Filed under: Private equity, Financial Crisis

On Thursday, the Federal Deposit Insurance Corp. (FDIC) is expected to propose new guidelines for private-equity investors seeking to buy failed banks. Those guidelines are intended to ensure that these largely unregulated firms don’t take too many risks with troubled banks or buy and flip them.

The new rules come as private-equity firms have grown increasingly active in the banking sector. FDIC Chairman Sheila Bair said she’s comfortable with the private-equity deals the agency has struck for failed banks such as IndyMac and BankUnited, but that a more structured process needs to be put in place.

Continue reading New rules for buying failed banks may deter investors

New rules for buying failed banks may deter investors originally appeared on BloggingStocks on Wed, 01 Jul 2009 17:10:00 EST. Please see our terms for use of feeds.

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Filed under: General Mills (GIS)

Food manufacturer General Mills, Inc. (NYSE: GIS) recently reported a 5% jump in fourth-quarter net sales. This resulted in a net income jump of almost 10%, from $185.2 million to $358.8 million. This translated into a leap from 53 cents to $1.07 per share, or an adjusted earnings increase from 73 cents to 86 cents per share. In the same period, sales increased from $3.47 billion to $3.65 billion.

Although most famous for its breakfast cereals, General Mills actually provides a wide array of home cooking products, ranging from the old-fashioned to the organic and from raw ingredients to fully-prepared meals. As such, it is positioned to experience massive growth as recession-plagued former restaurant customers start cooking at home and economizing home chefs move away from pricey prepared dishes.

The company is predicting that its 2010 adjusted net will increase by as much as 7%, a move that will yield a jump of up to 27 cents per share, from $3.98 to $4.25. For General Mills, at least, the recession looks like a fantastic growth opportunity.

General Mills churns out a great year originally appeared on BloggingStocks on Wed, 01 Jul 2009 16:35:00 EST. Please see our terms for use of feeds.

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Filed under: Economic data, Personal finance, Housing, Recession

Are mortgage rates affecting U.S. mortgage applications? The short answer most likely is yes. Mortgage applications tumbled to a 7 month low, with refinancing loans down 30%, according to Reuters. This is clearly not a good sign for the housing market.

Kenneth Rosen from the University of California says that mortgage rates are just one factor causing the drop. He adds that high unemployment, concerns for job security, and problems with buyers being unable to sell their existing homes are also affecting the market.

Continue reading Why did U.S. mortgage applications fall 30% to a 7-month low?

Why did U.S. mortgage applications fall 30% to a 7-month low? originally appeared on BloggingStocks on Wed, 01 Jul 2009 13:20:00 EST. Please see our terms for use of feeds.

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“The economy is based on trust,” said Dean Johnson, associate professor of finance at Michigan Technological University in Houghton, Michigan.

In situations like the recent housing bubble, or even the stock market collapse of 1929, where markets were driven by debt and fueled by the false expectation that values can only increase, trust can be a very fragile thing.

“One little blip and everything started to unwind,” Johnson said. “The particulars are different, but the basics are familiar.”

Trust, however, seems to be coming back, according to Johnson. If people are cautious and not spending money, the government and financial industry must take action to encourage capital liquidity. During the first half of 2009, this is exactly what they have been doing. And if the effects have not been as immediate as some would like and others needed, at least their efforts are beginning to take effect.

Why does Johnson believe trust is returning? He points to the Volatility Index, or VIX, which measures investors’ expectations of how volatile the stock markets will be. The VIX reached all-time highs in 2008.

“People think of it as the fear gauge,” Johson explained. “it’s encouraging that the VIX, though still high be historical standards, is down about 60 percent from what it was at its peak in November.”

Other, more recent, signs that trust is being rebuilt in the American housing/real estate markets and the financial industry include:

• USA Today reports that while the construction market remains weak the housing market may be improving slightly. Residential construction reportedly dropped to the lowest level since December 1995. Pending homes sales increased slightly in May, according to the National Association of Realtors (NAR).
• Proposed legislation to create a Consumer Financial Protection Agency is making progress at the federal level, according to the Washington Post. The Post reports that the Treasury Department’s proposal for a new federal agency to consolidate the plethora of state and federal regulators responsible for overseeing the lending industry arrived on Capitol Hill on Tuesday.
• At the end of June, Fannie Mae, which is still under the conservatorship of the federal government, reported its mortgage portfolio grew at a compound annual rate of more than 35 percent in May. A report from Dow Jones appearing in the Wall Street Journal indicates a large jump in the issuing of mortgage-backed securities offset continued rises in single-family and multi-family mortgage delinquencies.

