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Upon Further Review

Posted by Larry Doyle on February 26th, 2009 3:02 PM |

The FDIC just released its 4th quarter 2008 report. Read it and weep . . .

1. FDIC had a $26bln loss in the 4th quarter and now has only $18bln in reserves. (Little doubt that FDIC premiums — insurance premiums that banks must pay — will be increasing to rebuild reserves. All costs ultimately flow through to customers). In fact in today’s WSJ, FDIC Poised to Double Fees Charged to Lenders

2. banking industry had first loss in 4th quarter 2008 since 1990

3. troubled institutions rose to 252 from 171 in 3rd quarter

4. banks have taken a total of $750 billion in writedowns on problem assets!!

5. banks have increased loan loss reserves to $69 billion from $32 billion

These numbers in conjunction with the Bank Stress Test lead me to make the relatively easy projections that:

 — Government will have significant stakes in certain major institutions while continuing to take over and shut down many smaller institutions.

 — Banks will continue to look to build reserves against future losses. This development along with a limited if not nearly non-existent “shadow banking system” (securitized consumer loan market) will mean that credit will be tight.

 — As banks need to preserve capital, their ability to recruit and pay people will be severely restricted. I know employees are looking to leave these organizations to work at smaller shops without these problems.

 — Although bank stocks are currently getting a bounce given government indications of support, these are not companies that have attractive growth prospects under these conditions.

LD

Leading Wall Street Analyst Speaks

Posted by Larry Doyle on February 22nd, 2009 4:29 PM |

I worked in the mortgage business on Wall Street for 23 years. During that time period I had the good fortune of  developing relationships with some of the finest minds in this sector. While I do not know Laurie Goodman personally, I can tell you that there is no one individual in the market today whom investors follow more closely when it comes to developments in this space. While Ms. Goodman does work in a business that is actively engaged with investors, I have always appreciated her perspectives as being untainted by bias and merely reflecting an extremely professional and honest outlook.

What does Ms. Goodman think about President Obama’s plans for housing? It would appear that there may be all sorts of unintended consequences and misaligned incentives in this proposal. Regrettably plans  that are well intended often do not necessarily achieve their desired results. I strongly recommend you read Mortgage Plan Aids Liars About Income to gain a fuller appreciation of this proposal.

LD

Wall Street’s Next Big Trade…

Posted by Larry Doyle on January 4th, 2009 7:45 AM |

Secretary of the Treasury Henry Paulson has become a household name over the course of 2008. Paulson has been roundly criticized for his mixed messages and inconsistent use of funds from the $700 billion TARP (Troubled Asset Repurchase Program).

While most of us have seen more of Henry than we would have ever cared, allow me to introduce you to another Paulson. John Paulson (no relation to Henry) is one of the most highly acclaimed and profitable hedge fund managers on Wall Street. While investment banks, hedge fund managers, and most asset managers were investing in and promoting sub-prime mortgages and the like, John Paulson was “going the other way.” In 2006, he started shorting sub-prime originators, the ABX (the CDS index that tracked the sub-prime market) and the investment banks that most heavily trafficked in this sector. He personally and the investors in his fund made tidy fortunes in the process.

The reason for my introducing you to John Paulson at this juncture is because he wants to enter the world of community banking. One may wonder why a titan from Wall Street would want to enter into the world of regional and community banking.

This past summer, the first large bank to fail was Indymac Bank located in Pasadena, CA. Since then there have been another 24 banks that have failed with another 200 on the FDIC “watch list.”
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