Thursday, January 29, 2009

"Revolutionary Road" the film

Several weeks ago a comment here suggested looking forward to the film version of "Revolutionary Road". After seeing the film, I have no idea what impression it makes to those with no expectations. As to expectations, the screenplay captured all of the superficial themes of the book just fine, but just tried too hard all of the time. Only twice in two hours did the real grip of the book make itself felt. The emotional scenes were acted as if in a play, with the distance, pauses, and exaggerated emotion that work on the stage but not in film.

Perhaps great books can't be turned into great film in a literal way while middling genre books can. (The Godfather).

Wednesday, January 28, 2009

"Bad Bank" good for stocks

Stocks were strong from the outset today, led financial stocks, as the proposal of a "bad bank" looked like a tangible action to relieve credit market constraints. Finally there is a proposal to actually do something, said the market. After giving consumers money in the hopes that they would spend in the spring and summer and giving banks money in the hopes that they would lend in the fall and winter, this is an effort to take charge of the situation. I see the fingerprints of Larry Summers all over this, but who knows.

There was one prior effort to take an action that wasn't passive. That was the original TARP proposal to rapidly buy up to $700 billion of illiquid securities at market prices, create liquidity, and then recoup the government's expense and maybe more as markets improved. Remember the three page proposal. From this perspective that was on purpose. It was. Paulson was thinking like an investment banker that knows how capital markets work. The idea was to go into the market in a powerful way and have an impact. In the capital markets traders are proprietary to the extreme about their positions and their plans. So was Paulson. Three things went wrong and it was not approved as hoped. First, as a friend reminded me last week, we had a president with no credibility and who gave the appearance of having no understanding of the issue; second, there was a faux populist revolt against "bailing out the banks" when this might have effectively bailed out the economy; and third, in a democracy it was a stretch to think that one person could get as much power as Paulson was asking for on such short notice, even if he was right.

So the result was that weeks later, Paulson received approval for half of the amount requested and was handed a 400 page playbook for all the world to see. Forget behaving like a capital markets force that could turn things around. The original plan, a great idea possibly, was out of the question. Then the money went into myriad company supporting investments, mainly investments in bank preferred stock, which I do not understand. That's essentially a subordinated loan with really high interest. Why not just make straight equity investments if there is any confidence at all and "risk" getting the potential substantial benefit of capital appreciation rather than weigh down the firms to be helped with a corner boy vig.

That's the past. The market welcomes another substantive plan, and the sooner the better.

Monday, January 26, 2009

Legal asymmetry --- Madoff and Dreier

Within a few weeks of each other, Bernard Madoff and Marc Dreier were arrested for financial fraud in Manhattan. Madoff, the investment manager, defrauded his investors of $50 billion through a Ponzi scheme over many years supported by falsified investment statements and backed by virtually no trading or retention of his clients' assets. In the last year Dreier, a New York securities lawyer, sold $400 million of completely fraudulent securities to former or current clients.

The legal result is this. Madoff is living in his penthouse, as he posted required bond of $10 million. Dreier is living in jail as he is unable to post required bond of $20 million. On the surface this does not make sense. Dig deeper and it makes less sense. Madoff stole 125 times the amount of money as Dreier. Madoff's obviously well thought through swindle apparently continued for decades while Dreier's scam over the last year seems to be the result of some sort of breakdown. If Dreier's bail formula, amount stolen relative to bail, were applied to Madoff, then Madoff's required bail should have been $2.5 billion. That's absurd I guess, but a way of underscoring the asymmetry here.

Having stolen $50 billion, of course Madoff can handle $10 million in bail money easily and hire a load of the best attorneys. Dreier, in the midst of a meltdown and not having stolen enough money, can't meet his bail.

This is no Free Marc Dreier commentary. It's a Hold Bernard Madoff Accountable one, meaning require appropriate bail or jail him. What's the moral here? If you steal, be sure you steal enough?

