I wanted to make a few counterpoints now that I've had some time to think about your comments. Bank lending is generally made with exceptional credit reviews, including mortgages. For example, these subprime loans are trading at $40, with the underlying collateral of the house. In foreclosure, banks can flip these kinds of distressed asset prices at $70 when they sell the home in an auction. Sure, it may take some time, but it represents a huge return. Also, the bank can make money on the new loans that are used to repurchase the property.
The market meltdown was facilitated by the fact there were too many secondary lenders that were repackaging their loans to sell to the banks. All the banks stepped away from their financial support to let the margin calls wipe out all the cash and liquidity of the companys.
Credit problems are set when people stop lending the money. The only question is why the banks stopped lending the money. I think the banks shrewdly decided to stop supporting the secondary market to that the competition was eliminated. What right does NFI, LUM, AHM or any of the other mortgage reits have to underwrite paper they can't put on their balance sheets. The banks rapidly decided to stop buying these loans so that the companies had no alternative but to collapse in bankruptcy protection.
In corporate lending, the loans being issued are a small fraction of the capitalized value of the company. Look at HD, they just sold HD Supply Direct for $8.5 billion, put $1 billion in debt on their own balance sheet, and had the banks each buy $150 million in equity. They will use the proceeds to go ahead with a $22 billion share buyback.
I think the journalists talking about how these corporate deals will ruin the banks are using half baked theories. The Strategic buyers have an interest in renogiating the terms of these deals too, so private equity will work to renegotiate better terms with the company's they are buying. The companies need the cash to fund their share repurchase programs too. Bottom line, it's in everyone's best interest to reprice all the deals that are being mocked by the media. |
