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Old 09-07-2007, 12:54 PM   #21
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Brew, I see a P/B of 2, declining revenue, and declining earnings. I think housing sales volume still has a way to fall, and banks will continue to see declining revenue for a while still. Long-term, banks may be a good bet. I just think they may get a bit cheaper, even with a fed funds cut.
Uhhh, we talking about AF or KRE? I get about 1.6X book for the underlying banks in KRE.

AF does indeed trade at almost 2X book, in part because they are perenially at or near the top of every analysts annual list of most likely take-over targets. As for declining revenue and earnings, that is a reflection of an unwavering refusal to take tons of credit risk and do stupid things just because everyone else is. The price of restraint is tough sledding on earnings sometimes. But they now have very little competition and a gigantic funding advantage over most other lenders. Check out the long term dividend performance that AF has mounted. And look at credit quality.
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Old 09-07-2007, 01:09 PM   #22
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Astorial Financial has traded between 25 and 30 for going on 4 years now. So obviously they are not highly volatile

I see they have 4 billion of loans sold for secured financing that they must repurchases, that is hardly in keeping with your proposition that they hold their loans. As they state they have received the money and if the value of the loans where to fall they need to repurchase at full price the loans if I am reading that correctly.

From their 10Q:
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There has been a slowdown in the housing market, both nationally and locally, as evidenced by reports of reduced levels of new and existing home sales, increased inventories of houses on the market, stagnant to declining property values, an increase in the length of time houses remain on the market and increased mortgage delinquency levels. No assurance can be given that these conditions will improve or will not worsen or that such conditions will not result in a decrease in our interest income or an adverse impact on our loan losses.

While we continue to originate multi-family and commercial real estate loans, we do not believe that recent market pricing for multi-family and commercial real estate loans supports aggressively pursuing such loans given the additional risks associated with this type of lending.

Additionally, as a result of the recent market pricing and the additional risks associated with these loans, we are currently only originating multi-family and commercial real estate loans in the New York metropolitan area.
The description they give of their risks they see in a legal filing is more in keeping with what I fear and less what is being proposed here and the actions they are taking is of someone who feels an area of their business is unprofitable.

With more time tonight I will review their entire financials, I assume this is mostly a pristine company,
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Old 09-07-2007, 01:28 PM   #23
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The $4B you are talking about is just reverse repurchase financing ("repos") of securities, mostly Fannie/Freddie/Ginnie paper. Repos are how the entire world finances these securities, and the way the fed maintains the fed funds rate at its target is via repos. Nothing mysterious about it.

The 10Q spook language is cheifly for CYA purposes. The multi-famiy and mixed commercial stuff they do is very conservatively underwritten on a number of levels. Actually, I understand that these loans have gone from tighter and tighter spreads with increasingly loose underwriting, to fat spreads with very tight underwriting and even the imposition of 50BP commitment fees, all within the NYC area.
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Old 09-07-2007, 01:37 PM   #24
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So you are saying that even though they are legally on record as of 8/8/07 saying these loans are not giving returns to offset the risks so that they are cutting back those loans but actually are getting better returns on them than ever in past years?

Having experience myself with writing 10Q's I can assure you they are CYA only in relation to the fact you better not lie here or you will go to jail. I have never met a corporation that did not take their 10Q filings deadly serious. To imply it is fluff is ludicrous, this is where you will get business to state what they really believe, because no executive wants to go to jail.
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Old 09-07-2007, 01:45 PM   #25
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So you are saying that even though they are legally on record as of 8/8/07 saying these loans are not giving returns to offset the risks so that they are cutting back those loans but actually are getting better returns on them than ever in past years?
I am saying that since that passage was written, the competitive environment for small commercial and multifamily loans in NYC and environs has changed quite dramatically. They had been cutting back on those loans for the past year or two, but I suspect that will no longer be t he case very shortly.

That's a small part of their portfolio anyway. Most of their loan book is single family residential mortgages, very conservatively underwritten.
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Old 09-07-2007, 01:57 PM   #26
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How are they doing on loan origination volume?

Seems to be slowing in general.

Bloomberg.com: U.S.
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Old 09-07-2007, 02:01 PM   #27
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How are they doing on loan origination volume?

Seems to be slowing in general.

Bloomberg.com: U.S.
??

We are talking about portfolio lenders, remember? They don't try to originate tons of loans to resell, they try to originate an appropriate amount of good quality stuff they plan to hold onto. Slowing origination/refi activity is actually good for portfolio lenders because they don't have to incur the costs of putting lots of loans on the books just to maintain their existing portfolio (let alone grow).
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Old 09-07-2007, 02:15 PM   #28
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Sorry, I don't get it. They have declining revenue, declining earnings, increasing costs, but they don't need to increase their originations? So, your bet is based purely on decreasing interest costs they'd have to pay to depositors if the fed cuts rates?
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Old 09-07-2007, 02:23 PM   #29
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I don't see what all the fuss is about-

4,000 jobs is 80 jobs in each state. Almost negligible.
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Old 09-07-2007, 02:25 PM   #30
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I keep forgetting that most people don't look at banks too often.

Revenue is an effectively meaningless number for a financial institution. What you care about is net interest income after provision for loan loss. That is the "top line" for a portfolio lender like AF. This is their net spread after accruals for future loan losses.

