Sunday, April 5, 2009

Exposing The Utter Hypocrisy Of The FDIC, And How Andy Beal Is Making A Killing Off It

For all those who feel like punching their monitor or TV every time the administration says that the legacy loan program is fair and equitable at a transaction price in the 80-90 cent ballpark, we have some news for you (that will likely make the half life of said monitor or TV even shorter).

But first, there has been a lot of speculation about where banks have marked their commercial loan portfolios. Zero Hedge had previously discovered and disclosed interpretative data from Goldman, which concluded that the major banks were still stuck in a fairytale world where these loans were marked in the 90+ ballpark, a far, far cry from where comparable loans would clear in the market. Of course, FDIC's head Sheila Bair (who many WaMu shareholders lately do not feel too hot about) had some interpretative voodoo of her own, claiming the bid offer disconnect is purely due to a lack of liquidity and access to financing:
"It has been clear for some time that troubled loans and securities have depressed market perceptions of banks and impeded new lending. Difficult market conditions have complicated efforts to sell these troubled assets because potential buyers have not had access to financing. The Legacy Loans Program aligns the interests of the government with private investors to provide financing and market-based pricing, and is a critical step forward in the process of restoring clarity to the markets. While there are inherent challenges to implementing a program of this magnitude quickly, the framework announced today provides the foundation upon which the FDIC will begin to build immediately."
So it came as a big surprise that none other than the FDIC keeps a track of where commercial loans clear in its own internal auctions. In a relatively obscure part of the FDIC's website, there lies a little gem of disclosure, which exposes all the rhetoric by Sheila Bair and by other members of the administration as hypocrisy on steroids. We bring you: FDIC's closed loan sales database. Zero Hedge took the liberty of compiling some of the data for the benefit of our readers: we picked a data sort of all closed commercial loan auctions from January 1, 2009 to February 28, 2009, to see just at what level these would close. Of course, we highly recommend our readers recreate these results.
The results: 43 commercial loan auctions, of which 39 were for exclusively performing (so not non-performing, or lower quality auctions, and by implication free cash generating), consisting of 331 total loans, representing $206 million in face value, ended up clearing for a $103 million price, a 49.3% discount, or a 50.7% clearing price! That's right, the FDIC itself clears performing commercial loans at 50 cents on the dollar on average in its own regulated, orderly auctions. One would assume the chairman of the very agency that conducts these loan auctions would be aware of them and would at least reference or mention these results in her numerous public appearances.

Curiously, the FDIC also discloses the winning bidders. The surprising recurring result: a little known (but deserving much greater attention) company known as Beal Bank (and its LNV Corporation subsidiary). In the first two months of the year alone, Beal Bank, and more specifically its owner Andy Beal, has won $73 million face value of auctions, for a price of $43 million- a clearing price of 59%. Another way of looking at it is that Beal accounts for 35% of all FDIC auctions.

Just who is Andy Beal, aside from a prolific and profitable poker-playing, college-dropout of course? A great question, which Forbes goes into great detail answering this weekend. We paraphrase the key points from Forbes:
Standing outside the glass-domed headquarters of his Plano, Texas, bank in March, D. Andrew Beal presses a cellphone to his ear. He's discussing a deal to buy mortgage securities. In just a few minutes, the deal's done: His Beal Bank will buy $15 million of face value for $5 million. A few hours earlier he reviewed details on a $500 million loan his bank is making to a company heading into bankruptcy--the biggest he's ever done. A few floors above, workers are bent over computer screens preparing bids for chunks of $600 million in assets dumped by two imploded financial firms. In the last 15 months, Beal has purchased $800 million of loans from failed banks, probably more than anyone else.
It is amusing that Beal Bank, which is not large enough to qualify for the FDIC's zombie bank life-support program known as TLGP, is beating the FDIC at its own game, gobbling up assets (at fair market prices, which is what auction outcomes are by definition). Beal is such a non-mainstream individual that Project Zero will hold a honorary bunk in his favor, (he will have to decide who gets top with Chuck Bowsher) until such time as he decides to stand outside ZH headquarters for 24 hours to gain admission:
It's hard to imagine Beal fitting in at a bankers' convention. He walked into the Las Vegas Bellagio in 2001 and challenged the world's best poker players to games with $2 million pots--the highest stakes ever. Donning large sunglasses and earphones, Beal held his own against the poker stars, once winning $11 million in a single day, although he shrugs that he lost more than he won. At the track he'll drive one of his nine race cars (costing as much as $100,000 each) at 150 mph. On city streets he cruises in a huge Ford Excursion, the vehicle that has made him feel safe since a drunk driver punctured his lungs in 2000.
However, the main reason why Beal is prophetic beyond his years is the following:
He thinks the government is going to be "disappointed" by its various programs to revive lending. He says Treasury Secretary Timothy Geithner's new plan to guarantee loans to buyers of toxic assets won't lead to many sales because the problem isn't liquidity but price. They are not low enough. Half the country's banks--4,000 in all--would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.

