Teetering and Tottering

Doug Marshall
Market Assessment
Published December 18, 2008

While brokers watch commercial lending sources dry up and investors and consumers sweat over their IRA’s and 401(k)’s, concern over one’s personal welfare can sometimes cause us to lose perspective on the depth of the credit and liquidity crisis affecting the nation.

It’s amazing to consider just how big this one-time credit crunch, now a near-depression, has affected things – things like the American banking community.

The 24th and 25th banks to fail in 2008 recently gave up the ghost. Haven Trust Bank of Duluth, Georgia, and Sanderson State Bank, in Texas, both got bought out by local rivals according to the FDIC.

The opportunity presented for the strong financial institutions to buy out the weak ones seems to be irresistible – from big powerhouse institutions to small boutique investment firms, banks sit and drool over weakened rivals that can bolster their portfolios and positions.

In considering that 25 banks have failed during the year, compared to just 3 bank failures in 2007, it’s plain that the entire financial and banking institution is reeling, tottering around and trying to maintain its own balance, like a woman with most of the glue gone from one high heel.

And when the FDIC itself doubles the premiums paid into the system by banks and considers tapping Treasury for short-term cash to ease its own cash flow – it says that we all had better hang on by our fingernails.

The FDIC, insurer’s insurer, was created by Congress in 1933 expressly for this purpose, to reestablish confidence in the banking industry. Since then, it has covered the failures of 2200 depository institutions and brags that “no depositor has lost even a penny of insured funds.”

The FDIC even felt called upon to issue a statement to that effect; basically a “you can count on us” speech that seeks to assure investors and depositors that it will be there no matter how many banks hit the floor.

But those of us living in the world of financing and lender/investor relations have to wonder where we’ll be in a year’s time. For most of us, our goal for 2009 should be to just get through it as best we can and not necessarily to get on top of it.

Sources:
Financial Week/Reuters, Dec 13, 2008 – Two More Banks Bite The Dust
Financial Week/Reuters, Aug 27, 2008 – FDIC May Hit Up Treasury For A Little Pin Money
Bloomberg News, Oct 8, 2008 – FDIC Will Double Premiums To Boost Insurance Fund
FDIC Press Release, Dec 10, 2008 – FDIC Reiterates the Guarantee of Federal Deposit Insurance
Tim Catts for Financial Week, Dec 15, 2008 – Big Battle Shaping Up For Smaller I-Banks

Say Good-Bye To LandAmerica

The nation’s third-largest title insurance company, LandAmerica Financial Group, has been forced to file for Chapter 11 reorganization, with the sale of its underwriting subsidiaries to Fidelity National Financial.

The announcement, made Wednesday of last week, marked yet another tremendous loss to the mortgage crisis, on a national level.

Having already lost its subsidiary LandAmerica 1031 Exchange Services, Inc, to bankruptcy earlier this week, the Richmond-based corporation decided to sell its two largest and most profitable subsidiaries, Lawyers Title Corp and Commonwealth Land Title Insurance Co.

LandAmerica had a merger deal on the table with Fidelity National as recently as November 7. Fidelity National, however, backed out of that deal within two weeks of its announcement, apparently after assessing LandAmerica’s financial condition.

LandAmerica recorded $2.8 billion in debt September 30.

Instead of assuming such debt, Fidelity National retreated and then returned to pick up the ailing insurance giant’s underwriting subsidiaries which constitute 90% of LandAmerica’s profitability.

There wasn’t much choice for LandAmerica. Trading for the company stock on the New York Stock Exchange had been suspended, since it had sunk to $.20 per share.

LandAmerica’s worth, as recently as last summer, was $1.6 billion. However, as many other companies in this industry and economic climate are discovering, the mortgage squeeze is sapping credit and savings as few other downturns have.

For those with large investitures in real estate-minded affairs, it’s going to be difficult to retrench far enough to save their limbs.


Sources:
Joseph A Giannone, Reuters, “LandAmerica Files For Bankruptcy, Sells Businesses”, Nov 26, 2008
Paul Jackson, NuWire Investor, “LandAmerica Declares Bankruptcy”, Nov 26, 2008
Richmond Times-Dispatch, “LandAmerica Files For Bankruptcy”, Nov 26, 2008

Deflation: Friend or Foe?

Doug Marshall
Market Assessment
December 5, 2008

It’s hard to keep up with the news in this market. Not more than a couple of months ago, we were all worried about runaway inflation with oil prices leading the way. What a difference a few months make.

Now, the worry is deflation. Deflation is a period of falling overall prices. Prices can drop in order to reflect an adjustment in the market. It’s perfectly natural at times, and wonderful. However, if prices drop for extended periods of time, it hurts the economy rather than helps.

Here’s an example: you are in the market to buy a new home, but do you want to be the person who takes out a mortgage on a home that may likely be worth less in six months? Assume for moment that you want to put 10% down and finance the balance. If the price of the house you purchased continues to fall what happens to your equity? It eventually goes to zero and at some point the loan balance may exceed the value of your home.

So instead of buying a home, you wait. Consumers and investors delay buying since they expect further price drops.

Banks, borrowers, and businesses all stand to lose from such a situation, causing more economic turmoil for the average citizen as well as the capital markets. During the Great Depression, 10% deflation per year contributed to a huge lack of demand. Farmers found it impossible, also, to keep up with mortgage payments, due to the falling prices of agricultural products. (1)

How real is this worry? Here are some statistics from October alone that have economists’ brows furrowed (2):

> The consumer price index dropped an unexpectedly large 1%, including an 8.6% plunge in energy prices. The core index (excluding energy and food) fell 0.1%, the first drop in the index since 1982.
> The producer price index, measuring wholesale prices, reports that the index fell 2.8% in October, including 12.8% in energy prices. This is the largest decline in the PPI in the report’s 61-year history.

Another example of deflation of most concern to the real estate profession is the yields on treasuries. Yields have fallen on the 2-, 10-, and 30-year bonds to some of the lowest levels since the Federal Reserve began keeping records in 1962.

This is a sign of frozen credit (3), where lenders would rather invest in low yielding treasury bonds rather than lending to other lending institutions or borrowers where the risk of default is unknown.

All in all, a deflationary period of any sustained length of time would hurt everyone. Let’s just hope that the market proves more resilient than to follow this inevitable path to destruction.

1 John W. Schoen, “Falling Prices Raise Worries About Deflation” (MSNBC.com Eye On The Economy)
2 Ben Steverman, “Deflation: What Investors Need To Know” (BusinessWeek)
3 David Goldman, “Treasurys: The Pressure Eases A Little” (CNNMoney.com)