Is there a "Market Price" on toxic assets?

Has there ever been a clearer indicator that market to market is broken....."It is unclear whether banks will sell the assets"

http://www.thestreet.com/story/10493886/1/treasury-100-firms-want-toxic-assets.html

Just ridiculous! Why we ever decided to throw real dollars after a phantom unrealized loss is beyond me, but I guess I am going to have to get over it because that is what we are doing.

BAN meeting and SBA hope

Getting ready for the Birmingham Angel Network screening meeting on the 26th at Innovation Depot. (www.birminghamangels.com)

Also, noticed that the Treasury Department announced they will purchase up to $15 billion in securities backed by Small Business Administration loans in an effort to unfreeze the secondary market for SBA loans.

Here's hoping that we can get some of our new companies up and running.

A modest proposal or Why still Mark-to-Market????

I know I am not alone here, but since we are still in the grips of a credit crunch and economic downturn, I would like to make a proposal (or at least a post hock observation).

First a recap...

Way back in 2007, we began to have a freeze in the subprime mortgage markets and some writers began to foretell the economic turmoil that could ensue. (See -The Panic of 2007 - No Buyers at any Price) Since then, we have discovered that many Alt-A and subprime loan portfolios have much higher potential default rates on mortgages than at first expected, coupled with a realization that Moody's and S&P did a collective hatchet job in rating many mortgage backed securities, not just Alt-A and subprime. These deficiencies have lead quickly to a wholesale run on the overall mortgage backed securities ("MBS") market. Unfortunately for everyone, due to existing GAAP and mark-to-market requirements, our public institutions have been required to severely devalue balance sheets during the market freeze which has lead to a massive credit crunch, has left our venerable financial institutions either in ruins or gasping for air and threatens to crash the overall bricks and mortar economy.

So......what could or can we do about it?

Well, we could inject billions of dollars directly into financial institutions in order to re inflate balance sheets and make up for the massive write downs in securities portfolios due to the market freeze (See - TARP) and hope that financial institutions will go back to normal policy and not horde the injections in fear of further write downs due to continued market declines. ***this is apparently where we are

Or.....

We could recognize that real economic fundamentals are better than the markets are crediting, due to the widespread loss of confidence in rating agencies' scores as an effective measure of MBS safety. Meanwhile, mortgage defaults are still only about 3% and even those still have significant asset coverage, thus leading to sometimes staggering disconnects between market values and "intrinsic value" of many MBS. However, this disconnect creates some interesting options.

One, instead of replacing the lost balance sheet value with US government capital (see - TARP), the SEC and FASB could simply require companies to value portfolio at "expected realizable value" thus allowing them to adjust for short term market irregularities, so long as a given asset is not expected to be sold in that time frame. (See - Suspend Mark-to-Market Now, Gingrich 2008)

Second, the US government could create a "FDIC-like" insurance for the underlying obligations (ie - individual mortgages; See - Governmental "PMI") on selected classes of perceived at-risk MBS, whereby bond holders (or trustees) could petition the insurance for uncovered losses on defaulted mortgages. This should cure the default risk problems caused by the ratings agency malfunctions and thus re inflate the overall security values, while minimizing actual governmental capital outlays to situations of actual loss.

Humbly offered....

Happy Holidays and Fundraising in 2009

Well, the Holiday Season is in full swing and a new year is around the corner. I hope the new year sees you all doing well (despite the economists' speculation).

As we look toward a new year I think it is time to talk about fundraising post-credit market meltdown.

Interestingly, we seem to have a fairly healthy market in the angel side because the volitility in the markets has caused private equity to be viewed as less risky (or at least not as big a jump up in risk). Nonetheless, it is not all rosy because there is a lot of competition for the dollars available, since many deals that would have had other methods of finance are now looking for private investment dollars.

For new businesses the take away is really this:

"Do your homework and be the best."

If you are the best in a competitive environment then the dollars are definitely available, but due diligence is up and investors are taking a critical eye to risk, so companies need to really work on being a clean investment. This means, no sloppy contracts, unprotected IP, vague expansion plans, etc. or the investors will just pass you by for easier deals because there are other good companies that have put in the work. But if you work to be the best, good things are available.

Happy Holidays

Initial Birmingham Angel Network Screening Meeting

The 1st BAN screening meeting is set to be held at the Summit Club on Wednesday Oct. 29th at 7pm.

Members and Board members will be discussing the over 30 companies that have submitted and selecting the few that will be asked to present to the entire group later this year.

www.birminghamangels.com

Freehold Licensing Ltd.

I had an interesting company pass my way that we have begun to work with that I think has some real application to our current financial and liquidity crisis.

Freehold Licensing Ltd. (http://www.freeholdlicensing.com/) of Texas is helping their clients create long-term revenue streams by creating for-profit transfer fee rights in property owned by their clients.

The company says:

Freehold Licensing enters the world of Real Estate Transfer Fee Rights as the creator of a unique business process and the leading experts at advising property owners how to restructure property rights by easily and efficiently creating a long-term income stream.

The process was originally developed in response to a common problem faced by virtually every real estate developer: How To Add Improvements Without Unfairly Burdening The Initial Buyer?

The result is a fully collateralized income stream that continues to grow year after year. The existence of Transfer Fee Rights benefits both current and future buyers and sellers alike. This approach to structuring real estate transactions is well suited for many different types of owners of large portfolios of real estate such as builders, developers, REIT's, bank REO departments and more, as well as work-out professionals and bankruptcy trustees seeking to maximize the value of estates with large real property holdings.

After looking at the process, these revenue streams seem to be ideally suited for banks to utilize as additional assets that can help shore up lagging balance sheets. Furthermore, it appears that recent SEC and FASB guidance (http://www.sec.gov/news/press/2008/2008-234.htm) provides a pretty clear standard opinion on the valuation of non-market assets such as these rights. (Although the company has plans to create a securitized product option that would likely have a market.)

Given that the world governments are being forced to take extraordinary actions to protect our world economy from what appears to be an indirect run on the banks by rapidly deflating balance sheets due at least in part to disfunctional actions of the mortgage backed securities markets it would appear that it is in all our best interests to locate every alternative available for our banking system to "re-flate" their balance sheets and this appears to be a very viable option.

Birmingham Angel Network adds a new board sponsor

For BAN the hits just keep on coming.

I am very pleased to announce that Warren, Averett, Kimbrough & Marino, LLC has signed on as the Birmingham Angel Network's fifth sponsoring board member. Warren Averett is a nationally recognized accounting firm ranking among the nation’s largest firms and serving some of the South’s largest companies.

Warren Averett will be represented by Al Murray a member in the firm's Birmingham office. Al has over 20 years experience with closely-held businesses in all areas of accounting, taxation and business consulting. He has extensive experience with audits of retirement plans, manufacturers and distributors, not-for-profits, healthcare organizations, contractors and start up businesses.

Welcome Al.