Notes of caution, however, are also being heard. Yale University economist and co-founder of the S&P/Case-Schiller home-price index, Robert Schiller told Bloomberg: “At this point, people are thinking the fall is over. The market is predicting the declines are over.” At the same time he is “not optimistic that we’re going to see any sharp rebound.”

Johnson agrees with Schiller.

“It’s still a risky market,” Johnson stresses. “This is the first time in history that you’ve been better off if you’d put your money under a mattress 10 years ago. But hopefully, this indicates that the financial markets are returning to normal.”

Of course this doesn’t mean the housing market or the financial industry will be returning to the halcyon days of pre-mortgage crisis days anytime soon. It doesn’t matter how badly investors, bankers, consumers, lenders, the government or the world at large want it.

“There’s no easy fix,” Johnson concluded. “We have to take our medicine. It took 20 years to create the over-leverage and it will take time to undo that.”

Source [blownmortgage]

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Nouriel Roubini thinks that the new Obama banking reform plan gets it 75% right.  This in a video interview on Yahoo! Finance.  His one caveat is that the previous Fed under Greenspan had all the power, but didn’t care about managing risk, they wanted innovation at any cost.  That mindset led us to the big bust – so that in addition to the reforms, there must be people who believe that their job is to minimize and manage risk, no push the market towards untested innovation and accumulation of risk.

An overview of the reforms by the WSJ:

Roubini’s interview:

I imagine our regular commenter Capitan Ned has something to say about this. That the push towards unifying regulatory control under one or two federal bodies reduces regulation to the lowest common denominator, easily influenced by the lobbying of the biggest players in Washington, while the people are left hung out to dry. Better, let the states enact and enforce lending at their level, where more oversight and a better understanding of local markets and trends can be applied towards common sense regulation. Further, haven’t we seen concentrated power at the federal level already? And didn’t that precipitate the bust? Letting big, federally chartered banks run rampant with state governments unable to reign in predatory practices? See Wachovia. At least, that’s what I think he’d say.

I’d make a slightly different argument. That we have all the laws we need currently. Maybe a few need to be tightened up, and I’m fine with that. However, instead of simply passing new legislation dollars must be invested in oversight and regulatory scrutiny and prosecution. Laws without enforcement are worthless, and that’s the system we’ve been dealing with over the last decade. In fact, regulatory bodies have been so thinly staffed on the enforcement side that they were unable to keep up with the boom and growth in the market. (For example, California’s department of real estate only had 37 enforcement officers for 500,000 licensed individuals.) This cannot happen again if we’re to expect the new legislation to make one iota of a difference.

Source [blownmortgage]

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The Alt-A and Option ARM tsunami still looms large casting a dark shadow over the state of California housing.  This is on top of the reality that we are now talking about issuing IOUs for only the second time since the Great Depression.  I’m not sure if this is what many had in mind when […]

The Alt-A and Option ARM tsunami still looms large casting a dark shadow over the state of California housing.  This is on top of the reality that we are now talking about issuing IOUs for only the second time since the Great Depression.  I’m not sure if this is what many had in mind when Bernanke started talking about his imaginary friend Mr. Green Shoot.  There is definitely no green shoots in California.  I’ve gotten many e-mails asking for clarification regarding the California Foreclosure Prevention Act (CFPA) and, the recently released figures of loan workouts and modifications.  I’ll go into those precious details in this article but to sum it up, it is a joke and a pure theatre worthy of its own Comedy Central show.  The CFPA applies more can-kicking down the road logic while the loan modifications and workouts are like giving a drunk another shot of tequila to get over a hangover.

