.9 billion so far. Last week we estimated that the FDIC likely had less than $10 billion of that precious asset called "cash" remaining. How long will the $36 billion last? One year? Maybe 18 months of we're generous? And then what? Banks won't owe any new premium for another 18 - 24 months at that point. How many times can the FDIC tap already staggering banks for more money? We suspect we will find out.

The Citizen Guarantors of the FDIC - you and me - will inevitably have to step up to the plate on this. It is a function of when, not if at this point.

We have a lot more to say on this matter, but frankly it's probably best if we just let it play out before letting the steam come out of our ears.

Amherst Securities Issues A Report On The True Housing Inventory Overhang

Amherst Securities, perhaps most famous to TILB readers for their famous jobbing of JP Morgan, is back and this time they share an analysis of the true housing inventory overhang that exists today.

Basically, while the traditional media regularly touts the improvement signified by the contraction of housing inventory down to 8.5 months, these stories overlook the massive foreclosure/REO* inventory and pipeline that is building on the books of banks and servicers. Loans continue to move through the delinquency pipeline toward REO at a rapid pace but are moving out at a slow pace (meaning bank balance sheets (and the FDIC balance sheet!) are filling up with foreclosed homes that ultimately need to be sold). These properties are destined for liquidation of one kind or another and thus will be competing for scarce buyers with "normal" housing inventory. TILB argues that the shadow inventory is understated yet further by two factors:

1. Folks that would like to sell but are unwilling to list their house during an unstable market. Everyone knows someone(s) like this and we suspect this is a huge backlog (of course, most "normal" sellers are would-be buyers as well)
2. Investment properties. An enormous number of foreclosure sales have been purchased by investors that ultimately plan to re-list the properties they've acquired in order to have an exit and chrystalize their "gains". Unlike #1, these sellers do not come accompanied with a buyer. They are net sellers.

This point about "net sellers" is an important point. While "normal" housing inventory are homes owned by a bunch of sellers that expect to be buyers (e.g., they are moving and so they may sell a house in Cupertino and buy a house in Dallas, thus they are "net zero" to the nationwide supply/demand dynamic), REO inventory and investment property inventory are net negative. They do not have an natural "buy" that follows their sale. As such, this is a much "worse" kind of inventory, from a house price perspective.

Here's the synopsis Amherst provides about their report followed by the report itself. It is excellent.

Enjoy.

The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales. We look at the impact on a number of local markets, then look to the causes of the overhang: (1) transition rates are high, (2) cure rates are low and (3) loans are taking longer to liquidate. We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary.

Here's another juicy tidbit:

The Mortgage Bankers Association (MBA) Quarterly Delinquency Survey covers 44.7 million units, or approximately 80% of the total universe. Thus, about 55.9 million homes in the United States have a mortgage. Exhibit 1 (below) shows that at the end of Q2 2009, a staggering 13.54% of mortgages in the MBA survey were in some stage of delinquency: 4.3% of units surveyed were in foreclosure, another 3.88% were 90+ delinquent, 1.68% were 60 days delinquent, and 3.68% were 30 days delinquent.
...
Using transition rates for the calculations, our Q2 numbers indicate that the cure rate is near “0” for loans in foreclosure, and it’s 0.8% for 90+ days delinquent, 4.4% for 60 days delinquent, 26.5% for 30-day delinquent loans (thus, we assume 100% of the foreclosure bucket, 99.2% of the 90+ delinquent bucket, 95.6% of the 60 day
delinquent loans and 72.4% of 30 day delinquent loans will eventually liquidate). This implies that of the 13.54% delinquent units, we expect 12.42% of units to eventually liquidate. If the MBA data is representative of the mortgage universe, it suggests that 12.42% of 55.9 million units (6.94 million units) are already in the delinquency pipeline and will eventually liquidate.

To put that into perspective, existing home sales total around 5.2 million units - - so the overhang is approximately 1.35X one year of existing home sales. [emphasis added]

Honestly, we could go on and cut and paste the entire report, but you may as well click the below link and enjoy the source document yourself.

Green shoots!

Shadow Inventory Report Amherst 9-23-09


*REO means "Real Estate Owned". This is industry parlance for homes that banks and servicers have taken back, generally due to foreclosure, and thus no longer are recorded as a mortgage "loan" on the balance sheet of these entities but are now recorded as REO.

-------------------------------
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Detroit Lions Snap 19 Game Losing Streak Spanning Three Seasons Against Washington Redskins

How about Detroit putting its eight inches right up Washington's metaphorical dirt path yet again today? First Chrysler, then GM, then C4C, and now the hapless Lions snap an epic two year losing streak against the Redskins. It's like a karmic D in the A.