The future is going to be very different than the recent past for these guys. Their loan book will reset slowly, and what does refi will get done at higher spreads and tighter terms. Their funding base is somewhat quicker to re-set, and it will re-set at lower rates, which will widen their spreads further. Finally, the world of fatter spreads will mean that it is now attractive to start growing the balance sheet, which is what they will start doing. All of this will serve to steadily increase EPS over the next several quarters.
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Old 09-07-2007, 03:26 PM   #31
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Brewer, assume, for a theoretical exercise, that the Alt-A & even prime loans become "unmeetable" for a substantial number of borrowers.
Say maybe 20%.

Would you change your predictions then?
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Old 09-07-2007, 03:33 PM   #32
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Brewer, assume, for a theoretical exercise, that the Alt-A & even prime loans become "unmeetable" for a substantial number of borrowers.
Say maybe 20%.

Would you change your predictions then?



What do you mean by "unmeetable"? That 20% of prime and Alt A borrowers cannot make their payments? Thats about what is happening now in subprime. If that becomes the case in prime and Alt A, I don't think I will be worried about my securities portfolio, as we will have eneterd a replay of the Great Depression. Ain't gonna happen.
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Old 09-07-2007, 03:49 PM   #33
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Yes, I mean not being able to afford make the monthly payment.
I think the problem is much more widespread than it appears now.
A year from now I'll have a much more definite opinion.

An interesting blog that deals with the topic is

The Housing Bubble Blog

While about 80% of the posts are feces, there are a few bright, knowledgeable folks that make it a good read.

And yes, these guys are uberbears, at least on housing.
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Old 09-07-2007, 03:57 PM   #34
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Yes, I mean not being able to afford make the monthly payment.
I think the problem is much more widespread than it appears now.
A year from now I'll have a much more definite opinion.

An interesting blog that deals with the topic is

The Housing Bubble Blog

While about 80% of the posts are feces, there are a few bright, knowledgeable folks that make it a good read.

And yes, these guys are uberbears, at least on housing.
Tinfoil hat alert!

The Fed was pretty much explicitly set up to avoid a repeat of the Depression. If we ever got to the point of 20% of prime loans going bad, you would see a huge fleet of Federal Reserve helicopters money-bombing every city in Merkinland.

I think that the PS/Over-Enthusiastic Farm Workers are running around without their ball-gags again.
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Old 09-07-2007, 04:11 PM   #35
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Is it safe to conclude that some columnists are paid to fan the flames of bearish paranoia...?

FT.com / Columnists / GillianTett - Why financiers have missed the new monster
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Old 09-07-2007, 04:17 PM   #36
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Is it safe to conclude that some columnists are paid to fan the flames of bearish paranoia...?

FT.com / Columnists / GillianTett - Why financiers have missed the new monster
Dunno if that is what this particular article is about. Seems more like a columnist version of a "seagull manager."

Seagull manager: they fly in squawking, crap all over everyone, and fly out.
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Old 09-07-2007, 04:23 PM   #37
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Barbarus can only afford aluminum foil, which, being of a lower atomic number than tin, resonates much less effectively to the ethereal financial vibrations.

Nevertheless, I assume that the schvances that acquired coastal McMansions in the last three years didn't use subprime to buy before they were priced out forever. I too have a feeling the big banks will eventually come out smelling like roses, that being the way of the world. I'm not so sanguine about the shorter term prospects of any equity. Guess thats what makes the market.

I likewise think the house buyers, to whit, Mr. & Mrs. Yuppie, are in for a tiny bit of disappointment. This brings a bit of brightness into this observer's otherwise dull existence.

B the U.
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Old 09-07-2007, 04:28 PM   #38
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I likewise think the house buyers, to whit, Mr. & Mrs. Yuppie, are in for a tiny bit of disappointment. This brings a bit of brightness into this observer's otherwise dull existence.

B the U.
Why is it that so many of the bears remind me of how HL Mencken described Puritanism?

"Puritanism: the haunting fear that someone, somewhere is happy." -HLM

FWIW, I think the cycle will run like this:

1) The credit markets continue to be bunged up for a while, espcially the money markets and mortgage markets.
2) The economic fallout continues to become obvious
3) Bernanke & Co soil themselves, then start whacking rates
4) Housing prices take a long, slow slide but mostly just don't move that much.
5) Banks and any other lenders who retain funding start lending with abandon, since they coin money in the new world of expensive credit and cheap deposits
6) In a few years we start seeing sign s of teh next bubble puffing up.
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Old 09-07-2007, 04:37 PM   #39
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Is it safe to conclude that some columnists are paid to fan the flames of bearish paranoia...?

FT.com / Columnists / GillianTett - Why financiers have missed the new monster
Journalists are paid to be extreme. Whether the theme de jour is doom & gloom or euphoria makes little difference. The object is ad revenue through sales, not valid information.

"If it bleeds, it leads".
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Old 09-07-2007, 04:38 PM   #40
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Tinfoil hat alert!

The Fed was pretty much explicitly set up to avoid a repeat of the Depression. If we ever got to the point of 20% of prime loans going bad, you would see a huge fleet of Federal Reserve helicopters money-bombing every city in Merkinland.

I think that the PS/Over-Enthusiastic Farm Workers are running around without their ball-gags again.
Therein lies the problem. The FED has but one weapon - interest rates. Lowering interest rates is directly inflationary and anti-dollar (and a falling dollar is also inflationary in-and-of itself). This at a time of near record high commodity prices and sharply rising food prices - the "basics of life" that are conveniently stripped out of the core rate. The dollar at 20-plus year lows...

So yes, the FED could drop money from helicopters. They tried that once - in post-WWI Germany. Although I think at that time it was from zeppelins...
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