First, before we go forward let us take a look at where we are at in this process (updated chart with gorgeous blue arrow):

As you can tell, much of what is occurring is status quo.  It will remain that way until the end of the year, when we shift from less than $2 billion in option ARM recasts per month to close to $4 billion at the end of Q4 of 2009.  Most of these loans are in California.  Of the over 2 million in Alt-A loans 643,000 are in California.  If you think we are doing much to address this look at these facts:

March 2009 Active Alt-A loans

CA:         651,000+

April 2009 Active Alt-A loans:

CA:         643,000+

If you think this adjustment is occurring because of fabulous workouts and loan modifications, think again.  Much of the losses are occurring because these loans are defaulting left and right and we have yet to hit the major recast wave as the above chart shows.  Alt-A and option ARMs are toxic waste and will be hitting California at a time where the state is financially vulnerable.  That is why when people ask me, “should I buy now in a semi-prime location?” I can only shake my head.  Why buy now?  The largest X-factor is looming less than a year away and you want to jump in to swim with the sharks?  What I have realized is psychologically, many people still believe in the bubble.  When I created the title of this blog, Dr. Housing Bubble - How I Learned to Love SoCal and Forget the Housing Bubble I was word playing with an old Stanley Kubrick film.  In Dr. Strangelove a delusional Brigadier General Jack D. Ripper sets off a chain reaction which leads into a nuclear nightmare because of one bad step after another built on a totally false premise (that the Soviet Union is looking to sap precious bodily fluids of Americans) but with real world consequences.  The housing bubble is this.  Initially, we started with easier lending standards, followed by dropping rates, then subprime, then we entered the Alt-A and option ARM world where we flat out gave fiscal time bombs to borrowers and now the global economy is facing the deepest recession since the depression.

Much was being made about a report released last week from the California Department of Corporations.  The report touts that loan modifications have jumped to a whopping “20,000″ a month.  The report is pertinent because it surveys servicers that work with 3.3 million of the state’s active loans, approximately half the total loans.  But all you need to do is read the report behind the headline to realize what a supreme comedy it is:

Click for sharper image

Now you know the rest of the story as Paul Harvey would say.  Here is the meat and potatoes of the issue.  First, let me clarify the top 3 rows.  This is for January, February, and March 2009 data.  So in March for example 111,000 loan workouts were initiated.  This of course may look good but means nothing since this is only the first step and doesn’t mean anything has happened aside from someone starting the ball rolling.  If we look at how many workouts actually closed, we see the real story.  Only 34,000 of the 111,000 initial workouts were complete.  Not bad you say.  Well if we dig deeper, only 3,430 Alt-A loans were worked out in March which at this rate will take us 15 years to modify all the loans!  Bwahahaha!  A load of crap-o-la being spun as some sort of good news.  Keep in mind, many servicers are now getting $1,000 for kicking the can down the road.  Oh, but it gets better:

This is where you grab your monitor and let out a savage scream and say, “what kind of load-of-crap is this!?”  So now let us breakdown those 34,000 workouts in March.  What is their idea of a workout?  Well for 22 percent of the loans, they basically froze the interest teaser rate for less than five years.  The next option which was used on 16 percent of the loans was lowering the interest rate to another teaser level.  So already, nearly 40 percent of the “workouts” are being dealt with artificially low rates!  This is the damn reason the Alt-A and option ARM loans are so toxic in the first place, they had freaking teaser rates to begin with.  And this is the most popular method of fixing these loans?  Come on now.  11 percent where kicked out the door through short-sales which really isn’t a workout and 5 percent were paid off.  These are probably those folks buying in semi-prime and prime areas jumping in while they miss the next housing bubble.  But you know what I love?  Only 36 loans actually had their principal balance reduced!  Bwahahahaha!  Give me one second.  Bwahahahaha!  Their idea of a workout is basically turning underwater homeowners into indentured servants who have fewer options than renters.  The only way these people will ever sell their home without coming to the table with money is if we have another housing bubble.  This leads us to the ridiculous CFPA.

The CFPA FAQ gives us their idea of fixing the mortgage problem:

“While a sustainable loan modification may be different for different borrowers, the potential ways a loan may be modified include any of the following:

-An interest rate reduction, as needed, for a fixed term of at least 5 years.

-An extension of amortization period for the loan term, for up to 40 years from the original date of the loan.

-Deferral of some portion of the principal amount of the unpaid principal balance until maturity of the loan.

-Reduction of principal.”

