More Entitlement Stealing
Here are two more white collar thugs that thought they were above the law and could steal from clients to support a lifestyle they were owed because they were so much better than everyone else. I liked this line:

Mr. Greenwood was elected supervisor (the rough equivalent of mayor) of North Salem, N.Y., a bucolic town north of New York City, in 2007.

How touching. He can be a cell block leader with that experience.

Rhetorical Question
How many oil and gas deals make sense with natural gas under $4.00 per MMBtu?

Good News?
Here is a Bloomberg article that states that California home sales doubled in January from a year earlier as buyers took advantage of a 41% drop in median home prices. After reading the article, I am not sure of the timing of the price drop, whether it's from the peak or year-over-year from January. Half of the sales were foreclosures. Most impressive too me are these two points:

January was the first month since October 2005 that the seasonally adjusted, annualized sales rate passed 600,000 in the state, the California Association of Realtors said today. The time needed to deplete the supply of homes on the market at the current sales pace dropped to 6.7 months from 16.6 months a year earlier.

The median number of days it took to sell a single-family home in California was 49.9 last month, down from 70.8 a year ago, the association said.

California was the first state to see the housing bubble start to burst - August 2005 - so maybe it will be the first where it bottoms out. Fast sales time and shrinking inventory are good signs.

Inland American's Distribution
I received an email from Inland American about a month ago discussing its decision to cut its distribution to 5% and maintain a 5% distribution rate floor. The main reason given for the cut was Inland American's high level of cash and the low rates of return earned on that cash. Inland plans to maintain cash "in light of the turbulent economic conditions." The cash will strengthen Inland American's balance sheet, provide cash for acquisitions, and maintain liquidity "to meet potential financial challenges." The letter concludes by stating that Inland feels that the opportunities in real estate may be the most attractive in forty years - let's hope Inland is right.

As of its September 30, 2008 10-Q, Inland American had cash of $1.38 billion, or 12.4% of its total assets. Inland American's Funds From Operation on a per share basis was $.36 and its distribution was $.47, for a 77% payout ratio. From revenue standpoint, 52% is generated from lodging properites, and an 24% is from retail properties. It it my opinion that having 76% of revenue comprised of lodging and retail may represent the "potential financial challenges."

I wish Inland American would list the acquisition price for its properites. This makes it hard to determine the percentage in each property type. Late last year, subsequent to the 10-Q, Inland American acquired a correctional facility in Texas. Talk about a single use property. It paid $21,069,000 for a 548-unit facility that is subject to a five-year lease. I wonder if $38,447 per unit is a good price for a jail?

Strange Feeling
I am reading through the 10-Qs of several non-traded REITs and coming across some interesting items. One REIT bought the building where its sponsor is headquartered. Apparently, the sponsor no longer owned the building, but developed it (more than twenty years ago), leases it, manages it and occupies 9% of the space. The transaction occurred late last spring. In reading articles in local papers, apparently the price was fair, still though, it was the most affiliated non-affiliated transaction I have seen in a while.

I always viewed the ratio of Net Cash Flows from Operations (Operating Activities) to Dividends Paid (Financing Activities) as a sign of financial health. I am seeing that this analysis is too simplistic and timing needs consideration. Also, dividend reinvestment is not included in this figure because it is a non-cash transaction, but it has the impact of making the ratio better than it is, especially for firms that have a large amount of dividend reinvestment.

The REIT redemption rates were much higher in 2008 than in 2007. This makes intuitive sense but it is disturbing to see. These investors must be looking at the cash flow to dividend ratios.

Fait Accompli
I just saw this on Talking Points Memo. Greenspan is backing the bank nationalization, restructuring, receivership, recapitalization or whatever euphemism is appropriate. Here is the Financial Times article. In about ten days the market has gone from denying that government receivership is necessary, to acceptance of the idea, to expecting it. I have accepted it, too, if it can get the economy started. At minimum it will help the financial services industry by moving all the dead assets.

Memo to Investors: If It Sounds Too Good To Be True - It Is!
From the Bloomberg article on R Allen Stanford:

The bank made “improbable and unsubstantiated” claims about its ability to generate “safe” returns of more than 10 percent, and it misled investors about exposure to Bernard Madoff’s alleged Ponzi scheme, the Securities and Exchange Commission said today in a complaint against Stanford, firms he controls and two colleagues.

And this:

The SEC has asked former employees about the bank’s stated returns on investment, between 10.3 and 15.1 percent every year from 1995 until last year, according to documents and annual reports on the bank’s Web site. SIB says it has $7.2 billion in assets and 30,000 clients, according to the SEC.

Everyone likes a good deal. But you can't buy a Mercedes for $100, a Malibu beachfront house for $1,000 or earn 15% on CDs in a 4% world. It can't be done without extraordinary risk that will eventually impair principal.

Entitlements
I am beginning to think that the criminal activity in the financial world is stemming from a warped sense of entitlement. The Bernie Madoffs, R Allen Stanfords and John Thains of the world believed they were entitled to huge salaries and bonuses, multiple houses, private jets and countless other perks regardless of the underlying performance of their businesses. Madoff (and now it looks like Stanford) resorted to stealing when business results couldn't sustain a lifestyle. Thain lost his job and reputation when his bonus demands (and outrageous office remodel) became public. These numb nuts thought they deserved the money regardless of where the cash came from. If it required stealing or pillaging from an insolvent institution, so be it. This entitlement thinking is much more prevalent in business than the few cases so far made public. I have seen first hand that when people reach a certain level in an organization, they feel entitled to certain salaries, bonuses and perks, regardless of performance.