Hail.

Reflections On Jim Cramer's "They Have No IDEA" Rant

It is almost hard to believe that it's been over two years since Cramer famously went apeshit on CNBC during that August of 2007 warning flash, shortly after the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund, its sister vehicle, and Sowood all blew up, seemingly out of left field.

Banks had not yet begun to fail. Cramer, believe it or not, even alluded to Bear and other investment banks facing the likelihood of failure. This was in the face of Bear's stock trading for over $100/share! Amazingly, despite his well founded concerns, the market would go on to achieve new highs in October.

Cramer, we're sure, calmed down and went back to his typical schlocky pump and dump self. But for one afternoon in that summer of warnings, Cramer had prescience. He showed insight, knowledge, and connections. He was everything that he ought to be. It was fleeting and despite being the laughing stock of Wall Street in the days that followed this rant, nobody is laughing now. Watch the clip and ask yourself, "how did such a moron nail it so hard?"

When you watch this, it almost makes you respect Cramer. If he would stop with his typical showmanship schlock and do more of this, people would respect him.

What follows is from the afternoon that immediately followed Bear Stearns' conference call when it attempted to defend itself publicly and tell everyone, "there's nothing to see here. Move along."

Also, huge unintentional comedy in Cramer just totally disregarding Erin Burnett and steamrolling her.

In Cramer's own words:
"I don't want to create fear; I like Bear Stearns very much, but I think that at this stage this is not a good call, they shouldn't have done it, and they should have just said 'you know what, we're doing well' and don't say another thing. Just don't say it because it does not...it does not inspire confidence...

"Alan Greenspan told everyone to take a teaser rate and then raised the rate seventeen times, and Bernanke is being an academic...he has no idea how bad it is out there! He has NO IDEA! HE HAS NO IDEA!! I have talked to the heads of almost every single one of these firms in the last seventy two hours and he has no idea what it's like out there! NONE! And Bill Poole has no idea what it's like out there! My people have been in this game for twenty five years!! And they are losing their jobs and these firms are going to go out of business and he's nuts, they're nuts! They know nothing!!!"

Erin, "Cramer...I, I..."

"I have not seen it like this since I went five bid for half a million shares of Citigroup and I got hit in 1990. This is a different kind of market and the Fed is asleep. [Erin tries to interrupt] Bill Poole is a shame. He's shameful. [Erin tries to interrupt] He ought to go and read the Accredited Home document...You can't get a darn loan unless you're rich like me."

Then Erin tries to calm Cramer down, telling Cramer that if the Fed enacts an emergency rate cut we'll have Armageddon.

Cramer, "no, we have Armageddon. I wouldn't try to cause that. We have...we have Armageddon. In the fixed income markets we have Armageddon. We haaaavvve Armageddon...

"This is crazy. I am sorry to be upset about it...call someone for heaven sake...I worked at Fixed Income at Goldman Sachs. This is not the time to be complacent. I mean darn, sometimes I wish I didn't know anybody so I could just sit here and say, 'you know what, just go buy some Washington Mutual and take that yield.' Unfortunately I know too many people and I'm too darn old...I've been around too long... And Bill Poole? Bill Poole. Bill Poole listen to me: there was a president by the name of Hoover. And no one thinks much of him now: The Great Engineer..."

Anyway, enjoy the trip down Memory Lane. The rant is hard to view through the lens of August 2007, but you have to try.

Ron Paul Interview With John Stossel

First off, your TILB wrote in Ron Paul in last November's election and, as such, we admit to a large degree of bias. That said, having somehow never before seen this video series of Ron Paul's extensive interview in April 2008 with John Stossel, we walk away saying that amongst his more modern interviews, this is the most clear depiction of Congressman Paul's views we have seen. Absolute must watch. Stossel does a great job of challenging our favorite Congressman without being argumentative and allowing plenty of time for response.

It seems virtually impossible for Dr. Paul to be more different than President Obama.

The below is Part 3 of 6, as Ron Paul talks about the role of military and foreign policy.

The FDIC Announces Intention To Rob The Rich To Give To the Poor

We assure you that it was never our intention to become a site dedicated to unmasking the shitshow that is the FDIC, but we play the hand we are dealt.

The most recent FDIC ridiculousness, which we will address below, should not surprise loyal TILB readers as we have been stating over and over again that, using the FDIC's own numbers, the FDIC is insolvent.

