Thursday, 01 January 2009 18:00

The banking backdrop for 2009

To follow up on the post that I scribble together at 3 am, undedited, the other day -A few grim thoughts for the New Year, as I reflect upon the past year, I want to refresh the memory of my readers, particularly in regards to why I was so bearish on many name brand banks last year. This may require some re-reading of the Asset Securitization series. So, before we get started on the major value drainers of 2009 (believe it or not, still mortgages, consumer and corporate loans) I want to provide a few links of interest that put things into perspective.

Yes, I know its a lot of reading, but that is why I have the confidence to short heavily into a rising market, and it is what has powered my returns thus far. Confidence in the fact that I have performed more comprehensive, more diligent, and more accurate research than those that I am selling shares to.

Now, that we have caught up on the happenings of last year, let's look forward to what we can expect this year.

Monday, 08 December 2008 01:00

A change is gonna' come

Tribune filed for bankruptcy today. This, by a very smart
man who sold his $12 billion commercial and residential real estate portfolio
at the very tippy top of the CRE bubble, only to be sucked into another bubble
bursting. The Tribue Cos. And affiliates have sold off a lot of assets, fired a
lot of professionals and cut back on a lot production - in essence, they are
much lesser a producer of actual original content and will shrink further as
time goes on.

Considering "As
investment banks cut back, the serious blogs take the forefront
", there is
a strong current of trenchant, need I say "superior" analysis coming from
blogs, and the ability for bloggers to transform that analytical ability into
most nutritious fodder in the form of being able to quickly analyze news
events not only as they happen but to perform the type of investigative
analysis that is probably too expensive and (in this environment) too intensive
for a reporter who is not a specialist - I think even the most ardent of the old
school must come to face the music, "A
Change is gonna come!

This popped into my mind as I had to spend even more money
to upgrade my servers for the fourth time since starting this blog about a year
ago. I also had to hire customer service for subscribers, since I couldn't handle
it on my own. I hate to say it, but this nascent new media business that I
discovered by mistake by just trying to publish my financial and analytical thoughts
to the world is actually growing (knock on wood) while the mainstream media and
the investment bank analyst model are floundering. I now can count several major
central banks as subscribers, much of what's left of the Wall Street
broker/banks, all sorts of small, medium and brand name hedge funds, commercial
banks and even the IMF.

Published in BoomBustBlog

From Bloomberg -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”

It appears the TARP program was just a bait 'n switch tactic. The real money (ten times the amount) has been shoved out the door by the Fed. I disagree with the assertion that keeping the monies' recipients secret will guard against runs on, or short attacks on, those recipients. The government is assuming that we are all stupid and we can't figure out who's in trouble and who is not. Browe through the "Doo Doo 32" list and "The Anatomy of a Sick Bank" and you will find at least half, if not more of those monies right in those two articles. What the government should be doing, instead of tryng to anticipate the level of its constituencies financial acumen, is putting its credibility behind the institutions, not just its cash. Don't they know that in the age of blogs, the truth (and the lack thereof) travels at internet speeds???

My 7 momth old overview of where all of that money went:

Published in BoomBustBlog

This is part 29 of Reggie Middleton on the Asset Securitization Crisis. If you are new to my blog there is a sidebar below with a full roadmap to the crisis. Before we go on with this installment let's get a firming of the defintion of the term "inflation" with a little help from Wikipedia:

Inflation can be considered a general rise in the level of prices. For increases in the money supply, see the description below. I, being the simpleton that I am, like to consider it the effective rise in prices. For instance, nominal prices can go up 10% but if buying power rises 15%, we actually have a drop in effective, real prices. The exact opposite is currently happening in housing right now. Nominal housing prices are dropping through the floor. Unfortunately, they are not dropping with the same intensity and velocity that credit terms are tightening, crediit availability is shrinking, and the labor force is contracting. Thus, housing prices from a simpleton's perspective (such as mine) are at the very best, remaining level and probably from a more realistic perspective, increasing. This undercuts the argument that one must "stabilize" housing prices in order to stem the ongoing financial malaise. Reggie Middleton posits that the housing market is attempting to stabilize after an unprecedented and fundamentally unjustified meteoric run up in prices. The deflationary pricing IS the markets attempt at stablization and anything that would effect it otherwise will produce de-stabilizing results. You know what grandma use to say, "What goes up (too far), must come down". If our regulators want to end the malaise (and to do so prematurely will also lead to destabilization since the system must clean itself out) they should be working on employment and real productivity - and not the artificial elevation of already inflated and glutted housing stock in an effort to save financial institutions that failed to use the risk management prudence that my 7 year old exercises in an average game of Monopoly.

