Reggie Middleton

Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at, where we're ushering the P2P Economy.


We actually had a modern day run on the bank in the UK and the equity markets shrugged it off.

It is a mistake, plain and simple. I normally don't like to tell people who specialize in a business how to run it, since they probably know more about their business than I do - but sometimes the mistakes are just so glaring. I don't care how many analysts are poring over how many books at Countrywide. BAC's error is not misjudging the value of Countrywide now, but misjudging the macro environment in which Countrywide operates.

My experience has been primarily understanding and evaluating companies from the equity perspective, but that definitely doesn't mean that I ignore the fxed income side. I am just not better at it than the other guys. What I have been noticing of late is that credit markets have been screaming murder for some time now, and the equity markets have been humming along new bullish highs and trading runs as if nothing is truly wrong. This is a strong indicator that momentum trading has again taken control of the markets. It is an environment where price trumps value. The last time this came to a head was the dot com bust. It took many institutional and individual investors 5 to 6 years to break even. Some never recouped their losses. Well, my gut has been telling me for about a year and change now that we are back there again. 2008 thus far has done nothing but confirm that we have come to a head. The pic above was an actual shot (one of very many at various locations) of the run on Northern Rock Bank in the U.K. This was real, and it was indicative of a real problem.

Well, we had a very recent run on the bank here in the states as well. There were pictures all over the web when it occurred, and now mysteriously, they are all gone. All I was able to retrieve was this screen capture of a thumbnail from Just as the pictorial remnants of the run have somehow disappeared, so has the equity markets prudence in the face of such a run. You can guess which bank got ran on.

Bernstein Litowitz Berger & Grossmann LLP Announces Filing of Class Action Suit Against MBIA, Inc. and Certain of Its Senior Officers and Directors: The Complaint alleges that during the Class Period, MBIA and the individual defendants, Chief Executive Officer Gary C. Dunton and Chief Financial Officer C. Edward Chaplin, violated the federal securities laws by issuing false and misleading press releases, financial statements, filings with the SEC and statements during investor conference calls. The Complaint alleges that, throughout the Class Period, Defendants misrepresented and/or failed to disclose the true extent of MBIA's exposure to losses stemming from MBIA's insurance of residential mortgage-backed securities ("RMBS"), including in particular its exposure to so-called "CDO-squared" securities that are backed by RMBS. This highly risky exposure was belatedly disclosed in a series of public statements beginning on December 19, 2007 and ending on January 9, 2008, the last day of the Class Period. One analyst observed that MBIA had withheld from the public the riskiest parts of its insured portfolio, while others expressed similar dismay at MBIA's failure to apprise investors of these risks in a timely manner. But the readers of the knew this way ahead or time, or at least I hope they did.

Keller Rohrback L.L.P. Announces ERISA Investigation of the MBIA Inc. 401(k) Plan: Keller Rohrback's investigation involves concerns that MBIA and other administrators of the Plan may have breached their ERISA-mandated fiduciary
duties of loyalty and prudence to participants and beneficiaries of the Plan. A breach may have occurred if the fiduciaries failed to manage the assets of the Plan prudently and loyally by investing the assets in Company stock when it was no longer a prudent investment for participants' retirement savings. These shysters obviously failed to read Moody's reports. Don't they know that MBIA has AA rated debt and AAA rated claims paying capabilities. Thier new debt even pays 14%, just like junk bonds!

Statman, Harris & Eyrich, LLC Announces Investigation On behalf of Participants and Beneficiaries of the MBIA Inc. 401(k) Plan: The class action Cincinnati law firm of Statman, Harris & Eyrich, LLC announces it is investigating MBIA Inc. (NYSE:MBI) ("MBIA" or "Company") for potential violations of the Employee Retirement Income Security Act of 1974 ("ERISA") relating to the MBIA Inc. 401(k) Plan (the "Plan"). These shysters obviously failed to read Moody's reports as well. I guess us bloggers aren't the only ones left off of the Moody's AA cum junk mailing lists.

In particular, this investigation focuses on whether Plan fiduciaries breached their fiduciary duties by failing to prudently manage the Plan's assets by, inter alia: (a) offering MBIA stock as a Plan investment option and requiring participants to invest in the stock, (b) permitting the Plan to be invested in MBIA stock when it was imprudent to do so, and (c) encouraging investment in the Company stock in the plan by withholding or concealing material business or financial results information from the Plan's participants and beneficiaries.

