Wednesday, November 25, 2009

Bought 50 of the TP STLPRA/ Fed Minutes/Negative Home Equity/FDIC Deep in the RED/WIN SNV

1. Negative Home Equity: First American CoreLogic reported yesterday that 1 in 4 homeowners owe more than their home is worth. This does not include all homes in the U.S. but 47 million homes with mortgages or over 85% of the homes with mortgages. This report is available at the firm's web site. The WSF had a helpful graph which shows the negative equity percentages by state. In states that displayed the most madness, the negative equity percentages are staggering. Florida for instance has a 44.7% negative equity percentage, Nevada is at 65%, and Arizona is at 47.9%.

The government has its home price data that it collects based on Fannie and Freddie mortgages. This data showed a .02% seasonally adjusted increase in home prices with that subset in the third quarter. .pdf

2. FDIC Insurance Fund in the Red: The FDIC reported yesterday that its insurance fund fell into the red by 8.2 billion. NYT Also, the number of banks on the FDIC problem list rose to the highest level in 16 years increasing to 552 as of 9/30, compared to 416 as of 6/30. FDIC: Press Releases - PR-212-2009 11/24/2009

3. Five Year Treasury Auction: The five year treasury was auctioned yesterday to yield 2.175%. The total auction proceeds were over 43 billion. .pdf The average rate on a 30 year mortgage is below 5%:

The RB just had an idea. Once the U.S. has borrowed all of the money in the world, drained all of those suckers dry of their cash, the U.S. could then lend some of the money back at higher rates and make money on the spread.

4. Bought 50 of the TP STLPRA at $8.99 Yesterday (see Disclaimer): I placed this TP in my regular IRA, so that I can receive some value in the event it tanks on me, by including it in the next Roth conversion. This a $10 par value typical Trust Preferred issue, a maturity date in 2032, and a coupon of 8.375%:

I have mentioned that a Trust Preferred security is frequently confused with a regular preferred stock. A typical bank trust preferred security represents an undivided interest in a junior bond held in a Delaware Trust form by the bank. In the case of STLPRA, the bank is Sterling Bancorp (STL) and the name of the trust is called Sterling Bancorp Trust I. That trust then sells "preferred" shares in the trust to the public, hence the name trust preferred. STL owns the common shares of the trust. The proceeds are used to buy a junior bond issue from the bank. Sterling Bancorp then guarantees the performance of the trust in the manner described in the prospectus. The underlying security in the trust is a bond, and that bond would be more senior in priority to the bank's common or traditional preferred stock which I frequently call "equity" preferred. The owner of STLPRA would not receive distributions classified as dividends but as interest.

Sterling Bank did participate in the TARP program, and the government bought cumulative equity preferred shares issued by Sterling. 8-K In order to defer the interest payments on STLPRA, Sterling would have to defer paying the government its dividends on its equity preferred.

Prior to yesterday, I was not familiar with Sterling which explains the very timid purchase of its TP. I did review a few materials. It is a small bank based in NYC. Sterling National Bank - Sterling Bancorp It does pay a common dividend which is important to an owner of the TP under the stopper provision. The bank is profitable, though earnings have declined during the recession. STL earned, for example, 10 cents in the last quarter, down from 21 cents in the year ago quarter. Gabelli funds have a significant stake in the common shares according to a recently filed 13-D. stl_05.htm The consensus earnings estimate for this year is 32 cents and 54 cents next year according to Y F .

This is a very thinly traded issue. When I placed a market order late in the day, there were no prior trades, and 100 shares was on the ask side at $9 and a few hundred bid at 8.85. Since I was satisfied with a $9 handle, I place an odd lot market order which was filled at 8.99. At a $9 total cost, the yield would be about 9.3%. I would expect little, if any, price appreciation over the near or intermediate terms.

As usual with these bank TP purchases, I would emphasize my belief that an owner of a junior bond in a bank seized by the FDIC would be holding a worthless piece of paper. Some investors are under the mistaken impression that they will receive something even for their common stock in a failed bank, which is why I would just say again- do not expect anything unless you hold a properly perfected security interest in collateral owned by that bank.

5. Fed Minutes: My investment strategy now is being dictated by the Federal Reserve. Savers and other responsible people in the U.S., who have not borrowed more than they can afford to service, will pay for the profligacy, greed and irresponsibility of others, many of whom, including the Masters of Disaster, have kept their spoils as the system rewarded irresponsibility and recklessness while socializing the risk. The FED continues to indicate that the savers will be put in the penalty box for an "extended" period. In order to receive some kind of return on my money, I have no choice but to take more risk. The alternative is to earn a negative real rate of return in treasury bills and money market funds. The most recent statement by the FED expressing its intent to penalize the responsible people in our society for an extended period is contained in its minutes from the early November meeting:

Part of the statement expressing the FED's current view about the future course of policy is as follows:

" The recovery appeared to be continuing and was expected to gradually strengthen over time. Still, most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives. Based on this outlook, members decided to maintain the federal funds target range at 0 to 1/4 percent and to continue to state their expectation that economic conditions were likely to warrant exceptionally low rates for an extended period."