This corporate welfare needs to stop. Boards of directors need to defend the companies they get paid to represent and protect. Money mangers whose income is based on the size of assets under management and performance, need to see their incomes drop when assets shrink and performance falls. If that means selling a house and getting rid of the car and driver, that's too bad. I used to have a high school coach who repeatedly said that you don't get credit for showing up, or more crudely, you don't win games by throwing your jock strap on the field. America needs to put its game face on and get to work, and corporations need to fire executives on the dole.

More Insolvency Talk
Here is a good post from naked capitalism. It discusses the Japanese banking crisis of the early 1990s and the political train wreck that prolonged the crisis, and how this inadequate response is starting to mirror the United States' response. Here is the key summary:

It is amazing how the politcization of decisions is driving the US down the same road the Japanese took, despite the considerable differences in the two societies. While Obama strives to strike a new tone, true leadership (as in getting the public to do things that are difficult but in their best interest) went out of fashion in the US a long time ago.

The Elephant's Out
Here is a New York Times' article that states that major banks are insolvent. It is time to start thinking about the Resolution Trust Corporation-like entity that will help clean up this mess. The sooner this happens the faster the remaining banks can start lending again. I still believe that Treasury's realization that some of the biggest banks are insolvent lead to Geithner's much panned bank bailout speech on Tuesday. More insolvent talk is going to make the eventuality easier, and the market reaction more muted. Time is not on Geithner's side. Republican recalcitrance on the stimulus package is only going to grow stronger if his nebulous plan requires additional billions.

Insolvency
It's the word that cannot be spoken - at least at Treasury or the Fed. But it's the word and realization that gripped Wall Street today. Geithner's lack of a viable bailout plan, after months of preparation, makes it clear to me that some big banks are insolvent and the Government does not want to admit it. CNBC and too many blogs to link to, are saying the same thing. Some banks need to go under and an RTC-type operation needs to be formed to manage the remaining assets, and the banking industry needs to move forward. The list of insolvent banks is likely short, regional banks that focused on mortgages and Citi and BofA, but at this point, who knows. In the immortal words of Nike - Just Do It.

AIG's Collapse Explained
Very funny. Found it via The Atlantic's Megan McArdle.

Executive Compensation We Can Believe In
The New Yorker's James Surowiecki has a good post on executive compensation in his Balance Sheet blog. This take from the post makes most sense to me:

There is, though, one part of the Obama plan that does seem to me substantive and a useful step toward smarter executive compensation, and that’s the fact that if the bailed-out companies want to pay executives more than half a million dollars a year, they’ll have to pay them them in restricted stock, which means shares that the executives won’t be able to sell until the companies have paid the government back all of the money it invested, with interest. In other words, it’s only if a company performs well over an extended period of time that its executives will be able to collect what’ll amount to a bonus. Performing well for a quarter or even a year won’t do the trick: these executives will have to sustain that performance over time in order to cash out those shares. And this goes at least part way toward remedying what’s probably been the biggest problem on Wall Street, which is the fact that individuals have been able to make huge amounts of money while pursuing strategies that looked good in the short term but were terrible in the long term. A complete remedy to that problem will require companies to be able to claw back bonuses they’ve already paid out and, perhaps, to delay the vesting of stock awards and the like until years after executives retire. But at the very least, it’s good to see Obama recognizing the importance of tying compensation to long-term performance.

Shareholder wealth maximization is a basic principal of capitalism. In recent years, this core value had been replaced by executive wealth maximization. It will be good for stockholders and the overall market to bring back policies that encourage long-term earnings growth.

Forest Through The Trees
A couple of news items are making me nervous about the state of the credit crisis. Obama's cap on executive compensation makes little sense on many levels. It does not apply to companies that already have taken TARP money - Citigroup and AIG come to mind - and has no clawback provision, among many faults I saw at first blush. It's more populist than policy. naked capitalism has an excellent summary.

Wells Fargo was forced to cancel a meeting in Vegas and Goldman Sachs canceled a meeting in Miami. Citigroup is getting pressure to renege on its $400 million naming rights deal with the New York Mets. I am of the opinion that the banks need to keep doing business. Canceling sales meetings does nothing to help the credit crisis. Citigroup's 10-year deal with the Mets seems like smart branding to me. Banks received tax payer money to stay in business, not stop doing business. (And what about the ancillary impact of canceling meetings to the economies of Las Vegas and Miami?)

Policy makers need to focus on the important issues, not sales meetings. Banks need to start lending, derivatives need to be fixed, loan securitizaiton needs to start again, and other issues relating to the credit crisis need fixing. The feds need to get TARP money into the economy and get the banking system working again. Focus on what's important, not what's populist.

Non-Topic Post
For some reason, Michael Phelps' pot picture does not shock or discourage me. I laughed when I saw the picture. I am glad his sponsors did not drop him. (He seems to have gotten a pass this time, but I think it's a one time deal, so Phelps should be careful.) I think the idiot who took the picture is the one who's the jerk.

Equity Luxury
This article from Bloomberg states that the Australian mall owner Westfield is raising $1.8 billion of equity to pay down debt and strengthen its balance sheet. Westfield's ability to raise this much equity in this market is a luxury most real estate firms would like to have.

Another Reason Retail Is In The Tank
Private equity firms snatched up retailers during the real estate boom of the several years ago. They paid too much - cashing out smart retail executives - and did not know how to run the retailers they bought. The recession just sped up the inevitable. Just because a firm is good at raising money, does not mean it's good at managing a business it knows nothing about.