10 Financial Entities On the Brink

by: Michael Shedlock August 22, 2008 | about stocks: ABK / BKUNA / CORS / DSL / FNM / FRE / LEH / MBI / MER / RF / WB / WM    
Michael Shedlock

Michael Shedlock

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Clearly Lehman (LEH) is on the brink of disaster.

On Wednesday, the Financial Times was reporting Lehman’s secret talks to sell 50% stake stall.

Lehman Brothers, the beleaguered US investment bank, held secret talks to sell up to 50 per cent of its shares to South Korean or Chinese parties in the first week of August but failed to reach agreement with either.

The South Koreans and Chinese walked away after concluding that Lehman was asking too high a price, said New York-based people familiar with the potential buyers. Lehman declined to comment.

Fannie and Freddie Are Collapsing

Fannie Mae (FNM) is trading at $5 with a market cap of $5.35 billion and Freddie Mac (FRE) is trading at $3.06 with a market cap of $1.98 billion. Freddie Mac has promised to raise $5 billion in equity. Clearly that is not going to happen without a government bailout. The only question now is how big will that bailout be given that Fannie and Freddie have an enormous $223 billion debt rollover problem.

Washington Mutual  Is On The Brink

Washington Mutual (WM) has announced it has "no plans to raise capital". The reality is Washington Mutual cannot realistically raise capital.

Minyan Peter had some interesting comments about Washington Mutual in Wells Fargo, WaMu Can't Ignore Credit Crunch:

Last fall, in Coming Bank Themes: Whispers From the Confessional I shared with Minyanville readers that Washington Mutual (WM) had, to use the company's own word, "opportunistically" moved a large portion of its "held for sale" mortgages into its "held to maturity" portfolio.

At the time, management suggested that the reason was because of the attractive pricing that it saw on the loans. As I wrote then, and continue to feel now, I believe that the real reason was the difference in accounting for banks between "held for sale" and "held to maturity" assets.

Put simply, for banks, "held for sale assets" must be marked-to-market every quarter, with the changes in unrealized gains or losses flowing through comprehensive income – and I would note up front, not net income.

While "held to maturity" assets remain at cost (or market value as of the day of reclassification, if moved to "held to maturity" from "held for sale") and, like other loan assets, only when management is certain of cashflow impairment, are they written down.

As I have seen in a number of second quarter bank 10-K’s and in financial media, it now appears that banks are moving other assets at a rapid pace from "held for sale" to "held to maturity." Specifically, the assets that banks moved most during the second quarter appear to be largely trust preferreds as well as CDO’s from pooled trust preferreds issued by other financial institutions.

Washington Mutual, Wells Fargo (WFC) and other banks are playing valuation games with "assets held to maturity". They really want to sell this garbage, but they can't except at prices that will cause them to raise more capital.

From here on out, any assets banks or brokerages move to the "assets held to maturity" class is extremely suspect.

Merrill Lynch (MER) set the tone for what such assets might be worth when it shocked everyone by announcing it sold CDOs at 22 cents on the dollar. The reality was much worse. Merrill Lynch actually got 5.5 cents on the dollar.

Beyond Fannie, Freddie: Three More Problem Children

Minyanville professor Bennet Sedacca noted his favorites in Beyond Fannie, Freddie: Three More Problem Children?

While everyone focuses on Fannie Mae (FNM) and Freddie Mac (FRE), in my opinion there are 3 other possible disasters waiting in the wings.

1. Regions Financial (RF): The company needs to raise $2 billion, says Sanford Bernstein. What are their options for doing so?

They can sell debt. The problem here is that I believe you couldn't sell debt if you wanted. The last reported trade in RF paper was 2 weeks ago, nearly +700 to the 30 year or close to 12%. The company's preferred trades at 10%. And the stock is now a 'single digit midget' near $8 a share. So, as I see it, if you could get a deal done, shareholders could get a 50% haircut.

2. Washington Mutual (WM): WaMu trades as if it's in deep trouble. Its bonds trade in the 20% range and no way can they issue a preferred.

