Crystal River’s Q2 Write-Downs Could Bankrupt the Company

[Editor: Following review, we are republishing this article with two editor's notes and one clarification to the author's positions in stocks mentioned. Readers with differing opinions on this topic are invited to submit an article for publication.]

Crystal River Capital, Inc. (CRZ) is a leveraged financial entity structured as a Real Estate Investment Trust. I think that the company - within two to six months - will be insolvent and its stock worthless (and trade like other worthless REITS such as Thornburg Mortgage (TMA) for under 30 cents a share for awhile as it awaits delisting).

You might chide me for being Captain Obvious now for not speaking up about CRZ sooner. Predicting the demise of CRZ is not too bold a move, considering that its stock has plummeted over the past year, from about $25.50 to about $3.50. Nonetheless, one can still profit from buying puts on the stock as it falls to zero. The values of CRZ’s assets have fallen dramatically, but these declines are not reflected in its overpriced stock. Nor is the risk that the company could be suddenly wiped out by an inability to pay margin calls or meet its credit default swap obligations.

That swing has already happened, or very nearly so. I do not even think the company will be able to pay its next quarterly dividend [Editor's note: The author refers to the September 2008 dividend]. The market largely agrees, which is why stated dividend, if paid, would result in the stock having a yield of 34%. If the company does not announce that it is suspending its next dividend, its creditors will probably either issue margin calls or file a suit against the company to enjoin the dividend payment.

Balance Sheet Review

First, the company’s largest asset is available for sale securities, which it values at $271 million. The company took a big write-down on this part of its portfolio last quarter. I expect another large one when the company reports Q2 earnings and values as of 6/30/08.

Using the same method I used to estimate the write-downs in Redwood Trust's (RWT) portfolio, namely comparing similarly-rated segments of the CMBX to the securities in CRZ’s portfolio, I see CRZ’s CMBS portfolio decreasing in value from $271 million to $242 million. This is a somewhat larger percentage write-off than I am estimating for the CMBS portfolio of RWT. This is because RWT’s slightly older vintages of CMBS faired a bit better than CRZ’s newer CMBS.

Next is the company’s holdings of non-agency RMBS. Here, I estimate the company will report a $42 million write-down, again based on declines in the comparable ABX indices. While the CMBX and ABX are not perfect proxies of the value of CRZ’s MBS portfolio, many companies explicitly have disclosed that they rely on these indices in valuing their Level III assets, and in past quarters declines in these indices have closely mirrored the write-downs actually reported by CRZ and other public companies with these assets.

CRZ no longer owns agency MBS. These were once the largest part of the company’s portfolio, and its most stable liquid asset, which it was forced to sell in the first quarter.

In total, I predict a write-down of available for sale securities of $71 million. This is only slightly higher than the company’s first quarter writedown of these assets of $67 million.

Commercial Real Estate Loans

The company does not mark to market a portion of its commercial loan portfolio, but rather reports them at face value until it believes they are impaired. So far it has marked down the value of only one loan held at face value.  In 2005, the company issued a “mezzanine” or junior loan of $9.45 million for the construction of luxury condominiums in Portland, Oregon. A few months later, the borrower fell into financial difficulties, and CRZ threw good money after bad and loaned the project more money at 16% interest. The project has stopped paying interest on the loan. In total, because of cost overruns, the average construction price of each unit is estimated to be $849,185. Thus its “wholesale” cost of condos in Portland as the country heads into a recession is nearly a million dollars!

“We believe that it is probable that we will not recover the entire loan balance,” the company writes in its latest 10-Q. No doubt! Amazingly, sales in the project appear to be going backwards. As of 12/31/07 CRZ reported that 47 of the 70 units had been sold. Now the figure is 35 sold and 10 “under contract.” It will be interesting to see the updated figure of 6/30.

After the borrower defaulted, CRZ took a $4.5 million write-down on the loan in Q4 2007 and then another hit $2.5 million in Q1 2008. It has $6.77 million left to lose.  I expect, given the extreme weakness in residential real estate in Portland, that it will lose all of this money eventually and only the senior mortgage holder on this project will be paid from its proceeds.

Outside of this loan, CRZ has taken very little in the way of reserves for credit losses, despite the fact that these loans have a subprime average interest rate of 9.38% for junior loans and 11.98% for construction loans, showing the weak credit of the borrowers when the loans were made and/or the extreme degree of subordination of the loans.

What is the fair value for low-quality construction and junior loans made during the peak of the bubble on the open market these days? Certainly not close to the full value $50.7 million reported on CRZ’s books. $5.86 million of this is a junior loan on the Sheffield Building in Manhattan’s Hell’s Kitchen neighborhood, at 14.03% interest, and with $242.8 million in more senior debt as of 12/31/07. An article about the purchase in Real Estate Weekly, dated 1/19/05, noted that the sellers of the building were a “real estate family well known for its hesitancy to cash-out of properties” but were offered a price that was so high that it inspired “astonishment.”

