Financial, Real Estate, Stock Markets Trends and Current Affairs

The government is about to kick off the CMBS aspect of the TALF program. They are expecting a slow start to the program. For one, it will start with CMBS issued this year, but will later accept earlier issues. The real problem is that no matter how much liquidity you throw at the CMBS market, market players simply overpaid for previous purchases through the bubble, using too much leverage in the process.

As the bubblicious market corrected, this resulted in many totally insolvent deals. Thus, no matter how much money you have to throw at a problem, you don't want to throw it at a loss. Insolvencies are guaranteed losses unless the dynamics of the deal is changed and prospective of equity is created somewhere. You cannot take a 120 LTV property and refinance it at 75 LTV (what I believe is the going rate) without someone taking a big, cold bath! As a matter of fact, in order to even take that bath you have to come up with 35 points of equity - otherwise we are talking about default. Even the more marginal deals at 90 LTV cannot be refinanced at 75 LTV, hence the deluge of equity offerings.

It is unfortunate that risks that are virtually unfinanceable in the debt markets, and were literally driving lenders into bankruptcy as far back as a year and a half ago (ala Lehman and Bear Stearns) are now being peddled to equity investors. Oh well to each their own.

From Bloomberg:

Fed’s Commercial Real Estate Aid May Have Few Deals for Start

The Federal Reserve may have few, if any, securities deals for the start of its program to aid the commercial real estate market and head off more losses at U.S. banks.

A few readers of the site have commented on an explosion of bank reserves leading to the potential lending induced inflation are missing the primary reason for the Fed's gushing so much liquidity in the system in the first place. The major lending mechanism in this country, if not the world - securitization - is for all practical intents and purposes, dead! The Fed has plenty of leeway in supplying excess reserve capacity to banks and even having them lend it out because the banks a) will not and b) cannot lend off of their balance sheet at the same volume or velocity that they were willing to lend off of the global bond market's balance sheet. In more simpler terms, the era of OPM (other people's money) is over, at least for now. Those entities that lend money will now be doing it for real, versus packaging up flagrantly (under) underwritten IOUs to sell off to some fund somewhere across the globe. If I am not mistaken, banks can double their lending capacity and still not come close to equaling the pending capacity seen it the years surrounding the mid 2000's. This is a good thing, for it was too much debt. The question is will the defacto shrinking of credit stemming from the demise of the massive global credit card known as securitization, be enough to quell the inflationary fires being stoked by the Fed's "liquidity-at-any-cost" program? Remember, I brought this topic up exactly 6 months ago hn many poo pooed the idea... see Economic contractions AND rising prices, dare Reggie utter the "I" word - Enter a global phenomenon.

For those who have met me at the blog gatherings, you know that I am not a fan of gold as an investment or an inflation hedge. Yes, it has shown high correlations with inflation in the past, but it has also hiccuped during certain times as well. Even more importantly, now that we are no longer on a gold standard, the value gold has other than its industrial capacity is the speculation that you can get somebody to pay more for it at any given time, just because. Its intrinsic value is specious at best. Then again, that is my not so humble opinion. My preference is to have an asset that provides a strong hedge against inflation, but has the ability to generate cash flows or otherwise provide a utility of significant value if I am somehow (God forbid) wrong about my inflation correlation thesis. IMO, gold is not the universal answer. I know I stand in the exteme minority on this topcic, but those who have been following me for a while know that is where I like to be and were I perform best. In addition, gold is mentioned by every day trading board you come across. That can't be a good thing either. 

An independent, empirical look at potential inflation hedges/speculative plays.

We have calculated the inflation correlation of several asset classes including commercial real estate (and its subsectors), global equities, emerging market equities, emerging market debt sovereign debt, precious and industrial metals and international treasuries....

