It's going to be pretty hard extracting your metatarsus from your anus this time around. I mean, everyone makes mistakes with taxes, but the multi-billion dollar back door bailout that you tried to hide via EMAIL???!!! Come on, guys. If you're not smarter than that then you definitely won't be able to solve this financial situation thingy... Unless he knew absolutely nothing about the biggest bailout in the history of his country - under his watch, that is...
Jan. 7 (Bloomberg) -- The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show. And I must ask, Why???!!! If it was to be secret, why use email. If it wasn't to be a secret, why'd you do it anyway! Did you assume that there would be de minimus blowback in the form of repercussions?
From Bloomberg :
Dec. 8 (Bloomberg) -- Managers and board members at financial firms shouldn’t be sued for underestimating the subprime mortgage crisis, said the chief executive officer of XL Capital Ltd., which insures directors and officers.
“It’s very hard to pick out the management team that did something wrong to the level that the law requires,” Michael McGavick said today at a Goldman Sachs Group Inc. conference in New York. “Being collectively stupid is not a basis for a lawsuit.”
U.S. securities class action suits climbed to a four-year high in 2008 with almost half of the 210 claims related to the collapse of the subprime mortgage market, according to a report by Stanford Law School and Cornerstone Research. Investors are seeking to recoup losses from a crisis that contributed to more than $1.7 trillion in writedowns and credit losses worldwide.
XL is among insurers, including Ace Ltd. and Chubb Corp., that sell coverage for lawsuit costs tied to management negligence or misleading statements. The Bermuda-based insurer and reinsurer said claims rose in its professional liability business in 2008 as the pace of lawsuits increased.
Yesterday, I commented on Goldman's CMBS offering through the government's leverage program known as TALF. I was very nice and diplomatic, yet despite such I still received what I would consider, inappropriate feedback. Okay, let's take the politically correct gloves off - they never fit me anyway. This deal probably flew because Goldman Sachs underwrote it. Goldman thrives off of brand name value primarily, other than that nothing really sets them apart. Contrary to mainstream media inspired belief, they are not better than everybody else at everything. I posit, they are probably not better at anybody else at anything other than marketing and lobbying which allows them the perception of being better than everybody else and the protection from the government to get away with things other banks can't (or are afraid to try). I want to delve further into that CMBS deal I outlined yesterday (so be sure to read through this, particularly if you're with an insurance company), but before I do let me try to dispel the Goldman myth once and for all...
Goldman is a bank, just like everybody else. They hire the same people who went to the same schools, taught by the same teachers to use the same models to do the same things as the other big banks. When Goldman hires a banker with experience, where do you think they hire them from? When Goldman loses a banker, where do you think they lose them to?
Think about it:
- Financial shares slumped, their stock fell - just like everybody else.
- The market turned on big broker/dealers, they had to run for government protection - just like everybody else.
- The market recovered, their shares recovered - just like everybody else.
- Goldman pays the vast majority of its net revenue out as compensation, not dividends! I haven't checked, but I would wager that they probably paid more than their outstanding market cap as bonuses since going public. What does this mean? It means that you are much better off working at Goldman than you are as a client or as a shareholder. Keep that in mind as we review the CMBS offering from an anecdotal perspective later on in this post.
Their stock is fraught with risk that the sell side never bothers to analyze, which is why they are considered superstars when they have good quarters. Adjust for risk, and Goldman actually underperforms - see "Who is the Newest Riskiest Bank on the Street?" where I break it down in detail, showing Goldman as the leader in leverage, cost of capital and VaR as compared to the decrease in Risk Adjusted Return. I addressed similar points in the previous year in Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street.
Goldman Sachs Equity Guidance Would Have Made You a Fortune on Lehman!
I have outran their equity analysts and asset management arm on practically every stock I covered and I have a skeleton staff. Now, to be honest, I am devoid of the massive conflicts of interests that run through that company, but that is the point! To this day, we still have institutions that buy financial widgets because Goldman told them to, regardless of the fitness or viability of said widget.