Sunday, January 25, 2009

"Making the best of things"

Standing outside of a hospital entrance in southside Virginia, an overheard exchange caught my attention. Two middle aged men of apparently limited means passed each other and this was their passing greeting.

"How you doing?"
"Making the best of things."

The men gave looks of acknowledgement, pleasant but no toothy grins. They focused and continued on their separate ways. It was such a simple response to a simple question but it hit me as an attitude that was profound in its own way. Saying "making the best of things" so naturally struck me as real. These days, that's an accomplishment.

Saturday, January 24, 2009

The Stimulus Package and protectionist policy

There is frightening talk about the pending stimulus package including provisions that require that all allocated money only be used to buy American products and hire U.S. citizens as workers. That's overt protectionism and all it stimulates is a disturbing and possibly destructive nationalist sentiment. It is almost univerally recognized that the Smoot Hawley Tariff Act of 1930 helped lock in an extended depression in the U.S. and spread that depression to the rest of the world.

Popular sentiment in Congress and the the country wanted it then and they could drift that way now, leading to a chain reaction of global tariffs and nationalism. Who do we want to believe, John Kenneth Galbraith or Lou Dobbs?

We live in a global economy that is interconnected in a way that can't be unwound. It's far from perfect and there will be ways to work smartly on trade agreements and immigration policies to limit an unbridled free hand for major multinationals in all countries. Protectionism, however, would be a disaster. Many of our corporations, large and small, live on exports. Attracting the best engineers and scientists from around the world to do their magic in this country makes the U.S. stronger and richer.

Somebody please let this talk be only an unfounded rumor and not part of a political compromise.

(see second paragraph of 12/23 post for related comment)

Trade off time for property taxes

Here's a choice, one of many, that this economic environment gives us. Residential property taxes in many areas are not even close to keeping up with falling property values. The taxes are flat or rising on residences that have lost 25% or more in value in many areas. In areas that are adjusting assessment values downward, many are simply raising the rate of tax on the lowered assessment, especially for school taxes.

What should local voters do, given that they can't possibly be pleased with this situation. Should they petition their local officials, vote down school district budgets, and do everything possible to force greater efficiency and lower taxes. That may seem like the only logical and fair approach BUT --- with their home values already declining, will they reinforce that decline by having their school systems cut back innovative programs, eliminate sports teams, and raise class sizes --- will basic services such as trash collection and road maintenance be forced to retrench. There is often room to cut back bureaucracy and patronage in local governments but when do you get through the fat and start hitting the muscle and bone that made their communities attractive places to buy a house and raise a family.

That's the tough trade-off. Does seeking what can certainly be called fair tax relief have the effect of reducing the value of homes further, not to mention lowering the quality of life. Is the amount saved in taxes more or less than the potential further fall in the value of a house?

Thursday, January 22, 2009

Bank stocks

It is a terrible time for bank stock investors. Every individual bank problem reverberates throughout the sector.

The government takes a schizophrenic approach to the industry by injecting capital and assuming that banks will be able to lend while at the same time being rigid about capital levels and criticizing the banks for past lending practices. I hate to use cliches, but "between a rock and a hard place" comes to mind. Without functioning global securitization markets banks have minimal ability to lend at levels even close to the recent past. The business model has changed.

The high dividend yields for bank stocks are either indicative of cuts to come or dire stress that can be worked through. Could they be amazingly attractive with JPM at 8.4%, WFC at 9.6%, USB at 11.1%, WBS at 18.5%, BAC at 25%, STI at 14.3%, and BBT at10.2%. Yields like this are not available on most securities in the general capital markets and with hope for stock price appreciation as well they must be looked at. Unfortunately it seems almost impossible to buy a bank stock at the moment.

There must be more interesting mergers or asset sales in the works that make any analysis difficult, as if any analysis isn't almost impossible already in these markets. I would certainly like to have the guts to buy some of these "bargains" but I don't. Now is just not the time I think, which may well mean that a bottom has been reached.

