Friday, July 24, 2009

Countrywide in The New Yorker
The New Yorker
recently had a great article on Countrywide and Angelo Mozilo. Unfortunately I can't link to the article, but it was in the June 29, 2oo9 issue and was written by Connie Bruck of The Predator's Ball fame. I thought the article was fair and I came way with more sympathy and respect for Mozilo (although it is hard to feel too sympathetic for a guy spending his days at his home along the exclusive Lake Sherwood Country Club). I just heard a congresswoman, Michele Bachmann, on CNBC blaming the whole financial crisis on Fannie Mae and Freddie Mac. But this paragraph from The New Yorker stood out when I read the article and I was reminded of it again listening to the congresswoman:
Mozilo and some of his executives believed they were in a new era, in which limits had become obsolete. In 2001, the Federal Reserve began cutting interest rates dramatically, bringing them to their lowest point in forty years, and fuelling a boom cycle, particularly for mortgage lenders. And Countrywide had a ready market for its enormous volume of mortgages in Wall Street, which supplanted Fannie Mae as the country's biggest buyer. "We frankly can't produce enough product for that market to be satisfied," Mozilo commented in April, 2003.
I will readily admit that Fannie and Freddie played a part in the housing boom, heck they were formed to buy mortgages, but it is naive to think the whole blame falls at their feet. The real bad stuff never went to Fannie and Freddie because their standards did not allow it. The toxic junk that started the implosion went to Wall Street-designed mortgage backed securities. When this junk failed, the collapse quickly spread to other mortgage products and exposed the lax lending standards and disregard for risk of the mid-2o00s.

Wednesday, July 15, 2009

Paulson & Company
I think the revisionist historians are too quick to point a finger at Henry Paulson, the Treasury Secretary last fall when the world's economy almost imploded on itself. It is my opinion that the work of Paulson, Fed Chairman Bernanke, current Treasury Secretary Geithner (who was President of the New York Federal Reserve Bank during the crisis) and others helped save the economy. They made up the rules as they went along due to the dynamic environment that gave little precedent with which to work. Things could have been much, much worse without the financial expertise and Wall Street experience of Paulson. I hate to think what things would have been like today if either of the two previous Treasury Secretarys, John Snow or Paul O'Neill, had been at Treasury last fall. What sparked this post, the announcement of a bi-partisan probe into the financial crisis, will likely yield little new information.

Tuesday, July 14, 2009

Goldman's Earnings and Real Estate
Goldman Sach's record earnings are all over CNBC and Bloomberg TV this morning. Goldman earned $3.44 billion in the second quarter. This paragraph from the Bloomberg article caught my eye:
Goldman’s earnings included $1.4 billion of writedowns related to commercial real estate, including $700 million of fixed-income writedowns, $500 million lost on equity investments and $170 million of impairment charges, Chief Financial Officer David Viniar said in an interview with Bloomberg.
The large banks are going to be grappling with commercial real estate for the near term. The Commercial Mortgage Backed Security (CMBS) market and how the large volume of loans in these securities are going to be dealt with will dictate the recovery or prolonged slump in commercial real estate.

Monday, July 13, 2009

Banks are notorious for their endless, unnecessary fees. Now the US taxpayer gets to charge a bank some needless fees. Bank of America is balking at paying the US government $4 billion in fees for the US government's implied backing of $118 billion of BofA assets. Here is the link to the Bloomberg article. I imagine BofA won't have to pay the whole fee, but I think it's funny that a bank is getting the same treatment it dishes out - and does not like it. BofA, welcome to your customer's world.