The buyers won in a two-round bidding war that involved at least 15 other bidders. Unfortunately, about 11% of the units are going to have to stay “rent-stabilized” and can’t be sold until the tenants vacate, which in these types of situations doesn’t happen too often. Other troubles with the building that made news or blogs include protest marches, flooding lobbies, asbestos, and a buyer who had a “six inches in diameter and a foot high of solid concrete, [fall] directly into her tub.”

Why are the would-be Maklowes who bought the building so short on cash they are taking out loans at 14%? We’ll see if they default when the loan matures October of this year. In its held-for-sale real estate loan portfolio, the company took a $9 million write-down in Q1. I do not have enough information about this aspect of the company’s portfolio to venture an estimate on how it will be valued in Q2.

Commercial Real Estate

The company reports that as of 3/31/08 it values its commercial real estate portfolio at $233 million. Looking at rental revenues and related expenses, this is a reasonable - if somewhat aggressive - estimate. A better estimate of $210 million reflects the high cost of commercial real estate credit, the negative effects on rent of overbuilding office properties the past few years, and the deteriorating economic environment. I don’t know if CRZ is going to adjust the value of these assets downward, I suspect that, in line with past quarters, it won’t, except to account for depreciation. CRZ’s lenders, however, may want to consider the value of this property in determining whether to continue to loan the company money. I certainly would do so, and choose not to renew CRZ’s credit lines and issue margin calls to maximum extent the terms of the loans allow.

Going Out With a Bang or a Whimper?

CRZ reported equity of $132.6 million as of 3/31/08, or $5.33 a share. As of 6/30/08, the probable mark-to-market of the MBS securities portfolio will reduce that to $61.6 million, or $2.48/share. Another $2.5 million write-down on the defaulted condo loan in Portland would nick another 10 cents a share off book value, to $2.38/share. If the value of the CRE portfolio is just 10% lower than CRZ’s Q1 estimate, as I think it is, book value falls to a mere $1.44. Mark to market those high-risk junior loans (probably by 20% or more to reflect current conditions), and we are well under $1 a share.

The Q3 macroeconomic environment for commercial and residential real estate is looking like it will be to be much worse than Q2, which will mean additional write-downs and loan defaults. It wouldn’t take much to wipe out that last dollar of equity in the next couple months, assuming that it isn’t already already a negative figure. And with no profitable business model, a company whose stock has book value of less than 0 is worthless.

Instead of this “whimper” scenario of a relatively slow and graceful decline to below $1/share, margin calls on CRZ’s repurchase agreements or required cash payments pursuant to the terms of its credit default swaps may cause a sudden meltdown. New Century Financial, one of the first mortgage REITs to implode, closed on Friday March 2, 2007 at $14.65, but fell more than $10 a share the following Monday, closing at $4.56. Eight days later, it fell to 85 cents. Within three more weeks, the company filed for bankruptcy. Today the stock trades between 1 and 2 cents. The stories of the rapid downfalls of other mortgage REITs such as TMA, Luminent Mortgage (LUM), American Home Mortgage (AHM), NovaStar Financial (NFI), are similar, with the stocks collapsing 80% or more in a very short period of time.

Most of CRZ’s reported Q1 repurchase agreements were paid back in Q2 with the proceeds from the sale of its agency-MBS portfolio. That, however, still leaves $22 million in repo lines subject to margin calls. As the company notes:

As of March 31, 2008, our stockholders' equity was $132.6 million. If our stockholders' equity decreases below $100.0 million, we would be in default under these borrowing arrangements and … the lenders under those facilities would have the right to accelerate the maturity of the indebtedness.

My projection is that it will report soon that it is already well below $100 million. It’s possible the company will try some tricks such as writing down the value of its debt to stay above the $100 million mark, but there is only so much time to delay the inevitable. With a market cap well below $100 million, its clear that the market doesn’t think the company has that much equity. Last quarter 33% of the company’s write-downs were in securitized assets on its balance sheet, so this trick is still not enough to keep the company’s equity above $100 million given the extent of its likely writedowns.

Another problem that could suddenly bring down the company are its two remaining credit default swap [CDS] positions. The company closed out six CDS in Q1, losing $10.4 million on the transactions. The company’s exposure on these remaining defaults as of 3/31/08 appears to be $4.8 million. Losses in CDS have to be paid with cash to the counterparty, and CRZ had very little unrestricted cash as of 3/31/08. [Editor's note: See CRZ's 8K filings and Investor Presentation of April, 2008 (.pdf) for the company's statements of significant cash generated from Q1 asset sales.]

Conclusion

CRZ is going to report large write-downs when it reports Q2 earnings, which by themselves will cause it to violate minimum equity requirements on its repurchase agreements. This could cause the company’s sudden collapse. Even if this doesn’t happen, the company will have to drastically cut (for the second time) its regular dividend, if not suspend it entirely, which has also been the proximate cause of the collapse in stocks like CRZ with large MBS portfolios.

