TARP Recipient Insights
Research for Online Investors

by John Dalt

2/27/09

I had the chance to talk with a friend last night. He is President of a bank that has taken TARP funds. I should tell you, it was an interesting conversation. They bought some securitized mortgages a few years ago, and they are blowing up in their face.

They asked questions in their due diligence. Where were the homes, average credit scores, and average size of loan? These were located in California, with an average credit score of 741, and now are experiencing a 40% default rate. These started out with “A” ratings, now Moody’s has downgraded them.  The Treasury puts money in the bank, the congress yells because they do not loan money, the FDIC tells them they need to increase their balance sheet so their ratios are higher! I am no banker, but this is the dilemma; the TARP money was to bolster their balance sheet to increase their ratios. Their assets are going to non-performing, so to loan more they need more money on their balance sheets or the FDIC will take action against them. The Treasury and FDIC are like two referees making conflicting calls on the basketball court! One calls you for a foul; the other pats you on the back for a great play. Now the government wants to “Cram down” the mortgages by bankruptcy courts. This will further impact the value of the mortgages (since they may not be worth face value). My friend says that may not be all bad, if it starts people paying their mortgages again. He is suspicious of two things. There was fraud in the credit ratings of the borrowers in the origination, because people with credit ratings of 741 are typically good credit risks. That many of the present defaults are intentional by buyers trying to ‘game’ the system to get a better deal. They just want something for nothing. They do not believe they should have to pay for a house that is worth less, so they want the bank to take a loss! You can check out an interesting site here. It is debtx.com, where you can bid on mortgages from closed banks. These are from the FDIC. You could make some good money here, if you know what you are doing.

I was reading an earnings conference call transcript of a company in the mortgage securities business. A quote caught my eye, “In our discussions with the (federal) agencies it is clear that they are more focused on the social agenda of monetary policy today rather than on the aspects that we care about, which is net interest margin and understanding value in the asset and liability structures.”

The big news today was the government taking a 36% interest in Citi (C), the stock dropped 39%! The market closed out the week in the worst shape since 1997. Investors are digesting the proposed budget on top of the stimulus package that was signed into law. The verdict is driving people out of taking any risk in the market. We are in the midst of a cycle of re-pricing of companies shares based on reduced earnings. I wrote about this here.

The re-pricing added onto the uncertainty that Washington is causing, and fear about future taxes and budgets, is causing heartburn. I think we are set up for more lows. Oh! Bama and his administration are working hard to turn a recession into a full-blown depression. After watching the last five weeks, I do not think they care about the economy. They care about furthering their political agenda. You should be thinking about your holdings, do you really want to take another 10% or 20% loss on what you own? If you love the company and feel great about its future, ok. If you do not see them flourishing in a worldwide depression and don’t want to hold them for a few years you may want to go to cash. CAUTION: The previous statement is classic capitulation. This is what the market needs. Weak hands to sell, and then the market finally begins to climb out of the doldrums. I do not think the rest of the market is there yet, I am trying to get you ahead of the bloodletting.

I encourage you to join us in the Galt Long Term Portfolio service. I have a new recommendation coming out Monday. We have stopped out of three of our stocks this week. Do I like it, NO. However, we took a small loss and have our nest egg to grab some great income producers while we ride out the mess that most of the market offers right now. It only costs $49 per/year, less than a dollar a week. I watch the markets for you, and alert you with timely information to protect you. If I do not make you money, you can ask for any unused subscription back. I cannot make it any better than that! Learn more here.

Almost 2 billion shares of Citicorp traded hands today!  This represents 1/3 of the shares outstanding!  Somebody has to clean up the mess!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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