Wednesday, July 08, 2009

The ten-year Treasury bond is near 3.30%, down from nearly 4.00% in early June, and oil is close to $60 per barrel. Early last week oil was at almost $74 per barrel. I can't help but think that low interest rates and low oil prices are good for the overall economy. I know why, but don't understand the market's short term fixation that higher oil prices show economic strength. This is too smart by half. Higher oil prices hurt the economy and will stop any growth in short order, take it from someone that drives a big SUV. The economy is still not strong enough to withstand high gas prices. Lower interest rates mean lower mortgage rates that help the housing market, which is just starting to show signs of a rebound.
Apartment Vacancy at 22-Year High
Here is a Bloomberg article on apartment vacancies. High unemployment is hurting the apartment market. Some markets like Las Vegas and Southern California are being impacted by the "shadow market" of foreclosed homes that are rentals (this was not in the Bloomberg article, but a similar one in the Wall Street Journal citing the same Reis, Inc. report). The national vacancy is now at 7.5%, up from 6.1% a year ago. Rising vacancies will cause increased incentives and hinder rent increases. As all real estate is local, you should read the article for details on specific markets.
More Oil and Gas
The revelations on the Provident deal have me thinking. I am amazed that a half a billion dollar Ponzi scheme has gone unnoticed by the media, except for some truncated versions of the SEC press release. Bernie Madoff and R. Allen Stanford have hardened the media. In one of the versions I read, linked here, it states that Provident was paying old investors with new investors' money. Not good, and like I said yesterday, the drop in energy prices has exposed the weak operators. Like real estate, tech stocks or any other asset experiencing rising prices, all oil and gas promoters were geniuses when energy prices were increasing. Weak energy prices will continue to separate the good from the bad.

I've read a fair number of oil and gas syndication offering documents and the independent research reports that accompany the deals. There is so much self-dealing, so many affiliated transactions and so many places to inflate fees and expenses, it is hard to truly understand oil and gas deals. The lack of transparency in an oil and gas deal is startling. What is the norm in oil and gas - absurd mark-ups and self-dealing to name just two areas - would never be tolerated from a real estate sponsor. I am convinced that the analysts writing the independent research reports on these deals don't fully understand their intricacies, and in some cases even the workings of the oil and gas industry. I am not sure the attorneys putting the deals together fully understand the deals.

I recently read an analyst report on a royalty program (not Provident) and the report contained nothing on the sponsor's operating track record. The sponsor's previous programs' distributions have fallen off a cliff. Some of this drop can be attributed to the decline in energy prices, but not all. The deals buy existing royalty interests from third parties (and possibly affiliates) that are marked up (and the sponsor keeps all distributions until it assigns the royalty interests to the offering, which was not in the report either). The sponsor could not tell me how many wells have had production stopped due to low energy prices, or even how many had stopped production. There was no mention in the report on the acquisition criteria and pricing for the royalty interests, neither was there information on the age of the targeted acquisitions. Oil and gas wells in the Southwestern United States have steep initial (approximately twenty-four months) decline curves and then relatively stable production there after for many years (fifteen or more). A gas operator that acquired lease interests and drilled wells based on energy prices before they dropped last fall may shut wells and wait for prices to improve once past the initial decline curve, and a royalty interest owner has no say in this decision. I think it is important to know the economic interest and price threshold of the wells' operators. On blind pools, like the offering I am writing about, older programs must be reviewed. The analyst had no understanding of the deal and its dynamics.

Tuesday, July 07, 2009

Oil and Gas Scam
The SEC is seeking an emergency asset freeze of an oil and gas sponsor in a $485 million fraud and Ponzi scheme. The company is Provident Royalties, LLC. Here is the bulk of the SEC's press release:

Washington, D.C., July 7, 2009 — The Securities and Exchange Commission has obtained an emergency asset freeze in a $485 million offering fraud and Ponzi scheme orchestrated by three Dallas businessmen through a company they owned and controlled, Provident Royalties LLC.

The SEC alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent securities offerings involving oil and gas assets through 21 affiliated entities to more than 7,700 investors throughout the United States. Provident’s entities made some direct retail sales of securities, but primarily solicited retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. In fact, the SEC alleges that less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.

“Provident sold ostensibly safe securities such as preferred stock to thousands of investors,” said Ken Israel, Director of the SEC’s Salt Lake Regional Office. “But it was actually operating a Ponzi-like shell game in which assets were shuttled from one entity to another and investors were paid ‘returns’ from whatever money was available — usually that of the most recent investors.”

