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Another New Surprise - Banks Walk Away?



February 14, 2008 – Comments (8)

The "jingle mail" concept of homeowners walking away is catching on with banks.  Banks are being advised to walk away from big buy-out deals.

The article does not cite any examples of banks actually backing out of deals, just that their lawyers are now advising them to consider this option. 

 “If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it,” says one lawyer specialising in private equity issues for a major New York law firm. “But desperate times call for desperate measures.”


8 Comments – Post Your Own

#1) On February 14, 2008 at 10:52 PM, dwot (28.81) wrote:

I suppose this should be a wake-up call to re-evaluate that stock you might be holding that's going up because of a buy-out...

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#2) On February 15, 2008 at 12:50 AM, HistoricalPEGuy (67.59) wrote:

Dwot, you remind me of an old song lyric:

"I think I love you, but what I am so afraid of..."

Your insights and prolifc writing make me such a huge fan. ctojeira (one of my best friends and fellow caps members) and I regularly talk about your Candian perspective and willingness to impart real, useable knowledge in an understandable (and free) way

But your negativity is a bit tough to swallow sometimes.  LBOs are, by definition, risky -- they tried to take advantage of an obvious arbitrage game.  Now they are threatened by the simple fact that it was too good to be true.  You have called it nicely.

Let's rejoice in the fact that Banks are actually waking up and realizing that its better to walk away.  Let's embrace the fact that walking away from bad deals is a good thing, and not simply following through for the sake of following through!  Reality is here!  Yeee-haaaw! (I'm from Texas).  This is a huge sea-change from what we've seen before.  I see this as a great sign - Banks are actually taking a hard look at profitability and what it really takes to make the right decision. 


We are in for a bear market, no doubt.  If you hold an LBO stock, get out.  But let's remember that the first step to curing additction is admitting you have a problem and taking a cold hard look at the situation.  This is a wonderful sign of things getting better - which will take months to years to see the benefit.

Value investors take hold!  We are getting a unique opportunity to witness a complete change in thinking by the banking community.  It may be time to start going long on the financials.

Dwot, your the #1 fool in my book, hands down.  I just wish you saw some positive in the negative.  I know there's a value investor in there somewhere....

-- HPEGuy


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#3) On February 15, 2008 at 1:32 AM, DemonDoug (31.42) wrote:

this is one of the reasons I believe that stocks are not a good investment in 08.  One of the main drivers of the market in 2007 was the M&A activity, it reached record levels in 2006, and I got out (mostly) in 2007.  In 2008, M&A is grinding to a halt, and therefore rallies on buyouts will be few and far between.  This is bearish, because buyouts tend to push up equity prices, without that extra push, the water level that holds up stocks is going to continue to drop.

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#4) On February 15, 2008 at 2:32 AM, cluelessmorgan (82.63) wrote:

paper is the easiest thing to walk away from...

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#5) On February 15, 2008 at 3:21 AM, dwot (28.81) wrote:

HistoricalIPEGuy, the banks don't make money here, they simply limit their losses.  From reading the article, this kind of debt is trading about 85c on the dollar and walking away and paying fees limits the losses to about 2%, unless they end up with some lawsuits...

I have not followed the markets in the past so I do not have a perspective of following it through other problems, although I did enter the market working with a financial advisor just in time to lose 1/3rd of my portfolio within a couple months.  None of that money I would classify as "easy money," as equity gain or from a fast rising investment.  It was all savings from wages and there was some interest. 

Right or wrong, my perspective on that was that it was about bubbled stocks in the tech area.  Now when I look at it, and analyse the markets from a perspective of the bigger picture of what the declining interest rates over the past quarter century I can see that has screwed the economy absolutely royally.  But, at that time it had little spill over to the rest of the economy.

But the thing is, the changes lowering interest rates has done, it is so gradual, it is as if we are like frogs in a pot of water on the stove.  The frog does nothing to save himself because the changes in temperature are too gradual for him to notice.  That's the type of thing that has been festering in the economy for about a quarter of a century.  There were so many things that you measure about the health of the economy that were essentially flat until the Greenspan era, and then you see them changing, like M2/M1 was fairly flat and now it has been increasing.  That is enormous extra risk in the economy.

Well now it seems that everyday we are seeing a new consequence of what was done and it seems to be spreading through the economy as debt reprices itself and it is showing up in ways I never expected.  A year ago when I first started thinking about  how this might play out I figured it would probably be banks and pensions that would be the most hurt.  What we are hearing is financial institutions, construction, retail, commercial real estate, municipalities, hospitals, and schools all being hit.  That seems an enormous amount of negativity to me.

Instead of adjusting to increasing social programs due to an aging population, the rising an unsustainable costs have been masked by the false economy of low rates.  It isn't just the sectors that are already hit, it is also that now the pension issue will also have to be dealt with.

I am simply amazed at all the bad things I didn't think of and it doesn't seem slightly contained.

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#6) On February 15, 2008 at 4:50 AM, floridabuilder2 (97.55) wrote:

dwot321am????? boy and I thought i was bad......fwiw, i'm hedged for the worst possible outcome even though I don't think its coming... bad yes... very bad maybe.... worst i hope not

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#7) On February 15, 2008 at 7:55 AM, dwot (28.81) wrote:

I had been to bed but couldn't sleep, but it was 1:21 am where I am... 

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#8) On February 16, 2008 at 1:07 AM, HistoricalPEGuy (67.59) wrote:

Oh, the banks won't be making any money - but they are now forced to settle between losing money and REALLY losing money.  Thank the freakin' heavens they are taking a real look at whether or not a loan is worth following through on. 

You have to understand - when an entire industry decides to try and make money off of loans and then makes really bad loans, its hard to actually break the cycle.  I can see the meeting rooms now:

"We need to keep doing what we are doing.  If we don't loan to every Tom, Dick and Harry, we are doomed.  That's the only way I now how to make money"

Spend any time in the corporate world (not a dig at your Math Teaching) and you'll understand, these guys are a mess.  They only know what they know.  Why change now?  Because they have to.  Its time for a sea-change.  I love it.  This is what they need.  Not going to make money, only going to stop the massive bleeding...

As for the fed and printing money - I agree 100%.  We are in for a very nice correction and I can't wait - so many buying opportunities are going to show up, its going to be hard to cherry pick the very best.

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