Fitch Places 1 class of Nelnet Education Loan Funding, Inc. on Rating Watch Negative: Fitch Ratings-New York-07 January 2008: Fitch Ratings places 1 class of Nelnet Education Loan Funding, Inc. student loan interest margin securities on Rating Watch Negative. This action follows Fitch's placement of MBIA and its financial guaranty insurance subsidiaries Insurer Financial Strength (IFS) rating of 'AAA' on Rating Watch Negative. For more information please refer to 'Fitch Places MBIA on Rating Watch Negative on CDO & RMBS Review ', dated Dec. 20, 2007, available on the Fitch Ratings web site at ''. The ratings of the following ABS transactions are supported by a financial guaranty policy provided by MBIA Insurance Corp., which is a subsidiary of MBIA, and therefore are placed on Rating Watch Negative. Nelnet Education Loan Funding, Inc. (fks NEBHELP) - 1998 Trust (SLIMS) --class SLIMS at 'AAA'

As I have said in the past, Fitch is getting more aggressive than the other two big agencies. I expect to see more of this as teh losses pile on to the point where avoidance of a downgrade becomes a public relations nightmare. As it is now, I am sure the more shaky clients of ABK and MBIA are quaking in their boots - particularly after what happened with ACA.

Now, I am far from a fixed income specialist, but I just couldn't resist commenting on this...
From Reuters:
Investors may snap up a planned $1 billion debt sale by a unit of MBIA Inc, after the beleaguered bond insurer was forced to ramp up the deal's yield to about 14 percent to attract greater interest, according to investors familiar with the deal on Friday. The issue of so-called surplus notes by MBIA Insurance Corp. is part of an effort by the bond insurer to buoy capital and preserve its "AAA" rating. Investors on Thursday said dealers were negotiating a coupon rate between 9 percent and 12 percent, or as much as double what similarly rated bonds offer. "They had problems getting it done at the levels that were initially talked about," said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. "When they bumped it out to 14 percent, it got a lot of people out of the wood work." At nearly twice the prevailing rates, what do you expect?

Surplus notes, unique to insurers, can bolster MBIA's balance sheet since they can be classified as equity. Pricing on the issue, initially expected this week, is uncertain, said another investor, who declined to be named. Delayed pricing may be due to negotiations over protections demanded by some large investors against a five-year call feature, he said.

Not mentioned here is the risk of MBIA tripping its net worh covenants, due to the drawdown caused by marking to market. I warned of this at least two months ago, but I am not going to say I told you so. Specifically, Ambac is at risk with their Citibank $400 million credit line, and MBIA with their $500 million credit line.

From Marketwatch:

A general pricing guideline for surplus notes would be 100 basis points higher than the spread of an existing bond from the company with a similar maturity. MBIA's 7.15% issue due 2027 is being traded at 488 basis points over Treasurys, according to data from MarketAxess.

From Dow Jones:

MBIA Inc. (MBI) faces a purported class-action lawsuit for violating federal securities law from Jan. 30, 2007 through Jan. 9, 2008, according to the law firm Bernstein Litowitz Berger & Grossman LLP.

Representatives from MBIA couldn't be immediately reached for comment.

The Armonk, N.Y., financial services company is alleged to have issued false and misleading press releases, financial statements, filings with the Securities and Exchange Commission and statements during investor conference calls regarding its expose to losses stemming from MBIA's insurance of residential mortgage-backed securities. I am not going to say I told you so, am I?.

The suit alleges that in doing so, MBIA violated section 10b of the Securities Exchange Act of 1934 and rule 10b-5.

MBIA's chief executive and financial chief were also named in the suit.

From Bloomberg:

MBIA Inc., the largest bond insurer, is offering to pay a yield of about 14 percent on its $1 billion of AA rated notes, a rate usually charged to the lowest-ranked borrowers.

The yield would be 3.125 percent higher than what Greenwood Village, Colorado-based First Data Corp. paid in October when it sold $2.2 billion of bonds to finance its leveraged buyout by Kohlberg, Kravis Roberts & Co., according to Merrill Lynch & Co. index data. It is also more than a 140% (or 840 basis points) premium over B of A's AA notes, indicating AA can mean a lot of different things to a lot of different people. If surplus notes normally demand a 100 point spread, we are in uncharted territory here. I know Moody's and I have two dstinct interpetations "investment grade". I think the market differs with Moody's on this one as well. But hey, I am not a fixed income guy so I don't know this stuff that well. I'm rather well endowed in the good 'ole common sense department, though.