Friday, January 16, 2009


Here in my hometown I see once again this nuance of exchanges that is real but hard to explain. Why does a certain intonation or downbeat end to a sentence make me laugh. Maybe because it is my hometown.

My one favorite sandwich shop in this economically troubled town is closing next week. It was always unusual, a Korean wireless spot with sushi and healthy food, totally unheard of, and now to be extinct. It's across the street from the Nancy Langhorne house, the woman who became the famous Lady Astor and the home of her sister who was the "Gibson Girl", a model of some renown in the '40's.

Off to get a breakfast of whatever the sandwich shop offers as it closes.

Thursday, January 15, 2009

CEO's in trouble

Ken Lewis --- no one really thinks that he is anything other than an old style bank CEO, good with people, decent on banking admin, but no broad intellect and no capital markets knowledge. Now he's in trouble with the Merrill acquisition but why is this a surprise. Why did Thain sell. Lewis really has only the rally the troops attitude to rely on --- he is in a difficult situation now.

Steve Jobs --- his health problems have now come to the forefront and it is serious. There is little that can be concluded but that he is dying faster than the rest of us. He has been a uniquely wonderful manager and creative leader and Apple will be tested to show that it's bigger that Jobs.

Vikram Pandit --- he's out, my guess. There is no good explanation of how the Board of the world's largest consumer franchise in financial services appointed a former investment banker to the largest of institutions, and a hedge fund manager, to be in charge of Citi. He has no sense of the business and has continued the Chuck Prince know nothing management style. Citi needs energy for its still potentially amazing franchise.

Concern --- Yin Yang

Just 18 months ago there were headlines about banks lending like drunken sailors and the U.S. consumer spending same, drowning in mortgage, credit card, and student loan debt. With that overlay now we have headlines bemoaning the fact that banks have become more conservative, are lending only to credit-worthy borrowers, and are building their capital positons. Now we have distressed headlines that say consumers are now starting to save, they are more prudent in their purchases, and less likely to buy a $4 latte. How could this be viewed as a good turn of events?

It can be seen as a normal turn in the economy, more harsh than most of us have ever seen but healthy. There is a troubling aspect to this. Instead of a revolution in our economy, we are getting an evolution of our economy. Corporations are eliminating matching 401K contributions, eliminating matching gift contributions, cutting health benefits by raising the employee's contribution and trimming retirement benefits. Instead of dealing with core issues, we are in such a radically bad and swift turn in the economy that thoughtful change is hardly possible. These trim around the edges solutions are no solution and long term they are just a continuation of the demise of worker earned entitlement, emphasis on the word "earned".

Monday, January 12, 2009

The legal scam is on --- Re General Motors Corp. Securities and Derivatives Litigation

Arriving back late, today's mail had two mailings for different accounts asking for participation in securities litigation against GM. No doubt more of these identical mailings will follow for other very modest family accounts managed here. There's an important fact missing. In no account under my management have we owned GM stock, GM or GMAC bonds, or anything associated directly with GM in 20 years. Of course we own equity and bond indexes that include GM but that's not what these mailings are focused on.

So the question is, are these predatory litigators who support and are supported by the Democratic party just sending this mailing to every investor in the country who can fog a mirror in case they owned any type of GM security between 2000 and 2006. That seems to be the case, which leads to be a big settlement, most of which will be taken by these parasitic attorneys and eaten up by such expense as this mass mailing, inexplicable on the surface but understandable when you know the courts almost always cover all expenses in settlement.

Stocks languish as energy and financials decline

Volumes in the equity markets today are modest. There is no panic and little news. There are no buyers of any consequence. Stocks are declining materially due to lack of interest.

Big energy stocks are declining as oil declines in the commodities markets. At this point it seems that this direct link should be somewhat tenuous, but it persists.

