Nonstop Jerry - On the road with the CEO of Orion Bank.

I'm not trying to beat a dead bank here; but, I came across an article profiling Jerry Williams in the peak of the craziness in the real estate market - 2006. The happenings of the last week really put this "success" in perspective. It is titled Nonstop Jerry - On the road with the CEO of Orion Bank. If you like irony the whole article is worth a read; but, it is pretty long so here are some good parts. Emphasis Added.

From 2001 to 2005, Orion posted compound annual growth rates of 34 percent for earnings per share, 38 percent for net income and 27 percent for asset growth. With many loans concentrated in Florida real estate development, Orion's return on equity has hovered around 25 percent annually for the past five years.

Ok... break neck growth in an overheated market is always bad. Is it?

"It's a phenomenal thing," Kirkman tells the half-dozen senior managers about Orion's home equity loan production. "The loans never stop." Beaming, the managers have been reporting year-to-date production goals at 100, 150 and 250 percent.

Referring to an 'under-performing'  competitor:

"Are you kidding me?" Williams asks in mocking disbelief. All hat and no cattle, he surmises. Somebody needs to look into this deception, he mutters. The SEC, bank regulators, the media who bought it hook, line and sinker. Somebody. "People can say whatever they like. That's why we like the numbers, because the numbers don't lie," Williams tells the group.

Orion closed $1.15 billion in loans in 2005. Of that, $915 million was in commercial real estate, much of it construction loans... ..."We're making about $1 million a week," he says.

They lost about $1.5M a day in Q3 2009.

Williams pulls his BMW into an immaculate, cavernous hangar far from the hustle and bustle of commercial flight operations at the Naples airport. He walks about 50 feet and climbs aboard Orion's $6 million Piaggio Avanti P180, tethered to a powerful generator on the tarmac. Minutes later, the racy Italian twin turbo-prop climbs effortlessly to 10,000 feet, cruising at 300 mph toward Sarasota.

Keep an eye out for that in the FDIC auction!

A quick stop at Orion's downtown office (more hugs) before the pair meets with Harvey Kaltsas, an acupuncture physician who is developing the Kanaya condo tower in downtown Sarasota. Before dealing with Orion, Kaltsas had been turned down for a loan by some of the largest banks in town.
"The guys at Wachovia told me, 'Go see Rich Hopper at Orion. He's the most creative banker in town,'" Kaltsas says.

One lesson learned "creativity" and finance do not mix!

"Twenty-eight years as independent is rare," he says. He has no plans to sell Orion to the highest bidder-and there are plenty of bidders. "I get about five calls a week," he admits. "They want it all."

Maybe he should have taken those calls!

A classic example of FUMU Finance! I'll leave Jerry alone now...

Orion Bank - Management's master plan!

Orion Bank is based in South West Florida and specialized in commercial construction loans. If you know this area it already sounds bad; right? Well, it was! When management didn't want to own up it got ugly and resulted in one of the quickest "death spiral" bank failures of the year. Let's recap:

Orion bank was"adequately capitalized" (6% tier 1 leverage ratio) as of 6/30 with only $8M in losses over the 1st 2 quarters of the year.

When the 9/30 call report was released and indicated that the bank was "critically under capitalized" (0.47% tier 1 leverage ratio) and had lost $75M. (The loss is actually more like $136M because it was inclusive of $61M gain related to deferred tax assets that are not included in tier 1 capital)

It looks like the usually too friendly state bank regulators of Florida finally shut down the extend and pretend game being played by Orion.

But wait! Management had a plan! The following excerpts are taken from the 11/9/09 Prompt Corrective Action Order issued to Orion by The Federal Reserve:

Management goal - reduce classified assets:

In order to improve its management, the Bank must dismiss Jerry Williams (“Williams”), its current chief executive officer, president, and chairman of its board of directors, from office and as a member of the board of directors, based on the following:
(a)    Prior to June 2009, the Bank reached its legal lending limit under Florida law with respect to the aggregate loans outstanding to a borrower and his related interests. In June 2009, Williams permitted the Bank to make loans of an additional approximately $60 million to straw borrowers who were related interests of the borrower referred to above in continuing violation of the Florida legal lending limit statute (the “June 2009 loans”);
(b)    the June 2009 loans referred to above, which were made to enable the borrowers to purchase certain low quality assets from the Bank, were underwritten in an unsafe and unsound manner. The loans were made without adequate analysis of the borrowers’ creditworthiness, capacity for repayment, and valuation of collateral offered in support of the loans. Further, the loans were structured in a manner to make it appear that the Bank was reducing its level of classified assets;

