Monday, April 20, 2009

Uh - you were watching, being paid (by the taxpayers) and and should have been counting the cards!

Today is April 19, 2009

In a NY Times article today the General Counsel of the NY Federal Reserve stated "It wasn’t about ideology and it wasn’t about philosophy. It was about crisis management,” said Thomas C. Baxter Jr., general counsel for the Federal Reserve Bank of New York, which engineered much of the A.I.G. bailout last September. “We were at a very fragile point, and we had to come up with a decision right away about how to deal with the hand we had been dealt.”

So in order to justify your continued position (i.e. your job) you figured out a way to further abuse the taxpayers' money.
Am I the only one who sees a problem / pattern here?
The smart, confidence men and taxpayer-funded regulators on Wall St are rolling taxpayers yet again with more hyperbole - officials like this would have the taxpayers believe that problems at AIG or at certain few big 5 banks were UNKNOWABLE?

I may have been born at night and in a snowstorm - true - but it wasn't last night ok?

Where is former AIG CEO, Mr Greenberg in all this?
What is the status, if any, of an investigation into the CV Starr domestic and off shore entities?

Where is just one reporters investigation into AIG's decision in 2003 (not a typo) to exit Wall St's excess S.I.P.C. insurance, after having never paid out on a claim in 30 years. When HG was still CEO - then AIG FPG decided they will insure the brokers' credit default swaps.
Where was the NASD, SEC and the NY Fed - officials on this? Show me.

Siesta time on the taxpayers' dime.

Wednesday, April 15, 2009

Lennar prepares an 8K spread for investors - but is it enough to quiet critics or whet the wallets of insiders?

Lennar (NYSE:LEN) has been a mover, a shaker, an innovator in the home-building industry, but with the industry in trouble, they have found themselves under scrutiny. They are concerned about their future.

But perhaps they should also be concerned about the future of a share owner-putting a human face on a shareholder.

What if that share owner owned one share of stock, exactly one share of LEN?

What if that person was an orphan in a desolate, drought and plague-ridden village in Africa, whose next drink might be contaminated water, whose next meal was a few days from the last, who was last visited and given a hug several weeks ago? What if?

Every quarter, would (or could) LEN’s managers make a personal report and look that tiny, 100% dependent child and his little sister squarely in the eye and honestly tell them, “We’ve done our best to operate the company and because it’s within our span of control, we’ve done all that we could to disclose because we recognize that you have relied upon our financial statements and disclosures, and out of all the other stocks from which you could have chosen the world over, you have entrusted us with your only, most precious and last bit of capital".

All shareholders’ dependence, hopes, dreams and cash flow expectations over a lifetime depend on the information companies provide. Each share of stock purchased is based on the 100% trust and reliance the shareholder places in the company. Stocks are called “securities” for a reason.

Or is the fiduciary duty of undivided loyalty different for an owner of one share as opposed to a million shares of LEN? How does LEN know that one share is not a test? What if the test share were owned by Warren Buffet?

What if the “$474 Million of recourse debt” fear could be recognized as the opposite, the financial windfall?
What if, hypothetically, all the recourse debt came due and it fell upon LEN? It seems to me, that they would have over $600 Million left from the $1.1 Billion in cash reported. Reported book value would decline by about $3 from $16.34 to still over $13.00. That the assets (ex $1.7B in Landsource Communities Development LLC (LCD)) of roughly $6B from the joint ventures would add, even with $1.9B (ex $1.3B of LCD) of additional debt, rather enhance LEN’s balance sheet. The ex-LCD JV’s sport an estimated 45% debt to equity ratio, a bit more than LEN’s on balance sheet 37.4% net debt to net equity ratio as reported by Morningstar, that’s if the 8K asset valuations are as anchored in reality as the indebtedness surely is.

The above, however, is subject to some potential breaking news on LCD.
Since LCD is a trophy property, now as before commanding premium value, will it stand as a proxy post the reported bankruptcy workout in progress in valuing LEN’s other holdings at least in Southern California? Big Builder Online reports “would indicate based upon LEN’s own bid, a value of $550 million for a land venture that was purchased (from Newhall Land and Farming) for $1 billion in 2005, had a book value of $1.3 billion in 2006, and was valued at $2.6 billion in 2007, when Lennar sold 68% interest in the company to MW Partners, a partnership of CalPERs, CalPERs advisor MacFarlane Partners, and Weyerhaeuser Real Estate Co. A $300 million valuation for the land in the venture would be a figure that executives familiar with current land trends estimate would be closer to market realities.

