Top 10 at 10: US bank fears grow; Obama a plonker; Citi cancels cards; Doug's 'gratuities'; Dilberts

Top 10 at 10: US bank fears grow; Obama a plonker; Citi cancels cards; Doug's 'gratuities'; Dilberts

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments in the comments below or please email your suggestions for Wednesday's Top 10 at 10 to bernard.hickey@interest.co.nz . We don't have paper to crumple up at interest.co.nz... Dilbert.com 1. Nationwide problems - Rob Stock at the Sunday Star Times reports that Treasury has raised concern about the liquidity, capitalisation and provisioning for bad debts of New Zealand's Allied Nationwide Finance. This is concerning and the last paragraph quoted below is stunning. It turns out finance companies were regularly covering up impaired loans by shareholders 'making good' the losses on the loans. Oh that's fine then...

The report was prepared by a "third party" for Treasury, which Allied Nationwide Finance's chief executive John Mallon said had commissioned reports on the state of several finance companies covered by its deposit guarantee scheme. It was delivered to Allied Nationwide Finance on October 1 and Mallon said the board was considering its contents. A carefully worded statement in the prospectus, which says the board is "satisfied the financial statements continue to be appropriate", suggests differences of opinion on the state of the firm between its board and the report's author. Mallon conceded the liquidity and capital position of the company has been eroded but the firm been making use of a securitisation programme to raise funds to pay out debenture holders who want their money back, a facility it inherited when it bought troubled Speirs Finance in September last year. It has taken some clever footwork for the finance company to remain within its trust deed pledge to "maintain a capital ratio such that total liabilities of the Charging Group do not exceed 90% of total tangible assets". It just squeaked in on June 30 with 89.9%, a number that would have blown out had it not been for a capital injection of $3.9m from its parent and a deal whereby Allied Farmers said it would make good losses on some loans, allowing them to be treated as unimpaired "“ an arrangement Mallon said was similar to schemes employed by Marac and South Canterbury Finance.

2. Doug's 'gratuities' - The debacle around Money Managers' frozen First Step funds just gets deeper. Money Managers' supremo Doug Somers-Edgar is donkey deep in it, reports Tim Hunter at the Sunday Star Times in an article titled "Millions in gratuities for First Step trio". It's painful to read. A morass of related parties and trusts all over the place. Needless to say, poor Mums and Dads are the losers and Doug and his mates seem to have been the winners.

Investors in the defunct First Step Trusts promoted by advisory firm Money Managers, now known as MMG Advisory Partners, have learned three wealthy individuals received $1.25 million from the funds in the last months of their operation. The three "“ Doug Somers-Edgar, Gerald Siddall and Russell Tills "“ were involved in marketing and managing the funds but also gained from an unusual feature of the investment structure that made them personal beneficiaries of four intermediate trusts. First Step investors, many of them elderly, are out of pocket by about $236m since the freeze in 2006. Among them is retired Wellington investor Peter Fletcher, who gathered the information about the trust payments in a meeting last month with MMG chief executive Derek Young and First Step trustee Edward Russell of sister company Calibre Asset Services. He was told the beneficiary payments were $1.25m in the 2006/07 financial year "“ the period in which the funds were frozen "“ following payments in previous years of $5.5m, $8.9m and $9.5m. The money was on top of management and brokerage fees earned by companies owned by the three of typically $6m-$7m a year. "It seems excessive under any circumstances really," said Fletcher. "They are entitled to a profit I'm sure, but considering [First Step fund manager] Matrix was apparently doing the work, it's more or less a gratuity to them. They didn't invest or risk any of their own money."

Dilbert.com 3. Opportunity or threat? - Allied Farmers Finance, owned by NZX listed Allied Farmers, is looking at buying loans from a large finance company in moratorium, reports Rob Stock at the Sunday Star Times. Potential candidates include Hanover Finance and Strategic Finance. Apparently Allied wants to turn around poor performance. Can I suggest that buying loans from Hanover and Strategic might be a risky strategy to achieve that turnaround....

