Saturday, February 21, 2009

Corus bank

FDIC taking over WaMu and forcing Wachovia to the altar were unusual events not because the banks were large but rather because the banks were arguably viable when the FDIC acted. WaMu was capital adequate when taken over. My view is that it would – if left to its own devices – have survived – though it was touch and go. Without implicit FDIC support it was done for. Wachovia actually found a buyer without government support.

The FDIC usually waits until very late in the piece to take over a bank. With very few exceptions banks are shockingly insolvent by the time the government acts.

Lets do a comparison. WaMu still had 8 billion of pre-tax, pre-provision income – and that was enough to deal with what I thought were likely losses (30 billion or so – when WaMu was predicting 20 billion).

By contrast Corus bank - not yet taken over - is truly unremittingly awful. The the pre-tax, pre-provision income has disappeared. Banks should probably be confiscated before that event – but whatever – when that happens no amount of “voodoo maths” will save you.

So if you want to see what a truly insolvent bank looks like look at Corus Bank. I am not telling you anything new – they have signed written agreements as to how they will manage themselves and they have paid their senior staff retention bonuses so that they can manage. Here is an extract from their annual results.
Nonaccrual loans have grown to $1.5 billion, more than one-third of total loan balances outstanding at December 31, 2008. Combined with other real estate owned (“OREO”) of over $400 million at year end, most of which was foreclosed on during the last quarter of 2008, Corus’ nonperforming assets at December 31, 2008 totaled $2.0 billion. This extraordinary level of nonperforming assets put such negative pressure on Corus’ net interest income that it fell below zero for the quarter ended December 31, 2008. Empasis added.
To get an idea of how bad this is, non-performers were five times capital. Negative net interest income and there is no future – none, nada, zip. There is no income to bail you out.

In the words of Monty Python, this one is “pushing up daisies”.

Anyway what is strange is that some banks in America look like this – and others have non-performers of well under 1 percent. The system may be solvent (and I think it is) but there will be a few more Corus banks out there.



John

PS. This is a personal disgrace. I read Corus’s accounts in 2006 and never shorted them. That was despite a stated business model of being a specialist lender to the developers of condo projects.

PPS. The retention bonuses for the staff – critical staff in keeping this thing run – are – wait for it – 125 thousand dollars. When you see multi-million dollar retention bonuses to the people who failed what you see is theft. Whether the 125 thousand is theft is a matter of taste – but it is almost certainly a practical payment to keep people around at a bank with no future.

11 comments:

mas said...

I share the disgrace ... Bob Glickman's stump speech about knowing his customers might have been rousing, but Corus was a niche lender which ultimately pursued the worst niche.

Bye bye Corpse Bankshares.

Don said...

John, I guess that we just disagree on this:

"Wachovia actually found a buyer without government support."

My understanding is that the TARP tax proposals to help encourage mergers was what allowed Wells Fargo to make the offer. Here's a take similar to what I'm saying:

http://www.monkeybusinessblog.com/mbb_weblog/2008/10/wells-and-citi.html

"Either deal costs the US taxpayer. The taxpayer has given every bank an implicit put to sell troubled assets to the TARP - making the taxpayer's liability unlimited for these assets of both banks. The difference is how you deal with the starting losses.

The IRS regulation that came out on the 30th allows when purchasing or merging an entire bank you can use favorable tax treatment to write-off the losses you incur (that's Wells Fargo) whereas it does not apply when only buying a portion (that's Citi).

If Citigroup were to purchase, Citi takes the first $42 billion in losses, $30 immediately, plus pays the FDIC another $12 billion in preferred stock plus yearly dividends to insure the rest (even though the TARP has already done that). Assuming Wachovia has being doing its marks right, the portfolio of $370 billion would have to have a loss rate of greater then 15% further before the taxpayer got hit.

Wells Fargo if it gets Wachovia will take the losses immediately and apply them through favorable tax treatment to offset tax earnings stealing it out of the IRS revenue. However, by buying Wachovia and saying that it won't cost the taxpayer a dime is faulty logic. The only way for it not to cost the taxpayer is for Wells to give up TARP protection and not take advantage to the tax treatment.

