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Parking Cash

randallg99

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Largest bank failure in 14 years came across newswire at a time where there arent too many places to have cash sit and wait anymore without too much risk... its more expensive to keep US$ cash than it is to spend it today so our options are now even more limited. I currently use and have several accounts in ING Bank and Emigrant Direct.com. Both have brick and mortar branches and that gives some comfort although this recent news event has me on edge as my inclinations are proving true

I have been pounding the table among peers for almost a year now ... banks who have been starved for yield spreads took one dip too many into defaulting and overpriced mortgage pools... for months, the bobbleheads on tv/media promised that the subprime mess was isolated only to those mortgage companies that have already closed up... but are now finding a much harsher reality.

problem for investors in equities, we have to dig too deep and hard into their audited financials and holdings to determine what kind of pools banks invested... none of us here have the time, resources or even allowable access to this information, even on a publicly traded equity... and it doesnt even matter since ratings on the pools were full of crap anyway...

I will continue to harp on the fact that banks and big broker houses with leveraged exposure to defaulting pools will still have serious ramifications. It will take a couple of more bad news events about banks before more serious ripples throughout equities markets...

but, good news- up to 250k is covered by FDIC
bad news - only up to 250k is covered by FDIC

ING Bank will be taking over the existing accounts.... not sure how smooth this transition will be.


here are a couple of sites.
http://finance.yahoo.com/q?s=NTBK.PK
http://biz.yahoo.com/ap/070928/netbank_closure.html?.v=14.
 
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andviv

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Customers with less than $100,000 deposited with NetBank will be protected by FDIC insurance.

I didn't know that FDIC would cover up to 250K. The article also states it is only up to 100K (that's what Ive seen and heard everywhere).
 

nomadjanet

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2006: Deposit insurance, as of April 1, for Individual Retirement Accounts (IRA) increased to $250,000.00. This is separate from the regular $100,000.00 cover- age of your other deposit accounts.
__________
Source: Independent Banker

Perhaps this is the reference? Keeping your account protected is a real problem, I have been moving money of late to insure it is protected.

Janet
 

Andrew

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MJ DeMarco

I followed the science; all I found was money.
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Great post Randall -- Danger in chasing bank yields from unknown banks with questionable capitalization.

Speed+++
 

randallg99

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2006: Deposit insurance, as of April 1, for Individual Retirement Accounts (IRA) increased to $250,000.00. This is separate from the regular $100,000.00 cover- age of your other deposit accounts.
__________
Source: Independent Banker
Janet

Janet - thanks for clearing this up... I should have been more descriptive in my first post.... liquid retirement funds have higher FDIC coverage than ordinary accounts. Being aware of balances and keeping account levels at FDIC limits is a prudent and protective step.

Another note... there is a lot of bobble head talk that commercial lenders are going down the drain with some of the residential paper debt holders.... but my gut instinct is telling me that liquidity will continue to flow without problem into commercial loans where leverage is at maximum 6-1 vs. some of the residential paper which was commonly leveraged 20-1 which leaves a higher threshold for default. This is a plus for many fast lane members with good credit because lending practices among commercial arena will not change... if anyone has experienced any major changes, please chime in ASAP... I would like to know.

That said, I also believe that banks with highest exposure to riskiest and most volatile markets will not get enough Fed support via injections and will have to merge with other institutions or simply file chap 11. Two areas immediately come to mind- Florida and Southern Cal. Ordinary banks with access to overnight funds probably will not hold too much default paper, but I am having difficulty locating hard data to determine what different types of loans were made because the ARM re-sets will pose an entirely new problem for banks irregardless of the customers FICO scores.

Ultimately, there will be many, many changes in lending practices (as we have already seen) and there will less players in the field for the near term of 1-2 years making residential borrowing more difficult than in recent years past.
 

andviv

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Now the question is, how do we profit from this?

