For Whom the Bell Tolls: Liquidity Issues

Recently, some goofy artist actually sold an “art piece” which consisted of a ripe banana stapled to a blank white canvas.

It sold for over six figures.

Not a painting of a banana. A real banana. One that will rot and discolor.

This isn't the exact art piece, but you get the idea. I mean ...

WTF?

I think it was Jared Dillian who said he should have realized “that was the top”.

It was.

Of course, those “signals” go both ways

Because, what I think we are seeing are the first glimpses of a larger liquidity issue.

INSERT INFORMATION ABOUT RTC AND S&L stuff

And when a real liquidity problem hits, you no longer care about asset class or valuation. Those things simply don't matter.

You have to pay your bills.

We saw this over and over again in the 80's oil crash. Regardless of the quality of the asset, cash - and only cash - ruled.

When the government, in the form of the Resolution Trust Corporation (RTC), finally stepped in "to clean up" the S&L mess (definitely a casualty of the earlier oil crash), it didn’t get better, it only got worse.

Much worse.

No loan was considered “good”. Didn’t matter about the collateral, the credit worthiness of the payor, or whether or not the payments were current.

Even large banks were being swallowed whole, bank managers were fighting to retain any kind of job, and liquidation was the only game in town.

The Birth of NCNB (No Cash For Nobody)

Back in the time of NCNB (North Carolina National Bank, now BofA) which was known around here as “No Cash for Nobody”, I came across some of the loan portfolios dumped by NCNB when they took over smaller banks (usually without paying a penny).

The accepted procedure was to reject these loans (nearly all of them) and move them on to the FDIC’s balance sheet.

You could travel to Addison (in the DFW area) or Midland, present yourself to the FDIC  office, and be granted wholesale access to entire rooms full of file cabinets, each containing hundreds of loans.

One of the most interesting of these belonged to a small bank located just north of Bryan-College Station in the tiny town of Hearne, Texas.

The bank had been taken over and as a result, all of its loans were transferred to the FDIC.  From the perspective of the new bank company, why screw with these loans at all? Who cared?

All they wanted was the deposits anyway. Everything else was for sale before the ink dried on the paperwork.

Of course, if one of those loans belonged to you, … well, you were screwed. FDIC would immediately send out a letter (regardless of paperwork, payment schedule, credit history, or anything else) that basically said the following:

“Your loan is now the property of the Federal Deposit Insurance Corporation. We are not a bank.  You have 30 days to refinance your loan with another lending institution. Thank you for your cooperation. “

You were faced with two choices: pay your loan off at par (this after the large bank had been able to cherry-pick those same loans at pennies on the dollar) or face foreclosure because there was simply no where else to go.

Not in the big cities. Not in the small towns. No banks. No credit unions.

All that was left were the dead branches of No Cash for NoBody where the inmates (employees) desperate to keep as many depositors as possible (their compensation depended on it) kept losing your paperwork, asking for more collateral or cash, and “sending it up the line” to North Carolina to never be heard from again.

On one of my “scouting trips” to an FDIC office, I came across a loan file from that tiny little bank in Hearne, Texas.

It belonged to a Father/Son construction team who traveled around the country building Post Offices for the US government.

Their business went a little like this: the local Postmaster would put out a notice for bids to build a new Post Office and these guys would be one of those who responded.

Once they won the bid, they built a new Post Office and then leased it back to the government on 20 (sometimes 30) year contracts.

They were required to get the new plans approved, the construction completed, and the building “accepted” by the Post Office before an actual lease would be signed.

No problem. They were pros.

When I took a look at the file, they had more than 20 of these scattered around the State. It was a nice little family business.

Now, understand they usually took out an interim loan from the local bank to finance the construction. Once completed and the building accepted, the loan was rolled into a longer term loan (think mini-perm). The bank took the lease as collateral and actually received the rental payments directly from the Treasury department.

In other words, they (the bank) collected the loan payment and deposited the remainder (whatever was left) into these fellow’s account.

Pretty sweet.

And lucrative.

Didn’t matter.

NCNB didn’t want them.

FDIC didn’t want them.

I couldn’t even get my bank to take a look at them.

I ended up getting a small group of doctors to fund about 10 of these puppies (all purchased at a discount from FDIC) for a nice return. That return got even better when I offered the Father/Son team the opportunity to buy these back.

The family team got a nice discount and found a new funding source. The doctors made more money with less work than anything else they’d ever done.  I made some cash (and kept a couple of the contracts for myself).

That was my version of the banana on the wall. It was the turning point, the ringing of the bell. Whatever.

Things gradually began to get better. Money became a little easier to come by and banks actually began to loan money again.

But it took years. Basically, from about 1984-1994.

The absolute low point for the Austin area was 1993 when I could (and did) purchase SFR’s in Round Rock that sold for 100K or so in 1989 (mostly built by Fox&Jacobs) for 19K cash. Those same houses are once again priced at $100K plus (more like $185K).

You don’t see those kind of prices unless there is near panic, a demand for cash that must be met, when you feel the elevator floor dropping beneath you and you simply don’t think it will ever stop.

You will pay to find a way out.

You will offer your assets at a bargain price just to see another day, but sometimes it seems like the darkness will never end.

It will.

Most folks didn’t pay too much attention to the 80’s oil crash or the S&L mess because it didn’t happen in their backyard.  

It happened in Texas.

But that doesn’t mean the pain wasn’t real.

Hopefully, this virus shutdown will end soon and things will come roaring back.

Then again, they may not.

Even now, the perception of how we as a nation are doing depends entirely on where you are.

But it will affect us all.

Sorry for the ramble.