dcollon

I thought some of you would enjoy this article about AIG in Vanity Fair. Michael Lewis wrote it for the August publication. http://www.vanityfair.com/politics/features/2009/08/aig200908

For those interested...

Not sure if anyone will care, but Keefe initiated coverage of BRK with an Outperform rating and $107,000 price target. The put out a 60+ page report this morning.

There has been some discussion of Outliers by Malcolm Gladwell on the board. Below is a link to an article that Gladwell wrote for The New Yorker in May. http://www.newyorker.com/reporting/2009/05/11/090511fa_fact_gladwell

Sanjeev, I completely agree. Our state remains very anti-business, which is clearly not good for driving traffic to the state. The pro-union vs. right to work aspect is the largest hurdle. Most people are amazed with some of the home prices here relative to the rest of the country and I'm speaking of ones that you and I would want to live in. Nicely renovated homes for $100-125 per square foot are not uncommon at all. That's one of the toughest parts about managing money here, because we constantly have to remind ourselves that there are areas of the country/world that are attracting new business and spending. Just not here. Have a nice weekend, David

Sanjeev, I don't live in Detroit (nobody really lives in Detroit anymore), but I do live about 30 minutes north of the city. There are certainly opportunities. Cash on cash returns are very high if you are in the right area. Most of the transactions are being done with cash, since the banks will not allow financing. It's pretty depressing around here, but it has been for close to 9 years now. We never experienced the boom that the rest of country did, but we certainly have led on the way down. Forunately in the investment business you can live in an area like this and not worry too much. Although from where we sit it's tough to understand how this part of the country recovers within the next 5-10 years.

That was a great article. I also found a video clip on his blog that I really enjoyed. Thanks for sharing. Here's the video clip:http://www.perimeterinstitute.ca/index.php?option=com_content&task=view&id=551&Itemid=568&lecture_id=7639

Below is a link to a presentation that Robert Rodriguez gave to Morningstar recently. It is a very good read. I continue to think Rodriguez and his firm are very good stewards of capital. http://www.fpafunds.com/news_05292009_outrage.asp Credit for the link goes to the Chucks Angels board on Yahoo!

Hi Eric, I'm not completely up to speed on all the different series, but I would agree that some of them (not just Citi's) are still interesting. You want to make sure that the series you are looking at will be converting. I know that sounds obvious, but some people I have talked to have mistakenly bought trust preferreds or enhanced trust preferreds that aren't converting. I have also heard rumblings today that Citi is going to follow BAC's lead and do a large common raise. Just rumors. Take care

This interview is a little dated, but well worth reading if you haven't already.

David Sokol has an interesting perspective on "cap and trade" in the WPO http://www.washingtonpost.com/wp-dyn/content/article/2009/05/18/AR2009051802647_pf.html

I try to get most companies to mail them to me, so I don't have to waste a ton of paper. Most will do it if you ask, since they already have them printed. Edgar-Online is a great service, but you do have to pay for it. I use it to keep up with filings from both companies and investors. They send me e-mail alerts anytime something is filed. I know there some other sites as well. Take care

More on Citi: I wanted to come back to Citi and highlight an opportunity that I still think exists in the series "g" Citi pfd. Everyone can pull up the quote, but the Citi g's are roughly $20-21. There has been and S-4 filed and the conversion process should start soon (historically speaking). It would then be about 20 days for the transaction to take place. Obviously, this is much different environment so you have to factor that into your risk tolerance. The exchange is likely to be 95% of par with a $3.25 common exchange price. The total return at current levels would be north of 20%. I know it's not the 100%+ returns that some of us have seen in this space, but the annualized results are pretty nice. Now the ideal situation would be to short common against the preferred, but that might be tough to do. This isn't for everyone, but I thought I would bring it up just in case some might find it interesting.

Here is Tom Brown's opinion on some of our discussion in this thread: http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=5814&ArticleTypeID=2

Thanks for pointing out the interview. I really enjoyed it.

Eric, I think one would have to evaluate the difference between "truly" seized vs. merged. As you pointed out the examples you cite were distressed mergers. I would take a look at WM and a few examples like that to get a broader view of what can happen.

Shorting the common against the preferred has not worked as well to this point, but Jack it's a good question that I'm sure you have thought about a lot given your knowledge in this area (I have been reading your comments on the Ackman/Rose roundtable). Eric, puts are an interesting idea, but the premiums are pretty steep. The conversion on Citi is still floating around out there and it's going to be interesting to see how it's finally structured. The outcome will help me understand how to play some of the more speculative securities going forward. Kiltacular, I don't think any of the trouble banks would be able to issue equity at this point. My feeling is that any equity raise will come from conversions of preferreds, whether or not that is the right approach is up for debate. I guess you could argue that JPM, WFC, USB could raise common equity, but I don't think Mr. Dimon believes he needs to and I'm not sure that Mr. Stumpf and Mr. Davis do either. I have simply been trimming some of the preferreds and reducing the size of the bet.

