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Thursday, January 29, 2009 6:14 PM

Deals of the Week

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Inquiring minds are reading about "Deals of the Week" in Five Things You Need to Know: Banana Republic. Let's take a peek.

1. Change Comes Hard

This morning I was rudely greeted by two bizarre news headlines; bizarre because they were written about roughly the same thing, yet presented two diametrically opposed thoughts.

The first was from the New York Times: Geithner Sets Limits on Bank Lobbying

The second was from the Wall Street Journal: Geithner's New Chief of Staff is Former Bank Lobbyist

What in the hell? Seriously? That used to be something you would only read in a local broadsheet while waiting on a sweaty tarmac to flee a collapsing South American dictatorship.

Yes, change comes hard in all senses of the word.

2. Deal of the Weak

As if to underscore the reality of a the ongoing structural shift in consumption taking place, the Wall Street Journal "Deal of the Week" in commercial real estate this week is the sale of one of Cincinnati's largest malls by Simon Property Group (SPG) for $20 per square foot.

According to the Journal, the average price nationally for malls is around $134 per square foot.

"To be sure, the property is in sad shape," The newspaper noted. "Some 40% of its non-anchor retail space is empty."

Expect more "Deals of the Weak" to follow in the months ahead.
Day in and day out, Kevin Depew writes one of the best columns on the web.

Please take a look at his post if you are a following gold. In point 3, Kevin has charts of "Two views of Gold", one in Euros, the other in dollars. His take, there's reason for caution. My take? I still like gold here. Compromise: Perhaps gold does well in real terms (what it buys in terms of other assets) but remains range bound in nominal terms.

As for "more deals coming in the months ahead", why here's a deal to consider from two days ago. ....

Regulators Are Demanding A Deal

Please consider Suburban Federal Savings Bank told to sell
Federal banking regulators have told Crofton-based Suburban Federal Savings Bank that it must be sold by Friday or face a possible government takeover.

The 53-year-old thrift has been trying to recover from losses on soured real-estate loans. In documents filed last week, the Office of Thrift Supervision ordered Suburban to merge with another institution or accept "appointment of a conservator or receiver."

If Suburban were to be seized, it would be the first bank to fail in Maryland since 1992, the tail end of the savings and loan crisis.

The bank had about $33 million in bad loans as of Sept. 30, about eight times its capital.

If neither Suburban nor the government can find a buyer, the FDIC could take receivership and try to find one or more parties to buy pieces of it. "The desire is to have a whole bank transaction, where the healthy institution takes over the failed institution ... so they've acquired a franchise," said FDIC spokeswoman LaJuan Williams-Dickerson.

Bert Ely, a banking consultant in Alexandria, Va., said it will difficult to find a buyer for Suburban. "It's absolutely amazing they're still open," Ely said. "The capital at the end of September was almost exhausted."
Here's the deal. Deal: Sell Yourself. No Deal: The FDIC takes you over. That's the deal. More deals coming. ... Soon.

Good Bank Bad Bank Deal Is A Bad Deal

Institutional Risk Analysis is discussing The Big Banks vs. America: A Roundtable with David Kotok and Josh Rosner.
The term "bad bank" is being tossed around Washington dinner tables this week, a sign that the situation facing the largest banks is reaching a boiling point. It is amazing to us to see how little people understand the choices facing us with the big banks, how narrow those choices truly are and how the numbers in terms of losses are so BIG that they will ultimately force us to do the right thing.

Remember that the entire banking industry stands in front of the taxpayers in terms of loss absorption at the FDIC, so you can understand why the smaller banks in the industry are SERIOUSLY PISSED OFF at the large banks and their minions in the Obama Administration like Tim Geithner and Robert Rubin. Oh, and don't forget Chairman Ben Bernanke and the entire Fed board of governors. These leading officials are increasingly talking the side of the large banks in the battle over limited financial resources, a fact that is causing the community bankers to rise in anger. Stay tuned.

Roundtable: David Kotok & Josh Rosner

For additional perspective on this issue, The IRA spoke last week to Josh Rosner of Graham Fisher & Co and David Kotok of Cumberland Advisors:

The IRA: The basic question everyone's asking is what do we do with the big banks, particularly C and BAC and the growing tension between the cost of supporting the big banks w/o a resolution and the rest of the industry, which is being resolved according to the law. You can see our discussion of the issue and our view of loss rates above.

Rosner: First, I am very cautious about making loss estimates because your loss number could be very low. I can actually draw a scenario that gets us well above that level of charge offs, especially if we assume worsening macro conditions and their further impacts on ADC books, corporate defaults and other areas outside of the structured exposures.

Kotok: The motivation of keeping big banks alive is driven by a desire to avoid another Lehman on the Obama watch. I hear people saying that we cannot have another Lehman, therefore we cannot permit a failure. ... It is the Lehman failure and the contagion that is driving this policy.

The IRA: Well this just confirms that nobody in Washington understand the problem. As we have heard from many people in the industry who did the diligence on Lehman, there was no way for a private buyer to do the deal, so bankruptcy was the only choice w/o a very large, several hundred billion public bailout. The fact that the Fed and Treasury professional staff support this type of idiocy, over tinme, will destabilize the political consensus in this country behind an independent central bank. We might as well just make the Fed part of Treasury now.

Kotok: It looks to me as well that we now have Paul Volcker saying that we cannot tolerate another Lehman failure. Maybe Chris has some thoughts on this?

The IRA: My conversations with Chairman Volcker are OTR unless he says otherwise.

Rosner: I think what you are going to see is, on the one hand, the Fed, Treasury and OCC put together a proposal for a continuing or institutionalization of the "insurance wrap" approach used with C and BAC. This is a useless approach, in my view, and as we saw in the case of C because it created greater market confusion.

The IRA: Nobody in the Congress or the White House wants to acknowledge that the policy prescriptions coming from the Fed and Treasury are badly flawed when it comes to bank solvency. The market liquidity measures have had success, but the "save the big banks" approach by the Fed is just more of the same nonsense that cause the problem in the first place.
The Institutional Risk Analysis is always a good read. This one was exceptional. I recommend reading the entire article to see the letter from the reader that inspired the post, as well as more of the roundtable discussion.

"Black Swan" commented earlier today, his idea of what is driving Geithner. "There is only one reason Geithner doesn't want to nationalize the banks. It would destroy all the stock wealth of his bankster cronies now running these banks, and would force them out of their financial engineering jobs and personal fiefdoms. Geithner will do everything possible to not force banking's elite insiders to have to go out in the working world amongst the commoners."

Regardless of the motivation, one look at the IRA article suggests something that I have maintained for quite some time. This may not be a issue of "too big to fail", but rather the combined losses may be so great that it's a case of "too big to bail". Nonetheless, expect them to try, and expect lots of damage to our economy when Geithner does try. That unfortunately is the deal.

Mike "Mish" Shedlock
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