This paragraph, if you strip out the names, looks strikingly familiar:
To fund his purchases ***** has relied on brokered deposits, known as hot money in the banking business. A year ago ***** Bank had $49 million, but by dangling relatively generous rates on certificates of deposit (0.88% for a six-month CD) brokers have since funneled $1.2 billion into the bank. To replace the brokered funds ***** is building 28 branches from Miami to Seattle, up from 7 at the end of last year.
It’s actually Andy Beal — the Texan banker currently being celebrated as having had the foresight to withdraw from the credit markets during the 2004-2007 market boom. He’s emerged now to cherry-pick the best of the world’s toxic assets. Here’s the unedited text, from an article in Forbes.
Lately he’s been spending on a broad range of assets. Beal just bought a $465 million loan to bankrupt chemical maker Lyondell. He’s extended tens of millions to utilities, manufacturers, convenience stores, hotels, casinos–”everything you can imagine, in every state,” he says. Many of those assets have come from 15 failed banks, including First Integrity in Minnesota, Arkansas National and First Priority in Florida. Since November he’s bought $2 billion (face value) of home loans bundled into securities, too. But he says he’s still just picking off loans with a “rifle” not a “shotgun,” buying only 3% of what lands on his desk while waiting for the financial system to further “unravel.”
To fund his purchases Beal has relied on brokered deposits, known as hot money in the banking business. A year ago Beal Bank had $49 million, but by dangling relatively generous rates on certificates of deposit (0.88% for a six-month CD) brokers have since funneled $1.2 billion into the bank. To replace the brokered funds Beal is building 28 branches from Miami to Seattle, up from 7 at the end of last year.
Beal has been outspoken and prolific in publicising his trading strategies. He’s even taken on the US government, winning a six-year long battle against FDIC last year. And his contrarian stance has already caused him to come under regulator scrutiny. Beal Bank, based in Plano, Texas, is FDIC-insured.
The point, however, is this; no one is suggesting that Beal is doing anything improper but distressed assets remain a very risky buy. Especially the kind of things that Beal is reportedly pursuing — bonds backed by commercial aircraft, debt backed by a Houston refinery, home loans, etc. Much of Beal’s success will depend on the prices he is getting for those assets. As something of a mathematical genius and Poker extraordinaire – he does seem to be very good at playing the odds.
But that the company appears essentially to be acting more like a hedge fund than a bank — using money from investors’ CDs to buy distressed assets — is rather unsettling. Likewise the statement in the Forbes story that the bank is building new branches to “replace the brokered funds”, which, if right, would mean at the very least, a dramatic increase in Beal’s obligations. Beal will have to be able to roll his existing deposit base — a big ask in the current market.
If things were to go wrong – they would go very wrong indeed. Here’s hoping Beal is as good of an investor as his profiles make him out to be.
Related links:
Beal Bank – BankTracker
The banker who said no – Forbes
The Andy Beal award for eschewing moronism – Long or Short Capital