y2kurtus

Should Banks Extend and Pretend?

I work for a profitable, stable, well managed community bank. Never taken any bailout money, 5 star financial rating, pretty much as safe as a bank can get.

The issue of "extend and pretend" is a real one for us though. Our internal loan standards are tougher then required by statute and therefore tougher than market average. The problem is when commercial real-estate prices drop by as much as 50% and liquidity is low than there really is no other choice but to extend the loan on terms the borrower and bank can both live with.

The decision is actually simple when the gun is against your head... do you want to play a technical default card and force a liquidation that you know could not possibly result in a loan being paid in full?

Or would you rather keep the payments comming in at 6% knowing that your cost of funds were 2%?

It's not an easy position to be in for a bank... but IT'S A VERY EASY DECISION!!!

As long as cost of funds remain low this game can be played... if funding costs rise the numbers just don't work for the borrower or the bank.

Time to Change GSEs' Deal with Treasury

Every debt security issued in the last 10 yeasrs by FNM FRE and even the FHLB for that matter has stated on the cover page "THIS SECURITY IS DEBT ONLY OF THE ISSUING AGENCY AND IS NOT GUARENTEED BY THE TREASURY OF THE UNITED STATES OF AMERICA."

This is why agency debt trades at higher yeilds treasury debt dispite frantic buying buy the fedaral reserve. The minute that bond buying stops spreads revert to market levels... and home loan rates rise.

Good luck to those whishing for the federal goverment to admit they made a mistake when suspending preferred dividends on FRE and FNM... I view that as a highly unlikely outcome.

Bridgford Foods: A Diamond in the Rough

Mark you've been sweet on this company and it's management for a while now. I don't blame you... I own a few shares myself so obviously I like the stock. I think the book value understates the value of the real estate BRID holds.

I'll say this about management though, why would they pay a dividend to all shareholders (including the 20% of shareholders who aren't in the family) when they could instead chose just to vote themselves salary increases?

Also from an even more cycinal view point, are you sure that the oldest generation of Bridgfords want the price of the stock to rise sharply in the short-term? I'm not... a low price allows them to sell or gift a larger number of shares to the younger generations of sausage makers. If your an old salt who just likes to see the company stay indipendend and your grandkids have total control over their employment outlook than better to let the price languish somewhat and just hord the cash within the company untaxed rather than pay a dividend which would be taxed at 15%.

All the while the eldest family members can pass on $12,000 worth of depressed stock at say $6 rather than $10

Anyway it's good to see the stock on the rebound but I don't think we will get rich of this one until the buyout comes!

y2kurtus


On Jun 02 07:27 AM Mark Krieger wrote:

> One point I forgot to make. BRID's cash dividend could be about 27
> cents a year when it is finally resumed, representing about one third
> of its annual earnings (allowing coverage to be adequate) This computes
> to a respectable yield of 4.2%. This could happen by the end of the
> year.There is a huge amount of incentive to get this dividend payout
> started again, because management/Board owns such a large stake of
> the company ( about 80%), they would essentially be paying themselves.

VeraSun Energy:Buyout Candidate, If Obama Wins

The only problem with this thesis is that over the long-term no company will ever be able to profitably turn corn (the grain) into fuel ethanol. There are lots of companies who do profitably produce ethanol from corn but that's because they sell it for $10 to well over $100/ gallon. If you don't belive me on that here are some ticker symbols to do some research on DEO, FO, STZ.

If you want to profitably make ethanol for fuel you must use a feedstock that is an ORDER OF MAGINITUDE cheaper than corn. Sugarcane works already, (just ask CZZ) and optimistic scientists seem to think wood chips or corn stover (corn stalks and husks) are only a "few years" from commercial viability. Time will tell what will work in the long term but the only reason it ever looked reasonable to turn grain into fuel was because of goverment crop subsidies that were as foolish as they were massive.

Toyota, Honda, and T.Boone Pickens look to have it just about right.

-y2kurtus