Short interest in MBIA was 46 million shares as of Dec. 31, more than double that of a year earlier as hedge funds including William Ackman's Pershing Square Capital Management bet the stock will decline further. Short sellers sell borrowed stock in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder. Credit-default swaps on MBIA rose to distressed levels as investors demanded 12 percentage points upfront and 5 percentage points a year to protect MBIA bonds from default for five years, according to broker Phoenix Partners Group in New York. The price means it costs $1.2 million upfront and $500,000 a year to protect MBIA bonds from default for five years. So, Moody's/Fitch and the market are at least 500 basis points in disagreement. Somebody's wrong. Fitch admitted that they factored into their investment grade modeling HPA (housing price appreciation) that would go on in perpetuity- that is that housing prices would never go down. Taking this into consideration, my bet is against the ratings agencies.

CDO Losses - MBIA, which gets 90 percent of its revenue from insuring state, municipal and structured finance bonds, reported profits every year for at least the past 16 years. Net income in 2006 rose 15 percent to $819 million. But they are taking unprecedented losses now. The $737 million expense includes $614 million set aside to cover losses on home-equity loans, MBIA said today. The value of CDOs the company insures has slumped by $3.3 billion before tax, MBIA said. That includes about $200 million that MBIA expects to pay claims on. I'm not going to say I told you so.

The losses forced MBIA to ask Barclay's Bank Plc to change terms of a credit agreement to help it avoid breaching a net- worth condition because of the losses, according to a regulatory filing today. I'm still not going to say I told you so.

The company said the losses aren't ``predictive'' of future claims. He's right. Future claims are probably going to be worse...

This is part four of what was a four part series on GGP (see one, two, and three), but I think I will extend it a little just to make sure we have covered all the bases, so expect the next big comprehensive report to come down the pike some time late next week. I will dedicate this article to insider trading and what I see as Financial Shenanigans with reported lease rates. To keep the lawyers at bay, I'm going to keep most of my more stringent opinions to myself and simply portray the facts as I have encountered them.

I have analyzed GGP’s insider trading transactions for the last year. Backup documentation for the analysis is attached in the GGP Insider Trading Analysis - 2007. In short, the top management of GGP has exercised a large chunk of its exercisable options during early and mid 2007 while a few C-level executives have disposed of their holdings in the recent months. I have also noticed unusual purchasing patterns, but since I am still investigating them, it is nothing but conjecture at this point. I rarely rely on reported book numbers from the companies that I examine. Simply put, I just don't trust the numbers often put out in the public domain. The home builders, monoline insurers and GGP being perfect examples of why. Individual retail investors and institutional buy-siders can and often do get burned attempting to run an analysis based upon reported book value that strays significantly from real economic or market value. This has been exemplified beyond doubt in the case of Lennar (see Lennar Fully Consolidated Analysis) and Ambac (see Ambac Valuation Model 03 December 2007 Ver1.0, Ambac Auto Receivables, and Ambac Portfolio Analysis: Etrade mini app). I will run down leasing in their books that just don't add up, at least they don't add up to me. Maybe someone can explain it to me.

GGP’s Insider Trading Analysis

Over the past year insiders have been net buyers of the stock worth $42.8 million with total purchases of $55.3 million at an average price of $57.95 and total sales worth $12.4 million at an average selling price of $46.69.

Notably, most of these purchases were during March-May when the stock price was hovering around $60. It’s also worth mentioning that although the stock has nearly halved from $65.8 in Feb 2007 to $34 presently, insiders have not exploited this opportunity to buy the shares of the company.

Bear fightThis is an introduction and precursor to the work being done over at Reggie's laboratory concerning Bear Stearns, who has seen its share price halved since the credit market melee kicked off. A melee that many say the Bear is responsible for igniting. I don't know how fair a comment that is, but I do know one thing, though. In terms of equity devaluation for the bear, you probably ain't seen nothin' yet. Bear Stearns will soon be, if not already, in a fight for its life. It is beset with the possibility of a criminal indictment (no Wall Street firm has ever survived a criminal indictment), additional civil litigation, and client defection and aliention. Despite all of these, the biggest issues don't seem all that prevalent in the media though. Bear Stearns is in a real financial bind due to the assets that it specialized in, and it is not in it by itself, either. It's excessive reliance on highly "modeled" and real asset/mortgage backed products in its portfolio may potentially be its undoing. See Banks, Brokers and Bullsh1+ part one for a run down on model risk and part two for my take on counterparty credit risk as a backgrounder before reading this piece.