Last week, we proved mathematically that the FDIC DIF is now negative and chewing through its reserves. While its liabilities exceed its assets, a portion of those liabilities are reserves that will be used to offset actual losses and pay its creditors (depositors of failed banks). This conversion of reserves into realized losses will keep the DIF alive for a period of time, but the FDIC will soon hit a wall in which it still has "assets" but those assets just don't happen to be "cash". In fact, we also noted that a huge portion of its assets are illiquid assets that are amongst the toxic of the toxic. This of course would not be a problem if they could pay depositors with toxic mortgages, but alas...

After losing another $650 million of value to the Deposit Insurance Fund (DIF) last week (basically $850 million of insured losses offset by $200 million of accrued premium and guaranteed fees), the DIF's capitalization now stands at worse than negative one billion!

As we have said many times, if the FDIC were a bank under the regulation of the FDIC, it would have been seized a long time ago. As American citizens, we find this all very embarrassing.

So, that leads us to this week's FDIC announcement: the FDIC is considering asking sound banks to pay their regular deposit insurance premiums in advance of the normal timeframe (while not asking unsound banks to do the same [note: calling all sellside analysts, you now have a great question to ask the banks you track!!!])

This announcement tacitly equates to stating the following:
1) Oh, shit - we're out of money! ...but not really, but we do need cash, but don't worry, everything's great!
2) In order to remedy this problem, we are going to make all of our lend us their insurance premiums until the premiums come due (don't worry though, this isn't a backdoor special assessment - next quarter we'll credit you for it - wink, wink...)
2a) Oh, and we're not going to make relatively weak banks pay this advance payment...it just feels more fair that way
3) For the time being, our real problem is a "cash" problem rather than an asset problem - don't you see all our pretty reserves? We keep those reserves right there on our balance sheet offset by assets (e.g., toxic, unpurchasable mortgages)

What the deuce is going on here? Are we the only people on Earth that think taking capital out of the banking system to prop up the banking system makes no sense? Isn't Bernie Madoff in jail until he dies for f'ing fewer people behind their backs?

At least the mainstream press is catching on a little bit to the debacle that is the FDIC. That said, the press is confused in its rationale for why big banks "support" this. They obviously support it because they don't want yet another "special" assessment and if paying their normal assessment early helps them avoid said special assessment, they certainly will be in favor of that. However, the article goes on to state big banks don't want the FDIC to borrow from taxpayers...er, the Treasury.

This we are skeptical of.

To say that this would be construed as a taxpayer bailout of banks, is ridiculous. It's a taxpayer bailout of the government. And by the way, the FDIC's entire purpose is to provide bailouts. That's what the FDIC inherently is: a taxpayer guaranteed bailer-outer...but the bailout is to depositors, so to bailout the FDIC is to bailout depositors. While banks, of course, benefit from this in the form of reduced risk of bank runs, that is a statement that is always true, not true just now.

This proposal does not begin to address the FDIC's core problem: THE FDIC IS INSOLVENT. IT HAS LIABILITIES THAT MASSIVELY EXCEED ITS ASSETS. Borrowing more money does not generally address solvency (actually, it often makes the problem worse). What this solution does is simply delay the inevitable; kick the can down the road. As we said on SeekingAlpha last week, the FDIC's core problem is that while it has "reserved" $30 billion for losses (before Q3), it does not actually have $30 billion in cash. In fact, depending on how you calculate "cash" the FDIC had $20 billion or so of cash on June 30th (which is down by about $12 billion so far this quarter). Its largest asset was actually $22 billion of the most toxic loans from the most toxic banks: assets that buyers of failed banks were not willing to purchase ($22 billion as of June 30th, much bigger now).

...and, as we noted, the problem is compounding because the FDIC has been underreserving and its assets are almost certainly overstated. Because the FDIC has been extremely reticent to sell siezed assets, these generally non-performing loans have been sitting on their books stagnant, largely unmanaged and thus suffering deteriorating value as the likelihood of ultimate recovery declines by the day

[Note: generally when a bank fails, the FDIC sells some portion but not 100% of the assets of the failed bank. It retains the balance for disposition at a later date, generally through auctions]

And so this frames the FDIC's problem. It can pull cash forward by a few months, but that just means that unless the new payment cycle becomes permanent, the problem is worse three months hence. The FDIC can borrow from the Taxpayers...er, the "U.S. Treasury", but that does not address solvency - it simply adds another liability to the FDIC's balance sheet. Unless the Treasury makes an "equity" injection into the FDIC, we are not talking about "if" the FDIC is insolvent, we are simply talking about "when" people realize it.