Financials, especially large caps, are declining due to the fear of unexpectedly large write- downs that may be reflected in fourth quarter results to be posted in the next two weeks. That's the knee jerk view, but what's really happening is that investors are alarmed about what seems to be the government's arm twisting of Citibank in exchange for its recent support. Citi's endorsement of a proposal to allow judges wild west discretion over individual mortgages in bankruptcy is a complete about face endorsement of a horrible idea. Their proposed sale of a gem franchise of stability, Smith Barney's brokerage business, that in fact makes sense in a integrated retail financial model is also suspect. Combine that with renewed rhetoric by Barney Frank and others that unequivocally suggests that they view the government's non-voting shares of banks as essentially ownership, full ownership, positions and investors are right to be concerned. Why own banks now?

Those are the areas under pressure but across the board today there is a renewed orderly exit from equities. Cash is still being raised, liquidating funds are still being unwound, and the outlook for near term news relief is almost zero. Many companies that have strong balance sheets and leading business franchises look increasingly attractive.

Sunday, January 11, 2009

Strong Opinion --- timing is everything

A major flaw in the the U.S. responses to its economic challenges is more in its timing than in its methods. It is a well known if ignored fact that we live in a global economy and a world that has been through a technology and communications revolution . This is really boring stuff. That there are remote villages in Turkmenistan, Sumatra, and upstate New York that are unaware is not relevant to this discussion. That there are senior members of Congress who could care less is.

A patronizing primer --- public markets for securities adapt promptly to current news. These securities are for public companies, private companies, and governmental entities. These markets are fixed income, equity, fx, commodities, and derivatives on all. When news happens or does not happen today they react almost immediately.

When the United States cannot deliver on arguably necessary economic actions in a timely manner, they may as well just forget it. At least half of the efficacy of such actions is lost unless it is done decisively. With TARP, those several weeks of delay destroyed the validity of the entire concept and led to such a minimal impact that the original plan, the only really exceptional proposal to date, had to be scrapped in favor of bank preferred injections.

With public companies, huge public companies, the smart ones learn that their smartest investors know what the company knows about the economic environment, and that procratinating about needed reforms or actions, using words instead of seeking results, is not a neutral approach, that it is a negative approach. The investors lose confidence in management if there is not action.

While the fx markets have always had an intuitive but flawed way of keeping score among countries, bond markets in the last decade or two have moved forward to more rigorous focus. Equity markets trade like razors held lightly on wrists. It's all very sensitive.

The United States Congress has been dysfunctional to the point of destroying any possible chance of success on any action. It's gratifying to those who slow each effort to a snail's pace, because not only do they get the attention as skeptics, they also get the "I told you so" attention when the delayed actions are less than effective.

Only decisive timely bi-partisan action can be effective today. At this point, the smart Barney Frank and the sour Richard Shelby are both kamakazi's, willing to give it all up. That's a horrible comparison given Frank's competence and wit, so substitute a Pelosi and McConnell or a Levin and Boehner comparison and it's the same. No matter what we as a country do, the markets will vote based on their view of management, clear management that they can invest with. If what we decide promptly is wrong at least there will also promptly be a clear reading. What has gone on to date has been too slow, muddled, and politicized to mean anything.

Friday, January 09, 2009

"The Drop Edge of Yonder"

This was an unusual book to find at the local library, especially in the recently acquired "new fiction" section. With cover accolades by Sam Shepherd, Patti Smith, Michael Herr, Alan Arkin, and John Ashbery I had to take a look. It turns out that Rudolph Wurlitzer, the author, is a veteran novelist and Hollywood screenwriter, a writer on a cutting edge that was unfamiliar here.

This is a western set around the time of the California gold rush and it rambles through Panama, Central America, the southwest and western U.S. The writing is uninhibited and the story is harsh. One review commented that it makes "Deadwood" look like Disneyland. There are ample doses of mysticism, unlikely surreal occurances, and exaggerated descriptions of possible reality. It is set within a historical context that gives a lingering notion of truth. It's more than that. What is depicted feels like a better picture of the reality of the "wild west" than any historical retelling despite the fact that the story is almost cartoonish in some of its descriptions of events.