Allied's managing director, Rob Alloway, a substantial shareholder in the company, would not confirm whether Allied Farmers was close to striking a deal but admitted the firm had been in discussions with firms in the sector. "I believe there are opportunities," he said, but added a word of caution. "There is also a mixture of asset qualities out there. There's some pretty bad stuff on people's books. These companies are in moratoriums for a reason." He admitted the firm had looked at debt for share swaps, but said such deals were not simple. Alloway said his brief was to make things happen at Allied Farmers. "I bought into Allied Finance earlier in the year and joined the board in July. I wasn't particularly impressed with the annual result." He said a firm the size of Allied Farmers should be looking at 10 to 20 deals a year, of which only some would proceed, and he added: "Allied Farmers will be making a number of announcements in the next four to six weeks around its current business and future opportunities."

4. Nervousness aplenty - I've been banging on for weeks about the problems in the US commercial real estate market that threaten to blow up in the face of America's banking system. Here's the first big piece of fallout to hit the US market. One of America's biggest commercial lenders, Capmark Financial Group, has filed for bankruptcy, MSNBC reported. It had US$21 billion of debt and US$20.1 billion of assets. Guess who was behind it?

Capmark was created in 2006 after a private equity group led by KKR & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners bought the commercial real estate business of lender GMAC LLC.

5. Not so commercial - The commercial property debt news in the UK is bad too. Investors in the first British commercial mortgage bonds to be liquidated since the crisis have lost US$1.6 billion, Bloomberg reported. HT Gertraud.

Epic (Industrious) Plc issued bonds on 1,500 warehouses, which fetched 44 percent of their peak value in sales that completed this month. White Tower 2006-3 Plc packaged bonds against nine London office buildings owned by Simon Halabi, six of which went into administration this week.

Banks, insurers and pension funds that hold the bonds face losses from the 35 billion euros ($52 billion) in European commercial mortgage-backed securities that are set to expire over the next three years. Bank lenders have been willing to extend loans to help borrowers avoid default, while commercial mortgage bond issuers must repay investors by a set deadline.

"If they're not nervous now, then they've been hiding under a rock," said Hans Vrensen, interviewed in his role as head of European securitization research at Barclays Capital Inc, which he left last week.

Loans against hundreds of buildings were securitized throughout Europe, with more than 60 percent packaged near the market's peak. They include Paris's Coeur Defense, the largest office complex in Europe; London's city hall; German apartment blocks; and British hospitals and care homes.

"There's very little appetite among banks to recognize losses on their property loans, but CMBS doesn't have that luxury," said Jeffrey Rubinoff, a London-based real estate finance lawyer at Freshfields Bruckhaus Deringer LLP. "If maturity is looming, you're up against a hard date."

6. Motown mayhem - Read this story from MSNBC to get a sense of what's happening in the worst affected areas in America. The town council in Detroit has just tried to auction off 9,000 homes that it has seized because of unpaid rates. The minimum bid was US$500 but only a fifth of the 9,000 were sold after 4 days of non-stop auctions.

In a crowded ballroom next to a bankrupt casino, what remains of the Detroit property market was being picked over by speculators and mostly discarded. After five hours of calling out a drumbeat of "no bid" for properties listed in an auction book as thick as a city phone directory, the energy of the county auctioneer began to flag. "OK," he said. "We only have 300 more pages to go."

Dilbert.com 7. Mark to imagination - It's hard to believe this story has actually happened in recent months, but it has. A 20 year old woman called Denise Tejada who earns US$2,470 a month has borrowed US$183,000 from the US government to buy and renovate a house, Business Insider reports. The repayments cost 54% of her income. HT Gertraud.

Tejada appears to be using imaginary numbers about the value of her house. She says that when she bought  it, the house was just a "box" with no kitchen or bathroom. Now it is "gorgeous". She claims the renovation has increased the value of her home from $155,000 to $255,000.

"I bought my house for $155,000.  And now, after all the fixing, after all the remodeling, my house is worth $255,000. So just within a month period, I made a $100,000," she tells Market Place's Scott Jagow.