 Management goal - raise equity capital:

the Bank needed additional capital as of June 30, 2009, to avoid being less than well-capitalized. Williams had knowledge that $15 million of loan proceeds from the June 2009 loans referred to above were to be used to purchase common and preferred stock issued by Orion Bancorp, Inc., Naples, Florida (“Bancorp”), the parent holding company for the Bank, and Williams took steps to ensure that the $15 million was promptly used to purchase the holding company stock;
(d)    in early July 2009, in response to inquiries from the Federal Reserve Bank of Atlanta (the “Reserve Bank”), Williams stated orally and in writing that the $15 million in capital referred to above was raised “without any financing” provided by the Bank. This statement was false because Williams had information available to him to demonstrate that the Bank intended that the loan proceeds be used as the source of the stock purchase;

Wow! What a plan! Make more "unsafe and unsound" loans to a borrower with a very large exposure to the institution so they can purchase classified assets from the bank and provide additional equity capital! This would improve the banks position on paper; but, obviously not in reality.  Sound like more extend and pretend to me! The summary from the PCA:

(e)    as a result of the actions set forth in (a) through (d), above, the Bank, with Williams’ active participation, filed materially inaccurate regulatory reports, made false statements to the Federal Reserve, has suffered additional loan losses, and has failed to comply with provisions of an outstanding Written Agreement designed to require that the Bank properly address its asset quality problems. These actions show that the management of the Bank would be improved without Williams’ service as a senior executive officer or director of the Bank.

Sounds like an understatement to me! I would think that (a) through (d), above, warrant not only termination but criminal prosecution!

An interesting 9 bagger for the FDIC

Firday's 9 bank failures represent the largest number of closings in one week during the current banking crisis. However, all 9 banks were owned by FBOP a multi-bank holding company and all were purchased by US Bancorp.

Below is the updated under capitalized bank list with new failures in orange, and prior weeks failures in red.

Note that only 4 of the 9 banks that failed this week were under capitalized. This has to do with the fact that bank holding company (FBOP) was under capitalized. The Federal Deposit Insurance Act contains provisions that all bank subsidiaries of a multibank holding company are financially responsible for the costs of resolving the failure of any of the other subsidiaries.

Credit Philip van Doorn of The Street.com

The FDIC has been busy afterall!

Over the last 2 weeks there was only 1 bank failure. Well below the average over the last several months. Knowing that there are over 482 troubled banks, I for one was wondering what they heck they have been up to. Well now we know... they were preparing for the 7 bank failures today!

Check out the following list of banks that are considered under capitalized by regulatory standards. Capital ratios are a great predictor of bank failure. Failed banks are highlighted in red, with the failure date in the last column.

Data from SNL financial via The Street. Here is another great Troubled Bank List.

Apple releases cool new stuff!

Apple released a whole bunch of cool new tech today. I am personally most excited about the new 27" iMac:

Check out what Gizmodo has to say about the Mighty Mouse and New MacBook ! And all the Deals you can now get on old Apple Stuff!

Commodities - Untouchable by Retail Investors

Last year in when Oil was trading over $150 per barrel I had a novel idea. Short Oil. More recently I had another "ah ha" moment. This time I was loving the lowest prices for natural gas since 2002 due to extremely slow demand and over supply.

I started researching how to invest in natural gas. The first thing I came up with was an ETF called the United States Natural Gas Fund (UNG). This seemed perfect for my investment thesis, so I jumped in.

Then I started researching (wrong order... I know)...

It turns out that the massive popularity of commodity ETFs has been their downfall. I turn to Neil Collins and his article Here’s why commodity trackers lose you money:

Standard & Poors reckons that $100 billion is invested in commodity tracker funds, and it is only now that the problems are becoming clear. Unlike shares, commodities need space and insurance for storage, so the funds buy the commodities forward, selling them before having to take physical delivery and buying forward again. Because they have strict rules about how and when they roll the contracts, the traders can see the forced sellers (and buyers) coming a mile off, and move their prices accordingly.

This is, effectively, a tax on the fund, and the bigger the fund gets in any one market, the greater the tax the traders can demand to roll its contracts. The result is to guarantee underperformance against the relevant index, and the longer the investment is held, the greater the underperformance will be.