3. Lehman Brothers (LEH): This is my favorite and sits as my 'most likely to fail' problem child. Its stock is now on its way to being a single digit midget and just stuck investors with 143,000,000 shares at $28 a share in June of this year. I don't believe many folks are willing to buy more at $12. Also, its preferred stock trades are a not awe-inspiring 16%.

That is already more than the FDIC can handle which is exactly why the FDIC is passing around the collection plate:

Poor, poor FDIC - ever the Treasury Department’s whipping boy.

The latter gets to smack the former around like a badminton birdie because the FDIC’s primary responsibility is to clean up the Treasury’s messes. And these days, there are messes aplenty.

It goes like this: The Treasury oversees a regulatory body called the Office of Thrift Supervision, or OTS, that’s tasked with keeping tabs on federal thrifts (which are just mortgage companies moonlighting as federally chartered banks).

Until recently, the OTS was responsible for monitoring IndyMac Bancorp, which collapsed last month under the weight of misplaced mortgage bets. The FDIC is now sorting out the mess. The OTS also oversees such thriving institutions as Washington Mutual (WM), BankUnited (BKUNA) and Downey Savings (DSL).

Since the OTS’s idea of regulation is apparently to wake up late, sip a latte and spend the day diligently ignoring the wildly unsafe lending practices of its member banks, the FDIC is up to its ears in barely solvent financial institutions.

The FDIC charges deposit-taking institutions fees about $0.05 per $100 in deposits to display the group’s goofy logo (which dates to its Depression-era roots). This is meant to assure customers their money's safe, even if the bank’s risk management policies aren't.

Now, the FDIC's challenge is to raise sufficient funds to cover the coming wave of bank failures - without putting undue stress on the already shaky banking system or igniting fears that it would need to tap taxpayers' money to protect, well, taxpayers' money.

Add Wachovia And Corus Bank To The List

Wachovia (WB) has made a horrendous mess out of things with its pick-a-pay mortgages, inherited from the infamous acquisition of lender Golden West at the height of the housing boom in 2006. But that's not all. Wachovia has made so many mistakes that I am asking can Wachovia do anything right?

Corus Bank's (CORS) Yahoo! Finance Profile is enough to tell its story of bubble lending gone mad. "The company's loan portfolio comprises commercial real estate loans, including condominium construction and conversion loans; residential real estate loans; and other commercial loans. It focuses its lending activities in various metropolitan areas in Florida and California, as well as in Atlanta, Las Vegas, New York City, and the District of Columbia."

And let's not forget the monolines, Ambac (ABK) and MBIA (MBI).

Financial Entities On The Brink

  • Lehman (LEH)
  • Washington Mutual (WM)
  • Fannie Mae (FNM)
  • Freddie Mac (FRE)
  • Corus Bank (CORS)
  • BankUnited (BKUNA)
  • Downey Savings (DSL)
  • Wachovia (WB)
  • Regions Financial (RF)
  • MBIA (MBI)
  • Ambac (ABK)

On account of deflation, I had to throw in a bonus 11th. Everyone wants more for their money these days, even when things like this are free.

I am quite sure there are many more deserving candidates that should be on the list. An excellent case can be made for Ford (F) and GM (GM). They are really not manufacturing companies but rather financial lending disasters.

The key here is there is virtually no chance the Fed can save them all, or even most of them. The list is simply Too Big To Bail.

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This article has 45 comments:

  •  
    Aug 22 03:55 PM
    Any chance you are short any of these?
    Reply | Link to Comment
  •  
    Aug 22 03:57 PM
    I am short many of these via puts.
    My specific trades are at
    concisetrading.blogspo.../
    Ryan
    Reply | Link to Comment
  •  
    Aug 22 04:12 PM
    you amaze me !!! will it rain tomorrow ??
    yes I made money by buying the puts but I confess that I lost a lot duirng the dot com era, this is the game, there are no geniuses here only gambling and destoying peoples' fortunes along the way !!
    Reply | Link to Comment
  •  
    Aug 22 04:46 PM
    Monolines on the brink? doesn't seem likely, monolines are doing a good job in book remediation. Many of those bonds wraped in RMBS and CDOs are from NINJA loans or credits-No Income, No Job or Assests- originated by banks and broker firms. Many of those bonds were triple A rated by Moody's. Bond insurers believing they were high quality bonds decided to insure them, but surprise, surprise they contained JUNK, this cost a lot of write downs. Eventually Moody's dowgrades the bond insurers based more on SPECULATION rather than facts and causes a massive sell off of municipal bonds, a flood in the auction rate securities market, massive write downs in banks and broker firms, collapse of several regional banks, Fannie and Freddie, etc., bond insurers are now doing their homework and remediating their books from toxic waste. On the other side the housing market is correcting itself, it will take sometime, but like any other economic bubble is correcting itself, so remediation is on the way.
    Reply | Link to Comment
  •  
    Aug 22 05:11 PM
    What happened to "Mirror, Mirror on the wall who is the fairest of them all.?"
    Everyone these days is a Mr, Gloom E. Doom.
    Where did you buy that Crystal Ball? Seems like you got if off Ackman clearance shelf
    Ambac remains solvent, and to have people like you spew false phoney garbage around waiting for people to pick it up, is deplorable.
    The company itself can not speak /state any forward looking statements , but YOU can spew out negative rear view unabated toxic waste .
    "The year of the Shorts that distort and report with no Worth!!"


    P.S ABK will be double digits by Christmas,and I plan on having a wonderful,joyful, and happy time.
    Reply | Link to Comment
  •  
    Aug 22 05:54 PM
    P.S ABK will be double digits by Christmas,and I plan on having a wonderful,joyful, and happy time

    I second that!!!!!!!!!!!!!!!!!
    Reply | Link to Comment
  •  
    Aug 22 05:58 PM
    Clearly you are shorting these stocks

    All of your negativity is not going to help the market. You are not providing any insight on the market. Yes we know things are bad. How can you say Lehman Brothers is your “favorite” to fail? Do you love to see companies fail? Do you love the fact that many people are losing their jobs because this market is a mess? Maybe you wouldn’t use words like “favorite” when your job is on the line. Why not write about hope? Instead of having a list of “favorites” to fail. Write about 10 Financial entities that are going to do well. Bring some hope into this market.
    Reply | Link to Comment
  •  
    Aug 22 05:59 PM
    I third that. And by the way there is commentary on each of the first eight but none for mbi or abk. One last pot shot? Get off the Ackman train and if you were for real you would try to get things turned in a positive light not all has to be gloom and doom to get people to read it. As i siad to Morgan Housel over on the Fool site, the man with the pen is not always the mightiest.
    Reply | Link to Comment
  •  
    Aug 22 06:06 PM
    Are you on Cramer's payroll? Perhaps JPM? Who paying to write such negative crap
    Reply | Link to Comment
  •  
    Aug 22 06:11 PM
    Well... OF COURSE if he's got any position he's short.

    Do you folks have the same problem with people who are long saying things like "ABK will be double digits by Christmas"?
    Reply | Link to Comment
  •  
    Aug 22 06:29 PM
    Seeking alpha has lost all respect in my book. All you guys and gals are just mouthpieces for a couple of 2nd rate naked short-sellers. Remember "shorts can suffer unlimited losses"... ABK will be double digits by Christmas...
    Reply | Link to Comment
  •  
    Aug 22 06:42 PM
    ABK ON THE BRINK? YOU ARE ONE DUMB WRITER. AMBAC WILL BE $25 THIS TIME NEXT YEAR OLD MAN.
    Reply | Link to Comment
  •  
    Aug 22 06:50 PM
    if you put $1000 in each of these stocks right now, even if some of them fail, you would still be way ahead in 12 to 18 months from now
    Reply | Link to Comment
  •  
    Aug 22 07:28 PM
    For an independent opinion on the viability of a particular bank, check out the bank ratings at bankrate.com/brm/safes... Any bank that receives one star (including WM, BKUNA, DSL) from bankrate is probably going to fail. Any bank that receives two stars (Corus, Wachovia) is at risk of failure. Any bank that receives three or more stars (Regions) does not have an immediate risk of failure.