"Banks are on a prayer mission that somehow prices will come back and they won't have to face reality," Beal says. And that reality, according to Beal, is going to get a lot worse. "Unemployment is going over 10%, commercial real estate hasn't even begun collapsing and corporate credit defaults are just getting started," he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.

It is a fitting conclusion that Beal himself is the winning bidder in FDIC's commercial loan auctions (which no other major bank with a $ trillion+ balance sheet has any interest in participating in - why is this if the loans are worth 90 cents as Citi et al have them market internally?), and thus the true market test of what all these toxic legacy loans are really worth. Zero Hedge wholeheartedly agrees with Beal that the CRE situation is headed for a cliff at 120 mph, and that no matter how much hypocritical posturing and rhetoric the administration spouts, or how many more trillions in debt the U.S. incurs to revive the financial zombie on the morgue dissection table, there is nothing at this point that can be done to change the final outcome.

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maximus said...


I found a few things that I don't THINK you covered this week (although you cover so much I could be wrong) that can help keep your readers even better informed.

Keep up the incredible work you are doing....

This week's 4best4worst

Stock Market Cheap?, Shadow Unemployment, Blogger Privacy threatened? More....



Anonymous said...

Can we put this guy in charge of the Treasury (or even the country for that matter) instead of the lying assclowns we have now?

Anonymous said...

I don't understand why you think the PPIP plan won't "work". Assuming you adopt the cynics view, which you have in past posts, that the system will be gamed so that pimpco et al (or worse, the banks themselves if they are allowed to bid directly or indirectly) with vested interest in maintaining the viability of the banking system will bid generously for the toxic assets, why won't the banks be bailed out? If Bank America's bad assets are purchased by the taxpayers at above market prices, why doesn't it survive? Is your objection that the $1 trillion PPIP is not big enough to buy all the bad assets necessary? Seriously, if the real goal of all the Geithner plans is to save the stock and bond holders of the major banks, why won't his plan work?

Tyler Durden said...

i have never claimed the private participants (the pimpcos as you put it) won't participate, far from it. The problem is the price of entry: if PIMRCOCK buys these legacy loans at 90+, in 3 years taxpayers will be left holding the bag on massive losses. if the entry price is a more PC 70, the banks will either not get involved (i.e. plan is useless) or will participate partially, bringing the prevalent marks for other potentially lower depending on how the FASB interprets the PPIP participation. That is the simple dilemma. I think the plan will work for a while, until the CRE is bled (or cashflowed) dry at which point you get the digital outcome of a 90 mark going to 0. And as for why i believe CRE is in for a world of pain, check the last weekend posts.

scriabinop23 said...

Tyler- what are the details on the cost of capital (the FDIC backed financing) for the PPIP? This is the most important variable, and I've yet to see the numbers.

If I can buy a cashflowing 25 yr asset (5% yield on par) at a cost of capital of 1%, then I will bid near par.

If the cost of borrowed capital is 7%, then the conclusion is obvious- much lower prices.

Anonymous said...

Of course, one has to love how people who think the great depression is around the corner are purcashing performing loans at 70c on the dollar. I'd have thought you could do better than that, if one were really around the corner.

Anonymous said...


there is a well-established market for fdic-backed bonds

google it

Anonymous said...

President Durden and the space monkey administration. At least they will be open about trying to tear the system down. Sign me up

Advant Guard said...