The price of CRZ stock has been rapidly falling the last few trading sessions. The time to get out of a long position, or start building a short position through the purchase of puts and the shorting of calls, is right now. At best, CRZ should be trading somewhere near an estimate of its book value, which is under $2 and dropping by the day as more and more homeowners and commercial developers default on the loans underlying CRZ’s mortgage portfolio.

Disclosure: Author is long CRZ puts, short TMA stock, short RWT stock, long RWT puts; no position in other companies mentioned.

[Editor's note: disclosure of author's RWT positions added 7/7/08]

Comments

[Yomgui]

Thank you Greg for this detailed analysis on CRZ.
Regarding your disclosure ('Short TMA, Long CRZ puts, no position in other companies mentioned'):
Could you please confirm that you closed your short positions in RWT, a company you mentioned several times in today's article.

I'am asking because in your june 27 article (seekingalpha.com/artic...)
you disclose a short position.
Congratulations if you have closed it with a profit in the meantime, but could you please share the rationale with us, since RWT is still trading at 20 and you forecast a price of '8 to 4' by year end ?
Thank You,
Yomgui

[fatcat]

Yomgui,I am also short RWT ,as I suspect you are...not because of Gregs statements,I've had mine on for 3 months.

[Greg Weston]

Yomgui, I am still short RWT and still long RWT puts. Thank you for pointing this out.

[Yomgui]

Thanks Greg for the clarification.

Fatcat, FYI I'am long RWT: I don't share Greg point of view on this one and believe RWT has a significant upisde potential if you can wait a couple of years. It all depends on your time horizon I guess.

[JOETRADER]

CAN YOU TELL ME WHT MONTH YOUR ARE LONG IN PUTS. I SEE VERY LOW OPEN INTEREST IN ALL OF THE LONG PUTS. IF IT COMES A TIME WHEN THERE IS A NEED TO SELL THEM, THERE WOULD NOT BE ANY ONE ARROUND TO SELL THEM TO.

[fatcat]

Yomgui,you could be right,my time horizon is very short..

[fatcat]

Trader ,I've got the july 35, I cycled from the June..

[Greg Weston]

Joe, I don't know if you are talking about RWT or CRZ, but I own puts in both, and each for multiple months.

Liquidity could be an issue in buying puts, but when you're expecting short-term profits of more than 100%, it is not such a big issue.

I also sometimes hold puts until expiration, and then exercise them to create a short position. For example, most of my short position in FBR came from the exercise of 2.5 puts.

With these financial stocks, frequently all available shares to short were locked up a long time ago, and I don't think anyone is covering on companies like these that appear to be headed to 0.

Sometimes my brokers force me to close short positions shortly after they are created by exercising uncovered puts, but sometimes I am pleasantly surprised and the position is allowed to remain open even though the stock is not available to short.

[dixie]

Greg, shifting gears and viewing the REIT glass as being half-full rather than half-empty,which of the REITS, using your analysis, best pass the downside safety test?

[Smooth Jazz]

Greg Weston,

First off let me say up front I'm a recent long in CRZ having bought 500 shares at the recent lows, so I don't have much at stake. But I have to admit this has to be one of the most irresponsible hit jobs I've seen on a company, in part because of the histrionics headlines and the reliance on dubious market indices to pronounce that the company is dead. I've never been one to question business journalists, but if you are off the mark and you start a self fulfilling "run" on the company's share price which doesn't come to pass, then I would strongly recommend that the SEC look into you and your short position.

I say this because your entire premise, and the criteria you use to try to justify your short position and implosion thesis for this company, is the prevailing value of market indices that arguably have been driven down by short players and may not accurately reflect the performance of the underlying assets. In other words, your thesis is not based on any official communication from the company, or their cash flows, but arbitrary market indices that may not reflect reality. The one premise that would lead to a NEW, AHM or TMA type meltdown is an immediate call on their $20 repo debt based on your view that ABX & CMBX related marks would trigger net worth covenants and generate margin calls on this margin debt. To wit, here are my major problems with your article:

1. It implies the company will implode in part because of the arbitrary, arguably manipulated, ABX index that may not reflect reality:

www.bankstocks.com/Art...

2. It implies the company will implode in part because of the arbitrary, arguably manipulated, CMBX index that may not reflect reality:

www.reitwrecks.com/200...

3. Your thesis does not reflect the fact that SFAS 159 allows the company to mark the CDO Liability debt to match the asset marks, thereby offsetting your draconian net worth scenario.

4. Perhaps most important, the company declared a 30cent divvy on June 17, suggesting that barely 2 - 3 weeks ago, they felt they were not only solvent but in a position to pay 30cents. DID YOU ATTEMPT TO CONTACT THE COMPANY BEFORE PUBLISHING THIS ARTICLE TO SEE WHY THEY WOULD DECLARE A 30CENT DIVVY 2 WEEKS BEFORE YOU TELL THE WORLD THEY ARE GOING BANKRUPT? Unlike your hit job on RWT which we hadn't heard from since May, I'm very curious how you get to a bankrupt scenario so soon WEEKS after they declared a divvy, when 2 weeks ago ABX & CMBX were roughly where they are today. In other words, If the company felt they were facing liqudity draining triggers based on indexes, why didn't they suspend the divvy on June 17. Doesn't make sense.

