Mortgage industry group sees end of foreclosures

The Mortgage Brokers Association today claimed that foreclosures are nearing an end. In other news, the Big Bad Wolf Association is pleased to announce that houses made from straw are LEED certified and qualify for energy tax credits, the emperor has fashion show in Paris releasing his spring line of new clothes, and Tom Sawyer debuted a new workout regime focused on upper body toning by white washing fences.

Fast Forward to "It's A Trap!" Part III -Medium to Small Banks

Sorry to by pass "It's A Trap II- Japan", but this is too timely. I want to go on record now as the first to foresee this trend.

I must talk about the oncoming bank trap from the FDIC.

1. The Federal Reserve is starting a trend to approve "self chartered" banks or private equity groups with retired bankers aiming to buy distressed or closed banks in a specific region.

2. The bank closings from Jan 2010 to Feb 2010 (as of 02.19.10)amount to 16. This equals the same trend from 2009 even though many economists/regulators say 2010 will be a record year for bank closures.

3. The FDIC must go through some public channels before actually selling a bank. This is done through orders, agreements, notices, or Prompt Corrective Action Directives (PCAD). A look at recent FDIC actions show concentrations in a few MSA's. These may be spaced over time. My research shows that for the 2010 bank closings, banks had 345 days from agreements, 320 from orders, and 138 from PCADs to bank closure. Admittedly, some bank closing information is incomplete as records are not readily available. The most disturbing trend, is that American Marine Bank had 86 and 70 days from order and PCAD respectively until closure. At the time, AMB had $373 million in assets. That's some nice bank police work Lou!


4. The FDIC has really taken a beating on some of the bank closures and could only find interested capital to purchase them weeks after their closure. This comes after months of marketing by the FDIC to other holding companies even before the FDIC closes a bank (see links in #3). How does the FDIC keep from having to sell a lemon and losing more? Why, you could always try to securitize bad assets! Sounds good, but that may run into a few issues. The FDIC has also tried splitting a failed bank's assets and their deposits with varying degrees of success.

5. The FDIC can, and will, close a bank with efficiency regardless of a distressed bank's efforts.
Voicenews.com says:
"'What irritates me is that we went along with everything the FDIC said and always had a good rating,' longtime (Citizens State Bank) bank president and board member Oscar Socia said from his winter home in Florida recently. 'They didn't seem to want to bend at all.'"
Dailyme.com discloses:
"Charter's management, led since 2001 by bank President Glenn Wertheim, insisted that loans, mostly commercial real estate loans -- which OTS said were troubled -- were, in fact, being paid on time. OTS disagreed and ordered tens of millions of dollars of those loans to be classified as toxic.

That classification, recorded as an entry on the bank's balance sheet, on paper lowered Charter's capital (money regulators require banks to make sure their deposits are safe) to levels well below those regulators regard as sound, even though virtually all of Charter's commercial real estate borrowers continued to pay their bills on time.

'They had one judgment; we had another,' Wertheim said in a Journal interview Saturday. 'The evolution of the Office of Thrift Supervision and the criticism they received early in this cycle, then their reaction to that criticism, affected us,' Wertheim said. 'They had a shift in examination standards. We got caught in that shift. It was not personal. We were sort of at the wrong place at the wrong time.'"

6. The FDIC's quick and ambiguous enforcement of changing regulations has actually lead to their first defeat in court by action filed by a small bank. Obviously, this is not to say the FDIC is not unjustified in many of their actions, but there are more and more gray areas forming within enforcement. This type of legal hurdle may be a continuing trend.




So, what does all of this mean? It means that small to medium banks are enjoying a false sense of security in their efforts to comply with federal regulations and any steps the FDIC initiated with their respective banks right now. The FDIC is approving various private capital groups to become holding companies that would buy packaged portfolio of banks. This move would help the FDIC diversify their risk by grouping lemons with more attractive failed banks in a concentrated geographic area. The piece meal transaction of buying failed individual banks will go away and be replaced with new regional banks formed by these private equity bank holding companies. Of course, a generous loss-sharing agreement will come with each one. These poor banks in the waiting have no idea they are in line for the guillotine.

The Boston Globe reported that Stoneham Savings Bank and Athol-Clinton Co-operative (both within the metro-Boston area) both received FDIC orders in late January 2010:

"Richard Donovan, the Stoneham Savings Bank ’s president, said its operations are steadily improving and that the bank showed a small profit in January. 'We’re settling down,' Donovan said. 'Our goal is to work with regulators' to resolve any remaining issues, he said.

Athol-Clinton Co-operative lost $2 million last year, primarily because of troubled home mortgages. Bank president Wayne Grimes noted the Athol area was hit hard by unemployment. 'Things are looking up,' he said, 'but it’s a gradual process.'’’

It's a gradual process, alright, right up until the blade falls and they are left wondering what the hell happened.

It Happened

Maybe the bankers at Goldman Sachs were on to something. In July 2008, the CEO LK Chaudhry of the Indian (The country to any prowling PC police) company Graziano Pvt. Ltd, was beaten down and killed by fired workers inside the office premises.
Don't piss off desperate people.