Note: if these are whole loans, then banks almost never mark down performing whole loans. They may (and probably are required by their regulators) reserve against them if there is a significant probability that the loan will not be paid back in full. The loan value is usually not written down until the loan becomes non-performing at which point the loss is deducted against the reserves the bank (hopefully) charged in anticipation of the event. Whole loans are never mark-to-market for banks.

Anonymous said...

@ 1:40 pm

So tell me, when Lone Star Funds bought the toxic assets from Merrill at 22 cents on the dollar (link below) in July of 2008 it was a distress sale??

I don't think so.

Anyone with at least one foot on the ground and one ear to the rail will tell you that Lone Star was a little in the money but not by much. Their current return on those TOXIC assets is around 28 cents based on Merrill's $30.6 billion in nominal valuation. Yielding a BIG 6 cent return!

Lone Star bought in at 22 cents on the dollar for one reason! They had a price model with a yeild curve that spanned more that 2 years.

Good luck with Turbo Timmy's new "rescue plan". I'm sure the 5 hedgies earmarked for receivership are the perfect holding companies for the toxicity of the over priced ASSets. Afterall they are all involved in the bond market which will soon be tanking bigtime.

Let them have 'em. No matter how many ppm(part per million) of Lithium are added to the municipal water supplies around this great country of ours at some point there will be a revolution. Lithium has the opposite effect on consumer behavior so the "flip this house" generation is numb.

(right click --> Open in New Window)
(Merril link)

(Lithium in water link),9171,905404,00.html

Has anyone listen to radio spots (NPR) encouraging you to consume TAP water? I wonder why?? What do you drink?
NPR Tranquiling the USA

Anonymous said...

So am I still dumb and dumber Tyler?

Anonymous said...

Interesting. When I Google that story about NPR and Drinking Water I get another story entitled:

"Study Finds Drugs Seeping Into Drinking Water"

March 10, 2008

Then another story from NPR's BryantPark Project on 03/10/08 with a complete list of drugs in US water supplies has been scuttled. Wonder why?

G said...

Tyler -- great work. one thing that surprised me though is your comment that sales of 70 cents would be shunned by banks. If true, that is going to be a shocker to most people because that was the HIGH end of what most seem to be thinking the assets will go for.

Do you really think banks will turn their noses up at 70 cents and hold out for 90?

I was thinking these sales would start out at 70 and have a range to 50, and the banks would shun anything under around 50.

-- globalhawk

Rick said...

Great research and summary. The Internets truly are the 8th wonder of the world, making it possible for individuals (via blogs) to combat the stream of nonsense spouting forth from the government on a daily basis.

The extent to which one needs to suspend disbelief to believe the storyline of the mainstream media is just stunning. If these toxic assets were underpriced, the Andy Beals of the world would snap them up! They're obviously overpriced and banks just don't want to acknowledge reality, and why should they when our government will engage in increasingly market-distorting gyrations to enable them? We're supposed to believe that all of this government largesse is somehow necessary or the world would explode. But it's so obviously crony capitalism at it's best (worst?) that it's hard to believe we can't just see it for what it is.

These bankrupt institutions need to fail, and some creative destruction needs to occur. If America is as strong as they keep saying it is, we'll emerge stronger. But this current wealth transfer to ineptly-managed banks is laughable and immoral. I just hope Andy Beal isn't getting in too early...

Anonymous said...

"...there is nothing at this point that can be done to change the final outcome."

Shock stage: Initial paralysis at hearing the bad news.
Denial stage: Trying to avoid the inevitable.
Anger stage: Frustrated outpouring of bottled-up emotion.
Bargaining stage: Seeking in vain for a way out.
Depression stage: Final realization of the inevitable.
Testing stage: Seeking realistic solutions.
Acceptance stage: Finally finding the way forward.

TPC said...

The only chink in the PPIP armor is the amount of funding. These banks are basically going to buy the assets from themselves via shell companies. They're just going to unload billions on the US taxpayer. The problem is funding. The 20% of TARP money isn't going to be enough when the CRE and CC losses mount in the coming years. They will need to go back to congress in late '09. Good luck getting more of our money Geithner. Sh*t will hit the fan then...

Anonymous said...

"Acceptance stage: Finally finding the way forward."

Acceptance comes quicker when there is Lithium in the municiple water supply.

(right click --> Open in New Window)
NRP drugs in tap water

Anonymous said...

