matisse capital management

Will NAMA Be Enough to Save Ireland's Banks?

NAMA is Ireland's "bad bank." The National Asset Management Agency was created in late 2009.  It applies to six major financial institutions covered by the Irish government's deposit guarantee scheme.  The troubled assets of the banks (primarily commercial real estate) are purchased using government bonds; the banks will then be able to sell these bonds to raise cash to improve their Tier One ratios. 

But will this scheme be enough to solve the problem?  The most troubled of Ireland's banks is Anglo Irish, which now has had some €16 billion in troubled loans transferred to the government, and received some €8 billion of bonds in return.  Now Standard & Poors says that Anglo Irish may in fact need €35 billion to be rescued.  Other estimates run as high as €50 billion; this would be about 25% of Ireland's GDP using 2008's number.  And in a recent poll in the Sunday Independent, 73% of respondents thought "The Anglo-Irish bank crisis will bankrupt the country and bring down the Government..."  If any other banks approach the scale of the Anglo Irish debacle, the system may be unsustainable.  The second batch of NAMA  loans transferred on August 23 were as follows (disclosure the author is long AIB):

Failed Banks: May and June Edition

17 failures from May 1 through June 4.  The largest of these were Tier One Bank of Lincoln, Nebraska, and Midwest Bank and Trust Company of Elmwood Park, Illinois.  Tier One had $2.8 billion in assets and was closed June 4.  Great Western Bank, of Sioux Falls, South Dakota will assume its deposits.  Midwest Bank and Trust Company had $3.17 billion in assets and was closed May 14.  FirstMerit Bank, National Association, of Akron, OH will assume its deposits.  You can view a list of all the bank closures since January 2010 here at the FDIC's Failed Bank List.  Below are banks that were closed in May and June, click to enlarge:

 

Notes on Lehman's 'Version' of Accounting

How 'Repo 105" improved leverage ratios.  Examiner Anton Valukas has released a report that details Lehman Brothers accounting before its collapse.  From Market Watch: "An accounting maneuver known as "Repo 105" was a "drug" that helped maintain a veneer of health on Lehman Brothers' crumbling balance sheet...At its peak in the second quarter of 2008, Lehman used Repo 105 to effectively move around $50 billion of assets off its balance sheet...An ordinary sales and repurchase agreement, or repo, involves the transfer of assets to another party in exchange for cash, while agreeing to repay the money and take back the assets at a later date. It's essentially a type of secured loan...But Lehman's trick was to use a clause in the accounting rules to classify the deal as a sale, even though it was still obliged to repurchase the assets at a later date....That led to a sharp reduction in the reported leverage, which was crucial for maintaining the group's credit rating..."  A detailed analysis with links to the report is at Zero Hedge; more coverage at NYT.  

FDIC's List of Troubled Banks

From the NYT:  "...the Federal Insurance Deposit Corporation announced Tuesday that it had added 450 institutions to its list of challenged lenders in 2009 and warned that the industry was likely to remain under stress....The number of so-called problem banks rose to 702 at the end of 2009, compared to 252 at the beginning of the year. Both the number of troubled institutions and their total assets are at the highest level since 1993...The F.D.I.C. does not disclose which banks it considers at risk.

Friday's Bank Closures

• Pacific Coast National Bank, San Clemente, California
• Orion Bank, Naples, Florida
• Century Bank, FSB, Sarasota, Florida

Pacifc Coast National bank had $134.4 million in assets.  Orion Bank had $2.7 billion in assets, while Centruy Bank had $728 million in assets.  The failure of these three institutions will cost the FDIC an estimated $986.4 million, per AP.  So far this year, the FDIC has closed 123 banks, the highest number since the S&L crisis.  You can get a list of all bank closures since 2000 here.  

More Friday Bank Closures

Corus Bank (ticker: CORS) was seized Friday.  There have now been a total of 91 closures this year.  What makes this one different, at least according to the Wall Street Journal, is that Corus was brought down by commercial real estate loans (in particular, construciton loans in south Florida) and not by residential mortgages.  Per the Wall Street Journal, "...more than half of the bank's $3.9 billion in condo-construction loans were in nonaccrual or foreclosure in April."  And on Thursday, the  New York Times had a timely article about the bank's problem loans in South Florida:

"The Tao Sawgrass, as the twin-towered complex is known, was built on the western fringes of Fort Lauderdale with easy money from the now tottering condo king of American finance: Corus Bancshares of Chicago. Only about 50 of the 396 units have been sold, the New York Times’s Eric Dash writes...The 26-story Tao — begun in 2006, just as the Florida real estate market imploded — is one of the many troubled condominium projects that have mired Corus in red ink and now threaten its survival. Federal authorities are racing to broker a sale of Corus to avert yet another costly banking collapse."

On Friday, Corus share closed at $0.245.  Over the last year they hit a peak of $9.66, then began a steady march downward.  In 2006, however, they were trading above $30 per share.

Friday Bank Closures

The FDIC took over five more failed banks Friday.  This puts the total number of banks taken over this year at 89.  Of this years failures, more than half have been in Georgia, Florida, Illinois and California.  The five banks were:

• First State Bank, Flagstaff, AZ

• First Bank of Kansas City, MO

• Vantus Bank, Sioux City, IA

• InBank, Oak Forest, IL

• Platinum Community Bank, Rolling Meadows, IL

According to the Florida Sun Sentinel: "The record high for a year was 1989, when 534 banks collapsed as part of the savings and loan meltdown. But the 82 failures so far this year (now 89) already have more combined assets than the 534...."

Friday's Bank Closures

The FDIC has closed 81 banks this year, by my count.  The closures always seem to happen on Fridays, no doubt to stay out of the news cycle.  The banks that were closed by the FDIC on Friday include Guaranty Bank, GFG (securities investments were the problem); CapitalSouth Bank, CAPB (done in by construction loans); First Coweta, FCWT.OB (residential mortages); and eBank of Atlanta, EBDC.OB (real estate loans).  Per the New York Times:

 "These banks did not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did their traders make bad bets; they generally had no traders. They did not make loans that they expected to sell quickly, so they had plenty of reason to care that the loans would be repaid. What they did do is see loans go bad, in some cases with stunning rapidity, in volumes that they never thought possible.

The fact that so many loans are souring is a testament to how bad the recession, and the collapse in property prices, has been...."

Ireland and its Bad Bank Strategy

NAMA, the National Asset Management Agency, will be Ireland's 'bad bank.'  About €80 billlion in troubled commercial real estate loans (more than half of Ireland's GDP) will be transferred to NAMA from Ireland's banks (AIB, IRE, AGIBY.PK and others) making it one of the the largest bad banks in the world.  Ireland has had one of the most difficult commercial property markets in the world over the last few years (see chart below, click to enlarge) The issue now is at what discount the properties will be resold.  Current estimates are 30%; however, this may be conservative.  And it could be a decade (Ireland's lost decade?) before the property market recovers, as happened during the RTC downturn in the US, per FinFacts:  

"A US Federal Reserve study says it took a full ten years for the real land price index to return to the level at its previous peak in many cities. In a number of large cities - - including Los Angeles, Philadelphia, Providence, RI, and Sacramento - - real land prices did not reach their 1990 peaks until 2001 or 2002, well into the current housing boom."