"It's a Trap" Part I - Sterling Trap

Admiral Ackbar where are you when the world needs you? China has increased their foreign reserves to over $2.4 TRILLION at the end of 2009 up from $1.9 TRILLION dollars on September 2008 (over half in US Dollars). The Financial Times claims this partly comes from the Euro and Yen declining. Nevertheless, this is shocking.

China previously has called for a new international currency reserve to replace the dollar, and yet, continues to acquire dollars (Treasury Bills) to increase reserves. A March 23, 209 NY Times article articulated Chinese concerns:

"Nicholas Lardy, an economist and China specialist at the Peterson Institute in Washington, said that through its proposal, China was indicating that the dollar’s long dominance was unfair, allowing the United States to run huge deficits by borrowing from abroad, and that the risks to holders of Treasuries were growing.

'Chinese are quite concerned that the large U.S. government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar-denominated financial assets which they hold,' Mr. Lardy said. 'It is a legitimate concern.' "

Paul Krugman (not necessarily my favorite economist) provided some background in an April 3, 2009 NY Times Article:

"In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.

But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets."

I wish there was an example from history we could examine to enlighten us all. Teh internets (sic) save the day once again!

Post WWI was a time with great economic uncertainty. Governments were mostly adhering to a gold standard for their currency valuations and France's goal was to become a financial power house. Some guy named John Maynard Keynes in "Essays of Persuasion- Open Letter to the French Minister of France" noted that France was experiencing a large trade outflow and foreign investment inflow. France's government was artificially keeping internal prices low. France achieved this by diversifying reserves with foreign currency focused on dollars and the sterling.

France accumulated over half of the world's reserves by the 1920's. Confidence in the Sterling and, later, the dollar eroded forcing France to attempt to diversify their reserves, converting into gold assets. Because reserves were concentrated in these two particular currencies at such magnitudes, France could not diversify without accepting a huge loss and crippling other currencies (oh yeah and eventually it's own). IT WAS A TRAP!

If you have dusted your statistic skills off lately, please read Olivier Accominotti's paper "The Sterling Trap Foreign reserves management at the Bank of France, 1928 – 1936"

It explains The Sterling Trap in great detail and makes my skin crawl.

Let's examine the best investment strategies during the depression:

Pay down debt

Investments during German hyperinflation

Stocks

We'll look at Japan's Trap in Part II

Now for some Admiral Ackbar outtakes:

Lookin' Like a Fool With Your Head In The Sand

Today's expression of the day is "pretend and extend". Retailtrafficmag.com goes on to explain: "'pretend and extend' describes an ongoing phenomenon in commercial real estate finance: as the level of distress mounts, lenders have been loath to seize properties from troubled borrowers. Instead, in many cases banks are generously granting extensions or other modifications even in situations where it appears unlikely that borrowers will be able to pay back the loans. lenders are attempting to avoid recognizing writedowns and losses on their commercial real estate loan books. Loans originated at the height of the market were done at near 100 percent loan-to-value ratios and underwritten with generous assumptions on increasing occupancies and rents. But in the past two years commercial real estate values have dropped considerably and fundamentals have weakened. Rents and occupancies are now dropping quickly, not rising. On top of everything, a major source of financing, the commercial mortgage-backed securities (CMBS) market, remains locked down."

This article is from July 2009. Even then, loan modifications outnumbered new loans 2-1. Fast forward today, and it looks like banks are not only putting their heads deeper into the sand, but trying to breath it in as air.

CNN Money reports on 02.14.10: "After 13 months of consecutive declines, overall commercial property values climbed 1%, according to the most recent monthly reading by Moody's/REAL Commercial Property Price Index. Even well-respected bankers have offered a glass half-full outlook on the state of the commercial real estate market. 'Commercial real estate is a train wreck, but it's already happened,' JPMorgan Chase (JPM, Fortune 500) chief executive officer Jamie Dimon said during a company-sponsored conference last month."

I call shenanigans! No one bank, no one market, no one industry can completely realize a loss UNLESS all lenders fully disclose their losses. Even though banks are reporting Non-Current Loans, I would be willing to wager a large amount of money that a significant percentage of current loans are being propped up artificially. Borrowers are playing a shell game, using other loans to pay other loans in a vicious cycle. Hell, Visa reported a 33% gain fiscal first quarter as more consumers used cards than cash. Anyone else see a small issue with this?



Your average community bank can't bear to call a loan on their golfing buddy's business. Multiply this scenario by a few hundred thousand. This is why you'll see more banks go under. With $1.4 trillion dollars of commercial loans coming due in the next three years, it will only get worse. No one is buying commercial paper. What will change that?

Bankers With Guns

It must be a heavy burden carrying a guilty conscience. It might even be a heavier burden having a private security team and gates around your residences. Bloomberg reported today that many Goldman Sachs employees are taking extraordinary measures to protect themselves against a potentially angry public.

NYPD has revealed many bankers are applying for gun permits. You must possess a spine before firing a gun, however. Where could you get a permit for that in NYC?

Wouldn't it be easier to own up to your mistakes and quit milking the government's (empty) coffers? Nah!

I Love Australia

Who says bankers aren't fun. Watch wealth adviser Martin Lakos on the financial market’s reaction to the Reserve Bank keeping interest rates on hold at 2.30pm while an associate watches porn in the back ground.



VIDEO: Banker busted

Love how he turns around at the last second.