Good Luck, BofA [Housing Tracker]

Quote of the Day 

“This is lock, stock and barrel. We are out.” - CIT chairman and CEO Jeffrey Peek on CIT’s sale of its lending and housing portfolio’s to “focus entirely on commercial finance.”  (BusinessWeek, July 1^st) 

Subprime Fallout

Investment Strategy by Jeffrey Saut.  “At such a potential short-term downside inflection point, what you need to buy are those companies/indices with the best relative strength characteristics and those with the worst relative strength characteristics. Since we already own those with the best characteristics (energy, agriculture, materials, water, etc.), we concentrated on those with the worst characteristics. Consequently, our vehicles of choice were financials and real estate. The exchange-traded funds we are using are: ProShare Ultra Financials (UYG/$20.24); Financial Select Sector SPDR (XLF/$20.32); ProShare Ultra Real Estate (URE/$28.09); SPDR S&P Homebuilders (XHB/$16.76); and ProShares Ultra S&P 500 (SSO/$61.90).”  (Raymond James Newsletter, July 2^nd) 

IndyMac, Its Picture Bleaker, Works With U.S. Regulators. “SEC filing: IndyMac's chairman and CEO, Michael Perry, said the company is trying to raise more capital… IndyMac, hit hard by rising defaults and falling home prices, also said that its financial position "has deteriorated" since Q1. In May, IndyMac posted a $184.2 million loss for Q1… IndyMac said news reports of [Sen. Charles Schumer’s] letter [to regulators questioning IndyMac’s health] sparked withdrawals of about $100 million of deposits at IndyMac's savings bank Friday and Saturday. That was about 0.5% of total deposits… Until recently, IndyMac specialized in Alt-A loans.”  (Wall St. Journal, July 2^nd) 

Lehman's Rivals Come Out Against Fire Sale Rumours. “In the face of continued speculation that Lehman chairman (LEH) Dick Fuld is negotiating a below-asset sale to any number of potential suitors, leading analysts at rival banks, including Morgan Stanley (MS), supported Lehman's shares by arguing that such a sale was unlikely. Despite the support, Lehman's shares touched a low of $19.24 at one stage [Tuesday]…  its lowest closing price since 2000. In addition, the bank's credit-default swaps, which measure the risk of default, widened by 11 basis points to 286 points. This means it now costs $286,000 to protect $10m of debt.”  (UK Telegraph, July 2^nd) 

CalSTRS May Shift $23 Billion To Overseas Equity.  “CalSTRS could move some $23 billion in assets to international equities from domestic equities if the system’s investment committee approves combining the U.S. and non-U.S. equity portfolios into a global equity portfolio. As part of eliminating the home country bias and moving to a global benchmark, CalSTRS may have to shift 23% of its domestic equity assets to international, according to a proposed 2008-2009 investment plan outlining changes to its global equities portfolio to be discussed at a July 10 investment committee meeting. Currently, the system has $67B in domestic equities and $35.7B in international stocks.”  (Pension & Investments, July 1^st) 

Florida Eyes Subprime Settlement From Bank Of America.  “Florida’s attorney general: Florida hopes to negotiate a settlement with the Bank of America (BAC) for what the state called the deceptive lending practices of its newly acquired mortgage unit Countrywide Financial Corp… BAC completed its purchase of Countrywide on Tuesday, a day after Florida filed a civil lawsuit accusing Countrywide of deceptive lending practices. The state alleged that the mortgage lender gave subprime loans to borrowers who could not repay them, loaned money at higher subprime rates to people who qualified for prime rate loans and engaged in other unfair trade practices.”  (Reuters UK, July 1^st) 

BAC Punctuates Subprime Mess, Crossing Fingers at GM, With Alcoa: A Start. “At least Bank of America got a bargain [with Countrywide]: paying $2.7 billion for what it promised back in January to spend $4 billion on, a 37% haircut, as BAC shares retreat back in range of the lows reached Monday. Investors in the credit market also appeared to be voting against Kenneth Lewis’s plans to grab a big footprint in the mortgage lending business, as credit default swaps on Bank of America debt have swelled to a three-month high.”  (Barron’s, July 1^st) 

CIT Gets The Subprime Monkey Off Its Back. “Shares in CIT Group (CIT) surged 30% Tuesday after the commercial finance firm said it was cutting adrift its housing-related business divisions. CIT’s home lending business will be sold to Lone Star Funds for $1.5 billion. Its manufactured housing portfolio will go to Vanderbilt Mortgage and Finance, Inc. (Berkshire Hathaway (BRK.A) owns Clayton Homes, which owns Vanderbilt.) These two divisions are being sold for 63 to 64 cents on the dollar, so CIT will take a big hit in the short term. From the sale of the home lending unit, CIT will register a $2.5 billion loss in Q2.”  (BusinessWeek, July 1^st)

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Comments

[hanson001:]

With BAC, I wish I could fast forward 5 years. If the yield curve stays steep and sloping up to the right, this is a good stock to start purchasing.

2008 Jul 03 09:01 AM

[Smalltownba...:]

RE Florida and other law suits. Since when is it illegal to charge a higher rate of interest than someone can get somewhere else? What is next, sue target because they charge a higher price for the same item than Walmart? Is Ford in trouble for charging more for a Mercury, what about brand name products over generics? What about the builder who gets a better price for his home than the guy next door? We really need to be careful and we should end the current session of Congress and not let them come back until the election is over. It also wouldn't hurt to put a gag order on some of them, like old Chuckie.

2008 Jul 03 09:03 AM

[JAAG:]

I am not sure about Bac being a buy; I predict a wave of lawsuits against them because of countrywide previous practices. Florida already file a lawsuit and there are more to come. I never liked the idea of acquiring countrywide but it is going to be entertaining.

2008 Jul 03 09:26 AM

[JAAG:]

Newsflash!!!! Predatory lending ilegal, giving loans without checking incomes irresponsable and so on .... If all these mortgage companies did everything in a responsible manner, why the credit crunch??? Wake up people.

2008 Jul 03 09:31 AM

[rm:]

[RE Florida and other law suits. Since when is it illegal to charge a higher rate of interest than someone can get somewhere else?]

When it's politically expedient to do so.

It's unclear to me whether the legislators/litigators are really that clueless, or are completely shameless about the ineffectiveness of their proposed "solutions."

2008 Jul 03 10:59 AM

[Diyg:]

All together now: The banks were just playing the piano downstairs.

2008 Jul 03 11:18 AM

[Tom Lindmark:]

Don't just focus on BAC's exposure to Countrywide. This bank has some big looming commercial loan problems. Here's a back of the envelope analysis I did on their construction loan portfolio-blog.metro-real-estate...

2008 Jul 03 11:55 AM

[helplessobs...:]

Please note that BRK picked up a piece of CIT for 63 cents on the dollar. Buffett is soaring and snapping up the road kill. Don't all these LBO wizards wish they could do that. I thin his $100K salary is a tiny bit low.

2008 Jul 03 12:28 PM