Dear WSJ: Missing a Step?

The Wall Street Journal came out with this article this morning on Bank of America's successes from its real estate investments.  Note that the article nowhere mentions the SEC's expanding investigation of BofA (The article also refers to Deutsche Bank's revenues without mentioning its exposure to Dubai's unfolding defaults,  but that would be asking for just too much, wouldn't it.).  You think that cooking books and pumping offerings might have some effect on posted earnings?  Apparently the Journal doesn't; BofA's revenues are just from great management.  So, do you think the Journal is an information source, or just a cheerleader?

How 'Bout That Recovery

I'm not one of those people trying to gain fame and fortune from constantly preaching doom and gloom.  I wish we were pulling out of The Great Recession, and I believe that the stimulus is a good idea and that we need more (Regardless of the big headline this morning in which AP trumpeted that its analysis shows the stimulus hasn't done anything.  An analysis AP has yet to release, giving us only selected quotes from the economists AP selected to review the analysis.  What's with that?).  That said, I'm not seeing evidence that we're pulling out or that we will any time soon.

Today's case in point: Kiddie Kandids, the ubiquitous mall store for children's photos.  Not so ubiquitous now.  Employees got word last night that the stores weren't opening this morning and the company is diving into Chapter 7.  The company has set up a blog to provide updates, but all it currently amounts to is a press release, and it doesn't take feedback.

Another hole in the mall.  Actually, a couple hundred malls.  More dark retail space, more jobs lost, more bad loans, more of less.  The mere fact that a few thousand people are making a mint on Wall Street doesn't mean this economy has leaped from its sick bed and entered the decathlon.  Regardless what the pundits are saying, most people are in pain, and if the pain is reducing, it's only because people are going numb.

You Have to Call Things What They Are

I try to be a decent person, at least as far as my profession allows me (Don't be fooled by distraction noise from bar associations about "civility guidelines." That has no bearing on how Biglaw attorneys will treat mere mortal laity and even less bearing on how they treat lesser attorneys such as Yours Truly.), but ultimately things should be called what they are. The economic commentary site www.marketoracle.co.uk is a sack of Randonazi and Deep Libertarian nutbars, and as is SOP with folks of such persuasion, they are mind-numbingly hypocritical, espousing free speech while crushing it at every turn. I have posted several comments taking issue with some of their more absurd, tin-foil beanie commentators (cough, Gary North, cough, Nadeem Walayat, cough), often agreeing with another commentator on the site (e.g. my comment on Walayat's posting on Iceland's rejection of the Icesave agreement, in which I agreed with Mike Shedlock's posting, which was 180 degrees from Walayat's), and none of them have been approved. As in NONE. Nada. Zip. Gar nichts.

Well I'm sorry, but that's just crap. And so is Market Orifice.

Dubai: Lead Domino of the Next Round?

Last week, just in time for the inevitable information lockdown created by the Eid holiday, the United Arab Emirates requested that creditors of Dubai World, the state-owned investment company that essentially manages the UAE's investments and development projects, delay repayment of approximately $60 billion in debt coming due next month.  This comes after Sheikh Mohammed sacked, among many others, Dr. Omar bin Sulaiman from all his posts last Saturday and named Ahmed al-Tayer as the new governor of the Dubai International Financial Centre, signaling further retrenchment by the al-Maktoums by purging the Ivy League New Guard and replacing it with old, family allies.  This also comes after a $5 billion bond issue that had been represented as ear-marked for next month's debt payments but that is now obviously going to something the UAE considers more pressing, but what that something is remains a mystery.

But it doesn't stop there.  The bond prices of course tanked, and the spread on insuring Dubai debt shot past Icelandic levels as the threat of sovereign default became a real player at the table.  Then there is the effect on the $123 billion in debt held by foreign banks.  $50 billion is held by UK banks, notably HSBC, Standard Chartered, Barclays, and RBS, but there is plenty to go around.  BNP Paribas holds about $1.7 billion, Citigroup $1.9 billion, and Goldman Sachs a mere $600 million.  Any bets on how fast this ends up on the books of US and UK taxpayers?

And this morning I read something really disturbing.  It's an open question how much Dubai's problems will spread throughout the Gulf.  The spreads for Bahrain, Abu Dhabi, and Qatar have jumped appreciably.  But when asked about the growing cost of finance in the Gulf, a spokesman for Munich Re said, "As for whether the cost of insuring debt in the Gulf will soar it is too early to judge the situation."

Wait a minute, isn't it your job to judge these situations?  And if the reinsurers aren't making these "judgments," what exactly is the current market in hedging instruments based on other than balloon juice?  Two years into this train wreck, and we haven't learned a thing.

Capmark Craps Out

Capmark Financial Group, formerly GMAC's commercial real estate finance arm spun off to a consortium of KKR, Goldman Sachs Capital Partners, and Five Mile Capital Partners three years ago for a cool $2.1 billion, has filed Chapter 11 bankruptcy in Delaware. Word is that KKR had all ready written off its investment in toto. Gee, someone knows how to mark to market after all. A Warren Buffett entity had an offer on the table to buy every asset that mattered for $490 million (Over 75% hair cut! Love them green shoots!), but the bankruptcy will require more of the deal to be cash, so we'll see if The Sage walks away. If he does, the only "reorganization" coming out of this Chapter 11 will be moving the chairs around at the auction of everything that can be characterized as an asset.