For those with short term, or worse yet, media induced brand name fever, let's rehash "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) and Is this the Breaking of the Bear?. Then peruse Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!), Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 and Funny CLO business at Lehman Friday, 04 April 2008
The esteemed Goldman Sachs did not agree with my thesis on Lehman. Reference the following graph, and click it if you need to enlarge. Notice the tone, and ultimately the outright indication of a fall in the posts from February through April 2008, and cross reference with the rather rosy and optimistic guidance from the esteemed Goldman (Sachs) boys during the same time period, then... Oh yeah, Lehman filed for bankruptcy!!!
Does anybody think that Lehman was a "one off" occurrence? Well download Blog vs. Broker Analysis - supplementary material and you will be able to track the performance of all of the big banks and broker recommendations for the year 2008 for the companies that I covered on my blog. I can save you the time it takes to read it and just tell you that it ain't all its cracked up to be. Again, I inquire as to why these companies' clients do not wise up?
Now, back to that CMBS Offering
Pray tell, educate me as to where Goldman's clients actually think they get all of their money from? Let's take that latest CMBS offering that they hawked Monday. In Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off, I blogged about the 4% (unlevered yield) Goldman was able to get for their underwriting clients (Developers Diversified Realty, a REIT that came up in another blog post of interest - "Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!"). This was actually a big win for DDR for they got access to 4% money at a time when commercial real estate is in the crapper. It was also a big win for Goldman, for they moved a big CRE/CMBS deal through a government leverage plan when such deals really haven't moved much. Was it a good deal for the institutions that Goldman peddled the securities to, though? Yet, I query further, who does Goldman really work for? To whom do they have a fiduciary duty? Is that duty to their bankers, traders, and analysts to get the biggest fees, commissions, and spreads possible? Quite possibly, since they are on track to announce record bonuses. I don't see clients putting out press releases touting record returns from dealing with Goldman! Is that duty to the share holder? Well, it doesn't look like it from a risk adjusted return perspective (see "Who is the Newest Riskiest Bank on the Street?"). Is that duty to DDR to get them the lowest rate possible? Quite possibly, for 4% is pretty damn good, and they lowered the rate due to being oversubscribed (high demand). But wait a minute, If their fiduciary duty is to DDR (or themselves), then they can't have a fiduciary duty to the insurance companies and asset managers who they are pitching these CMBS to, can they? Buyers should want a higher yield to compensate for the risk, no? The Wall Street Journal reported that this was a low risk deal. Really!!!??? Let's look deeper into that assertion from an anecdotal perspective, shall we?
In the WSJ.com article, it was stated the collateral (the mall properties) was conservative because they were occupied by discount chains where shoppers flock during hard times. Then they go on to contradict themselves by saying that occupancy is in a material downtrend:
The deal reflects the high bar the Fed has set for loans eligible for TALF financing. The 28 shopping centers in 19 states securing the bonds have stable cash flow because they often are occupied by discount retailers that tend to attract business even in a recession. For instance, one of the properties is Hamilton Marketplace, near Princeton, N.J., a 957,000-square-foot property whose tenants include Wal-Mart Stores, Lowe's, BJ's Wholesale Club and supermarket ShopRite. According to Fitch Ratings, the property has maintained an average occupancy of 96.7% since 2006 and is 95.1% occupied.
Isn't 95.1% about 151 basis points less than 96.7%? Will this downtrend continue? Will it intensify? Do you see commercial real estate getting better in the next 5 years or worse? If you wanted buyers to perceive safety, you would quote an UPTREND in occupancy, would you not?
"It's a great execution for the borrower," says Scott Simon, managing director and head of mortgage- and asset-backed securities portfolio manager at Pimco, a leading bond house. "If other real-estate investors can borrow money at that rate, it would be a real game changer for the commercial real-estate market that has been so devoid of financing."
Mr. Simon declined to comment on whether Pimco would buy any of the Diversified Realty bonds. Bids for the securities are expected to come from many mutual funds, insurance companies and other institutional investors. Firms that are considering the deal include Babson Capital Management, the investment-management unit of Massachusetts Mutual Life Insurance Co. and Principal Financial Group, according to people familiar with the matter. Babson Capital declined to comment. A representative at Principal Financial didn't respond to requests for comment.
Institutional investors are attracted to the deal because it is viewed as a low-risk investment with relatively healthy returns when compared with five-year Treasurys, which are yielding about 2%.
