| December 19, 2013 | | | | |  | | | A Fire Sale in Two Acts | | | - A welcome respite from chatter about the Fed's decision to taper...
- The foreign investment opportunity you couldn't afford to ignore in 2012… and why it's now one of our critical 2014 forecasts...
- Plus, Chris Mayer with an update after calling out the bargains you could tap two years ago... the little-known method for you, the retail investor, to buy in… and more!
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33 trades - 33 winners... All year, I've been trading - and winning. In 2013, every single closed trade has made money. Click here and I'll show you how I plan to do it again in 2014. Enroll now to save a full 50% off your subscription. But on December 23, the price goes back up, so don't miss out. | | | | | | | | Addison Wiggin, talking about something other than the Fed's decision to taper...
 While everybody was yammering about Ben Bernanke's decision to taper yesterday… we had our gaze turned almost 4,000 miles east, to Brussels, Belgium. What we were watching for offers you a much better way to affect your wealth than the Fed's taper talk.
From a recent Reuters report:
"The European Union agreed on Thursday a blueprint to close failing banks but stopped short of a more ambitious plan for the eurozone to unite in tackling its troubled lenders.
"More than five years since a financial crisis struck, Europe is on the verge of finalizing one of its most ambitious reforms since the launch of the euro -- an agency and fund to shut problem banks as soon as the European Central Bank starts to police them next year."
How on God's plush little green earth does the state of the European banking sector affect my wallet? we hear you thinking aloud. That's an astute question. Allow us to provide a little clarity…
Two years ago, our own globe-trotting ex-investment banker turned value-hunting newsletter writer Chris Mayer walked into our office and told us about an opportunity we couldn't ignore.
"Where is the cash going to come from?" he asked us.
Puzzled… we shrugged at his question... signaling we'd take his bait.
"Europe's banking sector holds 2½ times as many assets as the U.S. banking sector," he went on to tell us. "It's huge. And it's in big trouble. Europe's banking sector needs cash -- mountains of cash.
| "It's going to start this year. It's going to be the biggest fire sale in history, and our readers need to know about it." | "It's going to have to sell more than $1.8 trillion of assets -- most of it real estate -- which will likely take a decade to work through. The sector sold only $97 billion from 2003-10. It's the longest list of asset sales you could imagine. It's going to start this year. It's going to be the biggest fire sale in history, and our readers need to know about it."
That was in 2012.
Chris, through his Capital & Crisis newsletter, told readers about the opportunity… printed his recommendations, et viola… back in the present day, you're up 87%. But that was just "Act I," so to speak.
The curtain will lift on "Act II" of the biggest fire sale on Earth in 2014. Or so we hereby forecast.
You'd think after five years, Europe's banking sector would get its act together. Alas, with apologies to the comedian Ron White, two years on, it's clear you can't fix stupid. Then again, their stupidity is your gain.
Importantly, new capital requirements will stoke the flames of Chris' fire sale and set the stage for even greater windfalls for you in the year ahead. Without wandering too far into the brush, the Bank for International Settlements (BIS) -- a central bank for central banks -- convenes what's called the Basel Committee on Banking Supervision, which sets global capital requirements for banks.
The requirements set in the Basel accords are completely voluntary and have been updated since the first one was established in 1988. They're creatively titled Basel I, Basel II and, most recently… (any guesses?)... that's correct, Basel III.
It's the latest Basel accord that's the kicker. Basel III's capital requirements "tighten every year through 2018," writes Chris in today's episode. "To meet these hurdles, the banks must clean up their books. This means they have to sell a bunch of assets."
Problem is most retail investors can't or don't know how to tap into these fire sale properties. Luckily for you, Chris' backdoor method for grabbing a piece of bargain-basement European real estate is poised for another spike. Read on below for the details in his own words... | | | | | | | | | What's the ultimate revenge on the IRS? What's the best revenge on the IRS? How about collecting up to three fat income checks per month... truly tax free. That's right. It's 100% legal. And there are no red flags. According to the Supreme Court itself, the federal taxman won't be allowed to touch a nickel. Millions of Americans do this already. Now you could too, for up to 36 tax-free income checks over the coming year alone. Click here to see how! | | | | | | | | The Daily Reckoning Presents…
| | | | Act II of the Biggest Fire Sale on Earth | | | | by Chris Mayer | | | It may be hard to believe, but the European banking system is in worse shape than it was in 2008.
Nonperforming loans, or NPLs, are loans for which a bank has not received a scheduled payment for at least 90 days. These are the deadbeats, in other words. Well, European banks hold 1.2 trillion euros worth of NPLs — that's double what they reported in 2008.
Banks have to get rid of these loans. There are new rules taking effect next year, called Basel III. They tighten every year through 2018. To meet these hurdles, the banks must clean up their books. This means they have to sell a bunch of assets. And they are selling them at deep discounts.
You want to be a buyer of these assets.
The "smart money" is all over this idea and has been for at least two years. Blackstone, Apollo and other private equity firms have raised billions to buy distressed loan portfolios from European banks.