Since both firms have implicit puts to sell troubled assets its better to take the one that explicitly spells out what losses that will sustained and are rewarded for it with equity kickers, the Citi plan. In exchange for not having the FDIC make an explicit agreement - Wells Fargo will be deducting off their taxes. This does not resolve the implicit put to sell to TARP. Ultimately, this is why its bad deal.

Yes, I am a shareholder and that biases my argument but its the way I see it. If Wells is willing to walk away from tax treatment and not use the TARP to sell Wachoiva assets then I'm fine with the Wells's purchases - it would be better for the taxpayer. However, I do demand a portion of the upside Wachovia received, if Citi had not stepped in last weekend - there would be no Wachovia."

That's my understanding of what happened. I could be wrong.

Don the libertarian Democrat

John Hempton said...

Don, a tax refund of tax paid when you make a loss is not outrageous government support.

The benefit was not open to Citicorp because it already had massive losses.

J

John Haskell said...

Corus Bank
Initiation of Coverage
Recommendation: STRONG BUY

It's disappointing to see you give up so easily on CORS, Mr Hempton. Although your Australian citizenship could pose an obstacle, there is still a chance that you or one of your fellow-travelers could be appointed to the Federal Reserve to implement the policy outlined in your "helicopter post."

With Corus's collateral all real assets and their liabilities all fixed in nominal terms, the Hemptonist/Leninist inflation program (named such because Russia 1922-23 the only time it was tried previously) would bring CORS's NPL's down to zero. STRONG BUY.

Michael Blomquist said...

I am not familiar with Corus, but to state that WAMU was solvent or able to survive on its own is asinine.

Just the legal exposure alone to repurchases of fraudulent securities (RMBS) would take down the company.

All lenders are insolvent and had provided reps and warranties to the investors of their toxic products. We have yet to see how the judicial system and treasury will deal with these "investors"

Unfortunately, many of these "investors" are pension and insurance companies crucial to society's survival.

Pandora's box is open, but that is all. The baseball analogy puts us in the first game, top of the third of a double header.

Some of WAMU's loans were originated by affiliates (third party originators) who should have the liability, but would be insolvent after one repurchase.

In any event there was plenty of fraud committed by their own originators.

The majority of interest income by WAMU at its end was NEG-AM. Income never received, but booked as income. In reality this income will turn into enormous losses.

The biggest problem is that many banks are still holding REOs at the original loan values and can continue to do so for 5 years. I know of dozens and there are most likely hundreds of thousands if not millions who have not made payments in 6-12 months.

There is SOOO much inventory on the books and on deck.

Government should let the banks and real estate prices crash then pick up the pieces.

We are dollar costing on insolvent assets which is an enormous waste of money and just bailing out the crooks.

Society can NOT and should NOT prop up home prices or insolvent banks.

Restore rule of law.

mish said...

Big money investors must now be pulling their deposits at both Citigroup and Bank of America and they must be doing it quietly and quickly with the click of a mouse. No mobs demanding paper money... just a 'click' and a string of ones and zeros blitzes from one end of the world to another over the internet.

Ben said...

Both WaMu and Wachovia had a walk (not a run) on withdrawals from it's customers. WaMu had about 8-9 billion in withdrawals in 8-10 days. Once the FDIC see's that it's game over, simple as that. The FDIC hasn't taken over Corus because their deposits remain strong. It is just a matter of time though.

Anonymous said...

WAMU was buried by the FDIC to bury the massive lending fraud. America will really want blood when they find out the extend of the fraud... by the OTS supervised bankers. The Bush administration needed a phony boom - bust economy to fund a phony war.

Anonymous said...

I've got a Corus financed project going up right across the street from me. Its about two years into construction and going slowly. I figure the developer is dragging his feet to delay the financing from going into payment mode. Its a ticking time bomb as the project is not selling. it cracks me up because this is probably a "performing" loan on Corus's books as the loan has not gone into repayment yet.

Toast.

Edward said...

Does any one know who holds the Corus condo loan portfolio?

Diga said...

I have a CD with Corus should I cash it in take the penalty for early or wait for FDIC to take over???
Any Advice

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