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Wednesday, March 26, 2008

Thornburg Mortgage: Pyrrhic Rescue

This is almost funny…

Thornburg Offers $1.35 Billion of Debt Paying 18% (Update7): “Thornburg Mortgage Inc., the “jumbo” mortgage lender trying to stave off bankruptcy, rose by more than a third after disclosing plans to raise $1.35 billion.”

Well, a RESCUE plan would indeed be good for a company that is effectively bankrupt and out of business. So a closer look is warranted.

“The rescue plan gives new investors debt that pays 18 percent and the chance to own a 90 percent stake, according to terms of the private placement outlined by Santa Fe, New Mexico- based Thornburg in a statement today.”

The common shareholder is of course wiped out in this rescue. CURRENT shareholders will end up with less than 10% of the company.

New investors are getting a 90% stake in the company AND an 18% yield on their money. This is where things get interesting.

“The sale includes senior subordinated secured notes due to mature in 2015. Terms call for an initial interest rate of 18 percent, falling to 12 percent later if certain conditions are met. The investors also get warrants to buy common stock for a penny a share.”

First of all, the ENTIRE Thornburg Mortgage Inc business model is this: Borrow CHEAPLY, lend DEARLY. They borrow money and then turn around and lend YOU that same money for your JUMBO mortgage. Obviously for this to work they have to be able to borrow at a LOWER rate than what they charge YOU. The SPREAD between the rate they borrow and lend at needs to be large enough for Thornburg to pay its employees and office rent. Naturally, a profit margin is preferred as well.

Borrowing at 18% and lending out sub 5% (see Rates chart) isn’t exactly sustainable. Granted, this money is not intended to be used for new mortgages. The purpose of this money is to meet margin calls on their EXISTING mortgage portfolio.

The company has $34.19 BILLION in debt going into this RESCUE. The company also only generated $309.4 in REVENUE. 18% on $1.35 billion is $243 MILLION in annual interest costs. So this rescue alone will consume 78% of the companies REVENUE. Factor in the servicing costs of the original $34.19 BILLION and the cost of both employees and office rent and you get ONE DEAD COMPANY.

I would call this a PYRRHIC RESCUE. “Victory with devastating cost to the victor.”

Taxpayers May Be Liable for Billions From Bear, Mortgage Rescue: “Even as the Bush administration insists it won't risk public funds in a bailout, American taxpayers may already be liable for billions of dollars stemming from Federal Reserve and Treasury efforts to quell a financial crisis.

History suggests the Fed may not recover some of the almost $30 billion investment in illiquid mortgage securities it received from Bear Stearns Cos., said Joe Mason, a Drexel University professor who has written on banking crises. Treasury's push to have Fannie Mae and Freddie Mac buy more mortgage bonds reduces the capital the government-chartered companies hold in reserve at a time when foreclosures and defaults are surging.”

Hahahaha… TAXPAYERS ARE ALWAYS THE ULTIMATE BAGHOLDERS. Taxpayers are also the BEST bagholders because they are just ignorant enough to muster nothing more than some anemic complaints and protestations AFTER the fact.

Just wait until taxpayers get the bill for Fannie Mae and Freddie Mac, because that one will be in the TRILLIONS.

The S&P couldn’t get past a key level around 1360 after two attempts over two days. Up volume quickly disappeared as the short covering dried up. With the BOTTOM CALLING at a fevered pitch, I rebuilt my short positions at these prices over the last two days.

Money-Market Rates Rise as Central Bank Cash Injections Fail: “The cost of borrowing in dollars and euros rose as central bank efforts to break the squeeze in short-term lending misfired.

The three-month London interbank offered rate, or Libor, for dollars increased 1 basis point to 2.67 percent, the highest level since March 14, the British Bankers' Association said today. The comparable euro rate climbed 2 basis points to 4.72 percent, the highest since Dec. 27.”

Here comes the financial stress… again.

“The difference between the rate banks charge for three- month dollar loans relative to the overnight indexed swap rate showed a decline in the availability of cash today. The so- called Libor-OIS spread widened 4 basis points to 67 basis points. It averaged 8 basis points in the first half of 2007.”

Time for risky assets to curl over and head once again for the edge of the abyss.

Related Posts:
Sarcastic Rant on Fannie and Freddie


Anonymous said...
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Anonymous said...

I really found the TMA analysis extremely interesting! It doesn't even seem to be a Pyrrhic Victory; rather it seems a distraction as the King of Epirus sallies forth in search of new, greener pastures. Bellagio offers more favourable risk/reward scenario's, and I hate to say it, those are not in favour of the player.

Brian said...

Speaking of the "bottom callers", I couldn't believe the number of bottom callers in the dollar last week.

Every time the DX has a 3-day rally (i.e. EUR/USD has a 3-day selloff), it's been regarded as a turn in the dollar. However, every single time, it's been a huge opportunity to short the DX or go long EUR/USD.

EUR/USD retraced nearly 500 pips since Sunday evening.. "Dollar Smile" is not happening..

Ben Bittrolff said...


"Dollar Smile" ... you have to wait for a shoe to drop over in Europe. You need one of their banks to come out and admit their just as screwed as the US banks.

LIBOR and EURIBOR have been pushing up suggesting that something somewhere over in Europe will snap under the stress sooner rather than later.

Anonymous said...

Ben, I understand you respect Dennis Gartman. What is your take on his "Gold Long" recommendation?

fish said...

i'm so with you on the FNM & FRE call. This retarded run above 30 was an absolute GIFT to us.

Unknown said...

Yikes, $35 bln in debt... that would have made this a top-5 bankruptcy in annals of U.S. history.

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