There's one recurring theme for the characters. It's a constant allusion. Zebulon, the main character, was "born in some in between place, between the worlds". That's reiterated often as in this shamanistic analysis at a campfire, "Look at this one who is caught between worlds. He suffers because he thinks there's a way to shake loose, that there's someone here with the power to free him. He believes a woman can help but that woman is as lost as he is...Look at the woman! She has come from the other side of the world only to find out she never had to go anywhere". Everyone it seems has been afflicted with this condition of displacement and uncertain identity. The result:

"Zebulon was awake when he slept , and sleeping when he was awake", but he carried on, as his Ma said "I didn't raise you for false sentiments son, you do what's in front of you and I'll do the same".

Wednesday, January 07, 2009

Remembering John McGillicuddy

John McGillicuddy's death this past weekend brought back many memories of this exceptionally charismatic man. He was Chairman and CEO of Manufacturers Hanover from the mid-1970's to 1991 and continued in that role with the merger partner Chemical Bank until his retirement in 1993. One testimonial in the New York Times used the phrase "prince of a man" and that sounds right. He had that unusual quality of being able to light up any office, conference room or auditorium he entered with his smile, easy confidence, and ability to somehow acknowledge a crowd as a group of individuals through eye contact, nods, and gestures. There was nothing fake, practiced, or orchestrated about it. That was just the natural John McGillicuddy.

This quality had no elitism to it. John seemed to never forget a name and a face. At every level of "his" organization, from security guard to back office clerk to vice president he recognized and respected people who played their role with a positive attitude. His recognition often paid people more than their salaries. As just one example, in 1990 or so my secretary had flown to Florida to visit relatives and as she boarded her flight back and walked through the first class section she was greeted by a friendly "Hi Anne" and gentleman John standing up to greet her. Not only that, once the flight was aloft John walked back into the cabin and stood in the aisle for a chat. If there was ever a more exhilerated person for days after, I've never seen it.

Joining Manufacturers Hanover in 1980 I quickly learned that there was one unequivocal leader, role model, and driver of the culture of the firm. As a junior officer a year or so later I became part of one of John's signature events. That was the annual all-officers meeting in April of each year. The 5000 or so bank officers in New York would meet at the headquarters on Park Ave. and then walk in mass behind the New York Police Department bagpipe band through cordoned off streets to Radio City. After a few speeches and awards capped off by a rouser from John, we would all be led back with the same Irish leadership sounding away, taking the crowd to an evening of food and drink back on Park Ave.

The second half of the 1980's was an extremely difficult time for the money center banks and the optimism and competitive drive for growth that characterized the management by John and his team left Manny Hanny severely stressed. 1988 was truly a touch and go year for the firm with its leading position in troubled Argentine debt and its large energy and commercial real estate portfolios. McGillicuddy bit the bullet and for the first time, this man who valued loyalty that went both ways above all else, announced lay-offs. He sold the prosperous Pennsylvania based consumer finance company and other assets. He promoted young stars so they would no longer need to stand in the seniority line. With all that, there are some who would say that what really pulled Manny Hanny through this period was John's charisma and character, respected in Washington, above all else, and by fellow CEO's around the country who he had helped in a pinch in the past. It was a tough time and he led the way, not always happy but certainly determined.

Vindication came sooner that anyone could have expected. In the summer of 1991 a proposed at market price "merger of equals" between ManHan and Chemical Bank was negotiated. The across the street neighbors with vastly different cultures came together based on the willingness of John McGillicuddy and Walter Shipley to compromise with and respect each other. Both banks were weak and much of the market, meaning the securities analysts and investors who followed banks, mocked the deal through the fall of '91. One analyst wrote that "it's like tying two bricks together and thinking that they'll float". There were issues of consequence that arose continually but at year end the deal closed and by late January the new Chemical Bank had successfully completed the largest equity offering ever done at that time in the United States to recapitalize the institution. It turned out that those two bricks were just the beginning of a line of dominos with John McGillicuddy leaning on the first one.

