Gary Townsend

Long/short equity, short-term horizon, medium-term horizon, hedge fund manager
Gary Townsend
Long/short equity, short-term horizon, medium-term horizon, hedge fund manager
Contributor since: 2008
Company: GBT Capital Management LLC
It struck me that the SEC's prosecution of Goldman was political from the start, to resuscitate and support the administration's financial "reform", which was flagging at the time.
After all, these CDOs were placed with institutional "sophisticated" parties, and in May 2007, despite what Toure may have believed, no one knew that September 2008 would bring financial panic.
Without the SEC attack on GS (approved 3-2 by SEC commissioners along party lines), the 2010 financial reform may never have passed. That would have been a good thing actually had we waited another two years to pass real reform, instead of the punitive, jobs killing hash of Dodd-Frank.
Advocates seem wedded to some aesthetic ideal that sees the division of the chairman's and president's roles, and usually assert that it's not personal, that it's not about Jaime, per se.
But the reality is that there's a political aspect at the center of this debate, that Jaime's been too good at questioning the governing authorities, for having suggested quite correctly that the economy's poor recovery can be explained by Dodd-Frank (a jobs killer) and the over- and poor-regulation of our financial system.
This author lost me in his first sentence, where he states that the SPX peaked on May 1st. It was actually April 2nd, at 1419.04. It was the DJI that peaked on May 1st, at 13,279.32.
In New York, the mid-cap financial to own is Signature Bank (SBNY), truly a growth story, with great deposit funded balance sheet growth, rapidly expanding loan base, growing revenues, combined with great efficiency and credit quality. Market cap of $2.9 billion.
That's a painful dividend to pay, and the $0.55 declared exceeded the $0.50 expected. If news is better than expected, it suggests to me that the stock price will rise, and sure enough, NLY is up $0.17 pre-market. How should we expect the rise in 10-year yields affect NLY's revenues?
I suspect that we'll find that when the eurotrades were so quickly unwound, the losses ended up about $2.4 billion, or nearly half the held to maturity repo net value, equal to the firm capital plus about 23% of the net value of the repos outstanding on October 25th.
I doubt that we'll find that Corzine ever had possession of any of the funds, which Madoff did, of course.
The monetary policy context must be considered. MF was pressured by Fed policy. Bad policy begets bad business. Fed funds at zero made a 150 bps in highly rated Italian sovereign debt an attractive alternative. What could go wrong?
Tim - In my opinion, the best way to understand what happened is that
* MF looked for yield in Europe because the Fed dialed down U.S. rates to zero, while the ECB had similar short-term rates at at least 1.5%. When the Fed misprices interest rates, MF misdirected its investments and risk managment.
* When it tried to unwind these investments rapidly, it took the unexpected loss of more than $1.2 billion, the missing client funds and also its capital.
Wouldn't better legislation better improve investor confidence? Without all the unnecessary baggage in perpetuity?
A similar debate took place in the early years of the United States, when Alexander Hamilton proposed that the federal government should assume state debts incurred during the Revolutionary War, that the rate of interest should be unilaterally reduced, and that payments of principal should be postponed.
Virginia's Jefferson and Madison objected that as that state had already paid down half its debts, that Hamilton's proposal would assess it again, benefiting other less "provident" states; further, that it was unconstitutional; lastly, that the lowering of interest rates and postponement of principal repayment was not repayment in full. Also, there was the usual objection that speculators, who had bought state debts at steep discounts, would profit.
As we know, Hamilton's view prevailed after he agreed that the capital city should be located in Virginia (the original land grant included land on that side of the Potomac). But the greater benefit was that the fledgling United States suddenly had access again to world capital markets. So out of penury, came prosperity.
The Europeans have the opportunity to remake their imperfect union after this long and continuing crisis. And perhaps we have lessons to relearn on this side of the pond, too.
Lao, the problem wasn't the question ... It was the answer! Cheap shot? Dimon couldn't predict Bernanke's answer. Bernanke could have made the usual Washington response ... In other words, the typical Washinton non-response.
The reason that it made headlines is that Bernanke gave such a lame, if honest, reply.
Bernanke's no neophyte. He takes hard questions all the time. But his answer was, in Washington terms, a gaffe of the worst order. It was, in other words, truthful, if too revealing of how the Fed's inadequacies.
The press' response has been so interesting. The NYTimes called
it an "ambush". Really? What were so many heads of the world's great financial institutions there for? To pitch softballs at the Fed chairman? The press should be asking the hard questions, but doesn't.
Regulation is more than adequate; rather, what we need is better regulation, more intelligent, wakeful oversight. There are many causes of any panic. It wasn't just the banks. Here's my list:
In my neighborhood, my utilities do such a poor job that we sometimes have service disruptions that last as long as a week. Happens perhaps twice a year on average. So if that's what you want, that's what you should expect.
In Washington's terms, Bernanke's answer was a "gaffe", an answer that was accidentally more truthful than intended by the speaker.
But Bernanke is partial to unfortunate policy decisions. He was Fed chairman when he engineered the ruinous and entirely unnecessary 18-month long inversion of the yield curve (2006 through late 2007) that helped destroy housing markets, pushed most participants to reach for yields, and disrupted the money markets (e.g., SIVs), the unhappy effects of which we still experience.
He didn't understand the consequences of his actions then. No reason, I suppose, that we should expect such understanding today. What's remarkable is his candor that that's the case.
As I understand Tester, there's no change that debit card transactions will be regulated henceforth. It only allows the Fed to consider all reasonable costs and profit in its rule.
