FOMC Statements : Side by Side Analysis

November 4, 2009

Last month (September 23) we saw a very small shift in a few of the key areas of the Fed statement. In particular the wording change that showed that the Fed saw economic activity has picked up following its severe downturn from “leveling out.”

They also had the following changes: Read more

Banks failing, so they are changing the rules….

June 19, 2008

The Wall Street Journal is telling us that there is a new game being played by banks to help make their book of businesses, “look” better. It is a desperate move but the problem is the lack of regulation that continues to allow for this latest form of unethical behavior.

David Enrich writes

In January, Astoria Financial Corp. told investors that its pile of nonperforming loans had grown to about $106 million as of the end of last year. Three months later, the thrift holding company said the number was just $68 million.

How did Astoria do it? By changing its internal policy on when mortgages are classified on its books as troubled. The Lake Success, N.Y., company now counts home loans as nonperforming when the borrower misses at least three payments, instead of two.

This type of blatant disregard for the consumer and shareholders will continue as the FED and the Treasury turn a blind eye. Yet, the truth is that this immoral and I daresay borderline criminal action will continue. Let’s face it, there is really no teeth and not enough of a deterrent that provides for a second thought by any of the laws on the books today.

As long as off-balance sheet deals and creative bookkeeping is allowed, feel confident that this will go on indefinitely.

On the other hand, if the banks continue to operate under the current rule set, how long will they be able to stave off the inevitable if their book of business is failing. AND, one more thought…are we all culpable as well as it is somehow in our best interests that they stay solvent and therefore ignore the obvious?

What can we as investors do anyway except vote with our buy or sell orders?

Stocks: (NCC) (WM) (COF)

Learning that we never learn: Citibank

March 27, 2008

“Education costs money, but then so does ignorance.” – Sir Claus Moser

Phew…Only $1.66 billion. It was only a short time ago that a billions dollar payment would be a big concern. Remember back to the 1998 collapse of Long-Term Capital management when an initial $1.8 billion hedge fund loss announcement lead to a global meltdown? I suppose that it was different as it was a decade ago and the dollar was worth a lot less back then. Then again….

The recent news of the Enron settlement by Citigroup (C) would normally cause a substantial stir and a marked concern by investors. But the truth is that this is a drop in the bucket compared to the real write-downs we are witnessing.

Citigroup settles with Enron creditors – International Herald Tribune

Citigroup said Wednesday that it would pay $1.66 billion to the Enron Bankruptcy Estate, which represents creditors of Enron, the energy trader that engineered one of the biggest U.S. corporate frauds. With a trial scheduled for next month, Citigroup was the last of 11 financial institutions to resolve claims going back to 2003. Citi’s shares fell $1.37 to close at $22.05.

Ironically, the Enron collapse was also due to derivatives, leverage and off-balance sheet arrangements. Sound familiar? I thought we had learned our lesson from that? The Enron, LTCM, and subprime are all the same animal, just in a different flavor. AND, touching the hot surface has not helped keep us out of the fire as we (investors) are lied to, over and over again..and apparently very stupid.

The most troubling news though is not that John Meriwether’s hedge fund is seeing record number of outflows related to a 28% loss in his Relative Value Opportunity fund has seen in 2008. Rather it is that after the amazing loss and market turmoil caused by his last fiasco, that his funds would ever see the inflows to begin with.

What do you think…have we learned our lesson?

Disclosure: No Positions in stocks mentioned.

Fannie and Freddie: Burnt Offerings

February 28, 2008

There is creativity and then there is desperation. The real question these days is finding that fine line and recognizing the difference.

The FED and the financial powers has thus far been classified as creative in their “handling” of the credit crisis. Yesterday, during a very exciting (?) testimony from Fed Chief Bernanke, a news item flashed across the wire that Fannie Mae (FNM) and Freddie Mac (FRE) will reduce the spread caps, thus allowing for additional capital and credit to flow into the economy.

The timing of the OFHEO announcement is at best suspicious and very worrisome. It came too close to the discussion by the FED about their understanding that there is a significant housing problem and there are more problems projected. There is clearly a need for additional capital directed towards consumers who are in a credit stranglehold. Yet, this seems to be more of a desperate move and a gamble on the future security of the credit markets. Remember, the reason why there were caps in the first place:

From the OFHEO: Since agreements reached in early 2004, OFHEO has had an ongoing requirement on each Enterprise to maintain a capital level at least 30 percent above the statutory minimum capital requirement because of the financial and operational uncertainties associated with their past problems. In retrospect, this OFHEO-directed capital requirement, coupled with their large preferred stock offerings means that they are in a much better capital position to deal with today’s difficult and volatile market conditions and their significant losses.

Excuse me, but a release of the cap will help to keep their problems in check? Surely there are different problems now and the 30% cushion helps to keep the stability of the quasi-agency companies during times when write-offs and write-downs are growing. The cushion is analogous to the loan-to-value that homeowners are required to have as they buy their homes.

One of the problems that helped to enhance the mess that we find ourselves in was the lack of a belief that old-fashioned loan and risk management procedures were of no consequence. Bad assumptions were/are standard operating procedure (SOP) and we now know that it was not the best way to operate.

— Andrew’s Book – The Disciplined Investor is available at Amazon and other fine retailers —

So, when markets are elated with the news that the CAP cushions are going to be lifted with FNM and FRE, don’t be upset when you see a continuation of massive losses. Rest assured they will continue to flow like a raging river for some time to come.