    One word of caution. To use this site you have to know the banks legal structure. Most publically traded banks are bank (or thrift) holding companies that own multiple subsidiary banks. Bankrate evaluates each subsidiary bank separately. A holding company can transfer all of its garbage assets to the holding company level and make the subsidiary banks' financial statements look clean.
    Reply | Link to Comment
  •  
    Aug 22 07:35 PM
    Wow... 100% of the comments here are BULLISH on these banks? Really?

    I mean...

    Really??
    Reply | Link to Comment
  •  
    Aug 22 07:35 PM
    ABK will be double digits by Christmas, I totally agree. MBI will also be a superior performer, although it may take a little longer.

    Mish, I don't see any disclosures, does that mean you don't have the nerve to follow your own negative advice?

    I don't see evidence of any research or thinking on ABK or MBI, just a rehash of a trade that stopped working in mid July, when I was backing up the truck.

    Tom Brown has published some good research on the monolines: I have also posted an article that includes a lot of factual material. I didn't notice any comments from you on either. If you have anything to support your assertions, I would suggest you do some work and present some facts to back up what you are saying.










    Reply | Link to Comment
  •  
    Aug 22 07:51 PM
    shedlock...You should shed those locks...or get a better haircut...then take a better picture...Goofy looking...Visible problem, but also clearly affecting your thinking.
    Reply | Link to Comment
  •  
    Aug 22 07:53 PM
    Also, please add some commentary on AMBAC and MBIA so we can see the words that you will be eating...
    Reply | Link to Comment
  •  
    Aug 22 08:52 PM
    show us adequate documentation if you don't mind.
    Reply | Link to Comment
  •  
    Aug 22 09:24 PM
    Att: RBC Bank President Gordon Nixon - Salary - 11.73 Million!!

    $100,000 - MISTAKE (FISHERMEN'S LOAN)
    I'm a commercial fisherman fighting the Royal Bank of Canada (RBC Bank) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. Help me fight this corporate bully by closing your RBC account.
    Website www.corporatebully.ca
    YouTube www.youtube.com/CORPOR...

    There is no monthly interest payment date on the contract.
    Date of first installment payment, (Principal + interest) is approximately 1 year from the signing of my contract.
    Demand loan contracts signed by other fishermen around the same time showed a monthly interest payment date on their contract,(agreement).
    The lending policy did change at RBC from one payment (principal + interest) per year for fishing loans to principal paid yearly with interest paid monthly. This lending practice was in place when I approached RBC.
    Only problem is the loans officer was a replacement who wasn't familiar with these type of loans. She never informed me verbally or in writing about this new criteria.

    Phone or e-mail:
    RBC President, Gordon Nixon, Toronto (416)974-6415
    RBC Vice President, Sales, Anne Lockie, Toronto (416)974-6821
    RBC President, Atlantic Provinces, Greg Grice (902)421-8112 mailto:greg.grice@rbc....
    RBC Manager, Cape Breton/Eastern Nova Scotia, Jerry Rankin (902)567-8600
    RBC Vice President, Atlantic Provinces, Brian Conway (902)491-4302 mailto:brian.conway@rb...
    RBC Vice President, Halifax Region, Tammy Holland (902)421-8112 mailto:tammy.holland@r...
    RBC Senior Manager, Media & Public Relations, Beja Rodeck (416)974-5506 mailto:beja.rodeck@rbc...
    RBC Ombudsman, Wendy Knight, Toronto, Ontario 1-800-769-2542 mailto:ombudsman@rbc.c...
    Reply | Link to Comment
  •  
    Aug 22 10:08 PM
    Sedlock...more like Shylock.