A few readers of the site have commented on an explosion of bank reserves leading to the potential lending induced inflation are missing the primary reason for the Fed's gushing so much liquidity in the system in the first place. The major lending mechanism in this country, if not the world - securitization - is for all practical intents and purposes, dead! The Fed has plenty of leeway in supplying excess reserve capacity to banks and even having them lend it out because the banks a) will not and b) cannot lend off of their balance sheet at the same volume or velocity that they were willing to lend off of the global bond market's balance sheet. In more simpler terms, the era of OPM (other people's money) is over, at least for now. Those entities that lend money will now be doing it for real, versus packaging up flagrantly (under) underwritten IOUs to sell off to some fund somewhere across the globe. If I am not mistaken, banks can double their lending capacity and still not come close to equaling the pending capacity seen it the years surrounding the mid 2000's. This is a good thing, for it was too much debt. The question is will the defacto shrinking of credit stemming from the demise of the massive global credit card known as securitization, be enough to quell the inflationary fires being stoked by the Fed's "liquidity-at-any-cost" program? Remember, I brought this topic up exactly 6 months ago hn many poo pooed the idea... see Economic contractions AND rising prices, dare Reggie utter the "I" word - Enter a global phenomenon.

For those who have met me at the blog gatherings, you know that I am not a fan of gold as an investment or an inflation hedge. Yes, it has shown high correlations with inflation in the past, but it has also hiccuped during certain times as well. Even more importantly, now that we are no longer on a gold standard, the value gold has other than its industrial capacity is the speculation that you can get somebody to pay more for it at any given time, just because. Its intrinsic value is specious at best. Then again, that is my not so humble opinion. My preference is to have an asset that provides a strong hedge against inflation, but has the ability to generate cash flows or otherwise provide a utility of significant value if I am somehow (God forbid) wrong about my inflation correlation thesis. IMO, gold is not the universal answer. I know I stand in the exteme minority on this topcic, but those who have been following me for a while know that is where I like to be and were I perform best. In addition, gold is mentioned by every day trading board you come across. That can't be a good thing either. 

An independent, empirical look at potential inflation hedges/speculative plays.

We have calculated the inflation correlation of several asset classes including commercial real estate (and its subsectors), global equities, emerging market equities, emerging market debt sovereign debt, precious and industrial metals and international treasuries....

Since so few people actually read government docs when they are released, I decided to post a summary of the report from the SIGTARP - the TARP special investigator.

Summary of SIGTARP Report on TARP programs

TARP funds are expected to be deployed under 12 separate programs. Originally, TARP was envisioned to involve purchase, management, and sale of up to $700 billion of "toxic" assets, primarily troubled mortgages and mortgage-backed securities ("MBS"). However, subsequently, the scope of and the funds involved under these programs increased dramatically and the total funds involved, after including Federal Reserve loans, FDIC guarantees, and private money, are expected to reach nearly $3 trillion.

As of March 31, 2009, Treasury has announced the parameters of how $590.4 billion, out of $700 billion TARP funds, would be spent. Out of this, about $328.6 billion has actually been spent as of March 31, 2009. Following table summarizes the details of the 12 programs.

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I have been receiving a decent amount of unsolicited interest in my work on GGP ( GGP and the type of investigative analysis you will not get from your brokerage house). This interest is ranging from law firms to banks to media. It is a text book case of how investigative analysis can uncover a significant mispricing of value, despite management's and the markets short term proclamations of said value. For those pundits and know-it-alls who feel that short sellers are bad for the US markets, I suggest you bring your argument to the small business men and women, pensioners, retail investors and taxpayers who were shafted by GGP as its share price collapsed from over $70 to near zero and into bankruptcy. I made it quite clear this was a probable, no actually an unavoidable scenario (firesale or foreclosure).

I went short short GGP at $60 in November of 2007 and released research shortly thereafter. I want to state again for those that follow me, this is a process that takes time to unfold and the markets are now as volatile and probably as manipulated as they have ever been. Since I cannot predict the markets or short term share price movements, you should anticipate (if not actually expect) prices to move against you (and sometime violently) in the short term. Look at the GGP chart above and you can see where I suffered several drawdowns that would have given cause to pop out of the position.

As I stated in my previous posting, "GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months", this was not a one off event either. I also called Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]), Lehman Brothers CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008]), Countrywide and Washington Mutual (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide with its peer), nearly all of the failed or failing regional banks of significant size (As I see it, these 32 banks and thrifts are in deep doo-doo!), MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton) and Ambac (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap and Follow up to the Ambac Analysis), among others - well in advance.

