March 8, 2010 Some folks trust to reason Say it once again now The Grateful Dead - "Playin' in the Band" Music by Bob Weir First a couple of updates. On Sunday The New York Times published a map prepared by graphics editor Hannah Fairfield using the data from the division of insurance and research at the FDIC and analytics from The IRA Bank Monitor showing the distribution of banks large and small across the US. The map illustrates the fact that most of the communities in the US are served by smaller regional and community banks, which hold more than half of total deposits. While large banks account for half of total assets in the banking system, their liabilities tend to be only about half deposits, thus the apparent disparity. To view the map, click the link below: http://www.nytimes.com/interactive/2010/03/07/business/07metricsg.html?ref=business Second, last week the Los Angeles City Council voted 12-0 to pass Councilman Richard Alarcon's motion to require banks doing business with the City, or seeking to do business with the City, to report on the details of their local reinvestment in the community. To read the blog post by IRA CEO Dennis Santiago, who attended the City Council meeting, click the link below: http://www.huffingtonpost.com/dennis-santiago/los-angeles-pushes-for-re_b_488126.html In this issue of The Institutional Risk Analyst, we feature a guest comment regarding mark-to-market accounting by Brian Wesbury Brian S. Wesbury, Chief Economist, and Robert Stein, Senior Economist, of First Trust Advisors LP in Chicago. But before we go to our feature, we thought we'd take a look at the Q4 2009 results for OneWest Bank, FSB, from The IRA Bank Monitor. Bank Profile: OneWest Bank, FSB OneWest has been the center of a storm of controversy in the conspiracy theorist community, much of it erroneous, because of the fact that the acquirer is sponsored by some of the biggest names on Wall Street and in Silicon Valley. OneWest Bank Group LLC (OWBG), which wholly owns OneWest Bank, FSB, is a privately-held thrift holding company whose investors include Steven Mnuchin, entities advised by J.C. Flowers & Co. LLC, Paulson & Co., MSD Capital, L.P (Michael Dell), Stone Point Capital LLC, SSP Offshore LLC (Soros Strategic Partners) and SILAR MCF-I LLC. A year ago, OWBG purchased the banking operations of IndyMac Federal Bank, which was being operated in conservatorship by the FDIC. When the Office of Thrift Supervision closed the $32 billion asset IndyMac FSB in July 2008, there were no buyers for the bank, period. The FDIC selected conservatorship instead of an immediate liquidation in an effort to safeguard the deposits and maximize the recovery to the Deposit Insurance Fund (DIF). Even when OWBG acquired IndyMac in March 2009 from the receivership created by the FDIC prior to the sale, there were only two bid groups: the winning group led by former Goldman Sachs investment banker Steve Mnuchin and a group led by Goldman Sachs (GS). But the real significance of the sale of IndyMac was that it began to thaw the market for dead banks. Today there is a large crowd of funds gathering in the hope of buying a dead bank, but most of the opportunities to buy failed depositories will go to other banks. See our post on ZeroHedge last week (The Newest Scam from Wall Street: Investing in Private Equity Funds that Acquire Failed Banks) in this regard. IRA Bank Stress Index Rating - OneWest Bank FSB Q4 2009
Source: FDIC/The IRA Bank Monitor The IRA Bank Stress Index is a quarterly survey of all FDIC insured depositories. The benchmark year of 1995=1. The current average stress level for the US banking industry of 21.5 as of Q4 2009 was more than a full order of magnitude above the benchmark year. As part of the sale, the FDIC cut a deal whereby if OneWest Bank adhered to the loan modification program designed by the FDIC, any loans that subsequently went into default above a certain threshold would be covered by a loss sharing agreement. For all of you out there who mistakenly think that the FDIC cut OWBG a special deal, this is the same loss sharing agreement that applies to all acquisitions of failed banks from the FDIC. So far, the FDIC has not paid out dollar one on the loss sharing agreement with OneWest Bank, either on IndyMac or on any of the two other failed banks subsequently acquired by OWBG. These include FirstFederal Bank of California and La Jolla Bank FSB. No surprise then that when you look at the profile for OneWest Bank in the professional version of The IRA Bank Monitor (which reflects only the IndyMac transaction, BTW) you will notice that the bank is reporting no loan defaults, zero, nechevo, bupkes, nada. While FDIC may eventually need to make payouts under the loss share agreement with OneWest and other acquirers of dead banks, most of the loss on IndyMac has already been realized. Indeed, we begin to suspect that many of these loss sharing agreements will not be significant compared to the cost of resolution of the failed bank. Based on preliminary analysis performed by the FDIC at the time of closure, the estimated cost of the IndyMac resolution to the Deposit Insurance Fund was between $4 and $8 billion. At the time of the sale to OWBG, the estimate loss to the DIF was over $10 billion or one third of the assets of IndyMac. Losses to the DIF in this cycle are averaging over 30% of the assets of failed banks vs. 11% in the S&L crisis of the 1980s. Now a lot of observers have argued that the FDIC cut OWBG a sweetheart deal. Compared to merely buying a troubled bank this side of a resolution, buying IndyMac was sweet, but not because the FDIC has given special treatment to OneWest