When the FDIC files its September 30th balance sheet for the DIF, unless they start gaming their reserving (which is why bankers go to jail, mind you!), Sheila will have to admit that the DIF is technically insolvent.

The FDIC will have some modicum of claims paying ability that lasts for another two quarters perhaps, but it hits a wall soon unless she starts converting toxic assets into cash. TILB has been following the whole loan mortgage market for the past few years in a variety of capacities - we strongly suspect that the FDIC will not be able to move those assets at anything close to carrying value. When Q3's new basket of bank failures is added, the FDIC's total will exceed $30 billion of super-toxic loans. This is an enormous volume of this type of asset. Extracting value from these kinds of loans requires lots of time and manpower - the likely buyers are niche oriented.

Of course, if these toxic assets start actually trading to new hands (so that the FDIC can raise cash), these sales will have a depressing impact on the realizable value of similar assets on what are theoretically solvent banks, leading to yet more bank failures.

And so here we sit, staring at a Federal government operated trainwreck that's playing out in slow motion. Nobody seems to be paying any attention, yet we find ourselves mesmerized and not able to turn out attention away. We deal with it by standing tall and sharing our views with the our readers.

This is our world and we suppose it's indicative of the role that we play. If the mainstream media will not talk about the Emperor's lack of clothes, we'll go ahead and let you know: Sheila Bair is naked. No, not that way. She's naked in that she is managing a debacle of a regulatory body that has failed at its mission, is insolvent and is introducing all sorts of despicable incentives into the system. She's naked because she is now undertaking in all the despicable acts that she so rightly criticizes and regulates. She's playing favorites, mismarking her assets and understating her liabilities. But time is running out. The paintrain is coming - our view is man-up and admit the situation.

Don't "borrow" from Timmy G; rather, ask for an infusion of new "equity". Frankly, the truly appropriate thing to do would be to seek private capital, recapitalize the FDIC, spin it out completely from the government and operate it as a for profit insurer.

But what is the FDIC's response?

Pretend it's not happening.

Head in the sand, just hoping taxpayers keep walking by pretending there isn't some crazy bastard suffocating under the weight of the beach around them.

September Car Sales Fall Flat On Their Face

Apparently this Boston Globe writer missed the memo that the reason September auto sales are just an abysmal disaster is not because demand was pulled forward into July and August from today and the future, as TILB predicted it would, but that it's simply an inventory problem. The author, Megan Woolhouse, seems to believe - crazily, we might add - that there is a demand problem when clearly there is a supply problem.

If only the automakers would provide dealers with more inventory, all of these ills in the auto industry would be cured, as the lunatic Peter Fong stated.

Here are a few choice quotes from the article which highlights Woolhouse's fundamental misconception [emphasis added]:

Manager Adam Silverleib said business was “pretty intense’’ as a result of the federal stimulus program, with the dealership hustling to accommodate customers and handle the piles of paperwork required for them to receive reimbursement on vouchers. “Now we’re kind of back to where we were in the spring,’’ he said.

In an attempt to draw customers back to showrooms, some dealers are offering new incentives, albeit none as enticing as a $4,500 for a rusting junker. Silko, for example, is promoting 2.9 percent financing on new Accords, along with other deals on its website.

Nationwide, customers snatched up 700,000 new cars, most of them foreign-made, and the government ended up paying out nearly $3 billion toward the purchases. But from the start, analysts predicted that Cash for Clunkers would not boost sales for the year. September’s sales swoon seems to be making their case. Car sales are usually slow after Labor Day, but because of the recession consumers this year are especially reluctant to say yes to major purchases. To make matters worse for dealers, most are still waiting for voucher reimbursements.

“It was probably, in the end, a complete waste of taxpayer money,’’ said John Wolkonowicz, a senior auto analyst at IHS Global Insight, Lexington forecasting firm. “The dealers, who were supposed to be the primary beneficiaries, many were forced into cash flow problems because the government didn’t pay them in a timely fashion.’’
...
This program was very good at getting product off the lot, but there haven’t been long-term benefits,’’ he said. “Dealers are reporting that showrooms are pretty dead right now.’’

Wolkonowicz said the fall slowdown may have been worsened by the program because many buyers came out early to take advantage of the program instead of waiting until now to shop.

In Raynham, Silverleib is relying heavily on longtime customers ready for a new model. But he is realistic about the state of the auto business, and skeptical that the economy is out of the woods.

“Speaking as someone on the front lines, we’re still in a recession,’’ he said.

I love the smell of napalm in the morning...especially when its victim was my tax dollars.