I clearly agree that CRZ has impaired assets and their value has dropped since 1Q. My problem is that you are able to broadcast dubious bankruptcy headlines on a public blog, based on quetionable market indices, without a response from the company, barely a couple weeks after they decaled a divvy. If your scenario turns out to be wrong, then at a minimum you owe the company's stakeholders an apology for using a well known public blog to push your short position.

Best Regards.

[Greg Weston]

Dixie, I would not go long anything related to real estate right now. Wait at least a year.

Jazz, whining about markets being "manipulated"... while holding on to stocks that a dropping like rocks is a good way of losing money.

Your point about valuing MBS according to cash-flow models is off the mark because the question is, how long with those cash flows continue? In the case of the junior MBS tranches that make up most of CRZ's portfolio, the answer the market has given is "not much longer." As I noted in my RWT article, some of RWT's MBS have already defaulted. Further, the cost of finance for these types of companies is going to get higher and higher, while availability is going to get lower and lower.

You show you don't know what you are talking about if you think the ABX and CMBS indexes are being manipulated. I urge you to visit Markit.com to learn more about them. Even accepting this false assertion as true, isn't it better to be making the same bets as the manipulators, which you claim are short?

My prediction that CRZ won't pay its next dividend is simply based on the fact that its loan covenants require a certain amount of equity, and the payment of any additional dividends would send it below that requirement (assuming that it already isn't below it.)

Since I own puts and am not short the stock, I actually would prefer the company to make one final dividend payment, since that would reduce book value and thus stock price by about the amount of the dividend, if not more. But it is just not going to happen.

But if you want to go long on a holder of toxic junior mortgage securities just as an already weak economy is tipping into recession, by all means do so, that's your right.

[alf58206]

You didn't answer Jazz's question as to why CRZ would declare a dividend weeks ago, if they faced imminent insolvency. The CMBS indexes are no different now than a few weeks ago?

[Smooth Jazz]

<Jazz, whining about markets being "manipulated"... while holding on to stocks that a dropping like rocks is a good way of losing money. Since I own puts and am not short the stock, I actually would prefer the company to make one final dividend payment, since that would reduce book value and thus stock price by about the amount of the dividend, if not more. But it is just not going to happen.>

Greg Weston,

Thank you for responding to my comments, but whether the ABX and/or CMBX are manipulated were the least of my concerns. My main concern is that you have a financial interest in the stock going down, and you use a well know forum to publish a hit job suggesting the company is bankrupt, 2 weeks after the company declared a 30cents divvy suggesting bankruptcy was not imminent.

Significantly, you did not point out this critical factoid in your article (The company declared a 30cent divvy 90% through the quarter when ABX & CMBX indices were not all that different from today). Nor did you explain to your readers why the comment would declare a divvy, any divvy, barely a few weeks before becoming insolvent. In the case of your RWT hit job the other day, the last time the markets heard from RWT was the divvy announcement in Mid way approx 6 weeks ago so much could have changed since then. In the case of CRZ, Mgmt had to have most of the 2Q numbers in when they declared on June 17, yet you did not let your readers in on this critical fact. The only reasonable explanation I can come up with is that either CRZ Mgmt is dishonest, they declared things were OK for a 30cents divvy on June 17 when they weren't, or they have simply lost their marbles and things were not in great shape on June 17 when they declared. Either way, the fact that you didn't share this important data point with your readers when you clearly have a negative agenda is disturbing. That hasn'nt nothing to do with market indices and everything to do with full disclosure.

Telling me you own puts rather than being short is a difference without a distinction and you know it. You have a vested interest in the stock going down. I would have considered you more credible if you would have explained to your readers how Mgmt could declare a cash divvy weeks before bakruptcy. By leaving that tidbit out, I question your motives and it's a shame Seeking Alpha allows this without closer vetting and scrutiny. As I said, if you are wrong, you will owe a lot of people and apology at a minimum.

Best Regards.

[davisfoulger]

I think it is substantially likely that this piece puts you at substantial risk of both a libel or slander suit and federal prosecution. It is clear that, whatever your opinion and whatever basis it may have in fact (I don't see much that), you have clearly established malicious intent with your puts (and in the RWT story with your short and puts).

If you are substantively wrong, and I suspect you are, I hope you are sued and prosecuted. This is not journalism. This is a hit piece. Even Cramer knows enough to not have a position in something he comments on.

And if I were I wouldn't want the SEC to be reading your comment on being pleasantly surprised when your broker allows you to keep what you know to be a naked short position open. You've just admitted to selling something you know that you neither own nor have borrowed.

Dumb.

[alf58206]

"...And with no profitable business model, a company whose stock has book value of less than 0 is worthless...".

Even if they are cash flowing?

