Greg Weston

The Benefits of Forced Debt for Equity Recapitalizations

Thanks everyone for the positive comments. I have had less time for writing because of work obligations. I have another GM column in the works, and more to come as my biggest case goes through the settlement process.

Even better, the settlement was big enough that I'll have plenty of money to invest!

The Benefits of Forced Debt for Equity Recapitalizations

Lisa, thank you for your informed comments.

We will have to agree to disagree about the solvency of JPM right now, and whether market prices of disfavored (some might say "toxic") assets is irrationally low.

But if you will assume that JPM is under legal capital ratios if it had to report assets at market prices and would under my plan be forced to raise capital by forced debt for equity swaps, and it later turned out the market prices were indeed excessively low, then the new equity holder would not be harmed, because they would have shares of a now extremely well capitalized bank.

Nor would current shareholders be harmed because they could use their warrants to buy new common JPM shares. JPM could also simply return all its new excess capital to its new shareholders (and old debt-holders) via dividends, so they too would get their cash back. And given the huge amount of debt these large banks have, the stronger of them would not have to swap that much debt for new shares, maybe 5%. And the market value of that debt would be higher than before given the bank's greater ability to pay it.

The Option Arm Triplets: Dead Banks Walking

Update on CA and FL Housing:

Please check out the entire article here about how foreclosures are not only getting worse, but getting worse quickly, especially in California and Florida, where DSL/FED and BKUNA have most of their OA lending.

Marketwatch:
Homes in foreclosure process set another record
California, Florida continue to drive national numbers in MBA survey

www.marketwatch.com/ne...={21015C68-EDCF-4E8B-B...

In particular, these portions:

---Increases in foreclosures seen in California and Florida overshadow improvements seen in states including Texas, Massachusetts and Maryland---

---California and Florida alone accounted for 39% of all of the foreclosures started nationally during the second quarter. Together, the two states made up 73% of the increase in foreclosures between the first and second quarters, according to the MBA.
"The worst states are getting worse,"---

--- Certain loan types also are driving rates, Brinkmann said.
"Subprime ARM loans accounted for 36% of all foreclosures started and prime ARMs, which include option ARMs, represented 23%," he said in a news release. "However, the increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans," he added.
In future quarters, foreclosure start numbers will probably be increasingly dominated by problems with prime ARMs, he said. That's due partly to the difficultly some borrowers are having with prime, option ARMs.---

My fact-driven opinion that DSL, BKUNA, and FED will all soon be shut down by the FDIC and see their stocks go to 0 is supported by even more new facts on the ground.

Maybe because I am here in San Diego, one of the ground-zeros for the mortgage/housing crises, while many analysts are ensconced in the very unique and still-inflated Manhattan market they refuse to recognize that these banks are on their death bed, and only being kept alive in the short term by the extraordinary degree incompetence banking regulators have shown in even letting them get this far.

The Option Arm Triplets: Dead Banks Walking

Yes Wez, I also took the crazy run-up last week as a chance to add to my position. I didn't manage to sell right at the peak, but my call writes (FEDIW) that I sold 8/28 for $1.15 are now worth about 20 cents.

Looks a few other people with even better timing managed to short FEDIW at 1.30 that same day. Congrats to them.

Pretty nice 78% gain in one week for me though.

If you have the nerves short like heck any of the triplets when they have these stupid speculative/short-cove... run-ups.

The Option Arm Triplets: Dead Banks Walking

E Nuff:

Having "most" loans perform will still bankrupt the company because of its leverage, which is not especially high for a bank, but is extremely high relative to the risk involved in its portfolio.

Also, where the heck are you getting "20-30% declines in home value."?

In much of FED's territory, prices are down by well over 50% from peak values, and still dropping as we speak.

FICO scores on very risky loans have proved to be a very poor indicator of risk, much better is CLTV. And CLTV is well above 100% of the average current value.

No, not everyone casually "walks away" form their home, but when you take out a $550,000 mortgage, and then it rises to $605,000 because of Neg-Am, and then your payments double, and the economy goes into the recession, and your house is only worth $400,000 if it were even possible to sell it.... well you get the picture.

As for the run up, I am a medium to long term value investor, not a day trader.

