Using Veritas to Construct the "Per…

29-04-2017 Hits:87256 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:81168 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:81016 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:85486 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:81984 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:84166 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:55229 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:83432 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:83170 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:83062 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:89320 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:87034 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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Quite a few people have been emailing me about my opinion on the bank bailout deal. I do not think Obama will go the Bush Route and favor Wall Street over Main Street. It is just not a wise move. Alas, I've been wrong before, but if I am wrong about Obama's politics, I still will not be wrong about bank finances. Exactly how well did all of the other bank (and insurer) bailout plans work? I don't recall any of them resulting in a sustained increase in banking shares. As a matter of fact, I observed just the opposite. I really like Obama (contrary to most finance folk), but the man (and his staff) can't work miracles. