The Great Deleveraging

[HenryTo]

Similar views from Peter Bernstein regarding our longer-term credit/economic outlook in this weekend's commentary:

http://www.investorsinsight.com/otb_va_print.aspx?EditionID=670

[HenryTo]

Deleveraging and real estate credit tightening also now hitting Houston, Texas - one of the major cities still (somewhat) booming due to its energy exposure:

http://www.chron.com/disp/story.mpl/front/5948418.html

[Odysseus]

Hi Diesel,

David really is one of the good guys. He has made lots of money and could with his rep danced his fund to shear more sheep. He did not. That is why I respect his observations.
His expectation for financials trading at half of book is a bit of a slippery slope. What he did not say but I understand is that book value can also be a function of future dilution for existing stockholders. In short, those with the ability to raise capital may eventually trade at diminished book. Those that cannot, will go BK at half of book.

The FASB has become another pawn/stooge in an accounting chimera that will give the banks and IB's a little time to recap. Jeff Skilling must be xxx on his guards and planning his appeal...

Tolstoi's great observation. "The threads of Mis-conclusions are woven into the fabric our lives."

I'm still trying to figure out how financials make money in the future. Their old models are broken. Historically ROE's were in the 8 to 10% ranges. Leverage was at best 12 to 1.

What I imply from David's analysis is that the next wave of troubled loans will be actual balance sheet loans for CRE, Alt-A's and eventually Primes.

Regards,

The crystal is broken. I need a broom and a dustpan.
_________________
Psychic with Alzheimers. I can predict what I will forget.

[diesel]

Great interview. Thanks for the link.

[Odysseus]

There is a great interview on Bloomburg today with David Goldman of Asteri Capital.

David is one of the few hedge fund managers to close funds before he gets locked in and the markets unravel against him. He closed his fund in 98 before LTCM and gave back the money.

He recently closed again giving back the capital. His reasons for doing this are quite instructive.

If anyone wants an in depth primer on the state of the capital markets, I would suggest going to Bloomies and listen in. It is about a 20 minute interview.

David is one of the good guys. He is objective to a fault. The comment that most impressed me was that he believes that the credit crunch is only now beginning.

Worth a listen for those who wish to keep up with Henry's great de-leveraging thesis.

Regards

One scared MF.
_________________
Psychic with Alzheimers. I can predict what I will forget.

[rffrydr]

Fed Credit Survey:

https://research.mfglobal.com/Dailyres/Financial/Eurobonds/12us_files/image002.jpg
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Auto Leasing: the door to the candy store is slowly closing.

http://www.bloomberg.com/apps/news?pid=20601213&sid=aStq6nvSPVDw&refer=home

GM will need this to jumpstart the Volt.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Covered Bonds: after pulling teeth major banks making a show of it. Article touches on some of issues financial institutions might have with these. Obviously there is more to a market than just making a market. How much our "free world" depends on regulation:

http://www.smartmoney.com/breaking-news/smw/index.cfm?story=20080728042057
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

How much depends on trust...how much, now depends on punishment:

[HenryTo]

Unlike the failure of IndyMac, there's no deleveraging here, as all bank account holders were made whole:
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No angry lines of customers after bank takeover
Saturday July 26, 10:01 pm ET
By Amanda Lee Myers, Associated Press Writer
Bank customers unfazed as FDIC takes over 1st National of Nevada and First Heritage N.A.

PHOENIX (AP) -- Customers of two banks closed by federal regulators were assured that every penny of their money was protected, preventing lines of angry accountholders from forming Saturday.
The calm response was a stark contrast to the hundreds of angry customers who waited for hours earlier this month in Southern California to demand their money after IndyMac Bank's assets were seized.

The 28 branches of the 1st National Bank of Nevada and First Heritage Bank N.A. -- owned by Scottsdale, Ariz.-based First National Bank Holding Co. -- were closed Friday by the FDIC.

But Mutual of Omaha Bank bought all of the two banks' deposits, even those over the amount protected by FDIC insurance limits. IndyMac customers had to take a loss on whatever amount they had in the bank over the insurance limits.

One 1st National Bank of Nevada in downtown Phoenix didn't even have a note outside to tell customers about the trouble Saturday. But there were no customers outside to tell.

"I feel like the Maytag repairman -- there's just not much to do on the customer side of things," Federal Deposit Insurance Corp. spokesman David Barr said. "There's going to be no impact on the depositors whatsoever, except basically a name change," Barr said.

Insurance limits are typically $100,000, but some accounts, such as joint accounts, can have more money protected, Barr said.

On Monday, Mutual of Omaha will open the banks as its own branches, Barr said. During the weekend, accountholders can access their funds by writing checks or using ATM or debit cards.

Jeff Schmid, chairman and CEO of Mutual of Omaha Bank, said the acquisition of the new accounts aligns with the company's growth strategy to get aggressive with banking.

"We're very optimistic about these markets," said Schmid, who was in Scottsdale on Saturday to speak with his new employees. "This could be our finest hour."

Mutual of Omaha Bank has $800 million in assets and operates 14 retail branches in Nebraska and Colorado. It's a subsidiary of Mutual of Omaha, a 99-year-old insurance and financial services company with more than $19 billion in total assets.

The Office of the Comptroller of the Currency said in a news release that 1st National was undercapitalized and had experienced substantial dissipation of assets and earnings "due to unsafe and unsound practices."

Those practices "also weakened the bank's condition and seriously prejudiced the interests of the bank's depositors and the deposit insurance fund."

Another news release said First Heritage was critically undercapitalized and was likely to incur losses that would deplete all or nearly all of its capital.

As of June 30, the closed banks had total assets of $3.6 billion. That's down from $4.1 billion six months earlier. Most of the assets are in 1st National, while First Heritage N.A. accounts for $254 million.

The FDIC said the takeover of the failed banks was the least costly resolution.

Calls to 1st National executive vice president Joe Martony were not returned Saturday. No one could be reached at the First Heritage N.A.

1st National has 10 branches in Nevada and 15 branches in Arizona. First Heritage N.A. has three branches in Southern California.

[rffrydr]

[HenryTo]

Fed making incremental steps to allow private equity firms to invest in US banks in a substantial way:

http://www.bloomberg.com/apps/news?pid=20601087&sid=andzW.Pv3DjY&refer=home

[HenryTo]

Something to keep track of going forward as the recapitalized Japanese financial system starts taking baby steps on the global financial stage - along with the amount of private capital sitting on the sidelines.
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Japanese banks take steps overseas, gingerly
Thu Jul 3, 2008 6:52am EDT
By David Dolan - Analysis

TOKYO (Reuters) - Unburdened by heavy subprime losses, and stuck with sputtering growth at home, Japan's big banks are once again investing and lending abroad, but investors should not expect a string of blockbuster buyouts.

Only a few years removed from a bad-loan crisis that pushed many lenders to the brink of collapse and sparked widespread industry consolidation, Tokyo banks will continue to keep their acquisitions conservative, bankers and analysts say.

Last week Sumitomo Mitsui Financial Group (8316.T: Quote, Profile, Research, Stock Buzz), Japan's third-largest bank, said it would pay about $1 billion to take a 2 percent stake in Britain's subprime-scorched Barclays (BARC.L: Quote, Profile, Research, Stock Buzz).

Earlier this year Mizuho Financial Group (8411.T: Quote, Profile, Research, Stock Buzz) injected $1.2 billion into Merrill Lynch & Co. (MER.N: Quote, Profile, Research, Stock Buzz).

Although big news by recent standards, the deals are minor-league compared to the overseas shopping spree of the 1980s, when at one time Japan was estimated to control more than a quarter of California's banking market.

Most of those investments were later sold as Tokyo faltered under mounting bad loans. Now that the subprime crisis has sapped Western financial firms of cash and risk appetite, Japanese bankers acknowledge they have a chance to rebuild overseas.

"We would of course consider investing in financials where capital has been depleted by the subprime," Tatsuo Tanaka, deputy president of the core bank of Mitsuibishi UFJ Financial Group (8306.T: Quote, Profile, Research, Stock Buzz) told the Reuters Japan Investment Summit this week.

But Tanaka acknowledged that Mitsubishi UFJ, Japan's largest bank, would take a cautious tack in building up overseas.

"There's a difference between a financial investment and a strategic investment. Rather than looking to boost our short-term profits, we would build a mid- to long-term relationship with a financial firm," he said.

Top Mitsubishi UFJ bankers, including the president of the group's main bank, have said the bank aims to take minority stakes in overseas firms, and then build business alliances.

Mitsubishi UFJ's brokerage arm in April raised its stake in Singapore's Kim Eng Holdings (KEHS.SI: Quote, Profile, Research, Stock Buzz) to about 15 percent. Together the two firms operate a joint venture in asset management.

TYPICAL JAPANESE?

The strategy of taking a small portion in an overseas firm -- such as Sumitomo Mitsui's 2 percent stake in Barclays -- is too meek to deliver real results, said Kristine Li, banking analyst at KBC Securities in Tokyo.

"It's very typical Japanese style: first you put a little capital in and try to do some kind of tie-up," Li said in a recent interview with Reuters.

"I just don't think it's Western style and I don't think it will really deliver anything significant."

Dubbing the strategy as "typical Japanese" doesn't bother Sumitomo Mitsui's president, Teisuke Kitayama.

"We (Japanese) are not big hunters. We are agricultural people," he told the Reuters Summit on Wednesday.

"So far our tentative conclusion is to stay with the current, present investment. That's it. And then sometime in the future we will decide whether we will make more investment or not."

The banks have agreed to tie up in areas such as private banking and overseas commercial banking.

Sumitomo Mitsui will also consider other investments in the subprime-hit West, Kitayama said.

"The current turmoil is not over yet. There will be opportunities for us to make investments in some of the operations to be disposed by ... Western financial institutions, together with some opportunities for capital investment," he said.

OVERSEAS LENDING

While acquisitions abroad are likely to come at a slow pace, overseas lending has been rapidly expanding for Japanese banks, which are able to step in to fund cash-strapped Western rivals.

Sumitomo Mitsui saw loans outside of Japan rise 44 percent in the year to March 2008 from the previous year, with much of the growth in Europe and North Asia.

Mitsubishi UFJ has said it is increasingly approached for bridge loans, a kind of short-term funding, overseas.

Expanding overseas lending is critical for Japanese banks, because they face fierce competition and slack demand in the domestic market.

While Japanese banks have yet to once again take big overseas stakes, their renewed outward focus demonstrates growing confidence.

"Arguably a single digit percentage doesn't make much difference, but it's the first step," Steven Thomas, head of mergers and acquisitions for UBS in Japan, told the Reuters Investment Summit.

"Will we see some dramatic, large scale acquisitions overseas by financial services companies? In my own view, we may in the future but it will still take quite a long time until the stars will be aligned for that to happen."

[HenryTo]

Goldman projects further capital raisings of $95 to $140 billion among European banks (the latter estimates take into account "multiplier effects" due to the current economic cycle in Europe):

http://www.bloomberg.com/apps/news?pid=20601087&sid=abu_8cEXAsLI&refer=home

[HenryTo]

JPM trims headcount in its European i-banking operations. Look for continued "deleveraging" in headcount among financial institutions over the next few months:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4jAZx3S8780&refer=home

[rffrydr]

The Madman says we have a price. Question is: is it about the mortgage anymore?