Poker Player Andy Beal is Loading up on Bad Debt
Great piece in Forbes about a banker, Andy Beal, who has been playing his cards right. I actually saw him in the back part of the Bellagio poker room a few years back, when he was killing professional poker players at their own game. Now his opponents are the FDIC and large dumb banks. Source
For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank’s assets because he thought the loans were going to blow up.
“Every deal done since 2004 is just stupid,” Beal says.
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
Next, a guy in charge of bidding for failed bank assets pops his head in the door to update Beal on loans he’s recently bought for as low as four cents on the dollar. “[FDIC Chairman] Sheila Bair doesn’t like the prices,” says Beal, but “you need a margin of error.”
“All these guys were stumbling over each other 18 months ago to pay over par,” he says. “Now they can’t sell fast enough at a discount. Why do people not do the great deals and do all the stupid ones? It’s crazy.”