As far as we can tell, this is just mark-to-imagination valuation. She doesn't give any indication about how she arrived at the conclusion that she has made a $100,000 gain in just a month. Even if her improvements had dramatically increased the value of the house beyond the cost of the improvements themselves, she would have to contend a declining housing market. From last year to this year, the median price of homes sale in Oakland, California has declined 28%.

8. Drums beating - China is beavering away to reduce the reliance of the region on the US dollar as the reserve currency. It planned to use this weekend's ASEAN meeting to sell the idea of making the Yuan an international currency, The Times of India reported.

It is using the sense of uncertainty over the US dollar to sell a new dream of enlarged regional trade, financial support from Beijing and reduced dependence on the volatile dollar. China has also offered to contribute nearly one-third of the $120 billion economic stimulus package being worked out by ASEAN with the stated purpose of helping member-nations reduce their dependence on the International Monetary Fund. Japan offered to cough up a similar amount so that its influence in the region is not diminished. A senior Chinese official has said that the China-ASEAN Free Trade Area agreement, which will come into being on January 1 of 2010, will result in wide scale use of the renminbi or Yuan as the regional currency. "The upcoming CAFTA, which boasts the largest population among all the world's FTAs and allows zero-tariff on 90% of products traded between China and ASEAN, will quicken the process of RMB rationalization, " the official Xinhua news agency quoted Xu Ningning, executive secretary general of China-ASEAN Business Council, as saying.

9. 'Break them up' - The last US Federal Reserve Governor to retain any credibility, Paul Volcker, is now a lonely figure on the fringes of Barack Obama's White House. He endorsed Obama very early and was appointed as an advisor. But since then he has been shuffled aside by Treasury Secretary Tim Geithner and National Economic Council Chief Larry Summers. Sometimes though he does speak out. He has given an unusual interview to the New York Times and called for the too big to fail investment bank/commercial bank monsters to be broken up. But will Obama listen to him? No. Because the President of the United States is a plonker.

Mr. Volcker's proposal would roll back the nation's commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities. The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration's proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses. Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street's wild ways. "The banks are there to serve the public," Mr. Volcker said, "and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties" and ultimately fails. The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It's a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation. "People say I'm old-fashioned and banks can no longer be separated from nonbank activity," Mr. Volcker said, acknowledging criticism that he is nostalgic for an earlier era. "That argument," he added ruefully, "brought us to where we are today."

10. Shitigroup - How much trouble is Citigroup in? Mish at Global Economic Analysis points to a couple of ominous signs coming out of Citigroup. It has just cancelled credit cards linked to gas station partners and has hiked interest rates for many credit card customers to 29% from 19%. This is at a time when America's Official Cash Rate is 0.25%. Mish cites Karl Denninger's report on why Citigroup has taken such drastic action.

Citibank's average yield year-to-date (consumer and plastic) was about 12%. But they're suffering 10% defaults, making their true margin about 2%. That's still a positive number.... if it's accurate. This spread, of course, has a lot to do with previously-issued fixed-rate 12.99% cards (they and everyone else had a lot) that were handed out like candy to everyone and their brother, frequently with $10,000, $20,000 or even $50,000 credit lines. Huge numbers of small business owners - especially sole proprietors - use these cards as a means of financing operations. They relied on that 10 or 12% interest rate, and most of them have huge balances outstanding. I have since confirmed that this letter is not just going to people who have had credit "challenges". Indeed, this appears to be a blanket change on the part of Citibank. I now have multiple copies from people who assert that they have 750+ FICOs and have never missed a payment on this or any other obligation - the "paragon" of so-called "responsible" credit use. All of the letters are identical. The problem should be obvious - for someone with one of the 12.99% cards that is now 30%, this is a radical change that more than doubles monthly interest expense. Of those who have sent me copies of this letter and disclosed their previous rate, none were over 20%, meaning that these changes represent 50% or greater interest rate increases. If you're anywhere near the edge of being unable to pay, this will shove you off the bridge and into the deep, shark-infested water of bankruptcy.

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