Allow me to catch my breath. What was once in early 2007 sold to the peerless, astute CalPERs-backed group for $2.6B scarcely two years later may be worth $300MM? That’s a cool $2.3B haircut-minus 88% or if valued at the $550MM, a $2.05 B or 78% dent.

Disclosing more, hiding less

The management team at Lennar decided to be more proactive. They will disclose more and hide less. Seemingly detailed disclosures appear in a recent supplemental 8K filing dated March 31, 2009. A 20-page PowerPoint-like document, action packed with new Joint Venture information is positioned, intended and distinguished by LEN as better way to understand and assign value to shares and attempts to be something of a standard setter in the universe of home building industry financial statement disclosures.

Clues and cues
Board and management can only control what happens within the organization and communicate the same to investors. Management clearly cannot control securities markets. In some respects, though, markets do take important cues from management. Management must recognize at least two forms of investor communication: 1) Information that may positively stimulate a stock price, e.g., good news-- new developments, new sales, and other indications the company is performing well and 2) The opposite--removing or addressing concerns, obstacles, hurdles and impediments to enhance investors’ comfort levels and collective understanding of the company. Kudos are deserved by LEN’s board and management for listening, for recognizing that it alone controls and decides whether to increase the flow of information to respond to analysts’ and investors’ concerns.

Summary of LEN’s recent 8K disclosures

·Based upon LEN’s new information, it appears in the past they initiated substantive actions to protect its balance sheet and shareholders.
·It also makes commendable disclosure of the manner in which it conducts its interests with unconsolidated joint ventures, including a mention that LEN’s internal audit unit monitors its compliance with fiduciary duties to them.
·The financial tables are a step in the right direction although disclosures are not sufficient regarding their off balance sheet, unconsolidated joint ventures.
·For example, the document breaks out the top ten JVs per LEN’s investment; shows 7 of 10 are “land” deals, 6 of 10 are located in Southern California, 7 of 10 are 2004/5 vintage deals, only 4 of 10 reveal recourse debt data, the total JV Equity column is a mystery number and the source of near 70% of LEN’s $474 Million in potential exposure to recourse debt remains uncertain.
·A related issue still waiting to be addressed relates to the nature, timing, consistency, extent, and method of valuation adjustments, if any, and the future compared to the past.

LEN’s share price and some additional investors’ concerns

·LEN has a reported $6.80 per share in cash, yet the stock is only at $8.18 – a slight premium.
·LEN’s is second from bottom in an eight-company* industry survey – whose average share price is 145% of cash per share which would make LEN’s share price $9.86.
·LEN’s reported book value per share is $16.34, yet the stock reflects a 50% discount to same, the lowest in the industry by a wide margin; the above industry average calculated equals 115% of book – which would make LEN’s share price $18.79.
·At the above seemingly attractive entry points, LEN’s insiders have shown a pattern not of acquisition, but rather disposition; there have been scant open market acquisitions, absent three directors and one officer, since 2008.

Smoke signals from Pulte/Centex deal?

Pulte Homes (NYSE:PHM) recent proposed takeover of Centex (NYSE:CTX) is valued at $1.3B – yet Centex has $1.4B in cash on the books.

Control, consolidation and disclosure

LEN’s 30% interest may be inching along, closer to “control” in certain off balance sheet entities by virtue of its managing JV member status in 70% of the JVs or in its role slashing exposure to recourse debt requiring consolidation onto its balance sheet and disclosure. Note - the bankrupt LCD deal above in which Lennar and arms length former unit LNR own a combined 32%, yet combined, have 50% of the vote.

LEN was an innovator in the off balance sheet, joint venture “Land Bank”
LEN appears to have effectively implemented industry-leading advantages from the “land bank” concept. It became a significant driver of LEN’s profits, though with some hedge fund-like characteristics: shielded from competitors’, regulators’ and investors’ eyes, valued to proprietary models with custom-engineered risk, reward, exposure and leveraged protected with unknown hedges and counter parties.

