Who is to blame for the banking crisis. When we spoke with Bob Patten of Morgan Keegan & Co., Inc he contends there is enough blame for all to share. Some of it pointing right back at congress.

Mr. Patten:  So the banks are to blame, Wall Street’s to blame, the government’s to blame, the borrowers are to blame and that absolutely needs to be shared among all parties. President Obama pointed that out in his speech a week ago. Right now Congress is pointing the fingers, I believe unduly so, at Wall Street saying, “Wall Street and the banks, it’s all your fault,” and holding no responsibility for the fact that their programs and policies since the mid-1980s, starting with CRA, have forced banks to make loans to less than worthy borrowers, have forced the banks to create housing policies and home ownership policies, and then they put exotic products that they didn’t regulate but supported through Fannie and Freddie in terms of option arms, interest only and lowered credit underwriting policies. So hopefully we can go back to the old days when banking was boring and right now, boring would be beautiful.

For the complete Banking report, including a full overview of this sector with stock picks and an outlook for 2009 and beyond, click here.

We recently spoke to Dorson White of EVP & COO of ECB Bancorp, Inc. he had some interesting things to say about why the company has fared well in this economy;

Mr. White: ECB maintains a very strong credit culture. Its loan officers are  required to extensively underwrite each credit request, complete an in-depth cash flow analysis and risk grade each loan. That discipline has minimized the bank’s credit risk exposure. The bank continues to have excellent balance sheet  growth, but credit quality has not been sacrificed for that growth.

For the complete Banking report, including a full overview of this sector with stock picks and an outlook for 2009 and beyond, click here.

Continuing our look at Real Estate Investment Trusts this week, we spoke with several analysts as part of our roundtable discussion on this space about what 2009 holds for the REIT space after the hardship of 2008. Here’s what analyst Dave Rodgers of RBC Capital Markets had to say about 2009:

Mr. Rodgers: “The best way to summarize it is that 2009, from our perspective, will be a year of opportunities and a year of continued volatility, particularly early in the year. There are more unknowns than we’ve seen in real estate for quite some time — financing, fundamentals, particularly with bankruptcies. I just think that lack of clarity doesn’t bode well for the REITs. That being said, the opportunities will start to emerge at some point and by the time they start to emerge, the stocks will have moved relatively quickly, we think. There is some opportunity to again be an investor today in stocks, to look for the opportunities among the names that we suggested that fit our criteria — those that don’t have large refinancing risk, those where even stressed fundamentals suggest that the stocks are trading at a discount today. Start building that portfolio of real estate and take advantage of that throughout 2009.”

For the complete REIT report, including a review of 2008 and stock picks looking forward, click here.  

Our special focus this week is on Real Estate Investment Trusts. As such, our Off The Record picks this week come from a variety of top CEOs and Analysts in this space. Here’s their picks for the week:

• Corporate Office (OFC-  Two analysts in this space pick Corporate Office:
  
  • “[Of those]  with very good management, which are capable of making the tough decisions — Corporate Office probably is the best of anyone
    we cover.”
  • “They’ve focused their business on a model that works through the cycle with government and defense contractors. That’s a component of
    the economy that never seems to shrink — government and defense. And I think they do a very good job of communicating with investors; they’re very clear in their message. I think they take chances when appropriate and I think they are conservative when something doesn’t really benefit them or the investors in the stock.”
• Boardwalk REIT (OTC: BOWFF)- Two CEOs in this space chose Boardwalk as their pick:
  • “I would say it’s Boardwalk. They are excellent operators, they maintain a tight ship and they have accumulated a very large portfolio of assets that I believe s currently undervalued.”
  • “I think Boardwalk has done a very good job. Basically I can see they’ve gone through the process of starting as a very small company and successfully expanding their portfolio, expanding their business to become, I believe, the number one landlord in Canada. I think they’re the biggest company in Canada. I must admit that the management team has done a fabulous job.”

For the complete Real Estate Investment Trust report, including a roundtable discussion of the space, and an outlook for 2009, click here.

Despite the continually gloomy economic climate, we here at TWST keep finding pockets of good news, and this week’s Insurance issue is no exception.

One of the company’s we interviewed, American Financial Group (AFG) declared its quarterly dividend payments last week of $.13 a share- a 4% increase over the quarterly dividend paid in 2008.

In the interview we did with their CFO, Keith Jensen, we asked them about their long terms goals, in terms of maximizing shareholder value. He had this to say about that:

Mr. Jensen: Our objective would be to continue to grow shareholders’ equity in the 8% to 10% a year range, to continue to develop products that work well, taking advantage of some of the competencies we have and to start up new businesses that meet some of the objectives we have around being specialty-type companies. For example, during this last year, we hired a group of individuals who are experts in environmental liabilities.

For the complete Insurance report, including the full interview with Mr. Jensen and other senior management executives from top insurance firms, click here.  