[Smooth Jazz]

<My prediction that CRZ won't pay its next dividend is simply based on the fact that its loan covenants require a certain amount of equity, and the payment of any additional dividends would send it below that requirement (assuming that it already isn't below it.) Since I own puts and am not short the stock, I actually would prefer the company to make one final dividend payment, since that would reduce book value and thus stock price by about the amount of the dividend, if not more. But it is just not going to happen.>

Oh and a couple more points:

1. You appear to be assuming CRZ isn't generating the REIT income from it's assets to pay the divvy. That doesn't make sense either. Sure, paying divvys reduce GAAP book value. But that assumes the business isn't generating cash to pay it. You do realize cash from operations INCREASE book value don't you.

2. You do not fully adddress the SFAS impact on their Liabilities and that is raising my antenna as well. Effective Jan 1, 2008, companies are allowed to mark their Liabilities to match their asset marks. If so, then it is possible these markdowns you talk about which trigger net worth covenants are at least partially offset by corresponding Liability marks.

I see that you are a lawyer, but do you fully understand basic REIT Accounting. Not only did you leave out info on the company's June 17 divvy declaration, you make some dubious statements about divvy payments affecting BV without pointing out cash from the business increases BV, and you did not clearly discuss how SFAS 159 Liability marks affects your thesis.

This gets curiouser and curiouser. If you do get the SP dump you are looking for and get to cash in your puts in a big way, I hope you are able to look in a mirror if you are wrong and it can be proven you maliciously deceived investors by ommitting critical and germane information.

[Wez]

As usual, I'm onboard with Greg's point of view. He has intimate knowledge of this industry and has an impeccable track record so far.

[Ex15:26]

Jazz -
I don't have a vested interest in this stock or options so take it for what it is worth. I'm glad to see that you have put $ on the table and it looks like Greg has too. The beauty about markets is that we won't have to wait long and we'll find out who did some great analysis or got lucky, or both.

1) CMBS or ABX indicies manipulation -
Please, if anything these indicies are too conservative in their valuations and don't reflect real values at all. Why do you think LEH, UBS, MER, and others continue to tell us that "WE'RE ALL DONE WRITING THINGS DOWN" - yet continue to write down assets..... in the case of the ABX - those are significantly impaired and in the case of CMBS - just wait a few months and those will really come off as office lease rates and rent rolls begin to fall.

2) Your comments remind me of the guys that owned TMA right before it was blowing up. You suggest that the REPO debt wouldn't or couldn't be subject to being pulled..... wake up!!! IB folks, banks, and other liquidity providers are pulling lines all over the place. Just look at the PENN National Deal (there were many reasons why it didn't go, but one was that funding appearing to be backing out). Why hasn't there been a high yield issuance in Europe this year? CREDIT IT TIGHT and banks don't want to give it to potentially risky counterparties.
As I mentioned, I don't have a dog in this fight, but it sounds like you are way, way too defensive for someone that only has a 500 share stake. I will predict that the CMBS market rolls over (with or without manipulation of the CMBS indicies) and your 500 shares won't buy you a cup of coffee in 12 to 18 months.

Best of luck.

[alf58206]

Here is an article published 90 days ago by a Seeking Alpha writer.
Ironic isn't it?


seekingalpha.com/artic...

[Smooth Jazz]

<As I mentioned, I don't have a dog in this fight, but it sounds like you are way, way too defensive for someone that only has a 500 share stake. I will predict that the CMBS market rolls over (with or without manipulation of the CMBS indicies) and your 500 shares won't buy you a cup of coffee in 12 to 18 months.>

Ex15,

You claim you do not have a dog in this fight, yet you know enough about me to conclude I have more than a 500 share stake. How prescient of you. I just started a small position and I'm looking to accumulate a lot more at these prices. But I don't want to accumulate shares in a company that is going bankrupt. Morever, I have a pet peeve about full disclosure on a public blog when the writer has something at stake, and the company in question cannot respond right away.

Look, I've been a stock market investor for 30 years, and a real estate/REIT investor for about 10 years. I am well aware what the sector is facing. The headwinds are unmistakable. I also realize there are conflicting opinions about ABX, CMX and related indices and the underlying default rates that are actually occurring.

Howvere, I am well aware that anyone can use public forums like these to make money, so my problem is FULL DISCLOSURE. In other words, the author left out 2 critical tidbits of information:

1. An explanation for why would the company declare a 30cents divy weeks before beoming bankrupt; and,

2. Why didn't the author fully disclose the impact of SFAS 159 - ie Would CRZ be able to offset the negative asset marks

CRZ may very become insolvent at some point, but that wasn't my key point. Since he doesn't want to answer those critical questions, and you are willing to defend him, how about if you answer those 2 critical questions on his behalf.

[davisfoulger]

With regard to smooth's position, financials are hammered all over the place. There are some good reasons for that. There is also a lot of overreaction, and management matters. TMA is a great example of the exact opposite of what we see happening with CRZ. They finally had things in control and then went out and got a whole bunch of new repo debt that was pulled immediately. That was dumb in the environment and TMA is paying a price for it.

The smart REITs are mostly sitting on their assets, writing new high quality loans if they can, and erasing repo debt, if they haven't already, as fast as they can. That's what you seem to miss in your statements about CRZ. They deleveraged for a reason: to get rid of debt so they could ride this out. That's what said when they did it and that's what they appear to have done.

