Posted by: Mara Der Hovanesian on November 05
Banks are in for another ugly year in 2010. But this time the problem will be the big batch of deteriorating commercial real estate loans on their books. That's because the big banks were operating with the same loose standards--and aggressive behavoir--as the investment banks in order to compete in the real estate market during the boom years. (Read our cover story about why this real estate bust is different.) Commercial real estate loans that banks underwrote and held on their books skyrocketed to approximately $190 billion in 2007, up from $11 billion in a single year, a decade earlier. In all, banks hold some $1.8 trillion of commercial real estate debt on their books.
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Posted by: Peter Carbonara on October 09
Documents produced by the Federal Deposit Insurance Corporation are not, generally speaking, gripping page-turners. One genre of regulatory report, however, does make for fairly interesting reading: "Material Loss Reviews" prepared by the FDIC's Office of the Inspector General.
These are required after any bank failure that has cost the FDIC's depository insurance fund a significant amount of money, The reports are available at the FDIC OIG's website http://www.fdicoig.gov/. They constitute a literary genre with significant growth prospects as the FDIC and other regulators continue their round of Friday evening bank closures around the country.
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Posted by: Mara Der Hovanesian on September 11
John Mack and Morgan Stanley have shared a few near-death experiences over the years. Mack, who will leave his post as CEO at the end of the year, is hailed by his fans as a hero for saving the investment bank from the brink of extinction in the financial crisis. Others bestow high marks for resurrection of the bank and morale after the troubled 1997 merger with Dean Witter that threatened the firm’s success.
But it was Mack’s penchant for amping up risk and increasing the firm’s appetite for trading and risky mortgages that nearly ruined his legacy. No surprise then that his successor James P. Gorman is cut from a different cloth. The bank Gorman inherits is still in flux and is morphing into a tamer version of its former self. The bank is no longer one that would even consider hiring someone of John Mack’s ilk to run it as CEO.
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Posted by: David Henry on August 31
Lost amid the talk about Goldman Sachs being a vampire squid and making money from the subprime mortgage bust is the fact that the firm lost $6 billion trading, of all things, its own stock. Yes, Goldman, which likes to be known as the smartest shop on Wall Street, bought high and sold low, plain and simple. How it happened might even show you how to make money at Goldman’s expense a few years from now.
The heart of Goldman’s mistake was excessive self-confidence. In 2006 through early 2008, the firm spent about $18 billion buying 100 million shares of its own stock, paying $184 a share on average. Then the financial panic hit in September and Goldman had to replace the money. The firm sold 94 million shares in offerings in the fall and spring to raise nearly $12 billion at $123 a share. It also sold preferred stock and warrants to the government and Warren Buffett at similarly low prices, but even without counting those special deals, the bottom line is clear: Goldman lost more than $6 billion because it was wrong to think it had enough capital to get through the trouble it knew was coming.
Goldman declined to comment on the loss, or on a related question: When will the firm add back leverage it had to forfeit? The question, as described in a recent BusinessWeek story, is being put to Goldman and other strong banks frequently now by stock analysts. The question is expected to keep coming up if the banks’ capital bases continue to grow with new profits from the firming economy and financial markets. The analysts and executives at the banks believe the banks are overcapitalized now and should be less conservative with their investments and with the leverage they use. The banks boost leverage again by borrowing to buy additional assets and by paying out cash for stock buybacks or dividends.
For now, though, the banks are holding back on doing any of that, even though it means sacrificing profits for shareholders. The executives said on the conference calls in response to the analysts’ questions that they are waiting until Washington decides what new restrictions to impose to make banks operate safely. They are also are wary that the economy and credit markets could turn for the worse again. A reversal in either could draw down banks’ excess capital. The bankers said, in general terms, that they don’t want to use additional capital until they are more confident that they won’t have to replace it at higher cost all over again.
Whether Goldman will loosen up its capital policies has become critical to its stock price. While the shares are up from $59 in January to around $163, they haven’t kept pace with the S&P 500 since the firm’s July 14 earnings call. For the stock to go higher, some analysts say, the market will need confidence that the firm will add back leverage to increase profits. By one measure of leverage, Goldman’s assets are 14 times its equity, down from its historic average of 20 times and peak of 26 times. Goldman’s use of leverage in the past has been critical in meeting its avowed goal of making profits of at least 20% of equity over the business cycle. If the stock market concludes that Washington won’t let Goldman leverage the way it has, or if analysts hear Goldman executives backing away from the goal of 20% return on equity, the shares could fall. CFO David Viniar reaffirmed Goldman’s commitment to the 20% goal in response to analysts’ questions during the July conference call.
Goldman’s aim for high returns on equity seems to have played a roll in its loss from trading its own stock. When a company buys back its own stock, the transaction reduces equity, while increasing its leverage; when there is less equity the company will report higher rates of return from each dollar of profit. So, the math makes it tempting to buy back stock, even when it is trading at rich prices. Was it this temptation that made Goldman buy the 100 million shares for $18 billion and take its leverage to a record high? Was the 20% goal a blind spot that caused savvy Goldman to spend down its capital and increase its risk even when it knew the subprime debacle was coming? We’ll never know, but it is something to remember in case Goldman ramps up leverage in a hot market in the future. Wouldn’t it be sweet to sell Goldman stock high to Goldman?
Posted by: Mara Der Hovanesian on August 26
A lot of overnight sensation subprime lenders imploded after the speculative housing market bubble burst. But many of the biggest subprime players that not only made oodles of profits during the boom are also still around--and benefitting handsomely from federal bailout money.
According to a new Center for Public Integrity analysis of public records, almost two dozen firms that "fed off the subprime lending frenzy that devastated the banking system are set to receive billions in taxpayer dollars through a federal government program designed to stem foreclosures."
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