Well, Treasurys don't have rollover issues (at least not yet), and CMBS do. There is usually a reason for higher yield, and that is often higher risk, actual and/or perceived. I will walk through why these CMBS buyers are getting twice the yield of treasuries in a moment, as well as explaining how they are so woefully under-compensated as to be tantamount to a crime (or is it a break in fiduciary duty?)
Investors buying the triple-A slice of the deal, totaling $323.5 million, can get an unleveraged return of about 4%, according to price information distributed to possible investors by Goldman late Friday and reviewed by The Wall Street Journal. If they finance their purchases with TALF funding, their returns can rise to about 6%.
I went into Fitch and its AAA ratings in "Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off". Anyone who believes Fitch's ratings actually mean anything should click that link scroll down to around the middle, then read tightly from a secure device. If you are carrying a pda, iphone, or notebook you may drop it from uncontrollable laughter!
The $400 million loan represents about half of the value of the underlying properties. By comparison, in the years before the financial crisis erupted in 2007, banks were willing to lend more than 70% of a property's value because the debt could be easily sold as CMBS. Even under a "stress" scenario, according to Fitch, the Developers Diversified properties would produce a cash flow of about 1.44 times what is required to service the debt. Back when credit was easy, the ratio for stress scenarios would even fall below one for many CMBS offerings.
This is the kicker, here. Loans can't get rolled over at 70%, 65% or even 60% LTV these days, and things are getting worse, not better. See Fitch's warning (that's right, the same guys that gave those very same tranches above AAA ratings) warning that Insurers Face $23 Billion Loss on Commercial Property.
The credit crisis has driven $138 billion worth of U.S. commercial properties into default, foreclosure or debt restructuring, according to New York-based Real Capital Analytics Inc. Commercial real estate prices have plunged almost 41 percent since October 2007, the Moody’s/REAL Commercial Property Price Indices show.
So, let's do a little simple math here. Goldman's salesman talks a good game (as the pimp) to the sweet little investor looking for yield (as the little girl just getting off the bus from a small town in the midwest looking for fame and stardom in the big city). They say, hey, I'll write these CMBS for this conservative CRE portfolio at only 50LTV. What could go wrong? This happens in October of 2007. In November of 2009, you find that your collateral is now around 89LTV (due to the 41 percent drop up to October in a rapidly decreasing asset value environment) and still dropping fast, with the LTV rapidly approaching 100, wherein you start taking guaranteed haircuts on your Fitch AAA rated (you can just imagine me cracking up in the background) tranched CMBS. Boy, those 400 measly basis points don't look like much compensation now, does it? You also see why Treasuries are yielding 2%, don't you? You are at risk of losing significant principal, for according to the WSJ article, the only deals getting done are at 50 LTV. Who the hell is going to cover that 390 point spread? You call your Goldman rep for help, but you can't reach him because he is in the Mediterranean with those TWO (that's right, not one but two) bad ass Italian chicks testing out his new Azimut 86S he just bought in a recession with YOUR commission dollars and the vig (oops, I mean spread) from your deal which is currently underwater!
If this deal would have went down this time, next year would GS have been in breach of their fiduciary duties: Dodd bill would make reps fiduciaries
A better question I know all of you are pondering, will this actually happen to the DDR deal? Well, let's bring back the chart of the week for the Japanese perspective from the "Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?" post.
You tell me if these CMBS aren't worth more than 4 points?
Now, don't get me wrong. I have nothing against Goldman Sachs. It does rather irk me when everybody, and I mean everybody truly believes that their sh1t doesn't stink, though. I actually have to bring my kids to school, so I will finish this post up with what it means to insurance companies who buy things such as this DDR CMBS deal from Goldman later on today or tomorrow. I'll include tidbits of what my subscribers know about the insurance industry, and I will also release some sneak peaks of the upcoming REIT research to subscribers as well.
Are we in consecutive back to back bubbles or what?
KKR Puts Higher Valuation on Dollar General Than Walmart in IPO Offering: Wasn't the private equity/LBO biz dead just a year ago?