The reason you want be a buyer is because the banks will sell these assets at discounts to the face value of the notes. For real estate loans, the discount varies greatly, depending on where the property is and other details. See the chart below to get a sense for the discounts on deals that already closed in the last two years.
That chart shows you what investors paid. The tallest tower is in the 41–50 cents per euro range. Meaning, the buyers paid 41–50% of the face value of the mortgage. The discounts have largely held over the past few years. It's not as if the discounts are going away.
So think about this: A banker lends 75% against the value of the property during the boom. The thing goes bust. You can pick up the property for half the value of the note. On a $10 million apartment with a $7.5 million mortgage, a 50% discount means you pay only $3.75 million.
Maybe it's 70% leased. It didn't work with a $7.5 million mortgage. The owner couldn't make the payments. But now you come in at $3.75 million. And say you put $2.5 million of debt on it. The property works now. You pencil it out and figure you'll earn a 12% cash-on-cash return in the first year. And you own the property, with a chance to boost occupancy over time. In a few years, you could double your investment as the property value recovers.
This is exactly what private equity firms did in the aftermath of the crisis in the U.S. It's taken longer in Europe, but it's happening. | | | | | | |
| Bigger than Benghazi, the IRS and the NSA Scandals… Combined? It's shocking stuff. Bigger than anything you might hear on Talk Radio.
A Florida-based computer expert is breaking an incredible story. Perhaps the biggest political story of the next decade.
In short, the last five years of the Democratic Party's agenda could be undone.
Gun control. ObamaCare. Internet sales taxes. All could be rendered irrelevant. Sooner than anyone thought possible before…
For obvious reasons, you likely won't see this story picked up in mainstream media outlets.
Instead, this whistleblower is putting everything he discovered up in a free video.
| | | | | | | | Two years ago, I called it "the biggest fire sale on earth." Here was my perspective at the time:
This fire sale is your opportunity. There is no better, more-reliable way to make money than to buy something from someone who has to sell. Bankers are the best people in the world to buy from. Believe me, I know.
I was a vice president of corporate banking for 10 years before I started writing newsletters in 2004. I would get at least three or four requests every year from some investor group asking if we had any assets we were looking to unload. Why? Because they know banks are stupid sellers.
I once had a big real estate deal go bad on me. But I knew I was covered by good collateral twice over. You'd never know it based on the pressure I got to get rid of the thing once the borrower stopped paying and the bank took the asset. I knew, given a little time, I could sell the property and make a bundle for the bank. But the folks at the top didn't want to hear it. They wanted that bad loan gone. They wanted to wipe it off the books fast.
| They wanted that bad loan gone. They wanted to wipe it off the books fast. | So I sold it quickly, basically at fire-sale prices. It was still the most-profitable loan the bank made that year, because I got a price a good 35% above the loan amount. But the group I sold it to — which could've been more patient in marketing the property – flipped it again and made an easy 50% above that. The bank left a lot of money on the table and knew it — and didn't care.
But institutionally, banks can't really hold bad debts for long. As soon as they report a big bad debt on a quarterly financial statement, some annoying things happen. It means they have to put aside more capital for this particular loan, which they hate to do, as it lowers profitability and requires a lot of paperwork. It can raise the attention of regulators, which banks hate. It can raise shareholder suspicions about lending practices, which banks hate. So the usual way to deal with bad debts is to clear 'em out as fast as possible. (Unless you're swamped with bad debts in a full-blown crisis, in which case you try to bleed them out and buy time to earn your way out, and/or patch them up as best you can to keep up appearances while you pray for a miracle — or a bailout.)
Two years on, my bankers-are-stupid-sellers theory has been proven correct. Even better, my recommendation on the fire-sale theme has nearly doubled since — but incredibly, the opportunity ahead of it is bigger still. Astonishing as it sounds, the idea is timelier today. After two years of foot-dragging by the banks, the fire sale is only really beginning in earnest now.
"Asset sales by banks have absolutely accelerated," according to David Abrams, who manages 3.9 billion euros in European debt for the private equity firm Apollo. "We're five years into the crisis, but it's just the beginning of the disposition process."
And Marc Lasry of Avenue Capital, which invests more than $8 billion in distressed loans, says in a Bloomberg story that "bank after bank" has been offering his firm assets for sale.
I could dig up many more such quotes and anecdotes. The key point is the pace is picking up.
PwC estimates that when the books close on 2013, we'll have a new record of asset sales by European banks. Yet as I pointed out, the mountain of NPLs is bigger now than ever. Take a look at the below chart, "There Are Still Huge Piles of Bad Debt in Europe."
This mountain is (once again) your opportunity.
Right now, there aren't too many options for retail investors to participate in the EU fire sale — unless you have access to private equity funds.
You could always buy Blackstone or Apollo, both publicly traded, but they do many other things besides this. It's kind of like buying GE for the light bulbs. I do have a specific recommendation … one that I think could increase more than 25% in the next few months. But out of deference to my paid-up readers, I have to limit access to it. If you're interested in accessing my play's ticker along with my full analysis, simply click here.
Regards,
Chris Mayer
for The Daily Reckoning | | | | | | | | |  Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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