It's also interesting to think about Mr. Buffett's comments on WFC as it relates to the whole debate. I'm not quite sure where I come out on the whole tangible common equity to assets debate. In addition, I think people are inappropriately lumping all assets into one category. They should be broken out and discussed individually. i.e. C&I vs. Residential vs. Securities vs. Consumer, etc... Not every balance sheet is the same and I don't think there is enough discussion about that concept.

http://www.charlierose.com/view/interview/10251

Dempster, Thanks very much for posting. I look forward to reading them. David

A quick little update on some of the Citi preferreds. Then this from BAS/ML: Citi public preferred exchange offer may get capped On Ferbuary 27, 2009, Citigroup (C; $4.25; B-3-8) announced its intention to exchange various publicly and privately held preferred stock and trust preferred securities for shares of its common stock, and on March 2, 2009, the company further specified the conversion ratios of this upcoming exchange for publicly trading straight and convertible preferreds (series E, F, AA and T) (see Table 1 below). After a preliminary S-4 filing on March 19, 2009, with substantially the same exchange terms, the news and filings tape about the offer went quiet while the final filing and the formal tender offer statement have been long overdue (traditionally, 7-10 business days after the preliminary filing). With the Citigroup common stock trading above $3.25 (the company-chosen exchange strike for the preferreds) in the last few days, the risk of the preferred exchange offer being repriced lower (that is, lower conversion ratios than previously indicated) has increased, in our view. Specifically, the exchange values for public preferreds listed in Table 1 may get capped at par. Nonetheless, the previously highlighted arb between preferreds and common still exists albeit in a less-easily quantifiable form, based on the fact that preferreds are trading only at about 68-78% of their par values. Even if the preferred exchange values are capped at their par values, there is potentially still a lot left to gain in these preferreds, since they are even now trading significantly below par. We still view the likelihood of the exchange offer being cancelled altogether as very low, given that Citigroup still needs to significantly increase its tangible common equity (TCE) in order to pass the government's looming stress test.

These appeared this morning from Doug Kass: After the close of trading, Moody's (MCO) stripped away Berkshire Hathaway's (BRK.A) Triple-A rating. This move, following Fitch's downgrade last month, is almost laughable in its timing. But, if nothing else, investors have become inured to untimely moves by the ratings agencies. As to the effect on Berkshire Hathaway's balance sheet and income statement, it is negligible. Gross debt expenses will only rise slightly -- thanks to the company's still large cash hoard and given the fact that Berkshire is overcapitalized (both absolutely and vis-à-vis other insurance companies). Importantly, Berkshire has structured its derivative contracts ingenuously in the fact that it did not have to provide additional collateral when the major world stock market indices dropped precipitously; it simply recorded non-cash charges. Nights in white satin, never reaching the end. Letters I've written, never meaning to send. Beauty I've always missed, with these eyes before. Just what the truth is, I can't say anymore. -- "Nights in White Satin," Moody Blues The irony is that the Moody's downgrade has coincided with: a substantial improvement in the value of Berkshire's investment portfolio; and a reversal in some of the losses from Buffett's foray into shorting puts on the major world indices. As it relates to Berkshire's common shares, I have been conspicuously negative toward the composition of Buffett's investment portfolio and what I described as his "style drift" regarding the foray into derivatives. My concerns peaked regarding the plight of Berkshire Hathaway's shares with a column I wrote as the U.S. stock market was bottoming in early March, "Buy American? I'm Damned!" At the same time, I qualified that view with the notion that I admired Buffett's remarkable long-term record; from my perch (and from many others'), he is the single greatest investor in modern financial history. Tuesday, afternoon, I'm just beginning to see. Now I'm on my way. It doesn't matter to me, Chasing the clouds away. -- "Tuesday Afternoon," Moody Blues I have often written that both Cassandras and Polyannas are attention-getters, not money-makers. My day job is to deliver superior investment returns to my clients, and, in order to provide alpha, flexibility is a necessary reagent, so is a contrarian streak, logic of argument and strong financial dissection and analysis. When conditions change, as they appear to be doing now -- see this morning's Wells Fargo (WFC) news -- opinions must change, and opportunities must be embraced. This is especially true in the case of Berkshire Hathaway as the considerations that led to my shorting of Berkshire Hathaway's shares at around $145,000 a share have now reversed, and, with the shares today trading under $90,000 a share, I have begun to accumulate a long position in Berkshire Hathaway. My current estimate of Berkshire's investment portfolio value is now in the neighborhood of about $73,000 a share, so I am paying less than 3.5 times after-tax operating earnings for the non-investment assets of Berkshire Hathaway. If we triangulate Buffett's own view of intrinsic value of Berkshire (in the letters to shareholders in the 1990s), the intrinsic value of today stands at about $115,000 a share , or nearly 30% higher than its share price. And, as I expect the world's stock markets to advance smartly from current levels (and for financial stocks like Wells Fargo to lead the way), the value of the company's investment portfolio and its intrinsic value will likely be much higher by midyear. (This morning's $3 premarket rise in Wells Fargo's shares equates to more than a $1 billion increase in value in Berkshire's investment portfolio.) Moody's move yesterday was classic in it's timing; the horse has already left the barn. And, umm, memo to Moody's: You better go now! Go now! Position: Long BRK.A

Everyone who is involved with WFC, BRK or the preferreds should read this preliminary data. Wow... http://finance.yahoo.com/news/Wells-Fargo-Expects-Record-bw-14889738.html

MPG looks like it could be an interesting spec. The pfd is cumulative and it looks like they didn't pay the Dec. dividend. I haven't gone through the documents, but it would be interesting to see if the pfd shareholders can elect board members after a certain amount of quarters when the dividend hasn't been paid. Michael Ashner is obviously a great real estate investor, but it's going to be tough for him to get 25% of shares (I realize that he already owns 9.5%).

I enjoyed this commentary from Bankstocks.com. http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=5742&ArticleTypeID=2