So... basically since I have been invested in UNG I have been providing the infamous "free lunch" to commodity traders. Oops! This is just one of many examples of how Wall Street's finest set up products for retail investors that are designed to make THEM money. What more should we expect?

Caveat Emptor!

Links - CRE Timebomb, Housing Tax Credit, Leverage Ratios... Oh My!

U.S. Office Vacancies Reach Five-Year High of 16.5%, Reis Says (Bloomberg via CalculatedRisk)

Fed Frets About Commercial Real Estate (WSJ via CalculatedRisk & NakedCapitalism)

Starwood Group Strikes Deal for Corus Assets (DealBook)

Manhattan Office Vacancies Reach Five-Year High (Bloomberg)

Apartment Glut Expands: Vacancy Rate Rises to 7.8% as Unemployment Dents Demand; Monthly Rents Slip (WSJ via Naked Capitalism)

US apartment vacancy rate hits 23-year high-report (Bloomberg via CalculatedRisk)

The Housing Tax Credit and the Consumer Price Index (CalculatedRisk) - Interesting take on how the housing tax credit is actually contributing to apartment vacancy and falling rents, and how that in turn could cause deflation... very interesting how all the parts fit together.

The Elusive Leverage Ratio (Reuters)  - There has to be a way to make the leverage ratio requirements at least remotely useful. As is in this country, they aren't worth much...

This wont happen again... right?

An article in Business Week titled Financial Reform: Lessons from 1929 brings up some interesting parallels between the regulatory efforts during the great depression and those going on today.

Now:

"Establish a "commission" of politicians and lawyers to investigate the problem. Check!"The Financial Crisis Inquiry Commission, set up by Congress to tell us who killed the banks and what to do about it, has just held its first meeting. Established by law in May, the 10-member panel gathered on Sept. 17 to appoint its executive director: Thomas Greene, a longtime California prosecutor."

Then:

"After Black Monday and Tuesday in October 1929, several senators called for new laws to prevent another crisis."

Here's what happened:

 "But over the next six months, stocks recovered 90% of their losses from the Crash. (President Herbert Hoover called it "the little bull market.") Appetite for reform waned, and bankers assured Congress that heavy-handed regulation was unnecessary—even counterproductive. They would reform themselves. Sound familiar?"

(Riholtz, you don't really think this is going to work?)

Oh, and don't feel bad for the 10 poor saps stuck on this commission-

"Congress appropriated $8 million to examine the causes of the recent crisis"

Only time will tell what we learn from, but I can't help but think that it won't be much.

For our visual learners: (via The Big Picture via Salon)

Random Links

Topple 2+ for iPhone free for a limited time - fun game, great price

Grumpy Bobby Bowden Interview - a big sigh for all my fellow FSU Alumni

The Canadians Are Coming - Deal Breaker - due to actually being regulated the Canadian banks are poised to take advantage of the US Banking Crisis.

Windows Mobile 6.5 Review: There's No Excuse For This - Gizmodo - While Windows 7 might have made you think there is still some life in MSFT, I might argue that the mobile market is more important for the future, and id doesn't look pretty for Gates and friends.

Comic Relief for the night:



This blogging sure is hard work, leave a comment if you are out there so I know if I should keep wasting my time! Thanks!

Daily Show on HFT...Funny

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Cash Cow - High-Frequency Trading
www.thedailyshow.com
Daily Show Full Episodes Political Humor Ron Paul Interview

Capitalism: A Love Story

Does anyone else see the irony? Michael Moore CAPITALIZING on an opportunity to MAKE MONEY!

 Also interesting from The Miami New Times: The Villain in Michael Moore's New Flick Is Miami's Condo Vultures Founder. The whole article is worth a read, but here is my synopsis:

Well, Zalewski has officially taken his shtick to the next level. It seems the king of confrontational liberal filmmaking, Michael Moore, has made Zalewski one of the chief villains in his new film, Capitalism: A Love Story, which opens in Miami today.

If you watch the embedded preview above, you can see King Vulture at the 1:25 mark, with a seriously bad-ass quote: "This is straight-up capitalism," Zalewski says, miming his hands cocking a shotgun. "Chck-chk, BOOM."

...