Wall Street Faces `Live Ammo' as Congress Tries to Dismantle Biggest Banks: So all of that posting about busting up the big banks didn't go to waste! See Any objective review shows that the big banks are simply too big for the safety of this country, Big Bank (and the Treasury) vs. Little Bank: Whose risking your tax dollars?, The Next Step in the Bank Implosion Cycle??? and the very important JPM Public Excerpt of Forensic Analysis Subscription (1878)
Japan Credit Default Swaps Seen Unraveling as Aiful Defers Payment on Debt: The Japanese version! See The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk - Beware what lies beneath!, Reggie Middleton says the CDS market represents a "Clear and Present Danger"!, CDS stands for Credit Default Suckers... and Will this be the first domino in the CDS collapse? .
Spanish Economy Contracts for a Sixth Quarter, Slowing European Rebound: BBVA may be seen as more viable than it actually is. See Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis
And from my friends over at Calculated Risk: Fannie, Freddie, Counterparty Risk and More - excerpt from Freddie Mac's 10-Q:
We believe that several of our mortgage insurance counterparties are at risk of falling out of compliance with regulatory capital requirements, which may result in regulatory actions that could threaten our ability to receive future claims payments, and negatively impact our access to mortgage insurance for high LTV loans.
Those that follow me know how bearish I have been on the mortgage insurers for two years running now. I pretty much promised my readers that Ambac and MBIA were insolvent back in 2007:
- A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton
- Download a "Window" into Ambac's Problems
- Fitch finally found my blog and cut Ambac's rating, So what's next...
- The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk - Beware what lies beneath!
- A personal email on the monolines, pt. deux
- Is MBIA About to Pull the Wool Over the Market's Eyes?
- Reggie Middleton on Assured Guaranty
- It looks like Ambac is about to go. Trading down 75% in the first 17 minutes of the day
- Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility.
As many of my subscribers know, I have caught many companies on the short side as they imploded. One company that I did not get was American International Group. The reason it escaped me? I was too close to it. I have met Frank Tizzio (then president), Maurice Greenburg (then CEO and Chairman), and a several of their upper management to collaborate on deals, and was impressed with the way they ran their shop. Because of this, I didn't apply the same critical, skeptical eye that I used with the other prospects. Alas, because of such, I overlooked the inevitable. Well, I have learned my lesson. The lesson learned from AIG was not wasted on me, but does seem to have been wasted on many others. With this thought in mind, let's review the net, unhedged swap exposure of a few of our analysis subjects. I think a few subscribers may have their eyebrows raised. Some things are actually hiding in plain sight. See Swap exposure_011009
For the sake of nostalgia, here is an old post of the same company's ABS inventory: ABS Inventory
I will be releasing similar analysis of other banks and insurers over the next day or two.
For those of you who really believed that AIG was worth $55, more power to you. I couldn't resist putting a strangle on it at about $55 or so, even-though I never delved in depth. $10 lower and 2 trading days later... The company received $183 billion of assistance, then boasted that it turned a profit of a few million dollars due to accounting machinations. It is on the hook for practically everything that is wrong with the credit system now. Does anybody really think that there is any equity value left in this company? The US government doesn't, the sell side analyst don't. This may actually be a contrarian trading opportunity because I can't remember the last time I agreed with both the sell side and the government :-)
What are the chances you will find many of the subjects of my rants and raves embedded in the reports below?
The Federal Reserve must for the first time identify the companies in its emergency lending programs after losing a Freedom of Information Act lawsuit.
Manhattan Chief U.S. District Judge Loretta Preska ruled against the central bank yesterday, rejecting the argument that loan records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions.
The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under 11 programs, most put in place during the deepest financial crisis since the Great Depression, saying that doing so might set off a run by depositors and unsettle shareholders. Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 on behalf of its Bloomberg News unit.
The Treasury will make federal bailout funds available to a number of life insurers, acting on the embattled sector's long-running effort to get government help.
Subscribers should look to the insurance header of the download section to get a history of the life insurance companies that I warned about - all of whom are now recipients of government welfare for the first time in life insurance history (at least that I know of).
This is an Op-Ed piece by BoomBustBlogger Mark. An interesting point of view and an example of the type of intellectual capital that roams theses pages of the BoomBust.