Why am I bringing all of this up again? Well its definitely not to boast or brag. After all we are all wrong sometimes, and even I doubt my findings on occasion. Recently many of my research subjects have skyrocketed in price giving short term bulls the fuzzy warm feeling in the mid section while giving those that are bearish diarrhea. I want to make clear, again, that short term movements do not condemn nor vindicate my research. It is just short term movement, often accurately considered noise. Positions must be taken carefully though, with hedges, stops or small sizes. Every home run that I hit above (nearly all of the companies above are either close to or in bankruptcy/insolvency or are no longer going concerns) has been far from a smooth ride down. As a matter of fact, Bill Ackman, who provided the orginal idea for the monolines, was short MBIA for 5 years before it finally collapsed from near $100 to about $7. Patience and steady hands must accompany strong research or market volatility will always shake you out before you have a chance to profit.

I have recently found what could be the most horrendous cover up(s) and accounting shenanigans that have come across my desk in some time. There are some big, brand name banks that are pushing numbers and false concepts around their earnings statements in a fashion that seems to make GGP 's management look like choir boys. Despite this, their share prices are doubling. Either I am wrong and will lose a lot of money shorting these guys, or I am right (like I was in the 39 examples above) and will make a killing. I will bring the issues to light for subscribers shortly if they bear out by the end of my analysis. Either way though, I think it is obvious how important it is for short sellers to have their say in the markets. A lot of pain could have been avoided by creditors and investors if they would have heeded my warnings back in 2007 and early 2008 regarding GGP - or any of the other 38 other companies mentioned above.

From the LAS VEGAS REVIEW-JOURNAL:

Mall operator files for bankruptcy protection

Teetering retail real estate giant General Growth Properties finally collapsed under nearly $27.3 billion in debt, much of it heaped on during a Las Vegas buying spree.

The Chicago-based real estate investment trust, or REIT, Thursday filed for Chapter 11 bankruptcy protection in federal court in New York, leaving judges, lawyers and creditors to unravel holdings in about 200 complex properties in 44 states. The malls will continue to operate during bankruptcy proceedings, which experts said could drag on for years.

The federal bankruptcy filing in the Southern District of New York included pending cases for 360 separate entities, including at least 16 with connections to Las Vegas.

It listed nearly $29.6 billion dollars in assets nationally, although the bulk of the assets are retail real estate holdings which face significant downward pressure on their value thanks to the recession that’s finally caught up with General Growth management’s buy-now, pay-later strategy.

In Las Vegas, General Growth and its subsidiaries own three high-profile malls on the Strip, retail, residential and office real estate in Summerlin and two regional malls for locals, Meadows and Boulevard malls.

“It is a doozy,” Nancy Rappaport, a bankruptcy expert at the University of Nevada, Las Vegas, abou the filing.

The Strip properties include Fashion Show Mall, Grand Canal Shoppes and Shoppes at Palazzo. Its Summerlin holdings include The Hughes Corp., which owns the stalled-in-construction Summerlin Centre retail, office and residential development.

One local representative of the company referred questions to General Growth’s home office in Chicago. A spokesman there did not return calls for comment.

Tom Warden, spokesman for The Hughes Corp., did not return calls for comment.

The company was a joint venture partner with Boyd Gaming in the gaming company’s stalled Echelon resort. But Boyd bought out General Growth’s stake in October for $9.7 million.

Among the top 100 creditors listed in the filing, several have Las Vegas connections.

Mandalay Bay is the largest local creditor listed with General Growth owing the resort $1.1 million. It owes The Venetian, home to Grand Canal Shoppes, $531,444.

Southern Nevada Paving is listed as being owed $178,296 and LVI Environmental is listed as being owed $99,533, although an LVI official says General Growth paid its tab to the company.

“They paid us last Friday. We just made it right under the wire,” said LVI President Joe Catania.

General Growth’s extensive holdings and massive debt load mean the list of local creditors will likely grow as lawyers for the renown mega-bankruptcy firm Weil, Gotshal & Manges of New York sort through the paperwork and file cases for every entity that falls under the General Growth umbrella, Rappaport said.

“They are going to try and unwind some of that in bankruptcy,” she said. “It is really going to depend on each individual business and whether the business plan for each company makes sense.”

Companies that have a business-to-business trade relationship with General Growth or a subsidiary are likely to be unsecured creditors, meaning their bills aren’t secured by a piece of General Growth’s property the way a mortgage is secured by a house.