[HT: LB]

September Auto Sales A "Disaster" Per Chrysler's New Chief

Looks like we're headed back below 10 mm SAAR rate.

The good news apparently is that the automakers have decided this plunge is not from lack of demand post Cash For Clunkers but from lack of available inventory. So, let's turn those machines back on, boys and girls.

That's good news, because some of us cling to the apparently mistaken belief that Cash For Clunkers did nothing except shift demand around from one period (the future) to another period (the cash for clunkers era). Oh, and it created all sorts of bad market signals in a broad swath of industries.

“We are going to see harsh reality in September," Sergio Marchionne, the chief executive officer of Fiat and Chrysler, said at the Frankfurt Motor Show. He described the U.S. industry results as a “disaster."

Anyway, here's the article with Chrysler's chief quoted.

Failure Friday? Yes. Finally The FDIC Deposit Insurance Fund (DIF) Goes Negative

Well, as we have been saying week after week, the wizards at the FDIC are managing a functionally bankrupt Deposit Insurance Fund (DIF). Anyone with common sense could assess loss-reserves to the DIF asset base and recognize this as fact.

But this week is different.

This week the DIF actually lost its last penny and went negative.

Best we can tell, the FDIC is now drawing down its line from the U.S. Tax Payers...excuse us, we mean U.S. Treasury.

With the finally announced and seemingly inevitable failure of Corus Bank in Chicago (shocker!) as well as the not-insignificant failure of Venture Bank in Washington state, the DIF suffered a $2.0 billion nutpunch this week.

Loyal readers know that last week we calculated the DIF's remaining value at $1.3 billion. While the FDIC is bringing in about $200 million in top-line fees per week, simple math let's you know that $1.3 billion + $200 million - $2.0 billion = bad outcomes.

Because this is a red-letter day, we update the math below.

Deposit Insurance Fund Status:
+ $10.4 billion: DIF balance as of 6/30/09 (FDIC reported)
- $12.95 billion: Insured losses from 6/30/09 - 9/11/09 (FDIC reported)
- $0.2 billion: DIF operating expenses from 6/30/09 - 9/11/09 (estimate based on last 12 quarters)
+ $1.85 billion: Insurance assessments (estimated based on 20bps p.a. assessment per insured deposit on $4.8 trillion of insured deposits)
+ $0.4 billion: TLGP fees (TILB estimate of 65bps p.a. on $339 billion outstanding guaranteed debt at 6/30/09)
+ $0.1 billion: Transaction Accounts Guarantee Program ($736 billion guaranteed at 10bps p.a.)
= -$0.4 billion: Total DIF as of September 11th, 2009.

So, from here on out, We The People - the citizen guarantors of the FDIC - will be paying for the FDIC's (and other regulators') foolish behavior. It is officially our dime...and yet nobody seems to care. The media could do this math. This should be splashed across front pages nationwide, "FDIC Goes Broke", "Bank Failures Overwhelm FDIC," "FDIC Fails".

Where's the anger? Where's the dismay? All we see is resigned acceptance; the beaten attitude of a conquered spirit.

TILB is prepared to stand alone...

Pissed.

Ronald Reagan's Speech Supporting Barry Goldwater At 1964 GOP Convention

This speech is considered by many the great speech of modern republican history. Small government, firm but humble economic policy, inalienable rights, low taxes, low spending, government as a servant not a master, balance budgets. While many GOP politicians parrot those ideals, they practice anything but.

Watching this speech makes you quickly realized how far the GOP has drifted...this, despite invoking the name "Ronald Reagan" so often. Other than a few voices that are largely ignored - such as Ron Paul - most mainstream Republican politician bare little similarity to this man's views.

It is worth your time.

Roger Federer Beautiful U.S. Open Tennis Shot

Roger Federer is easily one of the two or three best Swiss tennis players in the world. This shot reminds of us of a young Investment Linebacker.

Liberty Quote Of The Day: Ludwig von Mises

As TILB followers know, Mises is an unrivaled genius in understanding economic consequences and human behavior. We proudly display at the top of our website his "tu ne cede malis" quote as an ironclad motto of standing against the Wormwoods that populate our government.

As we collectively celebrate the wonders of money printing and the socialism of losses, TILB can't help but reflect back on this quote from Mises's great work Human Action. If it doesn't give you a warm fuzzy about Helicopter Ben, nothing will.

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

- Ludwig von Mises

From somewhere, far in the distance, beyond the rising fog and across the seas, the wind carried on its back a faintly whispered word, audible only to the ears of the awake: "gold".

[HT: TD]