Category Archives: Financial Crisis

Florida Wins…or loses?

Fox New’s Marketwatch reported that Florida has suffered the most in home foreclosures of any state  Over ten percent of all mortgages in the state are in foreclosure and double that amount have defaulted in one way or another.  Those percentages amount to over 2.3 million Florida mortgages being underwater.

It’s interesting because you always hear people musing that it was the Las Vegas housing market that was hit the hardest or that it was Michigan that took the toughest  blow.  How can all these places be hit the hardest, be suffering the most? Clearly, it’s comparing the lesser of evils.  Doing a quick Google search of “Michigan Housing Market” a majority of the hits have the theme of despair. For example, some hits were entitled: “When will Michigan Housing Recover, are we near bottom yet”?” “Why Michigan House Values keep falling (and falling).” The same type of theme comes up when the same search is done for Las Vegas.

So it is a scary thing to hear that a winner has been declared as having the worst mortgage problems, because if there is a state that has a higher foreclosure rate than those states that immediately come to mind in terms of high foreclosure rates, the bottom may be lower than we thought.



Bye Bye Block 37

It’s no suprise that Block 37 is being foreclosed on. The project seemed doomed from the beginning.  Doomed since it was first introduced under the original Daley, Richard J.,  in 1970.   Today Bank of America and another group of investors moved to foreclose on the development claiming the developer Freed owes $128.5 million on a $205 originally loaned.  So, what gives?  How could the developer not make the building work?  The location could not be more ideal, surrounded by the court house, theater district and shopping central.

However, maybe we shouldn’t be so quick to blame the developer.  This could be just another loan gone wrong.  Another time the banks and other lenders overextended themselves to debtors, a mirror of the imploded housing market.  We will have to wait and see if banks begin to foreclose on other development projects to know if this is a fluke or if it’s the begining of a trend towards a burst in the commerical real estate bubble.

Eastern Europe’s Economic Struggle

As most Americans continue to grimace at the mere mention of the words ‘economic crisis’ and ‘current job market’, looking abroad may provide solace for some.  Eighteen years ago the Soviet Union fell, transforming Eastern Europe into a playground for the world’s most daring capitalists.  The recent global economic crisis, however, has intensified an already tumultuous situation by highlighting glaring weaknesses in the policies of many of Eastern Europe’s most powerful governments. Continue reading

BofA, Merrill Lynch, and the Lawyers Who Advised

While Bank of America CEO Ken Lewis is taking the fall for the sketchy acquisition of Merrill Lynch, maybe we should also be looking at the lawyers who advised him. The bank has agreed to release more documents on the controversial deal, including legal advice. And the bank says it followed its lawyers’ counsel. According to Breakingviews, things could get uncomfortable for the lawyers.

Exhibit A is the decision by Jed Rakoff, a federal judge in New York, to reject the $33 million settlement Bank of America had reached with the Securities and Exchange Commission over disclosures, or lack thereof, surrounding the Merrill deal, including potential bonus payments to the firm’s bankers. Simply put, he wanted names to be named. He also wanted to know more about the legal advice the bank had received.

Exhibit B is Andrew M. Cuomo, the New York attorney general. His opportunistic strikes, including threats to charge bank bosses including Mr. Lewis, have helped persuade the bank to make an about-face, the publication argues. For months, the bank insisted it wouldn’t release the legal advice it had relied on. This week, it decided it would.

Law firm Wachtell, Lipton, Rosen & Katz was the main advisor for the Merrill Lynch deal.

While there it is not clear whether Wachtell’s advice “departed from the norms of previous financial sector mergers” or that the bank’s in-house counsel acted outside of the scope of Wachtell’s advice, it would be a disaster if either of these scenarios turned out to be true.

The Dark Side of Private Equity

Guy Hands, one of the few household-known private equity executives, recently provided an honest assessment of the industry – which I found to be quite refreshing. Hands’ firm, Terra Firma, is best known for its $4.73 billion purchase of EMI in 2007, which took place at the peak of the buyout boom. In an interview by DealBook’s Andrew Ross Sorkin, Hands reveals the dark side of the private equity industry.

Hands criticized the fee structure that provided executives with very little incentive to provide returns. Known as “2 and 20,” private equity firms receive 2% of the fund’s assets under management each year, plus 20% of its profits. According to Hands, firms grew to be so big that the 2% management fee was often more than the 20% performance fee. As a result, success had “less to do with performance or risk management, and more to do with bulking up,” he said.