Why? Here are some of the headlines into this brilliant plan:
– Freddie Mac Posts Wider Loss of $2.5B in 4th-Qtr As Loan Defaults Mounted
– Big loss for Freddie Mac
– Fannie Mae posts nearly $3.6B loss in 4Q
– Moody’s Warns ‘Sizable’ Losses May Be Ahead for Fannie Mae
– Moody’s puts Fannie Mae rating on review
– Freddie Mac posts wider loss of $2.5B in 4th-qtr as loan defaults

The fact that Moody’s is looking into downgrading these names is one of the few murmurs of sanity that can be separated from much of the rhetoric that is being bantered about. It is clear that the companies that are in dire need of credit expansion (builders, retailers) may be acting on a last-ditch-effort approach that will have them spin positive on any plan, no matter how detrimental it will be to our financial health. noted on FRE: The company’s estimated regulatory core capital was $37.9 billion at the end of 2007, $3.5 billion in excess of the 30% mandatory target capital surplus directed by OFHEO.

The core capital may seem like a substantial number at first glance but put that into perspective against the backdrop of an estimated mortgage portfolio of $1.8 trillion. In addition, the losses that have been reported for 2007 are more than they have experienced in the last 7 years. FRE is also reporting that the average current adjusted loan-to-value ratio for their single-family home portfolio has been increasing steadily over the past few years. It now is 60%, up from a low of 56% in 2005.

Even so, they have 16% of subprime ARM loans that are 90-days or more delinquent or now in foreclosure. This is far greater than any time over the past 10-years. ARMs are considered Hybrid Mortgages and as this category currently makes up 17% of their portfolio, there is reason to be cautious.

FRE Delinquencies

As housing prices continue to decline, loan-to-value ratios will continue to suffer. This is just one more part of the larger concern that investors will have to ingest as they are asked to commit more funds in the form of debt and preferred stock offerings. In the face of a credit rating panic, it will be interesting to see how they adjust their portfolio strategy to ensure that investors see the highest rating available in order to efficiently peddle their debt at the lowest cost.

Either way, FRE and FNM will surely have a higher cost of operations as they move forward. Everything points to lower net earnings and higher investor anxiety.

FRE Housing Prices

Chronic borrowers will be excited as there will, in theory, be more of the credit-drug available to help get them deeper into a their debt-hole. But do not make the mistake as an investor that it may be time to jump in. This move will have a negative effect and eventually weakening FNM and FRE. Simply using debt-to-equity ratios as a proxy for loan-to-value will show that this is more of a creative mechanism for credit to flow that will have the near-term effect of throwing these two companies under the bus.

We have no change to our outlook for these companies (see Mortgage Mayhem 11/21/07) and continue to warn investors that this type of gamble may lead to further solvency issues rather than balance sheet stability. Any downgrade (hard to fathom?) will also create a greater problem as the cost for asset-backed credit will eventually be need to be paid by….you and me! These will take the form of a tax burden that will be left to be cleaned up by the “winners” of the upcoming election.

The bottom line: FRE and FNM are being thrown under the bus in order to help the housing markets and in an effort to protect the credit markets. The removal of the mandatory CAP is a dangerous gamble by regulators. There is not much to say from a technical standpoint either. In the end, there needs to be a sacrifice to save the rest of us. FRE and FNM may well be the burnt-offerings to appease the credit gods.

FNM 1-Year Chart

FNM Chart
FRE 1-Year Chart
FRE Chart

Disclosure: Horowitz & Company Clients do not hold positions in any securities mentioned as of the date of publication

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Out of the Credit Mess in 1-2-3: Blame, Blame, Blame

January 14, 2008

This week appeared an interesting article from the Wall Street Journal that is just one in a broad series looking to once again cast blame for the economic mess we are now experiencing. The author sites sources that explain how the mortgage brokers (among others) are the new villains in the ongoing credit market chaos. Unfortunately, that is only partly true. It seems that the brokers/scapegoats have been tagged as the ones that are originating mortgages with a high level of default. While that may have occurred, please forgive me, but who ultimately sets the approval standards for those loans?

The blame game continues and until someone stops the madness and bellies up with a plan that makes sense, we are going to continue down a path that leads to financial ruin. It is the same-ole’ political battle that now has Bank of America playing the knight in dull, but shining amour. They stepped in with a helping hand in August and now they are left with the responsibility of cleaning up the rest of the mess.

On this week’s Meet The Press, Senator Clinton proposed a plan to freeze mortgage increases for Clinton and Russertthe next five years. In the interview with Tim Russert, she said, “…I want to freeze interest rates for five years, and I want to have a $30 billion package that will go in and try to stabilize the housing market and stabilize communities that are going to be affected by that.” To that, Mr Russert asked, “But, Senator, many people opted for those cheaper mortgages. They could’ve had a fixed mortgage at a higher rate, but they opted for a cheaper one. Should they not bear some responsibility?” Then with a gentle motion and a touch of pixie dust, Senator Clinton solved the entire problem with this exceptional plan; “…I think all of us should. But I’d say three things about that. The bankers, the mortgage lenders, the brokers, all bear a lot of the responsibility, because many of the practices that were followed were just downright predatory and fraudulent. There is no doubt about that. I started talking about this last March. A lot of people got into subprime loans who frankly could’ve been in a conventional fixed-rate loan. They were basically told that this was a better opportunity for them. Should they take responsibility? Yes, but look at what will happen if we continue this cascade of foreclosures. Housing values are down. They’re down 6 percent. That’s over $1.3 trillion in housing values in the last year. So everybody bears some responsibility. I went to Wall Street last month to tell Wall Street they had to be part of the solution because they sure had been part of the problem.”

It seems that the politicians and the lack of any meaningful oversight had nothing to do with it. It is unbelievable how much Read more