Note that Capmark Bank, Capmark's wholly-owned industrial bank based here in Utah to take advantage of our nonexistent banking laws, is not part of this bankruptcy. Now before all you jingos start going, "Hoowah Utah!" be aware that earlier this month the FDIC forced Capmark and Capmark Bank into a series of cease and desist orders that: 1) required Capmark to pony up an additional $600 million in capitalization for Bank, 2) requires Bank to file a new cap plan by Thanksgiving, and 3) effectively precludes Bank from even breaking a roll of quarters without prior FDIC approval. With Capmark in BK, that cap plan is about as likely as my winning the Mr. Universe title. Worse, the US Trustee in Delaware may well say, "That $600 million needs coughed up and put in the bankruptcy estate." Which means that Capmark Bank and its $10-11 billion in "assets" (not marked to market) is circling the drain as we speak.

On top of all this, a 4 September article from Bloomberg said that regulators ranked Capmark Bank as "well-capitalized." The C&D orders were entered less than a month later. Is there anyone driving this bus? Do I really need to ask that question?

Warehouse Fire

And as if CIT's clubbing of its bondholders weren't bad enough, here comes news that Colonial Bank is cooked.  A Federal court has frozen its assets.

Colonial Bank is a major source of warehouse lines of credit, which basically means that it's a place mortgage banks go for revolving credit to originate loans.  The number of sources for warehouse lines has diminished drastically in the last two years, and the loss of Colonial puts a big hole in a shrunken market.  Even before this, it looked like there would be a 20% shortfall of warehouse lines relative to mortgage demand.  Now?  It could easily shoot through 25%.  The good news is that, as mortgage rates go back up, demand will go down, so there will be a new equilibrium.  It won't provide much in the way of "green shoots" for our "recovery", though.

What Small Business Financing?

Any small business owner can tell you that financing is tight.  A lot of lenders have disappeared, and the ones that are still around have locked the vault.  If what's going on with CIT Group is any indication, in spite of all the recent smiley faces, things aren't going to improve soon.

CIT Group provides a broad range of financing for businesses.  In a very real sense, the retail sector would cave in without CIT, because it provides financing for a substantial chunk of the vendors for the major retailers.  And we know what the economy would loook like if retail went any further south.

By Spring, CIT was one of the few left standing in this area.  Then it started to sink too, and it seemed headed for Chapter 11.  At the last minute, its bondholders agreed to bail it out.  Not much of a choice on their part, really; they could either fork over more or lose what they had.  But now the bondholders are being asked to give up more.  CIT has a tender offer on the table for about $1 billion of bonds maturing Monday.  The tender expires tonight, so we're sitting around waiting to see what happens.  CIT is offering the bondholders a 12.5% haircut, down from the 20% haircut initially offered but still significant.

How does this affect you?  Bondholders provide the capital that makes loans possible.  If banks are requiring both bailouts and haircuts of their capital sources, how many of those capital sources are going to decide it isn't worth it?  And what do you think that will do to loan availability?

Bankuptcy is an option, but...

Bankruptcy is hot in Utah right now.  Filings for the first half of 2009 were up 62% over the first half of 2008.  Given the way the economy is, this is no great shock, but what's a little more surprising is that Utah rates so high in its filing rates (e.g. 9th in Chapter 13 filings).  A pair of professors at BYU, Lars Lefgren and Frank McIntyre, seem to have figured out why: Filing rates are higher in states that have less protection for debtors, especially protection from wage garnishment.  Makes sense.  If creditors are grabbing your paycheck, you need to do something about it, and if bankruptcy is all you can do about it, that's what you do.

That doesn't mean a head-long rush to the bankruptcy court is a good idea, though.  I've seen too many cases where the debtor waited until the roof was falling in before seeking counsel and then insisted on the attorney filing the petition immediately if not sooner.  Such cases seldom end well.  For a lot of reasons.

First, if you're a consumer debtor, you can't just jump into bankruptcy.  You have to take a debt counseling class to get through the door.  Then there's also a detailed analysis of your income, expenses, assets, liabilities, and such.  These things simply take time.  If you're a business debtor, you don't have to take the class, but believe me that the extra analysis of your business affairs required more than makes up for any time gained there.

So what can happen if you rush things?  Well, if there were 100 things that could go wrong, you could think of maybe 50 of them.  And there are a lot more than 100 things that can go wrong.  And you don't need anywhere near 50 to create a disaster.  Most problems consist of numbers that don't add up and need corrected, resulting in increased expense and delay, and coming under the trustee's whithering glare that can burn a hole in battleship plate.  Sometimes the consequences get more exotic and severe.  For example, in the Mount Holly Club bankruptcy, a major creditor is moving to dismiss because it alleges the company didn't get proper, member approval to file.  Oops, did someone miss a step?  We'll see.

Just remember, in bankruptcy as in business as in life in general: Proper Planning Prevents Poor Performance.