Home Prices in Bubble Regions still have a few to go...

From the WSJ

If you own a home in a former bubble region like California or southern Florida, there's bad news… and really bad news

But the really bad news is that, even after a year of misery and falling prices, homes in many of these regions still aren't cheap. They remain wildly overvalued compared to average personal incomes.

There is a strong long-term correlation between the two figures. And in many regions, house prices would still have to fall a very long way to get back into line.

How far?

Try around a third in Florida and Arizona -- and closer to 40% in California.

Yes, from here.

How to pay for outsourced due diligence

From EquityPrivate. funny stuff, but this is exactly how almost all consulting-style due diligence is structured. if the deal is not consummated, the fees are either lower or, at best, rolled into the next deal when they can be paid for as deal fees.

An interesting thought exercise for outsourced private equity diligence: If you were an overworked private equity fund needing smart brains attached to bodies to keep up with the deal flow that you are drowning in (let's remember that we are talking about 12 months ago for a moment) how would you design a fee structure for an outsourcing provider? It would depend, of course, on what kind of diligence you wanted. Yes? If it is your capital under management, I suspect you would want doggedly persistent and unrelenting diligence. I suppose I am assuming you, as a firm, regard diligence as a defensive part of the investment process, rather than a confirming check-the-box exercise, but I think I can be forgiven this optimism.

I would engineer a rather dull, but not ruinous, hourly fee for the work that covered my provider's cost, plus a slim but not insulting margin. To this I would add two sets of bonuses. First, a kicker for every issue discovered by my provider that allowed me to bring purchase cost down from the figure in my letter of intent. Second, a rather larger bonus if my provider unearths irregularities that cause me to exit the deal. (This would be easy to fund off of someone else's dime with a break-up fee assessed to the seller in such an event). I suspect my provider would be almost painfully skeptical, which is what I would want.

Leaving behind, for a moment, this fantasy world of aligned interests and prudent investment methodologies, what do you think the actual fee structure model looks like in these firms?

Fee with a major discount if the deal is not consummated. In otherwords: No fees of any substance whatsoever if it is not.

Pray tell, how often do you think diligence delivered in this way leans towards not consummating a deal? Give up? With respect to the firm that was described to me, not once. Glad I'm not one of their limited partners.

Bill Gross demolishing the monoline insurer model

Monoline insurers are so named because they originally covered just one line of business – municipal bonds. Today, however, because they do not insure lives, or automobiles or medical expenses, the name has stuck despite their additional reach into insuring financial assets of all varieties. In a real sense, the monolines have taken on their shoulders a supersized portion of the guaranteed solvency of modern asset structures. In combination with overly generous triple-A ratings on not only these assets but the monoline companies themselves, they have fostered a bubble of immeasurable but clearly significant proportions. That the monolines could shoulder this modern-day burden like a classical Greek Atlas was dubious from the start. How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy? How could an investor in California’s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation’s largest state with its obvious ongoing taxing authority? Apply the same logic to the gargantuan size of the asset-backed market it has insured in recent years – subprimes and CDOs in the trillions of dollars – and you must come to the same logical conclusion: this is absurd. It is as if Barney Fife, television’s Sheriff of Mayberry in The Andy Griffith Show, promised to bring law and order to the entire country.

Great essay. From the Financial Times

Fairly disgraceful behavior at Wachovia

From NYTimes.

Last spring, Wachovia bank was accused in a lawsuit of allowing fraudulent telemarketers to use the bank's accounts to steal millions of dollars from unsuspecting victims. When asked about the suit, bank executives said they had been unaware of the thefts.

...

Internal Wachovia e-mail, for example, show that high-ranking employees at the nation's fourth-largest bank frequently warned colleagues about telemarketing frauds routed through its accounts.

The Times said that documents also show that Wachovia was alerted by other banks and federal agencies about ongoing deceptions, but that it continued to provide banking services to multiple companies that helped steal as much as $400 million from unsuspecting victims.

"YIKES!!!!" wrote one Wachovia executive in 2005, warning colleagues that an account used by telemarketers had drawn 4,500 complaints in just two months. "DOUBLE YIKES!!!!" she added. "There is more, but nothing more that I want to put into a note."

...

However, Wachovia continued processing fraudulent transactions for that account and others, partly because the bank charged fraud artists a large fee every time a victim spotted a bogus transaction and demanded their money back. One company alone paid Wachovia about $1.5 million over 11 months, according to investigators.

"We are making a ton of money from them," wrote Linda Pera, a Wachovia executive, in 2005 about a company that was later accused by federal prosecutors of helping steal up to $142 million.

...

The lawsuit alleges that Wachovia accepted fraudulent, unsigned checks that withdrew funds from the accounts of victims, often elderly. Wachovia forwarded those checks to other banks that were unaware of the frauds, which in turn sent money to the swindlers.

Double-Yikes indeed. This is not going to look very good in front of the jury is it?