Five Things: Banks Go for Broke
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:
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.
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Should read....
'What is becoming clear is that banks are retaining many of their land parcels, especially the A-rated positions and they cross all their fingers and toes and hope against hope that market conditions improve at all and before they run out of money and hope and they can realise better pricing even if it is just a little better, anything, anything, please please please, hope, please, hope, hope, please.....'
exactly -
and ironically, the fed, if it so chose, could do the same....
Great article. The great banking game continues.
Regarding,"force feed liquidity into the stock market to help them recapitalize"
Rate hike be RBA, but none by FED. Most interesting.
Let's see banks borrow from FED at 0%, lever up and invest in Australia. Earn returns and then hopefully can return them with a better AUD/USD ratio.
Nice. It's good to be a big bank.
Bad for US savers, Aussie's in debt, Aussie exporters. But I guess good for Aussie savers.
"exceptionally low levels...for an extended period."
Translation: We will be the first ones in history to reflate a bubble, and we will continue at it until the job is done. Others before us did not have the insight, wisdom, resources, or smarts to pull this off. We know things they didn't know. Mathematics, physics, common sense be damned.
Translation: Deflation of the debt bubble is inevitable.
Translation: No bubble in history has yet been successfully reflated.
Translation: It's all a question of how long you want to drag it out, and how much you are willing to pay to try to do so. A futile endeavor. A Black Hole.
Translation: drag it out equals avoiding restructuring debt, particularly that held by the politically connected, and powerful
Translation: Depression
No attempt to lower debt/GDP. Just substituting gov. debt for private/corporate debt.
Decreasing lending, and zombie banks.
Still zero interest rates. Nice. Where is the incentive to save, other than the fear of not having enough to retire. Where is the money going to come from for investment in the economy?
Devalue the dollar and take even more money away from the consumer. I guess Uncle Ben forgot, that is 70% of the economy. Put money down the gas tank. An effective tax increase.
Japans mistake was protecting the corporate elite, at the expense of the real economy. We are making the same mistake, only it's the banking elite.
Uncle Ben, "It's the debt stupid" -Martin Armstrong
Gordon Brown... UK chancellor and now prime minister.... said a few years ago....it was "an end to boom and bust"
yeah, sure it was different this time.... big boom big bust
thanks to you and the rest of the banksters, the boom was bigger and the bust was greater, only difference is that the banksters win lots more, ordinary people lose lots more, no difference this time apart from the amount
"My macro view remains bearish, but I believe it's important not to confuse economics with the stock market, otherwise I'd be completely destitute right now and living in a cardboard box under a bridge."
Yeah no kidding. Reality is not a winner. How do you play that? Seems like the only long term play is stand aside. Anyway, that's why I only believe in day trading.
I loved your tranlsation diatribes . . . spot on and nearly couldn't contain myself.
Especially when you mentioned bubbles can never reflate themselves . . . and are Black Holes. Yes indeed!
Remember, Uncle Ben has no more bullets. He has to hope that 0% rates has to last for at least a minimum of a year or more in order to monetize some more without damage. Time will tell, but I wouldn't bet on it.
The economy and the stock market will converge at some point in the not too distant future. Judging by the Great Depression it takes about three years before the 'its getting worse more slowly crowd' finally acknowledges reality. People and businesses are holding on as long as they can in the hope this 'recovery' is real. Deep down they know that government debt is only delaying the inevitable but why face this fact before its thrust upon you,
Don't worry though Kevin. I've saved a nice spot for you under the bridge. It is out of the wind and even gets some sun in the morning. You've got to bring your own box though so don't go getting to crazy in the markets!