As for me, I respected John immensely but wasn't really in the mold of a real John McGillicuddy man at first. My hair was a little too long, my comments could have more than a touch of irreverance, and my attitude a bit cavalier. As a 30'ish Southerner just half a block from hippiedom I wasn't a natural at this straight arrow but rough edged New York culture. I never was, but eventually a buttoned-down, principled, supportive, and stubborn boss pushed me forward and my performance was recognized. When John made a point of introducing me to his wife and family at his retirement party, it made my day, or a long night.

-----My most sincere condolences to the family.

Monday, January 05, 2009

Republican business -- Step up to the plate

It's a truism that executive suites and boardrooms of U.S. companies large and small tend to have a higher percentage of Republicans than that reflected in the general population. It's now time for those GOP supporters to speak up and deal with obstructionist political hacks like Senators McConnell and Shelby.

It is clear that these Senators and others are gearing for an old style political fight when the Obama administration fiscal stimulus plan is formulated. Mitch from Kentucky has plenty to say about this but it all boils down to one point --- that he plans to make it as difficult as possible to get anything passed in any reasonable timeframe. Republicans of the business world unite! Infrastructure spending for mass transit, renewable energy, roads, bridges, school buildings and more will give your companies a boost. Engineering firms, there's work to be won and done. Manufacturers, you will sell more trucks, forklifts, building materials, road pavers, steel rods, fabricated metal, more of everything that will help your companies stay profitable. Consumer products companies, you will have more customers with some confidence in job security that will walk into the stores willing to part with a nickel.

Petitioning your fellow Republicans that are in office now will begin to have an impact. It's in your self interest to do that, and it is ultimately good for the economy. What's more true Republican than that. Go for it. Don't let those sour and backwards Senators from your party block timely passage of needed fiscal stimulus in this incredibly crucial period for our economy.

This is important. It's not about whether your son gets to marry his boyfriend or your brother in law can continue to collect semi-automatic weapons. It's about business.

Sunday, January 04, 2009

Michael Lewis in today's New York Times --- a reputation damaged

Michael Lewis's "Sunday Opinion" in the New York Times today, an article co-penned with hedge fund manager David Einhorn, is roughly 80% well written, informative, and at times insightful, and 20% a disgrace to Lewis's reputation. As a financial journalist with a widely admired style, it's almost impossible to conceive of how he decided to work with Einhorn and compromise his objectivity.

The lengthy piece has constructive observations and opinions about the SEC, credit rating agencies, the Madoff swindle, the corrosive impact of compensation practices at investment banks, and the failure of Treasury Secretary Paulson to use the TARP funds as advertised. It goes badly off track and becomes self-serving to the Einhorns of the financial world in other respects.

Take for example the call to regulate credit default swaps. The conclusion is that "the most critical role for regulation is to make sure that sellers of risk have the capital to support their bets". That sounds right at first glance and it is certainly the case for traditional securities and lending. Credit default swaps, however, are anything but traditional. The role for regulators here is unequivocally to require that a buyer of the swaps have exposure to the security underlying the derivative. That is a requirement in the short selling of equities(though it is not always enforced). This fix would eliminate the possibility that $50 billion of bets could be made against $2 billion of U.S. based subprime mortgage securities(numbers are an estimate). Lewis and Einhorn's solution seems to have the goal of making sure that Einhorn and hedge funds similar to his get paid out regardless of how extreme these smart players see the market's behavior. Analyzing and assuming counterparty risk is a normal responsibility of financial market professionals.

Then there is the comment on the opinions and efforts of some to adjust mark to market accounting rules. Lewis and Einhorn use the phrase "suspend mark to market accounting" in their characterization of these efforts and say "this means that banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them". This is a complete mis-characterization of the issue and there is no one credible that is advocating throwing out all mark to market accounting. The focus is on periods of no liquidity when prices are forced by current rules to be set at unreasonable levels, levels that made Einhorn and his crowd billions in the last year.

