Joe Friday

Option ARMs: The Banking Backdrop of 2009

Unfortuately this investment theme appears to have been played out. With WM, DSL, FED and WB all gone or on life support there is no money left to be made shorting these names. (It was fun while it lasted). It is very clear that there will be many more foreclosures, the question is, how can we capitalize on that knowledge? Any ideas?

Short Thesis Still Intact at FirstFed

I don't think that is accurate. Deposits in excess of 100K are uninsured and at risk. The 500M in wholesale deposit is very suspicious, and may in fact have been a "deposit" for only a day or two. No sane person would leave 500M on deposit and at risk at FED. it may have been put in on July 31st, and withdrawn on August 1st. It would serve the purpose of providing some window dressing to the July 31st statement.


On Aug 28 07:22 PM Kinabalu wrote:

> Just a comment on uninsured deposits. These deposits are usually
> demand deposits and are the most attractive deposits a bank can have.
> As a result when the FDIC takes over a failed bank they can sell
> the demand deposits to other banks for more than the face value.
> So the depositor doesn't have to take a loss as the new bank is happy
> to take over their business. There really isn't any more incentive
> for the uninsured depositor to participate in a run on the bank than
> for an insured depositor.

Short Thesis Still Intact at FirstFed

great article, a couple of points worth adding:

1. FED does not voluntarily provide the monthly report. It is required by one of their regulators. Note that Downey provides essentially the same information monthly as well. Perhaps someone could clarify which regulator requires that filing?
2. While the dollar value of 30-59 day late non accrual loans was fairly steady at 123M vs. 126M one month ago, the 60-89 day bucket increased to 101M to 81M. Total Non Accrual loans in the pipeline went up 17M in the month.
3. Cash was 562M at the end of July, but wholesale deposits spiked during the month by 556M. This spike in wholesale deposits was unprecdented in the history of FED and seems very susupicious. During the month, as you point out, ordinary retail depositors withdrew 257M. There is no further detail about the source(s) or this "wholesale" deposit. Note that is may have been only on deposit for a short time. We are also not given any information as to the terms provided to the depositor(s). It seems hard to beleive that anyone would put their capital at risk with an uninsured deposit at FED given its precarious balance sheet. Note that in the absence of this miracle deposit, the bank would have been out of cash, and needed to tap the FHLB, which would, of course have attracted still more regulatory attention.
4. Very important to always remember with respect to FED that almost all of its loans are in California (a few in Arizona as well), and primarily in the absolute worst hit part of California, LA, the inland empire, and San Diego. The loss severities for them will be very significant.

This bank is in very big trouble....