1. Banks Go for Broke...

...and They're Almost There

A game of chicken. That's really what it's come down to for banks. Listening in on the Pulte Homes (PHM) conference call this morning, Richard J. Dugas, Jr., president and chief executive officer, summed up the game chicken banks are presently engaged in:

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What is becoming clear is that banks are retaining many of their land parcels, especially the A-rated positions, until market conditions improve and they can realize better pricing.

See, right now banks aren't being pushed to sell their land portfolios thanks to Federal Reserve efforts to ease their balance sheet restraints and force feed liquidity into the stock market  to help them recapitalize. But we're nearing the tipping point where if those efforts fail, well, then all bets are off.

"Good conditions change if the economy gets weaker instead of stronger in 2010, and banks find themselves under more pressure," Dugan said. "Of course, given that banks have held on this long, we believe that our few incremental deals might get forced out, but not the flood of lots that many have expected and feared."

Naturally, the risks involved in this game of chicken are extraordinary, but would our banking system have it any other way? If the magical mystery recovery falters, banks will be forced to unload this property all at once, naturally, and at much, much lower prices.

2. Burlington Northern Santa Fe: Overpriced for Any Other Business, Priceless for Berkshire

We read most of the pieces criticizing Berkshire's decision to pay up for Burlington Northern Santa Fe (BNI). The consensus is Buffett has uncharacteristically paid too much for Burlington Northern. As well, in the past, Buffett has been very critical of companies, including Berkshire (BRK), that make stock-funded acquisitions.

Referring to the "error" of purchasing the Dexter Shoe Company in 1993, Buffett said that by using Berkshire stock, "I compounded this error hugely." In essence, Buffett said he gave away 1.6% of Berkshire to buy a worthless business in that deal.

So, what gives with the Burlington Norther purchase? Looked at as an individual acquisition it would seem to fall outside normal Berkshire parameters.

Another way to look at it, however, is to consider that what Berkshire is acquiring is specific to its existing lines of business. Berkshire now owns access to coal deliveries to its utilities operations, as well as Burlington Northern cashflow that can now be used for further acquisitions. As well, Berkshire suddenly has newfound exposure to China, so there's a certain irony to Buffett calling the purchase an "all-in bet on America."

At the end of the day, Burlington Northern may be overpriced for any other business, but it's priceless for Berkshire.

3. The Fat Is in the Fire

Meanwhile, a more pressing issue is Berkshire's AAA debt rating. Standard & Poor's said on Wednesday morning it may cut Berkshire's AAA rating due to the pending deal. A significant part of the cash portion of the acquisition will likely come from Berkshire's core insurance operations, reducing their liquidity and capital adequacy, S&P said in a statement.

The deal also pressured Berkshire five-year credit default swaps after it was announced yesterday. This has been a favorite target of credit bears who were certainly helped in the position by the S&P announcement. It's good to have friends. The fat is in the fire.




4. Post-Election Wrap-Up

I was speaking with a political consultant this morning about what is needed for candidates to perform well over the next year in a number of spring primaries coming up. With social mood nearing another very intense wave down that will likely last throughout next year, what is the key theme successful candidates will need to focus on?The answer is simple: Take back Main Street from Wall Street and Washington DC.