Furthermore, individuals were investing so much money in private equity firms that they were “really investing in the same thing.” Accordingly, their capital was competing against itself, driving up prices. On the other end, Hands alleges that some firms formed consortiums to buy businesses from one another because it was easier than going “through the pain of gaining internal consensus to something contrarian.”

According to Hands, neither the banks nor private equity firms will admit that they made mistakes. As a result, firms will “live as zombies,” incapable of growing their businesses. Banks will try to recover as much as they can in fees and “postpone recognizing the full extent of the losses of their underwriting decisions.”

Nevertheless, it is certainly possible that some private equity firms will make terrific strategic decisions now and will be come out stronger when the economy improves.

Assessing TARP Strategy Report from COP

100_dollar_billElizabeth Warren, the chair of the Congressional Oversight Panel (created to oversee the expenditure of TARP funds, and to “review the current state of financial markets and the regulatory system”) was on The Daily Show with John Stewart this week to talk about TARP and the recent report on TARP strategy released by the Panel.

On April 7, six months after the passage of the Emergency Economic Stability Act, the Congressional Oversight Panel released a report titled “Assessing TARP Strategy.” The report, relying on historical responses to past banking crises, reviews methods for evaluating the programs created to assuage the current financial crisis. The Panel identified 4 elements that were critical to historical banking crises programming: Transparency, Assertiveness, Accountability, and Clarity.

The first half of Stewart’s interview with Warren illustrated that some of these elements don’t seem to be a part of the current programs. Warren stumbled her way through questions about how much money has been spent, and what exactly that investment was worth – rather, what it wasn’t worth. She did manage, though, to point out that this general uncertainty was due in large part to Paulson’s “don’t ask, don’t tell,” policy of distribution in relation to the first $350 billion of expenditures. Warren said the Panel is calling for more transparency, more accountability, and more clarity; they want a better articulation of policy and an explanation of what exactly is going on in the current expenditure programs.

Warren also took the opportunity to advocate a need for smart regulation to bring about economic stability and prosperity. She noted that before the great depression our economic history followed a boom and bust cycle every 10-15 years. After the implementation of regulations like the FDIC, SEC, and Glass-Steagall, though, we had a long period with no financial crisis. But those regulations began to unravel, according to Warren, and we ended up where we are today. (Bonus: check out this post on Geithner’s regulatory plan).

So check out the the interview (part 1, part 2), and the report and let me know what you think…

What are the Toxic Assets Actually Worth?

01oped_190v-jpgAs reported, FASB changed the mark-to-market pricing rules last Thursday, giving banks more discretion in reporting the value of mortgage-backed securities. Bankers bitterly complained that the current market prices were the result of distressed sales and that they should be allowed to ignore those prices and value the securities instead at their value in a normal market. But even in a “normal” market, what are the alleged toxic assets actually worth?

Treasury Secretary Timothy Geithner seems to think that these assets may actually be valuable one day, and has implemented a plan to provide “nonrecourse” loans to institutions that buy up the unwanted assets.

University of Illinois College of Law Professor Larry Ribstein, on the other hand, has declared Geithner’s plan an elaborate “shell game.” The government subsidizes private equity companies to buy the assets at inflated values. Instead of just giving them wheelbarrows of money, they get non-recourse loans for most of the purchase price. When we find out that the assets are actually worth what the banks really think they’re worth (as opposed to how they’re currently booked) the taxpayers, who provided most of the money, will bear most of the loss.

Unfortunately, he may be right. USC Business School has released a preliminary report, titled The Pricing of Investment Grade Credit Risk during the Financial Crisis, written by Joshua Coval and Erik Stafford (Harvard) and Jakub Jurek (Princeton). An overview of the paper can be found here. The paper presents three uneasy conclusions:

  1. Many banks are now insolvent. “…many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities.”
  2. Supporting markets in toxic assets has no purpose other than transfering money from taxpayers to banks. “…any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities.”
  3. We’re making it worse. “…policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay – and perhaps even worsen – the day of reckoning.”

So, what is the solution? Profesoor Ribstein says we should let the banks sell the assets for what they’re worth but not make them reduce their capital for regulatory purposes.

What do you think we should do?