Bank. No, the vigorish in buying dead banks comes from the wonders of purchase accounting via the Financial Accounting Standards Board. Next time you banksters walk past the FASB HQ in Norwalk, CT, step inside for a moment and put a few dollars in the collection box underneath the statue of St. Robert of the Revised Basis. As with the purchase of Washington Mutual by JPMorgan Chase (JPM), the subsidy in these deals comes from the write-down of the assets of the failed bank. JPM, don't forget, paid just cents on the dollar for the assets of WaMu that it acquired from the FDIC and the same holds true of the acquisition of IndyMac by OWBG. That means that if a loan defaults and the recovery is above the new cost basis for the loan, JPM or OneWest does not lose money. They make money. Indeed, a foreclosure on a home secured by a mortgage loan that has been written down can actually generate an accounting gain for the bank. On a short sale, for example, even if the proceeds don't cover the old loan balance, JPM, OneWest and all of the other acquirers of failed banks take an accounting gain vs the new cost basis for the loan. But again, this was not the doing of the FDIC or the result of loss sharing, but rather stems from the purchase accounting rules put in place years ago by the FASB. Even with the extreme mark down of the WaMu transaction, because well less than half of WaMu's liabilities were comprised of insured deposits, the FDIC did not take a loss on that transaction. The assets of WaMu were cleansed of legacy liabilities, including unliquidated liabilities like loan rescission claims from securitizations. In fact, all of the potential claims against the parent companies of WaMu and IndyMac for rescission of securitized loans are sitting in bankruptcy court, where they will likely remain and effectively die. The same cannot be said about Bear, Stearns & Co., however, a fact that is going to be causing JPM considerable heartburn in future quarters. The JPM bankers thought they were ever so clever stuffing the Federal Reserve Bank of New York with the nasty bits and pieces that were inside the Bear mortgage conduit. But they apparently overlooked the unliquidated claims against Bear's securitizations, which now have an average loss rate in the mid-20% range. We hear in the litigation channel that some Bear securitization deals have loss rates several time that average loss rate. Suffice to say that the mortgage underwriting standards at Bear seemingly left a little to be desired and now claims from that rancid corpus of mortgage securitizations are JPM's problem. We'll be discussing this in detail in a future comment in The IRA Advisory Service. Prior to the sale to OWBG, the assets of IndyMac were written down to just about zero in the receivership, which is our guess as to why OneWest Bank is still reporting zero defaults. As in the case of Wells Fargo (WFC) and Wachovia Bank, the write down of assets to "fair value" effectively hides future losses. The FDIC and the creditors of the estate of IndyMac Bank FSB bear the real cost of the transaction so far, at least unless and until FDIC is required to participate in loss sharing. You can see the balance sheet of the estate of IndyMac Bank in liquidation here: http://www.fdic.gov/bank/individual/failed/indymacbalsheet.html All of the public information about the IndyMac transaction is available here: http://www.fdic.gov/bank/individual/failed/IndyMac.html Notice that there were $8.7 billion in unpaid deposit claims and $5 billion in assets in liquidation as of the end of Q3 2009. So far, uninsured deposits have received 50% of their claims. The FDIC has determined that insufficient assets exist in the receivership of IndyMac Bank to make any distribution to general unsecured claims, and therefore such claims will recover nothing. Uninsured depositors are first in line in terms of the priority for recoveries from the receivership.
Questions? Comments? info@institutionalriskanalytics.com About IRA Products and Services IRA offers advanced analytics for risk surveillance and investment research via subscription products such as the IRA Bank Monitor for Professionals covering the US banking industry and the IRA Corporate Monitor covering public companies. For a trial subscription or an on-line demonstration, please register here. IRA Advisory Services including our channel research and diligence support services are available to qualified clients. For more information, please contact our offices. IRA for Consumers IRA provides consumers easy to buy online reports to independently check on their banks via our How's My Bank? system. IRA on Web 2.0 For updates during the week please follow IRA www.twitter.com/IRABankMonitor. The Institutional Risk Analyst is published by Lord, Whalen LLC (LW) and may not be reproduced, disseminated, or distributed, in part or in whole, by any means, outside of the recipient's organization without express written authorization from LW. It is a violation of federal copyright law to reproduce all or part of this publication or its contents by any means. This material does not constitute a solicitation for the purchase or sale of any securities or investments. The opinions expressed herein are based on publicly available information and are considered reliable. However, LW makes NO WARRANTIES OR REPRESENTATIONS OF ANY SORT with respect to this report. Any person using this material does so solely at their own risk and LW and/or its employees shall be under no liability whatsoever in any respect thereof. (c) Institutional Risk Analytics www.institutionalriskanalytics.com
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