The Option Arm Triplets: Dead Banks Walking

GBGB:

I think 40% is a pretty good estimate of what has happened to California real estate. A change in the mix of home sellings can bias the figure to be sure, but here are some other things that can bias the figure:

(1) seller incentives that don't go to the purchase price (the recorded price is $500,000, but the seller gives the buyer $5,000 in cash for closing costs and another $10,000 for "repairs" or for "decorating")

(2) the seller pays for expensive upgrades and renovations. So X buys a house for $400,000 in 2006, spends $100,000 on extensive renovations, and then the bank forecloses and resells the place for $360,000. This gets counted as a 10% decline, when in fact the loss for the first buyer and/or the bank is 140,000 or 35%.

Certainly some parts of California, like Pacific Heights in SF, Mountain View in Santa Clara County, and the good parts of Santa Monica and West LA, are down only about 5-10% from the peak.

On the other hand, other areas are down 50-70%. Same for Florida. condos in South Beach are down about 20%, downtown Miami more like 40%, and Naples 60%.

When it comes to the banks I am writing about, the numbers in the bad areas are actually the more important figures, because that where all the foreclosures are.

A Short Update on My Four Short Ideas

Bogey: thanks for the update from NY

Matt: Bear market rallies are to be expected.

As for the reason why, I am no good at explaining short term market movements, which is why all of my articles deal with fundimentals.

That said, FED is one of the most heavily shorted stocks on the market, so short squeezes can always happen. I think current prices are a great opportunity to short FED.

Short Thesis Still Intact at FirstFed

Great article!

Especially the point you make about the monthly report not telling the whole story. REOs we know went up dramatically from Q1 to Q2. However, once a property is foreclosed, it is removed from the delinquent loan figures.

So the moderation in growth (not by any means a decline) in total delinquent loan figures could be because (1) suddenly Californians with toxic loans decided to start paying them at a higher rate (2) a lot of bad loans are no longer delinquent, but now are REOs.

As for the decrease in NPA ratio (1) total assets increased because of the funding of new loans and increase in uninsured "hot money" (2) write-downs of the value of NPA decrease the amount of NPA.

A Short Update on My Four Short Ideas

Thank you Groty for the response. I typically give up responding to someone after more than one post that seems to show either gross or willful ignorance of a topic, or that asks me to do research for others.

A Short Update on My Four Short Ideas

tquill: I am a lawyer, not a financial adviser, so I can't talk to you via e-mail about investments (unless you have a real estate investment issue or financial fraud case).

Probably the best thing you can do to learn about options is open up a "practice account" using Yahoo or Google's "portfolio" option (other sites have this too) and see how you do.

Or perhaps open an options account with just a few thousand of real money.

A Short Update on My Four Short Ideas

Tquill: If you've got the stomach for FED's volatility, yes I do think today's run-up presents a good time to short FED calls.

Steve: My financial short calls have fallen a lot more than the average financial stock. You are wrong, my number is correct, and comes right from the mouth of the company:

"This loss includes $60 million (negative $1.84 per share) of net negative market valuation adjustments."

A Short Update on My Four Short Ideas

SRS asks:

Isn't it more accurate to say that CRZ "breached loan covenants" rather than saying that CRZ [was] "in default"?
---
No, it would not. *In default* is more precise, because a breach may be minor or immaterial. There is no such thing as a *immaterial default.*

You don't have to be a lawyer to know this, I would expect these terms to be familier to anyone in finance.

A Short Update on My Four Short Ideas

Matt C: DSL/FED/BKUNA/CRZ/RWT puts are expensive for a reason of course, and I have not done much of this lately.

Shorting the calls on the stocks when they have their random bear market rallies, however, has worked quite well for me.

A Short Update on My Four Short Ideas

Portfolio Manager: By paying a premium as you did, or else in the options market.

Or you can short some of the larger financials, But profits may be lower since they are pretty well covered by independent sources, and there is always the hard to value premium they may have from potential too big to fail bailouts.

The smaller near-dead financials are a great way, however, to make a large profit just if current trends continue, and even bigger if they get worse.

A Short Update on My Four Short Ideas

Value Dope: predicting a trend in the PPS of a stock will continue is no more or less valuable than predicting the trend will reverse.

Shorting a stock that goes down is no more or less profitable whether the stock had been going up or down before you made your trade. So I don't understand what point you are trying to make. My articles are not attempts at expose, they are attempts to analytically value companies and make informed near-term and long-term estimates of their future value using the best available data.