A modest proposal: show investors the bronze, silver and gold linings.
LEN’s 8K filing lists the top 10 joint ventures based on LEN’s investment. A more responsive and reasonable approach might include the top ten recourse debt exposure deals with names redacted. LEN has an exceptional opportunity and challenge to lead the industry and indeed set the standard for public companies disclosure, consistent with its home selling tag line: “Everything’s Included”. It can become the brightest beacon of light in the industry by offering total disclosure of its off balance sheet operations and potential risks, rewards during an unprecedented, historic storm in the industry and economy. Investors are clearly yearning for decisive, tough, transparent decisions at the helm of our leading corporations.

LEN's innovative home purchase incentives $50K; reach record high at LEN
In the first quarter of 2009 fiscal year, LEN reported increasingly generous incentives, averaging over $50,000 per home. With the same mirror focused on management’s actions with respect to its share price, although LEN shines brightly on its home sales incentives concept, it fades in comparison with similarly creative ways to incentivize existing and potential shareholders. Perhaps LEN may consider a principal-protected or stop-loss securitization for some of these ventures, parsing out the slices of potential risk and reward or simply implement a corporate share repurchase program using a below market price put writing strategy.

Here’s how it looks to me: LEN has responded, with welcome and improved disclosures, but has not yet quenched investors thirst for more. This is something that applies not just to LEN but all public companies. All public companies should begin to address these questions: “What can management and boards do? What are all the tools and ways in which they can help investors feel more informed and comfortable about the stock?” For the ultimate benefit of all the constituencies that LEN’s board and management serve, recognize and deliver a fiduciary duty: individual and institutional shareholders alike, LEN employees in their 401k plan, joint venture partners, creditors and beneficiaries of family investments and related trusts and their regulators, LEN can set a high bar, new standard for disclosure that will help restore consumer and investor confidence. They can begin to lead by example.

* Eight company industry survey company components include DR Horton (NYSE:DHI), Toll Brothers (NYSE:TOL), Pulte Homes (NYSE:PHM), Centex (NYSE: CTX), Lennar (NYSE:LEN), KB Homes (NYSE:KBH), NVR Inc. (NYSE:NVR), MDC Holdings (NYSE:MDC).

The source of the financial statistics provided is Yahoo finance 4/9/2009

Tuesday, April 14, 2009

Bernanke (glaringly) omits certain Wall St. massive leverage in what got us here speech at Morehouse College

Ben Bernanke, Chairman of the US Federal Reserve, in answering his own question "what got us here?" blames it on the mortgages.

Lesson to be pointed out:
Don't blame it on the mortgages.

Fact Check:
If Bernanke is correct, then nearly all banks would be in dire straits, fact is over 95% of banks are NOT on the FDIC watch list as has been reported here since the fall of 2008.
Approximately 90% of ALL residential mortgage borrowers (Prime, sub Prime, Alt A, etc.) are making payments.

CONSCIOUS decisions made by professional investors at certain large Wall St brokers / banks; not confined to Bear Stearns and Lehman Brothers.

CONSCIOUS decisions to make more profits;
CONSCIOUS decisions to borrow more, More AND MORE
against 7, 8, 9, 10% yields on certain mortgage related securities by borrowing short term in the commercial paper markets at 2, 3, 4% in the belief these spreads would last indefinitely and most importantly that the creditworthiness of the collateral, the underlying mortgages would remain relatively constant.

Subject to confirmation upon additional information - certain banks operations may have been partly sourced by diversion (and perhaps improper use of, the subject of a pending class action matter) of customers' short term "sweep" funds. Subject to a forensic accounting audit, it may or may not be the case that certain of these monies found their way onto the balance sheets of the banks free to be lent NOT to the banks traditional commercial loan customers rather, it's believed, to the banks' own off balance sheet affiliates to capitalize / enable the issuance by same of commercial paper to raise funds to finance the purchase of longer dated Mortgage backed and related securities.