I haven't seen a For Sale classified that says "bank goes bankrupt, buy its mortgages for 25 cents on the dollar" published in a newspaper. Those with experience in this scenario please comment.
 
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randallg99

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Now the question is, how do we profit from this?

I haven't seen a For Sale classified that says "bank goes bankrupt, buy its mortgages for 25 cents on the dollar" published in a newspaper. Those with experience in this scenario please comment.

there have been some interesting offers listed in the Sunday NY Times as well as WSJ... they are sometimes listed as auctions, or bankruptcy trustee announcements (or something like that)

When a bank bankrupts, there are several thick tiers of debt supporting the institution. Unless you are A, B or maybe C debt holder (or preferred debt holder), you wont have much chance in taking over the institution or any of its assets including the mortgage pools... stock holders are on the bottom of the totem pole regarding being paid, btw.

Since there is so much regulation in US banking, (a lot of changes after 1980s S&L disaster) it is rather difficult for a bank to be saddled with bad paper and their ratings have to meet criteria to avoid the scenario from the 80s which convinces me as I once before said- the banks that will face problems are the ones who are exposed to the most troubling areas where FICO scores are dropping and those who were once strong credit worthy are now in default as a result of their recessionary surroundings... these are the ones posing the highest risk.... keep eyes on the banks in these areas perhaps...

However, if interested in mortgage pools - get chummy with large law firms who handle these transactions both bankruptcy and corporate law. The ones I know of are mostly in NYC and Northern Jersey. Minimum requirements are 5 to 10 mil and they are typically bought by institutional investors, funds and broker houses.... as seen in the news, the pools can get rather large... but the bankruptcy trustees usually find buyers for these assets before any chance of auction due to time sensitivity of the pool... (each day whittles away a lot of interest)
 

randallg99

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Andviv,
just got back from riding my bike and another point important for this discussion- most of the pools that are up for sale by banks and the like are the ones that are underperforming. Strong mortgage pools are not being discounted at this juncture (not like a couple of months ago when some of them were hocking their first borns to save their asses)

Now think about this... what happens to a property facing foreclosure (generally speaking)... lack of care, pipes stolen, plumbing problems ignored, etc...

same thing when a company holding mortgages faces trouble of meeting payroll... people split to high hell and ability to chase defaults suffered along with mediators to arrange salvaging loans, etc...

in other words, unless you are made of steel (or at least the cojones are) and you have high experience in analyzing debt, and you have the structure in place to service the loans... which is another point - see below - the mortgage pools are way too intense for the average investor like me...

you can contract a company to service the loan for a percentage of monies managed. Problem in the past few years that affected every mortgage pool holder is the spread btwn money borrowed and money lent is piss thin and then to pay someone to collect and manage the accounts leaves a seriously dangerous amount of room for default threshold...

back to original question - how can we make money off this?

1. buy low either through trustee or auction
2. understand the credit risk of the pool
3. hire risk analysis company for evaluation
4. do the servicing of portfolio yourself with a 1 or 2 man office staff

ideally, you want to be able to roll this debt off to someone else for a `flip` but if it was an enticing enough of a pool, it would have been gobbled up by one of the good ol` boys on wall street, or a strong bank... and the people specializing in the mortgage markets are virtually all but depleted of funds....

the carrying and holding of the mortgage notes may take several years before being able to sell it off... the downside risk is that 2Q08 and 3Q08 are going to see highest re-set of ARM rates history has seen... some economists are predicting that `we aint seen nothin yet` regarding defaults and consequently foreclosures.

another way to make money - understanding how this money flows and this cycle functions... it is practically like clock work in this day and age of technology and analysis... we have seen the 1980s S&L crash, 90s LTCM crash, and now... 00s subprime/Alt-A crash... in a couple of years, buying publicly traded companies who specialize in mortgage backs will be a very, very prudent investment.

Regards

Randall
 

andviv

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randallg99, thanks a lot for your input on this.
 
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