Comments on: Two Surprisingly Costly Bank Failures in Two Weeks

By: doc holiday

doc holiday — Sat, 06 Sep 2008 19:39:00 +0000

Mr. Kline, and others

If hot money does pour into 10 yr Treasury and pushes the bubble there with yields dropping to match Fed Fund Rate, then what? What happens when we see a mass exodus out of Treasuries at some point, like we are seeing with oil, with wheat, gold? Are we witnessing the morphing of hot money into light speed money that zips from asset to asset in realtime, as in the speed of attention deficit disorder? We may be watching our lotto mentality morph into a new age where risk management and a lack of planning, lack of education and behavioral addictions connect chaos to supercomputing.

It's really a disaster movie in the works, starring Shelley Winters and Ernest Borgnine, with musical score based on The Beatles "Number Nine":

Re: Bottle of claret for you
if I'd realised
I'd forgotten all about it George, I'm sorry,
Will you forgive me?
Mmm yes
Number nine, number nine, number nine, number nine
Number nine, number nine, number nine, number nine
Number nine, number nine, number nine, number nine
Number nine, number nine, number...
...Then there's this Welsh Rarebit wearing some brown underpants
...About the shortage of grain in Hertfordshire
Everyone of them knew that as time went by they'd
Get a little bit older and a little bit slower but...
It's all the same thing, in this case manufactured by
Someone who's always umpteen (...)
Your father's giving it diddly-i-dee district was leaving...
Intended to die (...) Ottoman.....

By: Anonymous

Anonymous — Sat, 06 Sep 2008 17:50:00 +0000

Sorry, bad address, try this,

http://www.youtube.com/watch?v=tMpCB9Ckk-o

(Only about 2000 views so far, talk about the uninformed and ignorant)

By: Anonymous

Anonymous — Sat, 06 Sep 2008 17:44:00 +0000

[url]http://www.youtube.com/watch?v=tMpCB9Ckk-o[/url]

Mr.Mortgage there, pretty much predicts the future which is not hard to do in his line of business.

What is more interesting is that anything mortgage backed was leveraged maybe 30 to 1 via some investment vehicle....these banking and investment failures are going to on for years.

By: Cash Mundy

Cash Mundy — Sat, 06 Sep 2008 17:43:00 +0000

Anonymous in CRE in LA,

Thanks for the hard front-line news.

It appears that between the FDIC and FNR/FRE, the US Government is going to be the owner of a great deal of US property. Am I cynical in assuming this means the property will be deeply discounted to upper-level Bushites and the taxpayer will get a bath and a haircut?

By: Anonymous

Anonymous — Sat, 06 Sep 2008 17:06:00 +0000

I’m in CRE in LA, and banks are sending me more and more C+D or land loans they want off their books. The reason that no market exists for these loans is that, even under the most optimistic scenario in which I could foreclose on these loans quickly and cheaply and then lease up res/retail or “blow out sale” some condos, the loans pencil out to being worth less than 50 cents on the dollar. Of course, the banks can’t sell at this price, as the FDIC would quickly take them over. I have seen over seventy term sheets come across my desk in the last two weeks. These are the best loans out there. I asked the banks what they are holding back with C+D loans, and they said nothing. Think about it. What a phenomenal mis-allocation of resources. Not only was all the equity wiped out on these deals, but the debt part is worth less than 50% of the principal. In a hard asset like real estate! I have generally eschewed development deals, but even I was a small player in two local condo deals that started in 2005 and were basically given back to the bank. The reason these bank losses are so large is that the banks don’t write them down until it becomes clear that the condos won’t sell or the res/retail can’t be leased up. This is all coming to a head right now as the developers are finally giving up their “call options” (they know they’ve been dramatically under water for a year) and just handing the keys back to the bank en masse. If my experience is at all representative (and it appears from these two bank failures that it might be), this is just the beginning. We are talking about huge losses on C+D loans, all coordinated to hit the banks in the next 9 to 12 months.

By: msgtb

msgtb — Sat, 06 Sep 2008 16:04:00 +0000

OMG! I saw a post on one of the message boards which said, Jim Cramer was recommending that the FDIC take all the bad parts of the closing bank (debt), and leave only the good (credit) assets for the receiving bank. Could it be that the FDIC gets guidance from Jim Cramer? How can we confirm this?

We are lost for sure.

By: Clyde

Clyde — Sat, 06 Sep 2008 15:28:00 +0000

Well, if the bank has finally been shuttered, its loans are suspect anyway, and since the FDIC is taking its sweet time, loan quality is deteriorating by the minute. There is no price premium at which these loans can be sold, much like the toxic waste in the SIVs or the investment bank balance sheets.

By: etc

etc — Sat, 06 Sep 2008 13:11:00 +0000

yves smith: “Query the FDIC is stuck holding the bag. Perhaps it only rings up other banks for a bid, but one imagines they’d have an idea of who the other suspects are. At a minimum, this suggests banks aren’t buying performing bank loans. That alone is troubling.”

If the FDIC can’t sell its bank loans, its asking too high a price. There are bids at below par; if the FDIC chooses to refuse them, it isn’t “stuck” holding loans; it is choosing to hold them rather than accept market bids.

Also, obviously, just because a loan is performing doesn’t mean it is worth par. Maybe the borrower’s financial strength has been be declining; maybe this weakness hasn’t shown up in a default because the loan doesn’t amortize principal, the loan allows the borrower to defer interest-payments, the loan allows the borrower to pay interest in additional notes or stock, etc, etc.

By: Richard Kline

Richard Kline — Sat, 06 Sep 2008 11:41:00 +0000

So dh, agreed but with an addendum: deleveraging is _initially_ $ and carry trade bullish—until that unwind is largely in place. Then, those overpumped refugee asset classes themselves crash. We have already seen the summer stock version of this with the commodities hump-and-crump. Now, the 10-year $ is getting gangbanged. In neither case does the ‘action’ reflect fundamental issues in the asset class; it’s all hot money, stoopid money, and dim bulb speculation. If the herd gets in, smart money generally has already gotten out, if they can.

By: Yves Smith

Yves Smith — Sat, 06 Sep 2008 10:48:00 +0000

etc,

I may have left a dramatic comment standing without further observation, but the general point is the FDIC typically unloads a fair bit of the loan book as well as deposits when it announces a bank closure. These aren't terribly large banks. Query the FDIC is stuck holding the bag. Perhaps it only rings up other banks for a bid, but one imagines they'd have an idea of who the other suspects are.

At a minimum, this suggests banks aren't buying performing bank loans. That alone is troubling,