Great post, Tyler.
The big problem clogging bank balance sheets remains resi whole loans. While the commercial notes will lkikely qualify, I agree with Andy Beal, until the hope dissapates from bank board rooms, few will be willing to participate. Conversely, there is no hiding from housing's plunge. Stress tests on the "big 19" should force resi whole loan sales (at least enough to make a market).

CRE is at least a year away.

If you want to talk about a real disaster in waiting, look ay BofA's home equity book. Performing Heloc currently trades in the 20's & they're likely marked in the 90's. Like zero hedge, & unlike CRE, these truly go to zero.

Anonymous said...

Oh, you think I'm playing around?

NPR stories:

(right click --> Open in New Window)
"New Yorkers Urged to Drink Tap Water"

The Water Debate Continues:Bottled vs. Tap


Welcome to the world of Lithium.

Anonymous said...

Mistaken link:

New Yorkers Urged to Drink Tap Water

Anonymous said...

Anony @ 3:22 pm

I agree with you. In that story

They are telling people on the one hand to limit their tap water intake, while on the other hand to increase their tap water intake.

Ensuring even dosage across the spectrum.

"Myth No. 1: Drink Eight Glasses Each Day" for years they have told us to drink at least 8 glasses of water a day... Now it's a public health myth?

If you drink bottled water exclusively you cannot avoid the municiple water supply. Icecubes, dining out (rice, drinks, boiled foods, etc...). Manufacturers of foods and drinks (juice, beer, etc) will use tap water to make their products.

You just cannot avoid municiple water intake.

Welcome to the world of Lithium.

Economics of Contempt said...

I don't see how this at all disproves Sheila Bair's point (and I'm no Sheila Bair fan).

Bair is arguing that the banks won't sell their toxic loans because the bids aren't high enough, and that the bids aren't high enough because buyers can't get access to adequate financing. In other words, the bids are artificially low because of the lack of adequate financing.

So how does data on loan auctions from a period when financing wasn't available disprove her? If anything, this strengthens her case. The buyers in these auctions haven't been able to get adequate financing (or so Bair claims), so their bids have been artificially low.

I could easily cite the 50c/$1 price as evidence that Bair is right and you're wrong. The argument would be: "Look at how low the bids are when there's no financing available! Buyers are only able to pay 50 cents on the dollar for performing loans!"

The issue is whether the buyers in these FDIC auctions had access to adequate financing. Bair says no. If you could present evidence that they did have access to adequate financing, and still paid only 50 cents on the dollar, then you could legitimately claim that Bair is being hypocritical. But until then, I don't see how your argument disproves anything Bair said.

(I also reject the notion that an FDIC auction establishes "fair market prices ... by definition." The FDIC is a receiver, not a going concern, so it doesn't have the option of rejecting artificially low bids and holding 30-year loans to maturity. If, for systemic reasons -- like, say, a complete breakdown in the credit markets -- all the bids are artificially low, then the FDIC can't just reject the bids and hold all the loans to maturity the way a private seller could.)

The reformer said...

Great post. I wonder how long the FDIC will leave that tool on their site before they remove it and sight budgetary concerns (although it costs nothing). It is an interesting trend how our overspending, arrogant, ignorant, and incompetent government seems to inform us that it is too expensive to collect information on only the sets of data that allow the public to see just how blatantly we are getting screwed.

Anonymous said...

Tyler -

Is that Average Discount figure in the chart weighted to reflect the difference in volume between the sales, or is it a simple average of the above cells?

Just clarifying.


Anonymous said...

Tyler -

Is that Average Discount figure in the chart weighted to reflect the difference in volume between the sales, or is it a simple average of the above cells?

Just clarifying.


Tyler Durden said...

T of C: obviously we disagree on the definition of auction. One could then argue that supply and demand are never in equilibrium. The clearing price is evidence enough of market values as there is never pressure on the supply to hit a high bid. Furthermore, the fact that the auctions are cleared by private entities that have no governmental involvement (read the beal bank's opinion on bail out funding) is evidence enough of independent assessment of whole loan cash flow capability: I would imagine there is an overbidding possibility, especially for smallish loan sizes such as the ones prevalent in FDIC auctions should render any liquidity constraints as groundless. Lastly, the thing that angers me is that Bair has never once mentioned the FDIC loan auction process in any of her public discourses: why do people need to find out about FDIC's knowledge of clearance levels through a blog?