There's always something to worry about!
Thanks for your interesting comment.
And while the broader equity indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing Friday -4.12% below its April 2010 highs and -32.7% below its best level of 82.55 in September 2008. Valuations are quite compelling. Combined with improving fundamentals, recommend that you hang in there.
David - Thanks for your comment. I've no debate with you that most, maybe all financials won't meet your definition of "dividend growth" stocks, but if one waits five years to satisfy that definition, then investors will have missed today's opportunity in financial stocks.
In my opinion, valuation -- more than dividend potential and share buybacks -- and improving fundamentals make the financials so compelling at present. Large-cap banks trade at a median 1.59x tangible book value and 14.3x 2011 consensus earnings. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. Analysts expect 2011 large-cap bank earnings to exceed 2010 operating earnings by +29.7%. In 4Q2010, large-cap banks earned $17.92 (the sum of 31 banks’ operating EPS), compared to $16.21 in 3Q2010.
One can discount analysts' expectations, but so far in this recovery/expansion, they've been way low. In 4Q2010, the BKX earned $2.99 per share, compared to $1.42 per share in 3Q2010.
Also, that these aren't dividend growth stocks isn't the same as saying that the market won't respond both the an increase in dividends by the most healthy banks or the resumption of capital management through share repurchases -- even if initally only to reduce shares by as much as paid to employees. Prospectively, many will again be active capital managers buying back much more.
Doc - I know all these gentlemen via my years as a sell-side analyst. I covered WFC for about 5 years, until 2007, when my partner and I started this financials focused fund. As an analyst, I had opportunity over several years to host meetings with Dick, John, and Howard in California and elsewhere, through good times and bad.
Objective? Everyone has a point of view. My experience and observations inform my views here.
Doc, disclosure is that I'm long the stock.
"hued" would be a horse of a different color, I believe. Thanks for pointing out my malaprop.
Regarding AF, NYB, and FFIC, I've never been a great fan of the thrift model, but all largely managed their credit exposures reasonably well through the financial panic.
FFIC seems to me the better buy of the three, trading at 1.23x TBV and 11.5x 2011 estimates. It may also be the more likely acquisition target. The street likes NYB, but it looks expensive to me at 2.68x TBV. AF trades at only 1.3x TBV, but nearly 18x 2011 EPS estimates.
Siew: Citi discontinued its common stock dividend in Feb 2009, but other large banks continued to pay some dividend, including BAC, if only $0.01/share. But I disagree that it's too early to "talk" of raising dividends. It's been a discussion all along. The difference today is that the regulators are poised to approve many of the banks' requests.
Wiz: We all analyze with imperfect information and this analysis is no different. No doubt you were struck, too, by how surprisingly low the settlement was. AMI clearly was. I use the Ally and FNM percent because it's indicative of where future GSE deals will be struck.
Though they are both "government controlled", in its condition, FNM can't agree to any deal without regulator's approval. It's highly unlikely that regulators would approve any deal unfair to FNMA. I can imagine the House Subcommittee on Governmental Affairs hearing now.
For reasons discussed, private label investors will likely fare worse than the GSEs. Legal costs and SEC fines come out of a different reserve, by the way. I've excluded them here, but you're free to calculate them as you wish.
bbro: Use your own estimate. Even at 60%, the result is quite manageable.
Doug - Thanks for your article. I've been watching LIBO rates, which haven't move even a tad over the past month. Using bloomberg, how do you produce the chart that you use.
grymmace - great moniker by the way. When sentiment is at high levels as it is now, markets often interpret it as a sign that the trade is getting crowded. When everyone is bullish, it's time to get bearish, is the smart-money instinct. For example, at the end of August, the AAII bullish sentiment index was in the low 20s. That was obviously the time to buy, in retrospect.
Actually, this recent recession is very similar to the 1981-82 recession. The Fed dialed up short term rates, inverted the yield curve for a record 20 months, and only dialed them down after it precipitated the mortgage crisis.
It didn't take long for the Obama administration to take CNBC to task for Cramer's insults of "Timmy" and Pizanni's
"Mr. President, are you listening?" Stewart showed that Cramer has no back bone, just wants to please.
Appraisers never liked FAS 157 either, as it provided little room for judgment, let alone professtional judgment.
On Mar 15 04:26 AM John Petersen wrote:
> FAS 157 was issued in September 2006 and effective for fiscal years
> beginning after November 15, 2007. As soon as the rule took effect,
> the Dow started its decline. As a one time practitioner of the dark
> arts, I believe FAS 157 is wholly inconsistent with the "going concern
> principle." If we are going to abandon the basic principals that
> give periodic financial statements value, why not turn the entire
> process over to qualified appraisers and be done with it? Seriously,
> what good is a consistent application of generally accepted accounting
> principles if the core valuation of assets changes from quarter to
> quarter?
In my experience, most large banks have a strong well-defined provision for loan loss discipline.
On Mar 06 09:59 AM biomedlives wrote:
> I take your point about the havoc MTM has created. Nonetheless, I'm
> sense that banks are often unrealistic when they set decide their
> quarterly loan loss allowances. As the current crisis was developing,
> many were setting nothing or almost nothing aside, even though loan
> balances were increasing.
SEC rules don't allow excess reserving for loan losses
On Mar 06 09:59 AM biomedlives wrote:
> I take your point about the havoc MTM has created. Nonetheless, I'm
> sense that banks are often unrealistic when they set decide their
> quarterly loan loss allowances. As the current crisis was developing,
> many were setting nothing or almost nothing aside, even though loan
> balances were increasing.