For those willing to look deeper than company press releases, publicly available information suggests that investors should avoid MBIA like a plague. As important as it is for investors to analyze MBIA's current economic position, however, the more important MBIA story lies in the lapses by those responsible for safeguarding policyholders of MBIA Insurance Corporation, MBIA's principal insurance subsidiary until February of this year when its assets were stripped. Parts 1 and 2 of this note discuss issues that should concern MBIA investors. Part 3 raises questions about what appear to be disturbing oversight failures.
PART 1: MBIA's FINANCIALS
Despite the large losses reported to date, MBIA's loss reserves appear to remain disconnected from economic reality and deficient by conservatively $5B, easily enough to wipe out MBIA Insurance Corporation's capital. Here are the main problem areas.
- Second lien securitizations - MBIA paid approximately $600M on second lien securitizations during the first quarter, 75% of the year-end net reserves for these exposures. Servicer reports reveal that delinquencies on these deals increased to $2B during the first quarter. Therefore, payments are likely to continue at similar pace through the end of 2009. MBIA's net reserves decreased to approximately $600M ($1.2B minus $600M in anticipated recoveries from servicer lawsuits) as of the end of the first quarter, an amount that could easily be exceeded next quarter. If loan performance does not improve, MBIA's future payments could exceed $8B. If loan performance improves gradually, investors should expect around $4B in future payments.
- Multi-sector high grade CDO impairments - Slide 44 of the first quarter earnings presentation (http://investor.mbia.com/phoenix.zhtml?c=88095&p=irol-presentations) illustrates cash flow projections for MBIA's high grade CDOs which imply about $3.2B of ultimate principal payments. By comparison, recent loan performance for the RMBS securities in MBIA's high grade CDOs suggests that losses will significantly exceed Pershing Square's Open Source Model projections from a year ago. Realized collateral losses in excess of subordination levels are likely to surpass MBIA's ~$3.2B estimate within the next six months, then grow to a low end ultimate estimate of approximately $6B, assuming steady improvements in loan performance. If loan performance does not improve or improves more gradually, ultimate principal losses could easily exceed $10B.
- Discount rates - The cash flows and present value impairment figure for high grade CDOs on slide 44 indicate that MBIA will consistently earn a significant spread above LIBOR, probably around 150 basis points, for the next 40+ years. The discount rate is discussed in MBIA's 2008 10-K, which suggests that the New York Insurance Department allowed MBIA to artificially inflate the rate by using a portfolio yield calculated excluding low-yielding money market investments and including intercompany loans under repurchase agreements. Discounting at LIBOR would more than double the present value impairment numbers.
- Guarantees of MBIA's investment management business - As of the end of the first quarter, the book value of liabilities of MBIA's investment management business exceeded the book value of assets by $500M. The market value shortfall was $2B. It is difficult to imagine how MBIA Insurance Corporation, which guarantees these obligations, can avoid a liability for the book value shortfall, at a minimum. MBIA Insurance Corporation's Statutory financials do not reveal any such a liability.
- Mezzanine CDOs - $500M is a reasonable estimate of losses on US and European mezzanine CDOs based on the ratings of the underlying collateral and subordination levels shown in MBIA's first quarter CDO disclosure. MBIA's public disclosures do not provide any indication that a liability has been established for these exposures.
The reinsurer analysis recently reported results in line with that
forecasted in my analysis. The shares have been, nonetheless, driven by
this recent bear market rally, as has the shares of HIG. I have
released a rash of HIG research warning subscribers of the trouble they
are in, and it seems the industry in general and particularly those
that have sold variable annuities will have problems for the
April 30 (Bloomberg) -- Hartford Financial Services Group Inc.,
the Connecticut-based insurer, had its third straight quarterly loss as
the stock-market slump raised the cost of protecting customers from
declines in retirement accounts.
The first-quarter net loss
was $1.21 billion, or $3.77 a share, compared with profit of $145
million, or 46 cents, in the year-earlier period, the company said
today in a statement distributed by Business Wire.
Hartford’s earnings shrank, then disappeared amid the six- quarter drop
in the Standard & Poor’s 500 Index as the company shouldered
declines for savers with equity-linked variable annuities. That
depleted capital at the life insurance division, and Chief Executive
Officer Ramani Ayer,
who also oversees a profitable property-casualty unit, is under
pressure to stanch the losses or break up the 199-year-old insurer.