A recognition of a possible, if not probable result of its policy was also made:

"Members noted the possibility that some negative side effects might result from the maintenance of very low

short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks. All agreed that the path of short-term rates going forward would be dependent on the evolution of the economic outlook."

The Fed expects unemployment to remain well over 9% throughout 2010, with their current prediction being 9.3 to 9.7%.

5. Winstream (WIN)(owned): Windstream continues its acquisitive bent by agreeing to acquire Iowa Telecommunications for 530 million plus the assumption of 598 million in debt. The deal calls for Winstream to pay about 261 million in cash and the rest in stock. This would value Iowa Telecommunications at around $16 per share based on Winstream's closing price last Friday. I view this deal negatively on the price paid. Iowa Tel is expected to earn about 51 cents in 2009 and is highly leveraged. These acquisitions are starting to worry me some. This one makes no sense to me. Still, I do not need more money earning nothing, and my yield is good on the Winstream stock.

6. Synovus (owned Lottery Ticket category): Yesterday the common stock of Synovus closed at $1.49 with a volume of 43,298,222 shares.

The Chairman & CEO of Synovus Financial is a fellow by the name of Richard E. Anthony. Mr. Anthony has been CEO of Synovus since July 2005 and President since October 2003. Before then he was Vice Chairman since September 1995. He is currently being paid close to a million a year. BusinessWeek Why is he still employed? The closing price yesterday was the lowest price since the Yahoo Finance chart started in 1990.

I am curious why American companies insist on generous rewards for failure. Isn't it clear that Mr. Anthony has failed, along with his management team and the Board of Directors? A few months ago, there was a story in the Atlanta Business Journal about a 220 million dollar non-performing loan made to Sea Island Company, a resort developer, by Synovus. Atlanta (report of a lawsuit relating to disclosures about this loan )(see also yesterday's Bloomberg story) Mr. Anthony was quoted then as saying that the exposure to Sea Island was much higher than appropriate for a bank the size of Synovus. Really! And, when exactly did that occur to Mr. Anthony, before or after the 220 million dollar write-off? It is scary when you start to look closely at the competence of those running our financial institutions.

(The excellent series called the Reckoning in the NYT showed without a doubt that a large number of those Masters of Disaster were in fact far worse than worthless. The Reckoning - Series - The New York Times Actually, the Old Geezer is being too kind to them. LB says that as a group they had a negative value of about 5 trillion dollars. If the Masters of Disaster were experts in anything, it was in the creation of illusory profits as a base for their outlandish compensation. And who wants to defend now the hundreds of millions paid to the financial wizards at AIG's London Financial Products Unit NYT, or the twenty million a year "professionals" who used 40 to 1 leverage to buy CDOs squared containing subprime mortgages?)

The market is basically saying that there is no confidence left in Synovus, and more protestations of capital adequacy will fall on a lot of deft ears. If that is a correct assessment, it is not irrational. The bank has reported a comprehensive loss of 1.182 billion during the first nine months of 2009. (page 10 e10vq) The treasury sunk $967,870,000 into Synovus for equity preferred stock, more than the current market cap of the bank which stands at around 750 million at the $1.5 price. The recent pronouncement by Mr. Anthony concerning the bank's solvency (Reuters) did result in a temporary pop of a few pennies above a $2 handle on the stock, before falling to a new all time low yesterday of a $1.5. I am a recent shareholder with just a 50 share buy as a Lottery Ticket, viewed as speculative with a high potential of a loss. Even though I lack confidence in the management of this bank, to say the least, it is conceivable that the author of this article is right about the loss cycle peaking ( Guru), though I do not share his optimism.

7. Dividends and Interest: The Aegon and ING hybrids that I own will go ex dividend on Friday. This includes IND, IGK, INZ, AEB, AEH, and AEF. The two Zions equity preferred stocks, ZBPRA & ZBPRC, both owned, go ex dividend too along with my shares in the floating rate equity preferred issue from SunTrust Bank, STIPRA. Suntrust is paying just a quarterly dividend of just 1 cent a share to its common shareholders, but that 1 cent is as meaningful as a dollar under the stopper provision. Coca Cola common, owned, goes ex dividend on Friday. KeyCorp goes ex with its one cent per share common dividend, and I recently added one of its TPs and I own the common as a LT. PFK, the Prudential CPI floater, goes ex with its monthly interest payment. Prudential has another exchange traded bond, PHR, which goes ex with its quarterly interest payment. That one has a 9% coupon and is a junior bond maturing in 2068. Prospectus Supplement I do not currently own PHR due to the maturity date but I may get desperate enough to buy it soon. PennWest declared its regular monthly distribution of 15 cents Canadian. I take my dividend from Canadian companies in Canadian dollars.