The SEC’s complaint charges Paul R. Melbye, Brendan Coughlin and Henry Harrison for orchestrating the scheme, as well as Provident, broker-dealer Provident Asset Management LLC, and the 21 entities that offered and sold securities. Although each offering was made by a separate entity through a separate private placement, the Commission alleges that the offerings actually involved a single plan of financing.

In addition to the asset freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of investors.

The SEC’s complaint charges the defendants with violations of the antifraud provisions of the federal securities laws. The complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Melbye, Harrison and Coughlin. Five affiliated entities that did not sell securities are named as relief defendants for purposes of disgorgement.

This does not look good. I heard that Provident barely made any distributions and that all funds had stopped distributions earlier this year. It should be interesting how this plays out. Today, natural gas is back under $3.40 per MCF. The low price of gas is wreaking havoc among gas sponsors. It reminds of that saying, which I will paraphrase: when the tide goes out we see who is not wearing a bathing suit. With the price of gas so low compared to the last few years, we are seeing what oil and gas deals were poorly structured, and in the case of Provident, apparently, who're the crooks.
Vornado Raising Capital to Buy Properties
Vornado, the publicly traded REIT, is raising up to $1 billion in a private equity fund that will seek to buy office properties in New York and Washington, DC. Vornado has committed 20% to the new fund. Here is the brief piece from the Wall Street Journal describing the new venture. This is a good idea and it may get real estate markets moving. I wonder if it will be able to acquire the assets at "distressed" prices. Vornado's stock is 60% lower than it was in October 2008, kind of making it a distressed security.

Monday, July 06, 2009

Oil and Stocks
Markets are confusing and the recent positive correlation between stock and oil prices show to me that no one will ever fully understand the mind of the market. The market has come to believe that rising oil prices are a positive sign for stocks. I do not get this thinking. The economic rebound is just beginning and higher gasoline prices could snuff out growth.

Update: The oil/stock correlation broke today. Oil dropped 4% while stocks rose half a percentage point. Don't look now, but natural gas is below $3.50 per mcf again.

Wednesday, July 01, 2009

Post Slacking and a Minor Medical Rant
The posts have been light. I have been working on a long post on health care reform, but am not sure I know enough about the various reform platforms to make an intelligent comment. I do feel that there are many factors impacting the price of health care. The problems facing health care include doctors and their secret, byzantine billing methods and holier-than-thou attitudes, insurance companies that perpetuate and abet the doctors, drug companies with their high prices and pills that cure or relieve any ailment (along with abetting doctors), and a nation of hypochondriacs. ("Help, I have a pimple on my ass and need an assendectomy, eighteen months of disability and a handicap parking sticker.") All four parties need each other in the current health care environment and changing this dynamic will be hard.

I am by nature against a national health care plan. (My dealings, however, with Medicare have been positive. It is a system that works and acts as a good safety net to most seniors.) I would like the "free market" approach to work. But try calling a doctor's office to get a price estimate before an appointment. You won't get one. It is disingenuous that a doctor's office does not know the cost of services. Doctors should provide an estimate, like an auto mechanic, and if more services are provided than the price increases. But people like their regular doctors and may not price shop before every office visit (imagine the nightmare of dragging medical records to each doctor). Insurance companies are actuarial experts and this expertise drives many medical decisions. Drug companies are big businesses, not altruistic enterprises, and they need to develop new drugs and new uses for existing drugs to survive (and deserve the opportunity to make a profit and have patent protections). All sides are going to have to play give-and-take to get any meaningful reform. Good luck.

I heard what I'd call a right-wing economist speak last week. He, of course, was against a national health care plan. But rather than have any serious comments or ideas on health care reform, he resorted to fear-mongering by saying that health care would be rationed. His example: if you're over 70 you won't get any major procedure, period; and if you are younger and need a knee replacement, for example, you will have to wait years. National health care is good unless you get sick (this is what is said about Kaiser!). This rationing notion is baloney and he knows it. I think everyone agrees that there are problems with health care. Democrats have the votes to get a national plan. Republicans need to step-up and push for real market reforms and not rely on scaring people with false information.