Hari Seldon

Live Discussion: Treasury's Bank Recovery Plan

And James Kwak should stop talking about accounting. You can't just declare you are holding the asset to maturity and leave it at par. It still has to be tested for impairment.

Moderate inflation will not solve the default problem. People are assuming that inflation will create wage increases, which it may but only if it is out of control. Otherwise, inflation will kill the middle class through reduced purchasing power and you still have a housing problem.

The only worthwile question (comments from observer2 and BIG AI45 are quality) was "[Comment From Steven]
Still wondering why there has been no administration discussion of bank bondholders versus taxpayers in absorbing bank losses? At a minimum we are owed an explanation, don't you think?"

And it wasn't even answered except for "scared to do that." If we are throwing out any risk in bank senior, sub or preferred, then the government might as well fund it all and make the income. Anything less is a farce.

Live Discussion: Treasury's Bank Recovery Plan

Further, the self dealing clause is nonesense. If ten banks all collude to participate, then they can provide the 99% of the equity (9.9% each) and artificially inflate the prices by securing the underpriced debt. They shouldn't be allowed to participate at all. If you are selling assets, you should not be able to invest in the sale.

Live Discussion: Treasury's Bank Recovery Plan

Why are we letting people (felix specifically) who hasn't read the term sheets talk about the program? I have a hard time taking him seriously if he isn't going to take the time to read all of the documents before opining on them.

To have missed the fact that CDO^2 are not covered under the plan is huge. This is where most of the problem is. The AAA mortgage securities should be OK (will not lose 100%) but a CDO^2 AAA backed by BBB is 100% loss already.

This is part of the systemic problem in this country. People are too lazy to take the time to truly understand things and still feel they are qualified to talk about them. It is a diservice to everyone to allow this.

How to Not Pay the AIG Bonuses

I think Cuomo is taking the right tack here with trying to use fraudulent conveyance. I agree that in practice it may be difficult but, outside of criminal prosecution for fraud (which is what I'd like to see happen), it is probably the only way to try to get the money back. The reality is that, if the funds were transferred on Friday as is being reported, it isn't coming back.

Another interest point on fraudulent conveyance would be the CDS contracts. Given the GS was (a) a shareholder, (b) very familiar with the comapny through its research department, (c) a large counterparty is there potentially emails or memos highlighting concern by GS that AIG would be unable to ever actually meet its contractual obligation under these contracts? It seems to me that if this exists, GS would be considered an "insider" and a transfer of assets (even collateral posting) would be fraudulent conveyance.

Uranium Producers: Worth a Look

Obama is going to announce soon that the reprocessing ban will be lifted. I haven't done the math in terms of what this means for global demand but it can't be good for the miners. That said, it is a huge step in the right direction from a policy standpoint.

I'm a big fan of nuclear energy and wish (a) uneducated "environmentalists" would stop the irrational bashing and (b) some more politicians step up and start advocating for new nuclear plants in the US. Of all the methods to produce a stable and clean supply of energy, nuclear is far above the competition.

Which Stocks Are the New Dividend Aristocrats?

There is a great opportunity now to buy sold, international blue chip companies with reasonable stable dividends. I don't think GE is on this list but does anyone really think great companies like KO, XOM, MMM or WMT are going any anytime soon? I'd pick these ones up on dips and forget about them for a while. In 10 years when your kids are going to University at $100,000 a year you'll be happy you did so.

WRT MLPs: Congress is largely expected to make changes that will impact the tax treatment of the MLP structure. This will have a double-whammy effect of 1) reducing the relative value of your dividend on an after-tax basis and 2) reducing the value of the holding itself as a result of 1. I'd steer clear of MLPs until there is more certainty around future tax treatment as I think you are sniffing around at a potential principal loss. This risk may already be discounted in the prices but if your goal is preservation of capital with a current return, definitely not worth the risk.

Further, to mkreisel's point(+1), debt maturities are going to be very, very difficult to roll over for the next few years and I personally don't want to be stuck in something that faces potential liquidation right now. While the leverage isn't out of whack with the cash flows right now, getting a banker to agree to roll something levered >5.0x right now is difficult to say the least.

In Mark-to-Market War Pragmatism Will Trump Principles

CWEST

Your comment is an interesting one but an incorrect interpretation of FASB 157.

The standard also allows you to adjust your liability value based on what the market is. Simplistically, if you locked in a rate of 3% and the prevailing market rate is now 6% you would write down the value of your liabilities (which is profit in OCI) along with whatever adjustments needed to be made to your assets.

The standard allows for dynamic adjustment to both sides of the balance sheet. It isn't meant to be (or applied by the auditors as) a solvency in liquidation test.

Additionally, as in your example, if your assets are producing a cash flow, the assets (which as you described would likely be Level II or III) could be valued based on this cash flow and other reasonbly market-based inputs. Assuming you do have a "positive spread" between the rate of return on your assets and cost of your liabilities (which you must have to produce positive cash flow), you would still show equity value on your balance sheet.

In Mark-to-Market War Pragmatism Will Trump Principles

FASB 157 is worth a careful read by anyone really interested in this issue. I think the standard is a very good attempt to force companies to rationally value their assets based on a number of market inputs.

I'm a bit concerned reading comments about MTM that people aren't thinking clearly about the subject and believe that the banks and other institutions are being forced to mark their books down to unfair levels.

To start, 157 defines fair value as "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."

