From The Daily Reckoning:
It's going to be the biggest fire sale in history - and it begins in 2012.
Europe's banking sector holds 2½ times as many assets as the U.S. banking sector. It's huge. And it's in big trouble. Europe's banking sector needs cash - mountains of cash.
As a result, it will have to sell more than $1.8 trillion of assets, which will likely take a decade to work through. For perspective, it sold only $97 billion from 2003-10.
"The list of asset sales is the longest I've seen in 10 years," says Richard Thompson, a partner at PricewaterhouseCoopers in London. Knowing how these things work, the final tally could well be double that. The world has never seen anything this big before.
Where will the cash come from?
This is our 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.
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.)
With the EU banking sector loaded with trillions of stuff it must sell, the mouths of knowing investors drool with money lust. These are deals the big boys do. Prem Watsa, the brain behind Fairfax Financial and dubbed by some as "the Warren Buffett of Canada," gets to do these deals. Wilbur Ross, the billionaire investor famous for investing in distressed assets, gets to do these deals. Warren Buffett gets to do these kinds of deals.
One such investor is a guy named Bill McMorrow. You've probably never heard his name before. But his current joint venture fund has returned 42% annually since it began in 1999 by buying up distressed property from banks....MORE