Brookfied Infrastructure, a recent add (Added to BIP), is ex dividend today.

A cornerstone of my investment strategy is to buy a lot of securities that throw off cash, and to use that constant flow of income to buy more securities that throw off cash, hopefully making the most opportune picks with each reinvestment of cash flow, choosing among all types of income generating securities including preferred stocks (fixed and floating), synthetic floaters, trust certificates, trust preferred, exchange traded baby bonds, closed end investment funds with monthly or quarterly distributions, canadian energy trusts, and high yielding domestic and foreign common stocks. So this approach requires a lot of information about a wide variety of potential investments and a considerable number of judgments made continuously.

8. Tidbits: Frequently, those who played a role in the causing the Near Depression disclaim any responsibility for their role. In fact, they present themselves as a victim of some kind of natural disaster, rather than a cause of a man made disaster. It would be analogous to listening to a lawyer for an arsonist blowing smoke at the jury, arguing that his client was not responsible for burning that building down since he only started the fire in one room.

One major cause of the Near Depression is the assignment of a AAA rating to pools of mortgages securities known as CDOs by the rating agencies. Without that rating, the securities could not be sold by Wall Street, who would then use the proceeds to fund the origination of more mortgages by firms who are now bankrupt to borrowers who clearly could not afford the payments. In fact, those mortgage pools were frequently nothing more or less than toxic junk. This provided the fuel for the easy credit that caused a distortion in home prices to levels than made no economic sense based on incomes.

The rating agencies are now being sued for their role and are claiming protection under the First Amendment. Bloomberg They were paid by the Wall Street firms that bundled the securities for sale and who had to have that AAA rating to complete the transaction. So I read with amusement the following statement by Moody's in response to a suit filed by Ohio: “It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption.” NYT

Some of my prior discussions about the role playing by the rating agencies in causing the Near Depression can be found in these posts:


Notable News 10 23 2008: We Drank the Kool Aid

Item # 8: Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSM

David Faber's Program "House of Cards" discussed at Rendition to Somalia

Zuckerman editorial

A summary of some of the issues can be found in this article The Reckoning series from the NYT.

One thing will probably end up being true. Those who made money on each step in the transaction will keep their booty, whereas the ones who received nothing will pick up the tab for cleaning up their mess. All of that comes under the heading, life can be unfair, deal with it.

The ING shareholders are voting today on proposed breakup plan and the 7.5 billion Euro rights issue, the last step needed before ING actually starts to implement the restructuring plan recently approved by the EC. Reuters says the shareholders are expected to approve the plan.

Order for durable goods fell unexpectedly in October, declining .6%. Machinery had the largest decrease with a 8% decline. .pdf

Weekly jobless claims fell by 35,000 to below 500,000ETA Press Release: Unemployment Insurance Weekly Claims Report This data is seasonally adjusted. If you look at the unadjusted data , the total increased 68,080 to 543,926. LB had to think about that one for a second.

Added 12 p.m. ING shareholders approved the rights issue and the restructuring plan. Reuters Pending a successful rights issue, and I anticipate no problems now, the EC will not compel a deferral of the hybrid coupons.


  1. Indeed the ING shareholders have now approved both the split-up and the rights issue. I wonder why you say (# 7) that the dividends of the preferreds are provisional pending this vote. The press release you quote mentions that the US common stock would trade ex-claims already yesterday (which drove many innocent people nuts - see Yahoo Finance), but I don't see the link with the preferreds.

  2. I was under the impression that a successful rights offering was a prerequisite to the payment of the hybrid dividends. If the shareholders had not approved the restructuring plan and the rights issue, then the EC would have compelled a deferral. If that is unclear to anyone, I will just remove that sentence. I said elsewhere in the post that the ING shareholders were expected to approve those actions at the meeting today. I normally do not read any Yahoo finance posts, regarding it as a waste of time. I have also not seen any unusual action in the hybrids this morning. So please do not waste my time on this kind of nonsense. Most of the people that visit this blog have no interest in these hybrids, and of the ten or so this morning half of them are interested in my comments on Synovus.

    I did add a note at the end of the blog referring to the approval.