The largest unsecured creditors will organize an unsecured creditors committee, which will itemize all of General Growth’s unsecured debt.

Smaller creditors, however, won’t be overlooked in court, Rappaport says.

That’s because in bankruptcy the lawyers working on behalf of the unsecured creditors committee have a legal and fiduciary responsibility to act in the best interest of all unsecured creditors.

That said, there’s no way yet for creditors to know just how much debt they’ll recoup from the hobbled titan.

“It is too early to say whether they are going to get screwed,” Rappaport said.

Founded in 1954, the company was primarily a regional player that in recent years used aggressive leverage to become the nation’s second-largest REIT after Simon Property Group.

The buying binge peaked in 2004 with the leveraged purchase of The Rouse Co., in a $14 billion deal that included Fashion Show and the Summerlin holdings.

It also included marquee properties such as Boston’s Faneuil Hall Marketplace, South Street Seaport in lower Manhattan and Baltimore’s Inner Harbor.

It committed more than $1 billion in separate transactions to buy Grand Canal Shoppes in 2004 and the Shoppes at Palazzo in 2008.

Management maintained complex fiscal arrangements by continually rolling debt over into new debt, a strategy that unraveled when the credit markets went sour last year.

“Their problem is they paid too much for it and they used too much debt to get it,” said investor Reggie Middleton who in January 2008 was among the first people to publicly state the company was in danger on his Web site, www.boombustblog.com.

Middleton, who was indirectly ridiculed for his skepticism by General Growth management, published an in-depth analysis of the company’s complicated finances that included a property-by-property look at the firm’s holdings.

He says the Las Vegas properties are moneymakers under the right conditions.

“Most of (General Growth’s) Las Vegas stuff looks good anecdotally, it is just a matter of what price it looks good at,” Middleton said.

Had General Growth not overpaid for holdings in Las Vegas or elsewhere or if had bought the properties with cash instead of debt it could have ridden out the recession, Middleton said.

With both the Las Vegas economy and nation’s retail sector in doubt, it is tough to say how General Growth’s Las Vegas properties will be valued.

Their Strip properties are well located and do well compared to other retail properties. But they are one-trick ponies compared to the resorts, which get money from gambling, room rentals, retail and food.

“The retail malls have one source of revenue, that is rent,” Middleton said.

Although the value of General Growth’s Las Vegas holdings is murky, Middleton says lessons for investors from the company’s downfall are clear.

“When everyone wants to buy you should be selling,” he said. “When everyone wants to sell you should be buying.”

Contact reporter Benjamin Spillman at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 702-477-3861.

In finishing up the GS Stress Test, I decided to throw in this chart to the free part of the blog as well. The Goldman Stress test is a Tour de Force, and I seriously doubt if the government has put as much into uncovering the truth as I have.

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Reference the CMBS exposure that Goldman has above (at no less than 14x leverage), then reference this chart directly below.

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We are talking a 6x increase in CMBS spreads that GS is rife with at a minimum of 14x leverage over a comparable time period (and a 30x increase all in all). This will just get worse as we get more of this: For those that attempt to argue that short sellers are bad for the market, I bring you GGP! and GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months. With this GGP bankruptcy, spreads will blow out even wider as asset values drop farther. Then there are all of the other REITs who share similar problems, just on a lower scale (at least thus far).

With the advent of the new FASB Fantasy Accounting Rules, it is possible that Goldman can hide these stresses and losses from average institutional and retail investors as well as the government. Well, they can't hide it from BoomBustBlog subscribers. Bear Stearns and Lehman Brothers had very, very similar real estate exposure. Look at where they are now! As a matter of fact, there are charts comparing the exposure of Goldman, Lehman, Merrill Lynch and Morgan Stanley in the Stress Test that I am about to release. It is revealing and interesting indeed. Goldman is trading at nearly $130...

