Last week, we talked about banks and the rebalance of power occurring in the industry. In this week's Digital Dirt, Big Builder Online takes a look at what might come next.
"I learned a long time ago, it's not the land that kills you, it's the debt on the land that kills you," John Landon said aptly in a conversation this week, and the point is one that is now being underscored almost daily. Perhaps the most visible example is the near-immanent bankruptcy filing related to the Landsource joint venture and its effect on Lennar.
Some sources with knowledge of the situation indicate that filing could come as early as tomorrow, May 23, and others speculate it will likely be structured as an involuntary filing forced by the creditors--a bit untraditional as opposed to a more typical voluntary restructuring.
An involuntary filing can occur when a debtor isn't paying up or is regularly missing sizeable payments. The catch likely comes, in the case of Landsource, because a majority vote of owners is needed to initiate an involuntary filing. Considering that Barclays distributed the deal to more than 150 entities, it's no wonder the stalemate has raged on this long.
Meanwhile, the industry sits on the edge of its seat waiting for the official wranglings to begin and the ultimate implications to land values--and joint venture risk--begin to unfold.
Simultaneously, much debate and discussion is taking place as industry minds ponder the likelihood that banks will actually be able to take the hit to their asset portfolios and, scars in place, move on--or whether we might be heading toward an RTC-like environment all over again.
Land and lots are coming across the transom of these banks, and they are trying to figure out what they have, what to do with them, and what is still to come.
As we speak, a new army of bank examiners in being put through the paces of training, and veterans with RTC experience are being pulled from retirement. Some having already received their orders and are in position, diligently and dutifully combing through loans to determine if banks are capitalized sufficiently.
There is no denying the parallel between the RTC days and today. At its most simplistic, the comparison shows that loose lending in both scenarios created a boatload of investments that made no sense when the market stabilized.
And while there are some eerie similarities between the current environment and that of the late '80s to early '90s, there are also some clear distinctions.
THEN: Roughly 1,000 financial institutions simply failed when the banking industry collapsed.
NOW: There are roughly 75 banks on the FDIC watch list.
THEN: In 1989, a piece of government legislation called FIRREA (Federal Institutions Reform Recovery and Enforcement Act) was passed, which basically told all the S&Ls to get out of the equity investment business. This collapsed everything in the industry, and the RTC (Resolution Trust Corporation) was formed to take in assets and liquidate.
NOW: Today, banks seem to be categorized in one of two ways: too big to fail (KeyBank, IndyMac, Wachovia, Colonial) and too small to save (insert the name of your local or regional that likely has 75% or more of its assets in real estate here).
Some of the too-big-to-fails have gotten ahead of the curve. They are taking the initiative to attempt a systematic, orderly dispersal of assets. In other words, they can take their lumps and move on without the need for government intervention.
Yet to be seen is the amount of pain the too-small-to-saves can endure. And just how many of them are there? Problems become larger relative to the size of the bank, as assets then fall into different problem categories. Will they be able to sell it for a low enough price to make a market for a bulk investor? Will they be able to withstand the time and energy relative to piece-by-piece dispersal? "It will be a one-by-one, bank-by-bank, asset-by-asset situation," said Landon.
THEN: There were a chosen few investors that could assemble sizeable investments to bid on large pools. But the term "large" was relative to the size of the industry and to the times. "The pools were in the tens of millions instead of the hundreds of millions," recalls Albert Praw of Landstone. "But the smaller transactions were plentiful."
NOW: Capital is more organized. There are more capable buyers with influence over much bigger assets pools. Liquidity is out there--available to some degree and at some cost. Some say there is as much as $150 billion in available equity. But at the same time, debt markets are frozen, so deals that occur need to be priced to reflect equity returns.
THEN: There were real illegal activities being unearthed, and people were put in jail, recalled Newland Communities vice chairman and CIO Derek Thomas. One of the most prominent scandals involved Lincoln Savings and Loan, which eventually led to frontman Charles Keating, Jr. and others being implicated in the Keating Five political influence peddling scheme.
NOW: At the minimum, banks that don't survive are likely to have some government influence by way of FDIC asset dispersal. That being said, "No one is on a witch hunt today," according to Thomas.
To be sure, after each of these observations, you could easily add the word "but" and go down a path into a distinctive area of debate. Next week, look online for special reports as we break down theses issues. We'll look more granularly at the RTC debate and also hear directly from some frontline voices of private equity on how they are assessing the opportunities on the ground.As always, there is a lot to talk about. Please e-mail me at firstname.lastname@example.org with your insight on these issues.
In the meantime, here's more on what's happening in the trenches:
Bankrupt TOUSA was in court today for a hearing regarding debtor liens. The builder wanted a judge to reject a bid by creditors for the sole right to sue the company's secured lenders over a $674 million financing agreement. The Judge ruled in favor of the builder and rejected creditor requests to strip Tousa of that authority
Lennar's Great Park project is said to be behind schedule, but not for lack of plans. Last week, a board approved spending $60 million by summer 2009 and said delays are largely due to Lennar.
Pulte makes plans to move its offices in the market in the fall of 2009.