Anon at 7:24: simple average.

Economics of Contempt said...

Tyler: I don't think we disagree on the definition of an auction, just on what the clearing price of an FDIC auction means. Since the FDIC is a receiver and not a going concern, it has to sell to the highest bidder once the auction process has started. There is no reserve price. But that means the clearing price is susceptible to systemic problems that prevent all the bidders from submitting bids that reflect expected cash flow. From what I can tell, that's what Bair is arguing: that there is a systemic lack of access to adequate financing that is artificially depressing the bids.

You may be right that the "lack of access to financing" argument is groundless. I'm not an expert on FDIC loan auctions by any means. I'd like to see some data on the issue before I take sides though, and as far as I know, no one has presented any such data.

(I agree it's a travesty that Bair has never mentioned the FDIC auctions in her public appearances. But in Bair's defense, she's a horrendous FDIC chair, so it's quite possible that she doesn't know the auctions exist.)

Anonymous said...

Tyler - my original post on the thread was why the PPIP would work. I want to be certain I understand your reposne. If hypothetically the PPIP's pay 90 cents on the dollar, the bank shareholders are saved, and the taxpayer gets hosed. The PIP worked from the banks perspective. Your major concern then is about their CRE exposure, correct?

Anonymous said...

I am sure banks would be happy to sell performing balance sheet CRE loans at 70 cents on the dollar, no problem at all.
The current default rate on 2007 CMBS loans (arguably worse quality on average than balance sheet loans) is about 1.5% (currently rising at about a 6% annual rate).
so selling these loans at 70 cents on the dollar clearly makes all the sense in the world to a bank. Banks marked 90 cents on the dollar? who would be crazy enough to have them marked there? makes no sense at all! I bet they are currently marked at 50 cents on the dollar with those kinds of default rates.
Marked at 50 cents, and selling for 70, talk about a windfall to the banks!! Is this another hidden bailout? Where is the conspiracy theorists when you need them!!

bschmitt said...

Everyone needs to re-read avant garde's post before making any further comments. ZH - to imply that all whole loans need to be 'marked to market' is not how commercial banking works. If every bank had to do so (esp right now), there would be no bank in existence. Banks have a credit team that evaluates loans and resrves against them using a general reserve and then an allocated reserve based on the likelihood of the borrower making pmts and collectibility of principle. This is the traditional main function of a bank (along with collecting deposits).

Again, if you are talking solely about securitized loans held as securities, then fine. But the post was misleading.

Terry Tate Buffett said...

E of C,
You said "So how does data on loan auctions from a period when financing wasn't available disprove her? If anything, this strengthens her case. The buyers in these auctions haven't been able to get adequate financing (or so Bair claims), so their bids have been artificially low."

This is obviously false in the case of Beal Bank. Beal Bank is a bank. Even if it's a low leverage bank (by choice), we're talking about someone that's probably deploying $10 for every $1 of equity. I'd argue all of Beal's bids (which were a big portion of the data set) represent a well financed buyer participating in a transparent market.

If there's anything we've learned in the last few years, it's that leverage doesn't improve a risk/return profile. It simply propotionally increases both the numerator and denominator. To use leverage AND offer a higher price than an unlevered buyer would actually worsens the risk/reward profile. This is an inherent truth. Now, the government is aware of this and is thus trying to offer all kinds of non-recourse financing that shifts some of the incremental risk from my equity to the taxpayers' equity, but this is a game that taxpayers won't accept long-term, so Geithner, Bernanke, Bair & Co. need to be right soon or risk losing their mandate to provide "support" to these markets.

The game of chicken is on.


Anonymous said...

More evidence of some reporter who has no idea what they are talking about making comments. The "performing" classification for the FDIC means almost nothing. It simply means the loan payments are less than 60 days past due. It could be matured 2 years ago, the collateral could be worth 1/10 the loan value. The borrower could be dead, still performing as long as it is less than 60 days past due. we purchased one where the FDIC gave a borrower a 2 year extension if they would get interest paid to date just so they could mark it performing because "performing loans sell at higher prices in auctions." Learn the facts before you write articles.