As I have stated, I believe the Goldman Research to be above and beyond anything available to the typical instituional or retail investor, and I am sure I have covered (or uncovered) bases that the government has failed to. Here is an (unfinished) table of contents (the Pro report is over 100 pages long, consiting primarily of numbers, tables and stats) as I wrap up the report to release some time today for Professional Level users (along with a summary for Retail subscibers):

Contents
Goldman Sachs 1Q09 results 2
Reggie Middleton’s Goldman Sachs Stress Test 4
Summary 4
Stress Test Macro Assumptions 5
VAR and Risk Data 6
Comparative Var Analysis 8
CMBS Pressure Points and Other Risk Factors Not Reflect in VaR 12
Economic Writedowns 16
Future Value of Assets (economic) 19
Future Value of Liabilities (economic) 28
Financial liabilities at fair value 34
Movement in Level 3 Financial Assets and Financial Liabilities ($ mn) 40
Writedowns (accounting) 44
Future Value of Assets (accounting) 46
Financial Liabilities at Fair Value (accounting) 56
Movement in Level 3 Financial Assets and Financial Liabilities ($ mn) (accounting) 65
SFAS 157 and SFAS 159 70
Debt Maturity 72
Level Three Comparison 72
Level 2, Level 3, CDOs and Related Assets 77
Revenue, Expense and Off Balance Sheet Loss Assumptions 80
Relative Book Valuation 81
Financial Projections 84
Income Drivers 88
Key Ratios 93
Unconsolidated Variable Interest Entity (VIE) Exposure 95
Scenario Analysis 99
Disclaimer 111

I am still in the process of preparing the Goldman Sachs stress tests for publication, but came across this headline in Bloomberg: General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy.

This prompted me to excerpt a portion of the Pro level Stress Test Analysis to publish on the public blog. Remember that Goldman has some of the highest VaR numbers of the bulge bracket save the collapsed Lehman Brothers, who collapsed in large part due to their commercial real estate exposure (as well as Bear Stearns). I also want to point out the investment horizon that I use when implementing my research. With the recent bear market rally forcing shorts into drawdown, keep in mind that my research looks 3 months to 1 year out. I personally bought puts on GGP at $60 and suffered through many a drawdown before the position reached fruition. That means that if I say XYZ company has poor prospects and that company doubles in price within 3 months, it really has no bearing on whether said analysis was right or wrong. I have absolutely no control or special insights into the markets. I can tell you if a company is in trouble though. The issue is, this trouble takes time to manifest, and this time period is often more than just a few months. Be prepared to hold on to your positions for a year or more. Trust me, it is worth it and I am right more often than not. Shorting a company from $60 to $1 yields a very strong IRR of return on an annual basis. Patience is both justified and highly rewarded. A lack of patience and weak hands easily turns a big profit into a big loss.

Goldman Sach's CMBS Pressure Points and Other Risk Factors Not Reflect in VaR

I have been banging the table about the unappreciated risk the commercial real estate market poses since September of 2007 - way before the crowd of investors, pundits, analysts and media. See:

• Will the commercial real estate market fall? Of course it will.
• Do you remember when I said Commercial Real Estate was sure to fall?
• The Commercial Real Estate Crash Cometh, and I know who is leading the way!

Well, the nations second largest property owner and REIT has just filed chapter 11, after I warned readers over a year and a half ago of this very distinct possibility. See General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy then go on to read the 80 or so pages of research that I have generated to support riding the share price down from $60 to near zero: GGP and the type of investigative analysis you will not get from your brokerage house.

This underappreciated risk will reverberate through investment banks, insurers, money center and regional banks alike for these are the sourced of the large nonrecourse loans and CMBS that funded these vehicles. In addition, the retail mall REITs will see significant hits to asset prices and consequently rents (more so than they have already seen, which has been significant already) which will put additional stress on debt service. Keep in mind that the GGP issue is not confined to GGP. Debt that had financed assets during a property bubble cannot be rolled over due to a dearth in financing - causing bankruptcy. Chances are that this will be seen several more times in the next 8 quarters or so. Long story short - expect valuations, rents, credit quality and cashflows to drop as vacancies and delinquencies rise.

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The commercial real estate risk that Goldman Sachs is woefully underappreciated by the market and apparently unknown to the sell side analytical community. Take it from the guy that clearly anticipated the fall of Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]) and (with the help of his readers) pointed out the Lehman Brothers CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008]), as well as the GGP debacle in full detail (GGP and the type of investigative analysis you will not get from your brokerage house). Goldman has risk here, among other places that aren't even visible in its rapidly increasing VaR numbers....

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See also: The Official Reggie Middleton Bank Stress Tests