This definition alone should alleviate those who claim that "lack of a market buyer" or "liquidity" are creating the problems. If their is no real buyers, then the banks may use other methodologies to value their assets.

Second, it is important to understand the various classification of assets under FASB. These include Level I, II or III assets. Definitions as follows:

Level I - Highly liquid asset with quotable market prices (eg stock, bond)
Level II - Illiquid assets which are unique but similar to other market assets (eg RMBS, CMBS, CDO paper)
Level III - Illiquid asset with unobservable inputs (eg PE investment, private company ownership)

Proof that banks are aware of the rules and using them correctly is the fact that assets similar to those that MS sold at 22c are still being marked at 70, 80 or even 90c at C, BAC and WFC. The auditors are viewing the MS sale as a distressed sale, which doesn't meet the fair value definition outlined in FASB 157.

The reality is that if a bank wrote an 80% LTV mortgage in a market that has lost 40% of its value, the loan has already lost 25% of its value before taking into account back taxes, upkeep, servicing and sales cost that will likely eat an additional 10-15% of the value of the home. This paper is really only worth 60c and valuing it any higher is just reality avoidance.

A lot of the losses that banks are refusing to take are real and unless the real estate market quickly recovers, will be realized in the near term. Avoiding a rationale and fair valuation for an asset is not a step forward in creating trust in the banking system (which is dearly needed right now).

Are the 'Sharks' Waking Up?

I've also been interested in the composition of the rallies. I can, somewhat, understand why the most beaten down names would rally the most (higher beta) but to me it seems like instead of throwing the baby out with the bathwater, we are bidding up the bathwater with the baby.

Two examples:

NewStar Financial (NASDAQ: NEWS), a specialty finance company focused on financing PE transactions in highly levered transactions. The company finances itself with CLOs and warehouse lines (both of which are disappearing) and its underlying portfolio has to be suffering based on fundamentals. Yet today, it rallied 73% from $1.24 to $2.15 after reaching lows of $0.60. This surely is an over-correction.

Boyd Gaming (NYSE: BYD), a gaming company which owns 15 casinos and hotel properties and operates an insurer and travel agency (seriously), gained 41% from a low of $3.05 on March 9th to a high of $4.31 today. The company is extremely levered, at 7.7x Debt/EBITDA compared to an EV/EBITDA of 7.5x (they have some cash but basically no equity value). They will need to roll this debt soon and, given declining fundamentals and a difficult debt market, this will be difficult. The reality is this company is a good candidate for bankruptcy should reasonably DIP financing come available.

FD: Short BYD (stock and puts), No position in NEWS.

General Electric's Strange Days

15.6x Debt/EBITDA (GE Capital is even worse).

Declining fundamentals

Obviously this is a AA+ company.

I am at loss of words...can't describe the irrationality.

Bond Expert: Wednesday Wrap

SW

Not saying I disagree with you that it is a unpalatable situation but it is what it is and you should make decisions appropriately based on what IS going to happen, not what we would LIKE to happen.

Bond Expert: Wednesday Wrap

The USD's strength (and to a lesser extent the EUR) reflects the world's trust in our institutions and property rights. The first thing a newly minted Chinese millionaires does is make sure he moves some assets into USD assets. He knows that, at the whim of a bureaucrat his wealth could be confiscated with almost no recourse. Believe it or not, the fact is that there is no better place to store your wealth right now (outside of maybe hard metals but that is a topic for another thread).

There are only two solutions to a declining value in levered assets: (1) Default or (2) Self-created inflation. I, personally, am betting that the reasonably intelligent and educated people in power realize this and not only the US but countries around the world will start running their printing presses in order to (a) return the banks to solvency and (b) deleverage their populace without requiring a major change in consumption or lifestyle habits.

As a percentage of GDP, the US debt load (both government and total) is not out of whack. In fact, the UK, Spain, Greece and Italy are definitely more indebted and eastern Europe is in the same place Latin and South America have been since I can remember (short a foreign currency).

I'm not convinced the US looks so bad. Every country is going to run the printing presses, and our institutions and systems have "safety value".

Bank Funding Datapoint of the Day

The sub (and to a lesser extent the senior) is just a gamble on what government is going to do at this point.

Not sure it makes a lot of sense to play around in this names, seems like there are greener pastures in industrial land with 20%+ yields on senior debt for companies that you can be sure have a future (dim as it may be).

Berkshire Hathaway: Proof That the CDS Market Is Irrational

At 12.2x EBITDA and 22.7x earnings, BRKA is overvalued.

Sure, it has a great position in the insurance markets and has generally stayed away from more risky underwritings but the value of its float has declined with rates of return and it could be on the hook for big payments in the future.

The puts are very problematic. A repeat of the '29 depression with flat stock prices will result in a sizeable payout on the sold puts.

It's businesses should decline in value along with the broader market. I believe purchase multiples have already declined 33% and will likely fall further. A 12x EBITDA valuation on this portfolio is unreasonable at best.

I respect Buffet but his reputation does not make him immune to reality.

The Case Against Gold

"No question but that stocks are cheap."
You lost credibility right there.

The case for gold is this:

I can take it to any place in the world and the people there, no matter what language they speak, understand the language of gold.

Governments can print money to their hearts content, but my gold cannot be duplicated.

When you make a claim that "their is no safe place to hide". This is pure sophistry designed to keep people in their paper holdings which will be worth nothing when there is no one to redeem or purchase it.

"Paper! Paper!
There is no gold in Aqaba.
No gold! No great box!"