I thought of sharing with you some of the key observations that we've made while doing the valuation model for Bear Stearns, which admittedely is quite late. I first took interest in Bear Stearns in June, but only recently got around to addressing the investment banking sector in a matter suitable for the blog over the last month. During that month, BSC has seen aggressive adverse price action. My research tells me that this price action is not only justified, but will have to continue in order for BSC to be adequately priced. There will be details that support this assessment in the final report.

Bear Stearns first caught my interest at around $130. When we started with the original shortlist of the investment banks for formal analysis on December 13, 2007, Bear Stearns stock price stood at $98.39. The stock price has fallen by more than 27% since then and now trades at $71.17.

External fundamentals behind my call for additional adverse price reaction

The company's exposure to the asset and mortgage backed securities is as follows:

Mortgage and Asset backed inventories of $43.6 billion

This is part III of a IV part series on GGP. Reference parts one and two for context. The majority of work on GGP is now done, and I will (as my time permits) start disseminating the non-proprietary research to the public domain through my blog. This is an extended summary with a supplemental download that will list the profitability and cap rate of each of the 260 properties that GGP has ownership rights in. Next week, I will actually post a 30 page valuation model for each of the 260 properties and will make them available to "serious" followers of the blog upon request. I need to do this to conserve bandwidth, for having 2,000 people pull 2 gigs off of my servers daily will cause congestion and expense - plus I want to know who my researched opinion goes out to. The numbers presented here are not final, for there are some issues that need to be ironed out. I am going to try something new here, and allow the constituency to participate in the research and report back with an opinion, in lieu of me and my team doing all of the work on a proprietary basis. Consider it open source analysis.


I have summarized GGP's valuation under the three scenarios of �Recession', �Base Case' and the most �Optimistic case'. From the table below, one can clearly witness that amid current conditions of weakening fundamental in the US, as being increasing confirmed by declining employment data, softening trend in consumer spending, rising risk, adverse liquidity condition and the deteriorating residential sector, General Growth Properties (GGP), a pure real estate investment trust, doesn't command a healthy premium over its current price even in the most optimistic scenario of growth in commercial rentals over the longer-term.

In the �base' scenario, assuming a moderate decline in commercial rentals over the next couple of years (owing primarily to expected slow-down in consumer spending and in particular reference to lower-than-expected retail sales in 4Q2007) and thereafter expecting the rentals to witness a nominal growth of 0.2%, 0.5% and 0.8% in 2010, 2011 and 2012, respectively, we expect GGP's valuation to be approximately $7,254 mn, translating into an expected share price of $29.8, a 12.2% lower from its current price of $33.9 per share (see valuation below under the �Cash Flow After Tax' basis). This is over and above the 17% decline the stock has already witnessed over the past week. Among other assumptions, the most important include the following:

  • An occupancy rate of 89.7%, lower than the current rate, expecting softness in demand for commercial rental space amid weakening fundamentals
  • GGP's cost of financing to increase to 6.14% as the company refinances its existing debt and borrows additionally to meet its capital expenditure amid tight credit market situation

This is the General Growth Properties summary valuation under a mild US recession scenario. A much more in depth analysis and presentation is on its way next week. Please see the original summary analysis for the non-recessionary outlook and if you are not versed in commercial real estate, see my quick and dirty CRE valuation primer. Remember, it is my opinion that many in this space are underestimating the potential downside to be had here. This summary analysis is based on the following assumptions:

  1. We expect recession to impact GGP's NOI primarily in 2008 and 2009 post which we expect the US economy to drift back to recovery though gradually. Thus negative growth in rentals is estimated in 2008 and 2009 and near flat growth for 2010 and 2011. Thereafter, we expect conditions to start normalizing, and have hence built in long-term normalized growth in rentals. This is a conservative showing, and my gut (empirically calculated, but investors gut feeling) says that we are in for a much harder landing than presented here. I don't have the resources to run full macro scenarios, thus I stay on the conservative side unless extremely obvious that I should do otherwise. If you have been a regular reader of my blog from the days of, you will probably realize that my conservative estimates are the equivalent of the consensus "doomsday" scenario. I believe that I am more realistic, but then again I would, wouldn't I?

  2. We also expect interest rates in the recession scenario to be higher than in the base case as the company treads through highly difficult credit conditions in the next few years, particularly when that a large chunk of its debt is due for repayment/refinancing. I made it clear to the mod squad (my analytical team) that I wanted them to be conservative in their expectations. In my opinion, we are already several months into a recession, but we will not know for sure 'til the near future.

