Monday, June 16, 2008

Banks Real Estate Woes

"Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums. ... Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses. ... Banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of the real-estate debt. ... Winning bids on many of the [Indy Mac] loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar. ... The sales are a response to a growing problem: Home builders are falling behind on loan payments, and the value of the land and housing developments that a serve as loan collateral is plummeting. ... The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can't easily absorb losses, and at banks with big exposure in states hard hit by the housing crisis. ... The FDIC's [Shelia] Bair said she would be 'very surprised' if a large bank failed, but added that 'we need to be prepared for all contingencies.' ... 'We've seen a real change in the market,' says Ricardo Chance, a managing director at KPMG Corporate Finance LLC, who is helping troubled builders restructure their businesses. 'Finally the banks are capitulating and saying, "Let's mark to market and flush this all out." The market is going to get worse. We don't want to hold on to this stuff'. ... 'I've been through three cycles, and this is the worst,' says Mark Connal, a vice president at Michael Crews Development, a closely-held Escondido, Calif., builder. 'You can buy brand new homes for less than the cost of construction.'", WSJ, 6 June 2008.

Of course Bair would be "very surprised" if a TBTF bank failed. That meant Helicopter Ben didn't buy enough of the bank's garbage to keep it afloat. KPMG's consulting arm helping builders is good. Has KPMG a conflict of interest? Did Chance warn KPMG's clients of the "housing crisis", 2-3 years ago? Hey Chance, did you short PWC's, E&Y's and D&T's builder clients 18-24 months ago? If not, why should anyone listen to you now? Can KPMG work for a builder if one of its clients, like say Citibank, holds the builder's debt, or are the builders hiring KPMG nuts? Will KPMG face the same issue Arthur Young, that's a name out of the past, did in 1964, with the "Big Skid at Yale Express"? Stay tuned.

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