Despite the dark cloud hanging over much of the economy, there is some good news to be had. Analyst J. Paul Newsome of Sandler O’Neil + Partners, L.P. talked to us a little bit about where the good news lies in the Insurance space:

“The good news has been relatively benign claim frequency and severity. Benign claims inflation has meant that the reserves have proven to be adequate for just about every company. So the liability side has been largely good news from a solvency perspective in the sense that the reserves look to be very solid really across the board.”

For the complete Insurance report, including an overview of the space as a whole and stock picks, click here.

As our focus this week is on Insurance, our top picks from our roundtable discussion on Life Insurance. This sector was hard hit by the financial turbulence of 2008, but the analyst we spoke to did have a few picks in this space:

• “Aflac (AFL) is our top pick. It’s a very solid, protection-focused company. You get a very reliable EPS stream that is not market sensitive, and from a credit perspective they do relatively well. I think I said before that no insurance company is perfect but their more risky exposure is concentrated exposure to bank and financial debt from Europe and Japan.”
• “My top pick is Assurant (AIZ). It’s a specialty insurance company as well. It’s got four or five niche oriented businesses, and no equity sensitivity in their earnings stream either. They’ve benefited in one of their businesses from the housing crisis. It doesn’t seem like anybody in the insurance business should benefit from a crisis, but their specialty property business has tripled in size in about three years owing
  to higher mortgage delinquencies and default rates.”
• “Reinsurance Group of America (RGA). It’s a pure play life reinsurance company. It’s not quite as cheap as it was maybe a month or two ago when they raised some equity, but their equity raise was much more about a proactive opportunity to take advantage of some new business opportunities here as a bunch of the primary life insurers are looking for opportunities and ways to relieve capital strain, unlock capital.”

For the complete Insurance report, including the complete roundtable discussion and overview of the Insurance space, click here.

Continuing our special focus on Banks this week, analyst Chris Marinac of FIG partners has some advice for the smaller end of the banking spectrum:

“If you are a small or medium-sized bank, you have to be very nimble and very focused. It is not time to take on new customers with both hands, it’s time to be very selective and very opportunistic, and I think you need to be thoughtful about the customers that you want to support, the customers you want to take on.”

For the complete interview with Mr. Marinac, including a complete overview of the banking space and stock picks, click here.  

Our special focus this week here at TWST is on Banking. As part of this focus, this week we held a roundtable discussion with a vareity of analysts in this space. Despite a generally sanguine view of the present and immediate future, the analysts we spoke to did have a few stocks to recommend in this space:

• Mike Shafir, Sterne Agee: Some of the names that we have been recommending are Danvers (DNBK), about 20 miles north of Boston. While that’s a commercial lender, the valuation along with 15% capital allows investors to be pretty secure there with the company trading at 95% of tangible book.
• Anthony Polini, Raymond James & Associates: You certainly want to commit some funds to this industry. Our top pick, New York Community Bank (NYB), is experiencing margin expansion, loan growth acceleration, double-digit earnings growth, and trades near its 52-week low.
• Andrew Stapp, Riley & Co. : I like Signature Bank (SBNY). It has been generating extremely robust loan growth, with loans rising 62% year-over-year organically as of September 30,2008. What is amazing is that it has been realizing this pace of growth by cherry picking only prime quality credits. As a matter of fact, its weighted average risk rating on its loan portfolio has been coming down over the past several quarters due to the quality of the loans that they have been placing on their books. The company also has low exposure to construction and development loans at only 5% of total loans.

For the complete Banks report, including an overview of the sector as a whole- where its been in the past year, and where its headed, in addition to interviews with CEOs of top companies, click here.

Interesting article in the NY Times today about the impact of large bonuses on performance.  Conclusion of psyche tests – for complex cognitive tasks large bonuses led to no improvement in performance versus smaller bonuses.  Worse – it showed inferior performance.   Hypothesis – stress induced by the higher expectations led to lower performance.

Of course this leads to questions about executive pay – at the C level, and at investment banks.   According to the article, its conclusions were immediately challenged by banking executives when referring to their own firms.   Duh!  Any senior executive is going to challenge anything that would suggest he or she is overpaid.

The executive  pay issue is exactly the same as that faced in baseball.    A-Rod performs no better now he is paid $30m per year, than when he was in Seattle.   The reason senior banking executives at bulge bracket banks are paid so handsomely is that they have convinced their bosses that they are rare and special talents.   Their bosses are easily convinced, because they are generally poor people managers, and because they are using the same arguments themselves to their boss.  Boards of directors bring in compensation consultants to assess fair pay for the top guys.  These consultants are like house appraisers – easily replaced if they provide the wrong answer.

The reason executives are so highly paid, is that they have successfully framed the market environment for their skills.   Scott Boras on one side, with no Theo Epstein on the other.   How have sports teams countered competitive inflation in salaries?  Generally not well.   Salary caps – how about that NASD?   Deep farm systems.   Long terms contracts.  Depth in every position is the best hedge.