    Summary of the article:

    "I speculate that the bandwagon is correct and every mortgage loan will default causing these banks on which I've done no thorough research to fail. Further, you can make an assessment of whether or not a bank will fail by simply looking at the line of business that they are in. For example insurers: Fail; Corus, they lent to condos which speaks for itself: fail; etc. Also, since everyone in the market agrees with my half-assed research free speculation, Fannie, Freddie and WaMu will not be able to raise capital, since I wouldn't invest in them. Amen, pass the Tylenol."
    Reply | Link to Comment
  •  
    Aug 22 11:48 PM
    Fascinating item on held for sale vs. held to maturity asset reporting. Certainly, creative accounting is a major hiding place for future writedowns. A lot of de facto insolvencies are no doubt being hidden by such tactics.

    And yes, foreign investors have already lost their shirts on financials, and so are reluctant at this point to lose their trousers, as well. So, there goes another possible way of postponing massive insolvencies. How long will it be before CDO assets have to be sold for their true worth? Merrill Lynch just unloaded a bunch of these for a tiny fraction of their mark to model value, and they had to finance that purchase with their own money!

    Hey, you guys who are tearing into Mish regarding this column: if you are such bulls, then how come you appear to have been hibernating in a cave during the bulk of this crisis? Wake up and smell the burning mortgage-backed paper.
    Reply | Link to Comment
  •  
    Aug 23 12:00 AM
    Shorts can suffer unlimited losses? What idiot would hold a short while the stock appreciates forever? These banks are worthless and they deserve every bit of critical comment coming their way. My "Favorite" Bank on the list that should go under is WM. Kerry Killinger is the worst CEO in the world. Alot of workers will lose their jobs because of his reckless ways. I do actually feel bad for the normal bank worker who had nothing to do with this mess who might lose their jobs. A moron should of known that someone buying a house should have some kind of income coming in. I hope these banks learn their lesson. But after a few years everyone will get complacent again. What a shame.
    Reply | Link to Comment
  •  
    Aug 23 03:11 AM
    "Favorite" is clearly used in the odds-making and not personal sense.

    Just one little question for the bulls. Where will the 10,000,000,000,000 the US owes come from? No, I did not add any zeros.

    Most of our wealth is in our homes, no?

    Korea ain't interested in buying Lehman, and JPM has swallowed enough poison.
    Reply | Link to Comment
  •  
    Aug 23 03:17 AM
    All the analysis you can stomach is in the links. This is an overview.
    Reply | Link to Comment
  •  
    Aug 23 03:31 AM
    I like DSL, CORS and MBI while I am hedged by being short FRE, FNM and BPOP. I think CORS will survive. Management is buying stoick and the compnay is buying stock. DSL undervalued. Check out its commercial real estate, carried at zero on its book. DSL worth $50 in next cycle and MBI over $30,
    Reply | Link to Comment
  •  
    Aug 23 03:37 AM
    Nothing wrong with being short. We all should be long and short. i like the dollar so I am short FXE and long UUP. Also like grains ,so I own JJG.
    A little late to short most banks. Those with CRE exposure will be next to go lower.
    I expect FRE and FNM to go to zero with in 60 days, though feds may keep alive thru november elections.
    Reply | Link to Comment
  •  
    Aug 23 06:52 AM
    I went short BBT and WFC week before last,so far its working...but have to be nimble in this bi-polar market!
    Reply | Link to Comment
  •  
    Aug 23 09:05 AM
    I recall ABK at 1.06
    What is it now??
    And I bought into this rubbish thinking so I sold at 2.50 with a tidy profit but bought in at 5.90. Little down now but no worries. It's only money.
    Reply | Link to Comment
  •  
    Aug 23 09:07 AM
    Has anyone noticed all the stealthy buying of WM by other institutions....?
    Intrest in WM.
    Reply | Link to Comment
  •  
    Aug 23 09:25 AM
    I am short DSL. Have been short for months now. It's ratios are along with Vineyard's one of the weakest in the industry. I've been trying to short more but shares are hard to locate. I understand the pain in losing money in the stock market, but fighting the numbers and replacing analysis with patri