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Friday, August 22, 2008 1:23 AM

Ten Financial Entities On The Brink

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Clearly Lehman (LEH) is on the brink of disaster. I talked about that on Tuesday in Lehman In Deep Trouble.

On Wednesday, the Financial Times was reporting Lehman’s secret talks to sell 50% stake stall.

Lehman Brothers, the beleaguered US investment bank, held secret talks to sell up to 50 per cent of its shares to South Korean or Chinese parties in the first week of August but failed to reach agreement with either.

The South Koreans and Chinese walked away after concluding that Lehman was asking too high a price, said New York-based people familiar with the potential buyers. Lehman declined to comment.
Fannie and Freddie Are Collapsing

Fannie Mae (FNM) is trading at $4.85 with a market cap of $5.19 billion and Freddie Mac (FRE) is trading at $3.16 with a market cap of $2.04 billion. Freddie Mac has promised to raise $5 billion in equity. Clearly that is not going to happen without a government bailout. The only question now is "How big will that bailout be" given that Fannie, Freddie Have An Enormous $223 Billion Debt Rollover Problem.

Washington Mutual (WM) Is On The Brink

Washington Mutual has announced it has "no plans to raise capital". The reality is Washington Mutual cannot realistically raise capital. I talked about this in Death Spiral Financing at WaMu, Merrill Lynch, Citigroup.

Minyan Peter had some interesting comments about Washington Mutual in Wells Fargo, WaMu Can't Ignore Credit Crunch.
Last fall, in Coming Bank Themes: Whispers From the Confessional I shared with Minyanville readers that Washington Mutual (WM) had, to use the company's own word, "opportunistically" moved a large portion of its "held for sale" mortgages into its "held to maturity" portfolio.

At the time, management suggested that the reason was because of the attractive pricing that it saw on the loans. As I wrote then, and continue to feel now, I believe that the real reason was the difference in accounting for banks between "held for sale" and "held to maturity" assets.

Put simply, for banks, "held for sale assets" must be marked-to-market every quarter, with the changes in unrealized gains or losses flowing through comprehensive income – and I would note up front, not net income.

While "held to maturity" assets remain at cost (or market value as of the day of reclassification, if moved to "held to maturity" from "held for sale") and, like other loan assets, only when management is certain of cashflow impairment, are they written down.

As I have seen in a number of second quarter bank 10-K’s and in financial media, it now appears that banks are moving other assets at a rapid pace from "held for sale" to "held to maturity." Specifically, the assets that banks moved most during the second quarter appear to be largely trust preferreds as well as CDO’s from pooled trust preferreds issued by other financial institutions.
Washington Mutual, Wells Fargo and other banks are playing valuation games with "assets held to maturity". They really want to sell this garbage, but they can't except at prices that will cause them to raise more capital.

From here on out, any assets banks or brokerages move to the "assets held to maturity" class is extremely suspect.

Merrill Lynch (MER) set the tone for what such assets might be worth when it shocked everyone by announcing it sold CDOs at 22 cents on the dollar. The reality was much worse. Merrill Lynch actually got 5.5 cents on the dollar as noted in Ratchet Provisions Soak Merrill Lynch, Will Sink WaMu.

Beyond Fannie, Freddie: Three More Problem Children

Minyanville professor Bennet Sedacca noted his favorites in Beyond Fannie, Freddie: Three More Problem Children?
While everyone focuses on Fannie Mae (FNM) and Freddie Mac (FRE), in my opinion there are 3 other possible disasters waiting in the wings.

1. Regions Financial (RF): The company needs to raise $2 billion, says Sanford Bernstein. What are their options for doing so?

They can sell debt. The problem here is that I believe you couldn't sell debt if you wanted. The last reported trade in RF paper was 2 weeks ago, nearly +700 to the 30 year or close to 12%. The company's preferred trades at 10%. And the stock is now a 'single digit midget' near $8 a share. So, as I see it, if you could get a deal done, shareholders could get a 50% haircut.

2. Washington Mutual (WM): WaMu trades as if it's in deep trouble. Its bonds trade in the 20% range and no way can they issue a preferred.

3. Lehman Brothers (LEH): This is my favorite and sits as my 'most likely to fail' problem child. Its stock is now on its way to being a single digit midget and just stuck investors with 143,000,000 shares at $28 a share in June of this year. I don't believe many folks are willing to buy more at $12. Also, its preferred stock trades are a not awe-inspiring 16%.
More Than The FDIC Can Handle

That is already more than the FDIC can handle which is exactly why the FDIC Is Passing Around The Collection Plate.
Poor, poor FDIC - ever the Treasury Department’s whipping boy.

The latter gets to smack the former around like a badminton birdie because the FDIC’s primary responsibility is to clean up the Treasury’s messes. And these days, there are messes aplenty.

It goes like this: The Treasury oversees a regulatory body called the Office of Thrift Supervision, or OTS, that’s tasked with keeping tabs on federal thrifts (which are just mortgage companies moonlighting as federally chartered banks).

Until recently, the OTS was responsible for monitoring IndyMac Bancorp, which collapsed last month under the weight of misplaced mortgage bets. The FDIC is now sorting out the mess. The OTS also oversees such thriving institutions as Washington Mutual (WM), BankUnited (BKUNA) and Downey Savings (DSL).

Since the OTS’s idea of regulation is apparently to wake up late, sip a latte and spend the day diligently ignoring the wildly unsafe lending practices of its member banks, the FDIC is up to its ears in barely solvent financial institutions.

The FDIC charges deposit-taking institutions fees about $0.05 per $100 in deposits to display the group’s goofy logo (which dates to its Depression-era roots). This is meant to assure customers their money's safe, even if the bank’s risk management policies aren't.

Now, the FDIC's challenge is to raise sufficient funds to cover the coming wave of bank failures - without putting undue stress on the already shaky banking system or igniting fears that it would need to tap taxpayers' money to protect, well, taxpayers' money.
Add Wachovia And Corus Bank To The List

Wachovia (WB) has made a horrendous mess out of things with its pick-a-pay mortgages, inherited from the infamous acquisition of lender Golden West at the height of the housing boom in 2006. But that's not all. Wachovia has made so many mistakes that I am asking Can Wachovia Do Anything Right?

Corus Bank's (CORS) Yahoo! Finance Profile is enough to tell its story of bubble lending gone mad. "The company's loan portfolio comprises commercial real estate loans, including condominium construction and conversion loans; residential real estate loans; and other commercial loans. It focuses its lending activities in various metropolitan areas in Florida and California, as well as in Atlanta, Las Vegas, New York City, and the District of Columbia."

Let's not forget the monolines, Ambac (ABK) and MBIA (MBI)

Financial Entities On The Brink

Lehman (LEH)
Washington Mutual (WM)
Fannie Mae (FNM)
Freddie Mac (FRE)
Corus Bank (CORS)
BankUnited (BKUNA)
Downey Savings (DSL)
Wachovia (WB)
Regions Financial (RF)
Ambac (ABK)

On account of deflation, I had to throw in a bonus 11th. Everyone wants more for their money these days, even when things like this are free.

I am quite sure there are many more deserving candidates that should be on the list. An excellent case can be made for Ford (F) and GM. They are really not manufacturing companies but rather financial lending disasters.

The key here is there is virtually no chance the Fed can save them all, or even most of them. The list is simply Too Big To Bail.

Mike "Mish" Shedlock
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