Lennar's Windfall
Ian Wyatt | The Daily Profit | February 17, 2010 2:31pm EST
So far this year 15 banks have been closed by the FDIC. Last year, it was 134, if I'm counting the closing figures right as posted on the FDIC website. Some of you may remember the last time there were mass amounts of bank closings during the S&L crisis of the late '80s and early '90s. At the time, a special agency, the Resolution Trust Corporation (RTC) was set up to dispose of the assets of these banks.
The RTC was controversial because many times it sold assets at prices far below market value. Ultimately though, the RTC succeeded in getting assets seized from insolvent banks into stronger hands. And because some of these "stronger hands" had low cost structures due to low up front costs, a new phase of growth was born.
A similar thing is happening now. Lennar Corporation (NYSE: LEN), a homebuilder, recently picked up $3 billion worth of unfinished homes from the FDIC for about 40 cents on the dollar. Lennar only had to put up $243 million. The FDIC kicked in $365 million and provided 0% interest financing.
Because Lennar's upfront costs are so low, it will be able to hire the workers needed to finish the homes and offer those homes for sale at a price that makes sense for buyers. This is how growth returns after a bubble.
But this time there's a twist. The $365 million put up by the FDIC? It's an equity stake. Yes, rather than simply disposing of the assets to the highest bidder the FDIC, and by extension the government, now has a stake in those unfinished homes.
The FDIC could turn a profit here. But by offering financing and providing an interest-free loan, the FDIC is also supporting home valuations by not letting these unfinished homes sell at absolute rock bottom prices.