  3. We have also lowered the occupancy rates in the recession version expecting lowering demand for shopping space in the wake of falling retail sales and consumer demand
    Giving effect to the above assumptions, we expect GGP’s consolidated valuation to be around $6.6 bn on CFAT basis converting into a share price of $27. This is a 25% downside to the current share price of $36. Please note (again) that we have taken a realistic/conservative approach while assuming the duration and extent of the recessionary conditions. However, if the recession were to prolong beyond 2009 or the economy were to take longer to normalize, the impact on GGP’s valuation could be worse (probably another 5-7% downside to the valuation could be expected in case the recession were to continue into 2010 or beyond).


Home Sales Seen Holding Steady In Coming Months

Pending sales of existing U.S. homes inched lower in November and should hold  steady over the next few months, a real estate trade group said. (I ask, "Why should they do that? Credit is tighter, recession evidence is stronger. Supply is greater, and demand is lower. Hmmm, let me consult the book written by that ex-NAR guru for the answer." )

The National Association of Realtors Pending Home Sales Index, based on contracts signed in November, dropped 2.6% in November, to 87.6 from an upwardly revised 89.9 in October.

Economists polled by Reuters ahead of the report were expecting pending home sales to decline by 0.5 percent from October's originally reported 87.2.

The November number was down 20% from a year earlier.

The pending homes sales data suggests that the volume of sales will hold steady for a while before turning upwards before the end of the year, said NAR chief economist Lawrence Yun.

With all due respect to Mr. Yun, Mr. Lereah and the NAR, anyone swift enough to complete the registration form for this blog should know, by now, to discount this association's data and opinions. They do not do the industry justice with this nonsense. Realtors should actually be the first in the protest line. It is their credibility that is being called into question, for this is THEIR trade group. Credibility is the key!

I, for one, would find it refreshing to have a realtor tll me, "You know, the market really sucks now, but I will contact you when I feel an appropriate opportunity arises." They may not get the sale that day (like they were going to get it from me anyway???) but they would have registered on my credibility meter and most likely would get the sale when the opportunity arises. They would definitely stand out against the cacophony that is the salespersons who pump the "company line" like the guys in this press release.

A couple of weeks ago I informed readers that I was working on a big project concerning commercial real estate short candidates. I stated last year that I was sure CRE was headed down, hard. Well, I am now ready to start releasing the results of my research over the next week or so. Unfortunately, the market has moved against the subject of my research fiercely as I was completing it, but it appears to be far from over. Who is the subject of that research, you ask? General Growth Properties (GGP). I have actually seen this company pop up in the media and a few discussion groups from time to time, but they have no idea what the management of this company has been up to. First, a little background on how I got here. Those who are not versed in commercial real estate valuation are urged to read my quick and dirty primer on CRE valuation .

I told members of my analytical team to screen the commercial real estate trust, service, and development sector for the usual suspects, starting with the the guys that purchased Sam Zell's flipped properties from Blackstone. I made some of the companies available via blog post and download: icon Commercial Real Estate Cos. (43 kB). icon Forest City Enterprise Peer Comparison (198.98 kB), icon Vonardo Realty Trust (146.49 kB). After and exhaustive screen and resultant short list, we chose GGP. I then instructed the team to canvass local and national brokers (4), databases (5) and data aggregators (several) to get the most precise localized rental and expenses figures possible. This data, as well as purchase dates, prices, management actions, capital improvements, etc. were used to plug into models such as this 33 page illustrative example, icon GGPs Woodlands Village (612.34 kB), to ascertain the true value of GGP's portfolio. We also measured and valued their development operations, joint ventures, CMBS financing, off balance sheet vehicles and master planned communities. Sum total, I now have roughly 2 gigabytes of "REAL" valuation data on my servers covering 260 properties owned or partly owned by GGP. A this point, I may know more about their operations than they do.

What is more telling is the window of understanding this opens into the commercial real estate space in the US. It is my opinion that most are extremely over-optimistic regarding the prospects for this space.

Just a quick note to remind those that think the housing downturn will not be severe or long lasting. This is by far, the most severe real estate boom since the tail off from the US gold rush. It probably bests the gold rush as well, but I didn't access data going back that far.

We have 50% to fall before we even get to the top of the 2nd largest bust in the early 1900's.  This is graphed from data on Professor Shiller's web site.

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