And in the process, NOT do what banks' raison d'etre, charters generally call for - "FOR CUSTOMERS" - BUT CERTAIN BANKS / BROKERAGE FIRMS did or may have done for themselves; raising a fundamental question of a bank's potential conflicts of interest that arise in carrying out its duty to shareholders or customers - which gets or should get priority?

To this day, certain banks, despite hundreds of billions in collective taxpayer support, have not disclosed the full nature and extent of the use of these customers' funds nor the purpose of the banks' potential instances of self dealing.

Saturday, April 11, 2009

FINRA Arbitration - Respondents' Ratification defense in the age of TARP!

Banks, Brokers aggressively assert customers' “Ratification” to defend themselves against customer complaints.

It's inconvenient in the age of TARP.  When they should look in the mirror when it comes to their own investments!  They ask for BAILOUTS!

In FINRA securities arbitration, Wall St investment banks and brokerage firms are very successful defending themselves against customers’ complaints by asserting the customer knew, and therefore ratified investments, pinning 100% of the liability for losses on the customer.

Any securities litigator (PIABA attorney) and any in-house counsel will admit to this tactic; EXCEPT upon Self-analysis. When applied to the banks’ own proprietary trading book, toxic asset problem – Wall St investment and bank holding companies – may conveneintly forget in 2004, they pressured the SEC to allow them to use their own proprietary securities valuation models, fair market value was pretty fair then but not now? recognize profits, paid out oh so tiny bonus checks from these now toxic assets and consciously (no one put a gun to their heads and said you have to buy this or hold that) “knew and assumed 100% of the risk huh?

Further - Suitability is more than that and should be contrasted to Ratification.
Suitability requires that the broker determine whether the customer has the ability, access and skills to independently evaluate risks in the account.  Malcolm Gladwell in "outliers" correctly identified that "time" on the job provides the strongest and best explanation for differences in results; citing school kids, Bill Gates, the Beatles and himself!

To suggest a customer has spent more time, has more capacity to evaluate than the adviser and often thousands of support personnel (whose costs are embedded in fees, costs and expenses) fails to contrast skill sets, representations, reasonable reliance, use of or omission of same and time of use to the single customer.

Friday, April 3, 2009

Singularly reckless Big 5 banks

James Tisch (JT), CEO of Loews Corp. (NYSE:L) stated in a 4-3-09 inteview on Bloomberg TV with Eric Schatzker, "We are all guilty - bankers, regulators, consumers." Really?

JT must be deluded or have a convenient bout of amnesia; to wit JT would have us believe that civil servants, regulators, consumers have the skill set and xray vision to peer into and evaulate that which the Big 5 banks refuse to reveal even to this very moment - today is April 3, 2009! Off balance sheet holdings and exposures; the "hedge fund" visited/s the Big 5 banks of America!

JT would have us believe consumers know as much about those certain few Big 5 banks' SINGULARLY reckless, greedy pursuit of profits and compensation thereon stemming from securitizations, ENORMOUS LEVERAGE, credit default swaps, counterparty risk, off balance sheet entities like SIVs and Asset backed commercial paper and proprietary mark to model securities valuations.

Uh - help me out JT - where is such course syllabus for the consumer and the regulators?

Answer - in certain Big 5 banks IT budgets, legal, regulatory, compliance, supervisory manuals, org charts, employee handbooks and job descriptions starting with the CEOs.
Also check in the Human capital management departments of same and the not so "independent" compensation consultants.

Or is it me? Is it the "systems" which are responsible?

Reminder - over 95% of FDIC regulated banks are NOT in trouble.
Why - how could that be?

The Big 5 cry foul "the market" collapsed. Really?
If the Big 5 were truly only market-weight invested like the 95% of banks which are ok - then what does that tell you? That they decided they knew better (for themselves) and consciously took on way more than market-weight risk huh?

Risks that Tim Geithner, quoted on Bloomberg TV in a 4-1-09 interview with Peter Cook, "banks took on risks they didn't understand, and could not bear" WOW!
WHEN did TG come to this epiphany? Before or after his confirmation hearings?

For what purpose? Simple to book enormous profits, and cause those oh so tiny bonus checks.

They were as Liberace coined "laughing all the way to the bank" huh?
Now they cry. Why should we, the US taxpayer listen?