Wednesday, October 1, 2008

Bailout or Bargain?

It is becoming apparent that part of the reason for the initial failure of the $700B federal 'liquidity boost' earlier this week was the fact that it was consistently presented to the public as a bailout using taxpayer dollars - a sickening prospect for many Americans. Given that we're in an election year many representatives couldn't bring themselves to vote for anything that sounded like it threw a tax-funded lifeline to 'greedy Wall Street tycoons.'

In the banking world however, the term bailout has recently sounded pretty good, and could easily be confused with another B-word: Bargain. The 'bailouts' of Washington Mutual and Wachovia by JPMorgan Chase and Citigroup respectively look, to many observers, like really smart acquisitions. Both JPMorgan and Citigroup were able to massively increase their geographic footprint overnight while at the same time accessing the heaping piles of consumer bank deposits held by WaMu and Wachovia. Not to mention the two acquiring banks pulled this off at a time when raising capital for acquisitions is more difficult than ever before.

JPMorgan's bargain purchase cost it all of $1.9B. For this price the New York bank took over the Seattle-based WaMu's $900B in deposits and 2,239 branches in 15 states while taking on almost none of its liabilities. Citigroup seems to have gotten a sweet deal as well, paying $2.16B for Wachovia's banking operations. For this Citi gets over $700B of Wachovia's assets and takes on only $53B of Wachovia debt. The FDIC is even insuring some of Wachovia's riskiest assets such as option ARM mortgages to reduce Citigroup's risk.

There are at least three important lessons for commercial real estate imbedded in these two 'bailouts':

1. Negative hype creates bargain opportunities - look for chances to bailout assets whose prices are beat down because of rumors, hype, or lack of liquidity, but where fundamentals remain strong.
2. Make sure you have strong guarantors - Citi and JPMorgan got the federal government to back them up in these acquisitions. You may not have the full-faith-and-credit, but sponsors with high net worth and strong experience can still get deals done in today's environment.
3. Be ready to act swiftly - keep your powder dry and be ready for that late night phone call telling you that a prime asset is hitting the sales block. If you're the only capable buyer who shows up you may just get a bargain.

Llenrock Group

3 comments:

Carbide said...

The bailout s bull! Pure, bull. We have roughly 300 million people in this country who are largely so stupid they can't even comprehend what $700 billion represents. Essentially, the MORTGAGE problem is claimed to require $700 billion to fix, and of course it all started with sub-prime borrowers. Well, $700 billion dollars given to the individual citizens would translate to over $350,000 each for those above the age of 18 years old. If the government gave each "adult" citizen $350,000 with the stipulation they have to pay off their home first, or if their mortgage is more than $350,000 to bring it completely current, the mortgage crisis would disappear instantly. In addition, al that extra money in everyone's pockets would be spent so fast it would make all our little heads spin. Talk about a boost to the economy, we would all be out buying new cars, trucks, boats, tv's, paying off credit card debt, remodeling our homes, and a hell of a lot more. That is what I call a true bailout plan, and one that would work immediately for every citizen in the entire country. Just think about what you would do if every member of your family over the age of 18 received $350,000 from the government tomorrow. Al of your friends, your co-workers, everyone. Talk about this country being the shit...by God that would give everyone a chance to fulfill their dreams.

The biggest concern I would have is that most people would have a desire to quit work the moment they received their check, so the government sets rules that state you cannot quit your job or be fired for cause for a period of two years or you have to refund the entire payment. Also, those who are unemployed today and receive a payment must take full time work within 6 months or they owe 2 years of volunteer duty working for the government in some capacity. Stay at home mothers and other hardship situations are exempt.

That is what we should be doing if we are going to give away $700 billion.

Better yet, I can save the country a ton of money. Just give every single citizen $100,000 tomorrow. That is only $300 billion and it would give every adult $100,000 to pay off their mortgages (if they have one), catch up their rent, catch up on bad debt, whatever. For all the kids out there like my 9 month old son it would mean one hell of a nice spring board for whatever they need in life. For my kid it would be the ultimate college fund.

And stop talking about sub-prime. I mean, how many sub-prime loans are there? The sub-prime isn't the problem, it is just where the pain starts first....bunch of dumb fucks that is supposed to be our leadership better not say sub-prime one more time or I will scream. We need a correction, but if we don't want the free market to work it's magic and we want to bail out wall street do it by giving the money to the citizens and not the mother fuckers who caused the mess in the first place. AND THAT WAS NOT THE SUB-PRIME BORROWERS!

Llenrock Group said...

A few points:

1. $700B spread over America's 300 million citizens comes out to $2,333/person; hardly enough to be called a windfall.

2. If the U.S. government gave out $700B directly to citizens it would have to raise that money by increasing taxes or by taking on debt to be paid back by future tax income.

3. The government's current proposal involves buying assets that will at a minimum retain some value and may increase in value, turning a profit for the government. Giving cash to citizens would at best generate slightly stronger economic growth, but as we saw with the incentive checks earlier this year it's a temporary and minimal boost.

4. Let's try to keep comments family friendly.

Llenrock Group

Anonymous said...

I think it’s unfair to describe the stimulus package as a ‘give away’, or even a ‘bail out’ for that matter. The money will be exchanged for bond and loans which are assets. So the Federal government will be borrowing at 2% or 3% and investing at 10-12%. The assets could deteriorate in value and still be a money-maker.
It’s also worth reminding ourselves that no-one held a gun to their head of American home owners and made them borrow money. People signed on the dotted line and decided to borrow money to buy a house. I don’t see how it’s ‘Wall Street’s’ fault that they can’t pay back what they borrowed. If you are angry that the government stepped in to help certain financial institutions because they were caught wrong footed – i.e. levered 35 to 1 – I can understand your argument. But, now that the vicious down-side to a large credit cycle is causing a massive contraction in credit (as it has done many time throughout history), it think it’s inappropriate to make the situation worse because we are frustrated.