Of course, as Lewis is being scammed by the type of people that he once parodied, there certainly needs to be a comment on short selling. In discussing the deservedly maligned SEC he faults their actions on limiting short selling for brief periods during the financial crisis. It is this SEC that he criticizes that eliminated the uptick rule in 2005 with the rationale that current technology and market theory made it unnecessary. The SEC has not yet budged on this mistake which no doubt pleases Einhorn. They opine that the SEC's limitations on short selling at times "protected financial predators with political clout" and the purpose was to "intimidate and impose rules on short-sellers --- the only market players with the financial incentive to expose fraud and abuse". We have the short selling community depicted as the Robin Hoods of the market so we certainly wouldn't want to "impose rules" on them? While there are definitely some short-sellers, like Jim Chanos, with long term reputations in the field for integrity and rigorous analysis, there are also a significant number who are a uniquely amoral type, exaggerating and distorting information with impunity in their rumor-mongering and loosely coordinated market manipulation.

This final example cannot be excluded from this comment. It's too choice. In their comment on what should have been the solution to this overall financial crisis(nationalization of major financial firms deemed too big to fail and the subsequent sale and liquidation of their assets) Lewis and Einhorn suggest a model used by Sweden in 1992. Yes that's Sweden, not exactly a financial behemoth, and yes that's 1992, when the only major derivatives markets were in fx and interest rates and when the globalization of securities markets was only at its beginning relative to today. Whether the solution is any more intelligent than what has been done during this extended financial crisis, the fact that it worked in Sweden 16 years ago seems beyond irrelevant.

With their comments on regulating securities firms and banks, overhauling the SEC, and neutering the credit rating agencies, there is one area of the financial markets that Lewis and Einhorn somehow forgot to mention --- the regulation of hedge funds.

Saturday, January 03, 2009

IndyMac Bank has buyers

Correction --- Monday, January 5 --- While the opinions expressed in the following post still stand, in fact even more so, the numbers do not. Saturday media reported that the "value" of the IndyMac deal was $13.9 billion. As said below, that was "startling" and for good reason. "Value" was not referring to the price paid. Subsequent reports pointed out that the investors price was to make a $1.3 billion cash infusion into the bank upon deal closing. "Value" was the expression used for the FDIC's value of the assets immediately after closing. What that refers to is that approximately $25 billion of assets on IndyMac's book today will be written down to $13.9 billion at closing with the FDIC eating the difference. That's huge, and all the more reason to suggest that this is a good deal for the investors, or just highway robbery.

One can be sure that the partnership of seven private equity and hedge funds that have offered to buy IndyMac Bank from the FDIC is getting a good deal. They are a top tier group of investors that know value and know financial services. On the surface $13.9 billion for the failed mortgage lender was startling. The little that is known of what must be a complex deal agreement suggests that the FDIC is still assuming considerable risk on the mortgage book and that the buyers are getting a deposit franchise, a reasonably sized mortgage servicing operation and a reverse mortgage company. The deal is still just a letter of intent, which allows more negotiation before closing, negotiation that likely will have the buyers with more clout than the seller.

Despite the probability that the big private money is going to do well, and this gets somewhat tiring, there is some good news here. First, any deal activity in the financial sector, and more specifically the mortgage business, is the sign of a pulse. Second, that this group of investors sees an opportunity may tempt others to reinvest in financial services equities, and like it or not a healing financial services sector will be good for U.S. businesses. Third, it may lead to a more cynical look at the financial press which tars every banking firm with problems with the same brush. IndyMac Bank was, believe it or not, a reasonably well run bank. It was an Alt-A lender, not subprime. They had, by mortgage bank standards, a conservative balance sheet. They admittedly originated some of those pick your payments type of mortgages but their share of that market was just 4% of what Washington Mutual had and less than 3% of Wachovia's share. They were in for a tough slog, and may or may not have been able to avoid bankruptcy, but they were destroyed by a liquidity run on the bank that was started by Senator Schumer's alarmist attention seeking comments to the press about what he heard in confidential briefings.

It could be that this partnership of seven is buying a good franchise.