I could be wrong on that. I won't know until I see the 2Q (and maybe even 3Q) results, but I'm not going to jump off a cliff (as you appear be doing) without hard data in hand, and you clearly do not have the data to support 3/4's of what you say in this article, which is incautious in the extreme.

Smooth has a position (as do I), but I've seen comments from people without positions in other places that say, in substance, "this article makes me sick". You don't need a motivation to see this article as a wrongful hit job that is the extreme of everything that is wrong on the market right now. It simply is.

If CRZ goes below two next week without any other news, you will probably have succeeded in setting the amount of a damage claim against you. You are a lawyer. You should know better. I'm not even a lawyer and I know there are precedents that don't favor your position.

[fatcat]

I guess I'm going to jail too,for publishing a comment about my position in RWT. .. with as much bs going on with Wallstreet and the financial media,its going to take a lot of mind police to catch up with all of us!!You're safe Greg..

[stretcho44]

Most disappointing is that a trial lawyer could forget his "short RWT common stock and long RWT put" position and not include it in the disclosure. The RWT article was written last week and there are even links to it in this publication. It has to be pretty fresh in Greg Weston's mind since he is making tons of money from the results of that article. Lawyers don't miss those kind of facts.

The pattern of 3 very negative Seeking Alpha articles on small companies where he holds a short or long put position is the most revealing pattern of all.

It may not be but it has the appearance that the prime motive is personal gain.

[Greg Weston]

Jazz, your comments are increasingly nasty and personal, so this will be my last response to them, or any other such comments.

"1. An explanation for why would the company declare a 30cents divy weeks before beoming bankrupt"

So you think companies that are doing very poorly never try to make it look like everything is honky dory? Besides the obvious reason of "keeping up appearances" I can give you two other plausible explanations.

(1) suspending the dividend would cause the stock to drop at a time when management is considering an equity offering.

(2) if the company is clearly on its way to insolvency or already there, paying a dividend is a way to return money to shareholders rather than creditors. In this sense the company was acting in the best interest of its shareholders by paying a 30 cent dividend, despite its gigantic Q1 loss.

Again, I hope the company does pay a dividend, because it will decrease the stock price by about the amount of the dividend. If I were short I would be indifferent since the stock would go down but I would have to pay the dividend, however holders of puts do not have to pay for regular dividends.

"2. Why didn't the author fully disclose the impact of SFAS 159 - ie Would CRZ be able to offset the negative asset marks"

I devoted a full paragraph to this. Try reading the article again.

[Greg Weston]

By the way CRZ has been selected for deletion from the Russell 2000 and 3000. That means the Russell 2000 and Russell 3000 ETFs/index mutual funds will automatically be selling shares of CRZ when the deletion officially happens.

www.russell.com/indexe...

The owner of the Russell 2000 and 3000 ETFs is Barclays Global Investment, which in turn owns 678,644 shares of CRZ as of 3/31/08.

I know some people trade on additions/deletions to the major equity indexes. Maybe someone who does can comment further on this, but it seems to me that some passively managed funds that are big holders of CRZ are going to be selling hundreds of thousands of shares when the deletion becomes official.

[dixie]

Greg,
I am surprised of your recommendation, "do not go long anything in real estate now - to wait at least a year." I find it odd that with the number of analyses you and your associate, Tim Haag, apparently do, that absolutely nothing in this secotr suggests a long position. Is not a glass ever half-full?

I also find it suspect that your recent prior posts regarding RWT and FED were both made after the markets had closed; first on a Sunday and then on a Friday when you had a, "captive readership."

Most importantly, why are you sharing your "insight and helpfulness" to investors you have absolutely no relationship with. Law school, and certainly Harvard, does not teach this.

It does not require a lot of gray matter to understand your true motivation: quick, personal financial gain. Perhaps, ego may play a minor role. Then again, since you are on your own with a new firm, maybe the need " to get business" is also a motivator.

Shakespeare said it best about your blogs, "me thinks thou doth protest too much."

[dixie]

Greg,

So as to avoid some of the heat you have generated, you quickly posted a few minutes ago that CRZ would soon be excluded from 2 of the Russell Indexes and that will account for future near term selling.

Sorry, you are a week late. The exclusion from these indexes was effective Friday, June 27th. So any sell-off resulting from that has already occurred.

You seemingly will write anything to achieve the result you want. My gift to you - take a course in ETHICS.

[Greg Weston]

Dixie, I imagine that ETFs and index mutual funds do not divest themselves of deleted companies all in one day, in particular the Russell 2000 funds where many of the companies have very low average daily volumes. You may be right, if you can find a source showing how long it typically takes, I'd be interested in seeing it.

I am long some individual tech growth plays such as China Mobile, long the S&P 500 and TIPS via my 401(k), and long the Swiss Franc (FXF).

While I obviously don't think all real estate companies are overvalued, most are, and I have yet to find one worth investing in.

