Forbes has a great piece on Andrew Beal, the CEO of a relatively small/unknown bank in Texas called Beal Bank. Unlike most other banks, Beal got out of the loan business starting in 2004 because he said the loan market was behaving “stupidly”. For 3 years Beal avoided the market and actually shrank his bank. At one point firing 50% of his employees. Business slowed to a drip while all other banks were booming. Like a lion in the grass, Beal waited patiently for the market to turn and now business is booming as Beal swoops in to buy assets on the cheap. Unfortunately, this soothsayer doesn’t have a rosy outlook. The assets he is buying for 50 cents on the dollar are many of the same assets that banks are currently holding on their books at 90 cents or higher. The same assets Geithner hopes to remove from the balance sheets with your money. Beal thinks the plan will ultimately fail.
He thinks the government is going to be “disappointed” by its various programs to revive lending. He says Treasury Secretary Timothy Geithner’s new plan to guarantee loans to buyers of toxic assets won’t lead to many sales because the problem isn’t liquidity but price. They are not low enough. Half the country’s banks–4,000 in all–would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.
“Banks are on a prayer mission that somehow prices will come back and they won’t have to face reality,” Beal says. And that reality, according to Beal, is going to get a lot worse. “Unemployment is going over 10%, commercial real estate hasn’t even begun collapsing and corporate credit defaults are just getting started,” he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.
As for the cause of this mess, Beal points a finger at the government for giving its imprimatur to just a handful of credit rating agencies, then insisting that money market and pension funds buy only paper with top grades. He also blames government for luring people into debt by backing everything from bank deposits to Fannie and Freddie to student loans.
Of course, readers of TPC know all of this. I’ve been preaching the same message for months. The market is quite confident in the government’s ability to fix our problems, but the real issues haven’t even hit yet. Credit card and commercial real estate nightmares are only just beginning to mount. Mix in the ARM resets coming in residential in 2010 and we’re almost certainly staring at the edge of the cliff as the market pops the champagne. But don’t take it from me. Take it from the one banker who actually saw it all coming. Andrew Beal is certain to be busy for years to come….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.