Published in BoomBustBlog
Tuesday, 28 October 2008 02:00

GGP: Requiem

Las Vegas Review Journal :

General Growth borrowed to create a massive portfolio of more than 200 properties in 44 states, including a $14 billion deal in 2004 to purchase the Rouse Co., which owned Fashion Show mall, Summerlin Centre and several other Las Vegas properties.

Company stock started slipping several months ago as prospects for consumer spending waned.

Shares went into freefall more recently when investors realized the confluence of the credit crunch with an emerging recession would make it difficult, if not impossible, for General Growth to make good on its debts.

Financial blogger Reggie Middleton, whose detailed criticisms of General Growth were posted online at in January, months before management acknowledged serious problems, said the news Monday wasn't a surprise.

"Of course it could have," been prevented, said Middleton. "They didn't take care of the problems."

He criticized management not only for over-leveraging the company long ago but for compounding the problem through mismanagement.

Middleton said General Growth officials heaped blame on short sellers for forecasting a demise, got the company added to the list of firms protected from short sellers that was created in September to protect banks, then dumped millions of their own shares to meet margin calls.

"The latter part of the share price compression was the management's own making," Middleton said. "They owned a lot (of stock) on margin. They sold more shares than speculators like me ever would."...

... Wally Brewster, General Growth Properties senior vice president of marketing and communications, said the malls are healthy on an operational level...

... As for the notion that General Growth officials would seek a buyer for the entire company, "We always look at all the options."

Brewster also responded to the idea that company officials could have averted the problem by taking action earlier.

"I think we stand on our success of the past 50 years," Brewster said. "We are now dealing with an environment I don't think the U.S. has seen since the Great Depression."...

... Moore agreed with Middleton that the moves on Monday aren't likely to preserve General Growth as a complete entity. He added that current problems could have been averted had management girded the balance sheet before the credit markets went south.

The moral of the story?

"Leverage is very, very dangerous," Moore said.

In November and December of 2007, I plainly forecasted this turn of events in painfully explicit detail Don't tell me this could not have been seen coming. Greed and avarice vs. ignorance - the battle of the vices...

Published in BoomBustBlog

This missive is more than probably any outside investor in GGP knows about GGP, plus some. The accuracy of the contents below is not guaranteed nor warranteed in any form or fashion. I try my best to be accurate and exact, but things do happen - thus all contents in this post is based upon information and belief. Thus, I invite all to roll your sleeves up, and dig in to do some research for yourselves. This is the type of research that I expect to come from my local brokerage houses. It doesn't happen, thus I must do it myself. Please be aware that I have a bearish position in GGP stock. Read this complete missive, and it will be easy to understand why.


Table of Contents

  • Short summary of the 3 elements of this report
  • Background Information on the founding Bucksbaum Family
  • Background Description of General Growth Properties’ Business
  • Item 1- Clear evidence that GGP is heading into a refinancing-induced liquidity crunch
  • Item 2- One-time items are holding up deteriorating core operational performance
  • Item 3- Evidence that GGP is potentially misrepresenting itself

Must read content tie-ins


Short summary of the 3 elements of this report

1. There is very clear evidence that GGP is heading into a refinancing-induced liquidity crunch.

2. One-time items are holding up deteriorating core operational performance.

3. There is evidence that GGP is misrepresenting itself and breaking securities laws.

Many themes currently broadcast in the news directly apply to GGP – its situation is one of high leverage in the face of a weakening consumer and an evaporating debt market. It’s a family-run business that tripled its size through a major acquisition when the debt markets were healthy, and is now left scrambling. There appears to be dissension between the founding father and his now-CEO son over some of the tactics that they have resorted to recently, which appear to be questionable. If the core operations continue to deteriorate in the continued absence of a functional debt market, the 2nd largest mall REIT in the US will simply run out of cash and no amount of accounting or financial gimmickry will be able to hide that fact.

