What Would Another Banking Crisis Look Like?

Investors and Colleagues,

As I write you this letter, Wall Street is under significant pressure. On Monday, US markets were hit by another round of selling – led lower to a large degree by financial stocks.

The newspapers and TV reporters had plenty of negative material to point to. The major US banks have been reporting relatively strong earnings, but when you look at the details, the picture is much less clear.

Banks are shifting capital around and “creating” income by cutting back on the amount of capital they have set aside as a risk buffer. This is financial engineering at its best… Positive earnings simply by moving numbers around on the balance sheet.

The charade isn’t fooling investors and traders, whose sell orders are now pushing the financial sector to its lowest level this year. And even as executives are wrapping up their conference calls, new risks are rising from overseas.

You see, the debt crisis in Europe affects our own financial system. European banks own large blocks of government debt that is becoming increasingly risky. US banks may not be very exposed to European government debt, but they certainly have plenty of interaction with the European banks.

If the trouble in Greece spreads to Portugal, Italy, Ireland or Spain, US banks could wish that they still had that risk capital set aside – and not moved into the “earnings” category.

Risk Overseas = Deals at Home
So how does a European debt crisis affect an Atlanta-based real estate company? The dots are more closely connected than you might think.

As the banking industry is forced to deal with their growing exposure to the European crisis, they need to unload risky assets to avoid a crisis like we saw in the fall of 2008. This means that we are still sitting down to the negotiating table, and able to command the very best prices for any properties that we purchase.

Negotiating from a place of strength is a very powerful advantage. When we begin discussions with a bank or even the FDIC, we always start by making one thing very clear:

We don’t need to complete this transaction.

We may want to buy the attractive development. We may even have a builder lined up to begin putting houses on the lots. We may have investors that are anxious to participate in the deal. But we always approach the negotiations from a detached perspective.

If the terms aren’t attractive, if the price isn’t low enough, if the stipulations are too constraining, we simply walk away – it’s that simple.

But the banks don’t have that luxury. For them, the clock is ticking and the risk is mounting. Every day that they are not able to move these underwater assets off their books, they lose capital. More importantly, they lose credibility. The banks are negotiating from a place of weakness which is why we have been able to ink so many attractive contracts over the last several years.

New Developments In Progress
While we’re constantly researching any number of different properties for a potential investment, there is a specific real estate development that I am particularly excited about.

I can’t give you the specific details because we haven’t yet signed the contract. I don’t want to risk this letter reaching a competitor and jeopardizing our negotiation. But I would love to speak with you personally about this opportunity.

The neighborhood in question is in a suburb outside of Atlanta and is one of the more desirable communities in the region. The amenities are beautiful. The surrounding neighborhood is pristine. The community is well established. A builder simply became overextended and was foreclosed on by the bank.

Now we have the opportunity to pick up a number of lots at a tremendous value – and should be able to quickly turn around and sell them to a builder for a tidy profit.

I’d love to discuss this opportunity with you – and determine how we can help you grow your investment capital. Would you call me this week to set up a time? I look forward to our conversation.

Wishing you every success,