[Wez]

Puts on the roll at the open, CRZ is cooked.

[Smooth Jazz]

<Jazz, your comments are increasingly nasty and personal, so this will be my last response to them, or any other such comments.

"1. An explanation for why would the company declare a 30cents divy weeks before beoming bankrupt"

So you think companies that are doing very poorly never try to make it look like everything is honky dory? Besides the obvious reason of "keeping up appearances" I can give you two other plausible explanations.

(1) suspending the dividend would cause the stock to drop at a time when management is considering an equity offering.

(2) if the company is clearly on its way to insolvency or already there, paying a dividend is a way to return money to shareholders rather than creditors. In this sense the company was acting in the best interest of its shareholders by paying a 30 cent dividend, despite its gigantic Q1 loss.>

Greg Weston, Regarding your 7/4, 9:44pm post:

So let me get this straight: This company would knowingly go ahead and declare a dividend on Jun 17, 2 weeks before it was insolvent, because it was in the process of raising money via an equity offering and was acting in the interest of shareholders in spite of a huge 1Q loss???? Good god. You do realize that the divy is paid out of REIT income (Which was 63cents in 1Q and does not include MTM losses) not GAAP income, which reflect MTM losses correct. Your answer makes absolutely no sense.

Furthermore, your minor blurb mentioning SFAS 159 near the end of the article does not address the question I was asking: Whether CRZ will be able to mark their CMBS & RMBS related CDO debt to offset the asset marks you are saying will bankrupt them. You barely touch on this by noting "the company will try some tricks such as writing down the value of its debt" at the end of your piece without really discussing SFAS 159 at all and how it may affect your thesis.

Finally, and perhaps most important, did you have a chance to review the "First Quarter 2008 Update" slide from the following presentation before you published your CRZ is bankrupt article. If so why did you not tell your readers they raised $45M in April by selling assets and freed up another $52M.

files.shareholder.com/...

You will note on that slide, the company stated:

1. It raised net cash of $45M from the sale of its Agency MBS
2. It freed up $52M on their funding line
3. Has $100M of unencumbered assets as of mid April

And you claim they are going bankrupt 8 weeks after saying this? Are you stating flatly this Mgmt team is lying when it said it raised $45M in cash and freed up $52M in funding as recently as April? Mr Weston, Did you thoroughly research this company before publishing this article or is this a get rich quick scheme. If you do cash in your puts for big bucks and your article turns out to be sloppply written and proven false, I hope you eventually have to cough up your profits somehow someway.

[theskeptic]

Greg, thanks for your third well written piece for Seeking Alpha. I hope you will continue writing in spite of the abuse. Personally I prefer articles authored by people willing to put their money where their mouth is; long or short. I am continually amazed at the vitriol directed at shorts. Suggest a stock is overvalued and you can just about count on threats of prison.

Due to fundamental shifts in the US economy things like financials, real estate and builders are in for a long brutal decline. Apparently many have trouble handling a falling market; like Smooth Jazz they lash out at the bearers of bad news. Smooth Jazz, get a grip, Greg doesn’t have the power to make or break a stock; if you are so confident in CRZ, he has merely given you a chance to increase your position at a lower price.

Greg, great call on FED; and this from a Michigan graduate.

[Smooth Jazz]

<I guess I'm going to jail too,for publishing a comment about my position in RWT. .. with as much bs going on with Wallstreet and the financial media,its going to take a lot of mind police to catch up with all of us!!You're safe Greg..>

Fatcat,

Cut the BS. This isn't about you, RWT or some imaginary Wall Steet mind police. This guy could be the sharpest guy in the kitchen. Or he could be a sheister looking to cash in some puts for a quick buck. I agree it would be tough to put the guy in jail without absolute proof, but he did leave out 3 critical points from his article which would call into question his entire thesis:

1. The company gave a presentation barely 8 weeks ago where they said they freed up approx $100M (cash & a credit line) via the sale of their Agency MBS. Why didn't the writer mention this. Or explain how a company that just freed up $100M in liquidity in April and had only $20M in callable repo debt is insolvent by the end of June.

2. He doesn't satisfactorily explain why the company would declare a 30cents divvy on Jun 17, 2 weeks before he claims they are insolvent. Telling me that Mgmt is just dishonest without proof doesn't cut it. Perhaps they have the liquidity to pay the divvy given they just freed up $100M (See Point #1 above), and his "Mgmt are crooks because they want to pay the divy to shareholders and not creditors before they go bankrupt " (See his 7/4, 9:44pm response) makes absolutely no sense.

3. He doesn't discuss how SFAS 159, which allow companies to mark their CDO debt to match asset writedowns, would call into question his entire thesis by allowing CRZ to offset the CMBS & RMBS writedown he is estimating will bankrupt them with similar debt writedowns.

I do not have much skin in this game, but the more I think about this author's ommisions, non explnanations and duplicity, I get more disturbed when I see that he is trying to use a well known blog for financial gain, without the company having an opportunity to respond beforehand. Yeah, He's safe alright! He could always use the "I was careless" explanation long after he has banked his puts.

