GLG News by Joe Garrett

Implications: Sometimes you don't want to get what you've been hoping for.  Wachovia has a top deposit gathering franchise, and they clearly help complete much of the Wells Fargo footprint.

Analysis: The problem, obviously, is dealing with the $120 billion portfolio of pay option arm mortgages.  Yes, there will be tax benefits avaulable that might not hsave been there before, but this will be at a huge cost and a huge distraction.Finally, Wells' reputation on M&A has been entirely built around small deals, most of them very small.  Take a look - they have soecialzied in buying $100-300 million banks. The skills needed in those deals may be applicable to buying Wachovia - but they might not.

Implications: Asian-American banks, most of which are in California, are very cheap, small enough to be easily acquired, and will likely be acquisitions targets for Chinese banks looking to diversify and expand.  The biggest of these banks are UCBH, in which an investment has just been announced, and East-West Bank, with market caps of $1.9 billion and $2.2 billion respectively.  They get smaller from here, the point being that these would be bite-sized deals. 

Analysis: When the Japanese started buying U.S. banks in the 1980's, there was a similar dynamic of their banks, like the Chinese banks today, having excess capital and excess liquidity looking for new opportunities.  They did their slew of acquisitions, none of which had been Japanese-owned or oriented.  If we look at the just-announced investment in UCBH, this is of a Chinese-American bank with a Board and senior management that is all Chinese and/or  Chinese-American.  This can make the deals easier to negotiate, and it can make them more successful once completed, the cultural differences being largely diminished. 

Implications: There just was, and to an extent still is, a global credit crisis, and financial system in Kazahkstan seems to have weathered it.

Analysis: As has been proven very recently in the U.S. and U.K. (Northern Rock Bank), having a good base of deposits is much more reliable than the securitization market and other sources of funding.

Of the major Kazahk banks, KKB gets only 35% of its deposits from customers, and this number is insufficient to weather a tougher crisis.

JSC Halyk Bank, however, gets 69% of its funding base from customer deposits and should be able to weather most credit market storms.

Implications: What a strange marriage, with Lone Star refusing to come to the wedding ceremony, Accredited sueing them, and the two eventually tieing the knot.  Lone Star must have some vision for what to do with Accredited, but at the moment, there is almost no market for sub-prime loans. The only logical plan is that Accredited will be the Last Man Standing when the sub-prime sector comes back to life.  It's actually a valid business, but one that was trashed with lax credit standards and financial engineering that allowed sub-prime loans to end up in securities, some of which now had triple-a ratings. Sub-prime works when you limit the loan-to-value ratios.  It worked just fine when the max LTV was 70%.  It didn't workwhen these moved up to 95% or even 100%. At some point, new, tighter standards will emerge, and investors will tip-toe back in.  The yield requirements will be higher and the loan-to-value ratios will be lower, and 3-5 years from now, people will have forgotten 2007.

Analysis: See above

Implications: It's good for the industry.  Sends a signal that there will be winners, that there will be money to be made in this business.  It does seem, however, like very expensive capital for Countrywide, especially when you compare it to their preferred converts last year or earlier this year which were in the 2-3% range and out of the money.  This seeminlgy implies how desperate Countrywide must have been.

Analysis: It buys time for Countrywide to weather this storm.  Countrywide has been picking up lots of retail salesmen the past few months as their competitors failed. 

With this new capital to give them breathing room, they should be able to come out with an even more dominant market share than prior.  They recently had a 16-17% market share, and given their taking on all these news salespeople, and given how much of their competition has gone away, it's not impossible to imagine then getting to a 25-33% of the origination market.

Implications: When the history of the Mortgage Crisis of 2007 is finally written, it won't be about subprime or Alt-A. I believe it will be all about layered risk and Loan to Value ratios. All of these products worked and performed well - up until the LTVs started rising. 100% LTVs justs don't make sense.

Analysis: The pendulum swung to far in the direction of overly loose underwriting standards, and it will now swing too far in the direction of tightened standards.

Implications:  Investors should not at all be shocked. When you peel back the curtain, the tightening of credit standards that New Century and others have been bragging about have been, essentially meaningless.

Analysis: Certain mortgage lenders claim to have tightened as far back as July 2006, and almost all this January and February, but when you look at the actual changes in their standards, they were laughable minor in impact.

Option One dropped loans with Fico scores below 580 in the Midwest in one of their tightening. The difference between making a loan to a 575 borrower and a 590 borrower is, essentially meaningless. Both exhibit and are predictive of an extreme inability to service their debt. There’s just no real difference between 589 (no longer able to get a loan) and 595 (still eligible). Both are deadbeat borrowers.

If they wanted to make an impact, they would have eliminated all Fico scores under 620.

The whole mania for sub-prime loan volume was no different than the tulip bulb mania 400 years ago. A tulip is still just a tulip. And a sub-prime borrower is still a deadbeat. Requiring no down or only 5% down to someone with a low credit score was and still is sustainable only when housing prices are appreciating rapidly.