Background Information on the founding Bucksbaum Family

The Bucksbaum family founded and has run General Growth, in various legal forms, since 1964. Martin and Matthew Bucksbaum were the original founders, forming the General Growth Properties REIT in 1964. In 1972, General Growth was listed on the NYSE. In 1984, General Growth sold its 19 malls to another company and liquidated the REIT, but continued to manage subsequently. A large acquisition in 1989 made General Growth the second largest mall manager in the US, and in 1993, General Growth did an IPO to form GGP, the legal entity we see today. In 1999, Matthew Bucksbaum stepped down as CEO and John Bucksbaum (‘JB’), Matthew’s son, replaced him. In November 2004 (mid-point of the real estate and credit bubble), GGP completed the $14 billion Rouse acquisition, which established GGP as the 2nd largest mall REIT. In August 2007, MB stepped down as Chairman of GGP, and was replaced by JB.


Background Description of General Growth Properties’ Business

General Growth Properties is the 2nd largest mall REIT in the US. It buys malls, financing the purchases with equity and a combination of secured and unsecured debt. On May 14th 2008, GGP had $27B of net debt after adjusting for pro rata joint venture debt and $11.3B of equity, implying a total debt to capitalization of 70.6%. Along most metrics, GGP is the most highly levered publicly traded mall REIT. Malls are typically put in 3 categories – Tier 1, Tier 2 and Tier 3 – based on the average sales per square footage of the mall. As of early 2006, GGP controlled approximately 18.3% of the regional mall market, with 5% of the Tier 1 market, 6.8% of the Tier 2 market, and 6.5% in sub-Tier 2 properties.


Unlike most of the major mall REITs, 70% of GGP’s debt is in the form of traditional secured mortgage debt. Most of the secured debt comes from commercial banks, who extend commercial loans and then feed those loans through into the CMBS market. Life insurance companies also have been known to participate in mortgage financing, but have traditionally been a small player due to the high amount of administration required, cumbersome capital allocation process, and small financing capacity. GGP’s average interest rate is currently 5.46%, even though its senior debt ratings from Moody’s and S&P are BB- and Ba2 – below investment grade.


GGP leases out space to retailers, who primarily pay GGP in the form of base minimum rent. The historical relationship between tenant sales and occupancy costs charged by GGP is shown below.

Published in BoomBustBlog
Wednesday, 14 May 2008 09:20

The Asset Securitization Crisis

javascript:mctmp(0);Contributed Reading:

  1. Debt - Thoughts On A Global Problem (Part 1),
  2. Banking out of Control (Part 2)

Recommended Reading - The Asset Securitization Crisis:

  1. Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
  2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
  3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  5. Municipal bond market and the securitization crisis - part I
  6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
  7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  9. More on the banking backdrop, we've never had so many loans!
  10. As I see it, these 32 banks and thrifts are in deep doo-doo!
  11. A little more on HELOCs, 2nd lien loans and rose colored glasses
  12. Will Countywide cause the next shoe to drop?
  13. Capital, Leverage and Loss in the Banking System
  14. Doo-Doo bank drill down, part 1 - Wells Fargo
  15. Doo-Doo Bank 32 drill down: Part 2 - Popular
  16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
  17. The Anatomy of a Sick Bank!
  18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
  19. GE: The Uber Bank???
  20. Sun Trust Forensic Analysis
  21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
  22. Goldman Sachs Forensic Analysis
  23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
  24. Part one of three of my opinion of HSBC and the macro factors affecting it
  25. The Big Bank Bust
  26. Continued Deterioration in Global Lending, Government Intervention in Free Markets
  27. The Butterfly is released!
  28. Global Recession - an economic reality
  29. The Banking Backdrop for 2009
  30. Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets
Published in BoomBustBlog
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