[davisfoulger]

Fatcat,

I'm going to put this simply. People have, in the past, paid huge fines and gone to jail for this kind of article and, especially, the admission he made about knowingly naked shorting shares. Its not easy. The SEC, by its own admission, doesn't have the tools to attack illegal naked shorting, but you can make it easy for them. Hedge funds don't make it easy. I won't tell you how they don't make it easy. It appears that Mr. Weston has made it easy, and in a very public, even flamboyant set of articles that say "look at me".

The feds may not have the tools to attack illegal naked shorting, but they are looking for scapegoats that they can take down. Nobody can stop the behavior right now, but they can discourage it, and Mr. Weston really has painted a target on his forehead. They may not have the tools to do everything they'd like, but they do know how to track down brokers, gather evidence, and line up a brokerage statement against a set of very public articles and to recognize really damning evidence. I'll tell one thing that Greg wouldn't want any jury to look at: the smirking picture he uses at the top of his articles.

As for the issue of libel/slander, there is existing legal precedent for such suits against individuals by businesses for on-line statements. Businesses have won in the past where a malicious intent has been established. Seeking alpha may (and I stress may) be protected by those precedents, but it does have an editor and looks more like a newspaper (where precedents that extend liability to the publication have long been established) than a bulletin board (where the service provider is protected so long as they don't pre-screen messages and make appropriate deletions when requested).

I'm not making this stuff up and I'm not threatening at all. Mr. Weston appears to have gone on a self-serving crusade of sorts. I'm sure he has another real estate financial in his sights for next week. I'm simply indicating that the self-serving element of his articles, combined with the patent lack of research that Smooth Jazz (a extremely good analyst in my view) has documented, sets up the possibility of some serious legal consequences.

[Smooth Jazz]

<Apparently many have trouble handling a falling market; like Smooth Jazz they lash out at the bearers of bad news. Smooth Jazz, get a grip>

theskeptic,

Stop patronizing me, and insist that the writer answer the basic questions. I know full well the sector stinks and that CRZ's business model is currently broken primarily because they cannot easily raise money in these turbulent credit markets. I also know the difference between a CRZ, which as of April funded 98% of its income with long term, non recourse CDO funding, and NEW/AHM/TMA/etc. which funded their entire business with repo, margin debt and taken down when lenders called in that debt.

The author needs to answer one basic question for me to consider him anything but a huckster using a well known public forum to make a quick buck: How can a company which had $100M of liquidity and about as much in encumbered assets as of April (See "First Quarter 2008 Update" slide from the following presentation) suddenly implode and go belly up when it only has $20 in repo debt. This makes absolutely no sense and it is disturbing he did not let his readers know about the company's actions in April to shore up liquidity. This has nothing to do with a "falling market" or "fundamental shifts in the US Economy" and very much to do with the veracity of one writer with an agenda who leaves out pertinent facts in his thesis.

files.shareholder.com/...

Maybe Mgmt is dishonest and lying. It is also possible the writer did not properly research or due adequate DD in this one instance, his other "good" calls, including FED, notwithstanding. I will not go as far as to call him dishonest. Yet.

[Wez]

Lol, davisfoulger....yea, endlessly touting stocks when your long is fine, but give your opinion on the short side and you get told your going to get fined and maybe go to jail. These boards are hilarious....

[Greg Weston]

Well I am done feeding the trolls here. I got a number of high-quality comments disagreeing with my RWT article, which I enjoyed responding to, but here the disagreement consists of semi-intelligible bile.

[Smooth Jazz]

<By the way CRZ has been selected for deletion from the Russell 2000 and 3000. That means the Russell 2000 and Russell 3000 ETFs/index mutual funds will automatically be selling shares of CRZ when the deletion officially happens.>

Greg Weston,

You have got to be kidding me. You are posting articles about companies going bankrupt, and you make such a grevious error. The Russell deletions occurred on June 27 (You're more than a week late), and most of the selling was done PRIOR to that date so that Russell based index funds are out of the stock by the day of the deletion. Good grief. That blatant error about the Rusell rebalancing suggests maybe you are careless and might not do exhaustive research all of the time.

mreits.blogspot.com/20...

As for your most recent comment, I couldn't care less whether you respond to my legit questions or not, but I can almost surely guarantee you this: If you profit from a situation where you were careless and you turn out to be wrong, you will need to explain to someone how you excluded from your hit piece the convenient fact that the company reported approx $200M in available liquidity in an April 8K ($43M cash from sale of Agency MBS, $50 availabale funding line and $100M in unencumbered assets) when they only had $20M+ in repo debt.

I got a feeling that this one will end nasty given the vast difference between your bankruptcy storyline, and the company's reported $200M liquidity backstop. If Mgmt turns out to be sheisters, you're home free. But if you were wreckless and wrong, responding to legit questions from board "trolls" will be the least of your worries.

Peace out.


and a company that reported $200M in available liquidity

[Greg Weston]

As I said, I am done responding to the rude comments by Smooth Jazz and David Foulger, but I will note that th