"A lot of people are going to see this movie and hate us," Zalewski says. "But from the beginning, we've been upfront about what our company does. We are not warm and fuzzy. That's why we're called Condo Vultures."

...

"This is going to mean off-the-charts publicity for our company," he says. "I couldn't be happier."

At least the Condo Vulture knows what he is. I think Micheal Moore is just confused about the definition of the word Capitalism.

Disclaimer: I haven't seen the movie... so maybe it isn't what it seems in the preview...

Ocean Bank lays off 78

From the South Florida Business Journal:

Ocean Bank notified 78 employees Friday that they had been laid off.

...

The bank’s expenses will be reduced by about $4.3 million a year after the workforce reductions, Macedo said.

I suppose this is a step in the right direction, but it is way too little way too late. Back to the article:

With 19.5 percent of its loans noncurrent on June 30, Ocean Bank is among the most financially troubled South Florida banks. After losing $204.7 million in 2008, the bank lost $89.5 million in the first six months of this year. The bank has been under a cease and desist order from regulators since 2004.

 ...

Its shareholders in Venezuela supported the bank, which has $4.4 billion in assets, with a $40 million capital injection last year. Capital levels exceeded regulatory requirements in the second quarter.

According to Carson Medlin's Q2 2009 Florida Asset Quality Review Ocean Bank had a Texas Ratio of 160.8% due to the extremely high level of NPAs. Making it a high risk for failure. The way the CRE market appears to be headed it will need another capital injection soon to avoid a meeting with the FDIC on Friday.

Update:
A perfect quote from a WSJ article titled Banks With 20% Unpaid Loans at 18-Year High Amid Recovery Doubt via Calculated Risk (both worth a read)

For banks with 20 percent of loans overdue, “either they’ve got a massive amount of capital, or the FDIC just hasn’t gotten around to them,” said Jeff Davis, an analyst with FTN Equity Capital Markets in Nashville.

I wouldn't say that Ocean qualifies as having a massive amount of capital...

The spoils of Subprice & C&D lending

So far in 2009 95 Banks have failed in the US due to various types of Irresponsible lending. You might be wondering why this is a good thing for local economies. Just imagine the value added by enterprising college students (and unemployed mortgage brokers) when they discover the mysterious and shockingly crappy auctioneer websites that are being used by the FDIC to auction off the spoils, buy them from the FDIC for almost nothing, and then flip them on ebay / craigslist!

Is it possible that the FDIC is worse at liquidaton than it is at regulation?!?!

For your browsing pleasure:

http://www.tranzon.com/OnLineAuctions.aspx

https://ricklevin.nextlot.com/public

http://www.worleyauctioneers.com/index.php


Disclaimer: I realize that a few exotic cars and desk chairs are completely insignificant when compared to the Billions in bad (loan) assets, but it is interesting none the less.

South Florida mortgage fraud... more to come?

On South Florida mortgage fraud, from Paul Quinlan at the Palm Beach Post: How one household picked up nearly $5 million in mortgages for mansions

...two seniors and a 37-year-old woman secured millions of dollars in home loans for three ritzy properties in Versailles, as well as two in Palm Beach Gardens' Osprey Isles and two condos in Wellington.

...

The bill for the trio's home-buying spree: $5.1 million.

...

Castells got $1.375 million in first and second mortgages to purchase his $1.25 million home, according to court records, an excess of $125,000. Similarly, Richardson borrowed $327,500 above the recorded sales price.

...

Two Versailles mortgage deals were among indictments handed down last year by a multi-agency task force created by the FBI. Asked if Versailles transactions were still being examined, a spokeswoman for the FBI said, "The investigation continues".

This house, for (short) sale for $395K is in the neighborhood that the article talks about. It sold for $2.1M in 2007. With a mortgage of only $1.47M this buyer may have only been a victim of all the fraud, but JP Morgan (or the poor saps that invested in its MBS) is still going to take a much larger hit.

It blows my mind, these scenarios are endless in the poorly planned sprawl of McMansions found in newly developed regions of South Florida. Entire neighborhoods that are nothing but fraudulent purchases with fraudulent appraisers, mortgage brokers, buyers, sellers... the whole thing was a giant sham! I wonder where they all are today? Perhaps they have moved on up...

To make things worse, it can, and will happen again. Planning is already in the works: 1,590 homes on the way? Palm Beach county developers want to build on six rural tracts, again from Paul Quinlan at the Palm Beach Post.