$10-15B In Fannie/Freddie Losses For U.S. Banks [Housing Tracker]

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

Quotes of the Day

“The FDIC’s closure of West Virginia’s tiny Ameribank on Friday was not in and of itself terribly important. However, it does beg the larger question of what the regulators are waiting for with many of these institutions.” – Anonymous source, on the failure of yet another small regional bank. The bailout will cost the FDIC $42 million where the bank has assets listed of $100M. Of the bank’s $80.2M in (almost entirely residential) loans, $33.13 had non-accrual status. Are many other banks in such obvious dire straits? (Housing Wire, Sept. 22)

"What started last summer has accelerated and intensified so much so that we believe any government bailout plan has little hope of improving core fundamentals over the near and medium term." - Oppenheimer & Co. financial analyst Meredith Whitney said in a research note. (Lloyd’s.com, Sept. 23)

Banking Subprime Fallout

Public Humiliation. “Lehman’s assets were not significantly more toxic last Monday, when the company filed for bankruptcy protection, than they had been a week earlier. And, technically speaking, the bank may not even have run out of money, since it had access to an emergency liquidity line from the Federal Reserve. What Lehman did run out of was credibility. It couldn’t remain a going concern because creditors and customers no longer trusted it. Why would they, when its stock price had fallen nearly 80% in the previous week? The less faith the market had in the possibility of Lehman’s survival, the more remote that possibility became.” (New Yorker, Sept. 29) 

Call The Treasury’s Bluff. “I would rate the economic stress as pretty even across the worst of 2001-2002 and now.  We bounced back from 2002 without any bailouts.  Could it get worse from here in this present era of stress?  Yes… But at some level, enterprising investors come in without the aid of the government and begin buying assets where the downside is adequately discounted, and the upside ignored.  We are close to that now, with mortgage opportunity funds starting up.  Those won’t see the light of day if there is a bailout… The Treasury bailout proposals [could] waste money by buying assets at levels above what the market will bear.” (David Merkel in Seeking Alpha, Sept. 24) 

Buffett Enters the Fray. “Effectively Goldman has created a near monopoly, wiping out nearly all competitors while keeping a few weakened ones around so as not to feel any anti-trust pressure (Intel model), has its men running Merrill, Wachovia, and the new most powerful position in the world - Secretary of U.S. Treasury, has the credit line of the Federal Reserve behind them, has the SEC protecting them, has the US government looking to buy their toxic assets, and now has Buffett backing them. They even fooled us with the "hey our stock is falling too, we're no different than anyone else" scenario last week.” (Trader Mark in Seeking Alpha, Sept. 24) 

Goldman Gets Buffett Aid in $7.5 Billion Fundraising. “Warren Buffett is buying $5 billion of Goldman Sachs Group Inc. (GS) perpetual preferred stock with a 10% dividend. Berkshire also gets warrants to buy $5B of common stock at $115/share at any time in the next five years. The common stock closed yesterday at $125.05, providing Buffett with an instant paper profit of $437 million. In addition to raising money from Buffett, Goldman said it plans to sell at least $2.5B of common stock to the public. It will be the firm's first common stock offering since 2000.” (Bloomberg, Sept. 24)

Morgan Stanley, Goldman Search for Deposits; Banks Are `Lunch'. Morgan Stanley (MS) plans to sell as much as a 20% stake for $8.4 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank, to shore up capital. Goldman Sachs said that its new status as a bank will help it purchase assets… Lehman Brothers’ bankruptcy and Merrill Lynch’s takeover by Bank of America Corp. (BAC) [have] helped financial services leapfrog the mining sector to become the most active for mergers and acquisitions this year. Regional banks probably will become “lunch” for larger institutions, JPMorgan Chase & Co. analyst Steven Alexopoulos said.” (Bloomberg, Sept. 23) 

Fannie Mae, Freddie Mac Takeovers Cost U.S. Banks Billions. “American Bankers Association: About a quarter of the nation's banks lost a combined $10B-$15 billion in the wake of the federal government's takeover of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE)… ABA found 27% of the nation's 8500 banks held preferred shares in Fannie and Freddie in their investment portfolios. The shares are expected to be worthless. The survey found that 85% of the affected institutions were community banks -- those with less than $1 billion in assets. Many were located in Massachusetts, followed by Illinois, Connecticut, South Carolina and Virginia.” (WSJ, Sept. 23)

Fed Changes Bank Investment Guidelines. “Reuters: An investor [can now] buy up to a 15% voting stake [in a bank] instead of the previous 9.9% limit. Investors can also buy up to 33% total equity interest, including voting and non-voting shares, instead of the 25% prior limit. This will allow private equity companies to own a larger share of a bank without becoming a "bank holding company" and falling under [Fed] supervision… [Pre S&L crisis,] the 1982 Garn-St Germian bill allowed S&Ls to have just one owner, and this led to developers buying S&L’s and lending to their development companies at attractive rates… There is the same concern here… that private equity firms will lend to their other businesses excessively.” (Calculated Risk, Sept. 22)

The Death of Wall Street. “Both Morgan Stanley and Goldman Sachs, the last two independent investment banks standing, have become commercial bank holding companies… The most direct effect of the change in charter will be that both Morgan Stanley and Goldman will need to deleverage significantly from current levels. WSJ: Banc of America Securities estimated Monday that Morgan Stanley’s current leverage stood at 34x tangible equity, while Goldman’s stood at 27x; commercial banks are capped at a gross leverage ratio of 15x.” (Housing Wire, Sept. 22)

Citing Writedowns, Washington Federal To Report First-Ever Loss. “The Fannie/Freddie takeover will cause Washington Federal Inc…. to report its first-ever quarterly loss, the Seattle thrift said. Washington Federal (WSFL) will take a one-time, after-tax charge of about $57 million for its loss in the two loan guarantee companies, [resulting in] a quarterly loss of $39M. For F2008, the company will report net income of $62M. WSFL said its Fannie Mae and Freddie Mac securities are now worth $2M. Washington Federal was ranked No. 12 in the 2008 Portland Business Journal list of the biggest banks in the region, with $326,000 in deposits.” (Portland Business Journal, Sept. 22)

                                                 

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