The government is basically advocating that these loans all become option ARMs.  40 year mortgages?  Deferral of principal amount?  What is this?  Did the government hire New Century Financial as consultants to devise this program?  Even those prime workouts are being pushed into this crap.  As we have seen from the actual data the reduction of principal is such a joke (see why the banking industry didn’t want cram-downs?).  36 loans out of the entire pool had their principal reduced in March of 2009 for the state of California.  So all this is doing is buying more time for the inevitable.  We all know that notice of defaults are skyrocketing even after the 2008 moratorium:

So these programs are really a joke and basically waste more money but that seems to be the way we operate.  Now keep in mind that we have seen very little plans that actually address the major issue.  JOBS! JOBS!  JOBS! Have people forgotten how you pay a mortgage?  You pay it with a thing called wages which you earn from working.  More and more Californians are losing those wages since we now have an 11.5 percent unemployment rate so how are they going to pay those 40-year mortgage payments?  Maybe on future loan modifications we’ll allow people to use unemployment insurance as their primary source of income.

As you can see, the Alt-A and option ARM tsunami is still heading this way.  Many of these programs being devised are betting (not explicitly) that another housing rebound is just minutes away.  This is utter nonsense.  Say you bought a $500,000 home that is now worth $250,000.  Does a 40-year mortgage and a lower interest rate sound appealing to you?  You are simply a renter.  By definition you won’t be building up any equity given that one of the options in the CFPA is negative amortization.  And do you really think that home will go up again?  If you wanted to sell you would find yourself in the same position as today.  Either a generous short-sale is approved or you walk away.  And for those that think real estate can’t stay down for a long time I offer you Japan:

Japan has seen stagnant housing prices for nearly two decades.  So by 2029 with a 5% 40 year mortgage, you will finally be at $250,000.  Congratulations!  You can now sell your home and get a whopping zero at closing (assuming you pay nothing on a sales commission).  Isn’t that basically renting?  The bottom line is many borrowers are going to look at these terms and if they have any sense, will simply stop making their payments and walk away.  Yet some banks are now using a strategy of not letting you foreclose!

“(WaPo) And even though a delayed foreclosure can be a blessing for some troubled homeowners, for others, it simply prolongs the financial distress, leaving them on the hook for the condition of the property. Even if they move out, they cannot move on.

“I have even begged them for a foreclosure,” delinquent mortgage-holder Charlotte Jensen said. When she realized she couldn’t save her Glen Allen home last year, she filed for bankruptcy, packed up her family and moved out. Nearly a year later, Bank of America has yet to take back the home.”

And since banks like pinching pennies from customers while bleeding taxpayers dry, they would rather a hot body stay in the place and maintain it instead of squatters or teenagers looking to practice their break dancing moves in the home.

The latest data still shows 2 million Alt-A loans floating in the United States.  California’s solution to the Alt-A and Option ARM problem? The solution is to turn more loans into Alt-A and option ARMs.  This is great thinking that we have come to expect from Sacramento.  The easy solution is this; those that over leveraged themselves should lose their home through foreclosure and find a rental.  Nothing to be ashamed about.  Lenders will need to eat their losses.  However, I get the deep feeling that the public-private investment program that starts next month is going to eat a lot of this crap up.  My sense is lenders are merely kicking the can down the road until they can kick the can to you.

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Post from: Dr. Housing Bubble Blog

Alt-A and Option ARM Economic Disaster Update: California Solution? Workout 3,430 Alt-A loans in March. Good Job. All we have is an additional 643,000 Alt-A Loans in the State. At this Rate it will take us 15 years to Modify or Alter all Alt-A Loans.

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Filed under: Options, BHP Billiton Ltd ADR (BHP), Anglo Amer ADR (AAUK), Stocks to Buy

This is a continuation of a theme I have been writing about this year involving stock options referred to as naked puts.

This allows investors to take a position in a stock, most often below its current price, but depending on market sentiment. That sentiment remains relatively negative so the spreads are attractive.

I have been following BHP Billiton Ltd ADR (NYSE: BHP) the largest mining company in the world, with headquarters in Australia, for a while but I do not own the stock today. I view all mining companies as an opportunity because I think the diversified raw materials they control are the best hedge against inflation. I do not think inflation is imminent, but with the extreme increases in money supply and debt being created I do not think it will be avoidable a few years out.

Continue reading Chasing Value: Favorite trades — BHP Billiton

Chasing Value: Favorite trades — BHP Billiton originally appeared on BloggingStocks on Tue, 30 Jun 2009 13:40:00 EST. Please see our terms for use of feeds.

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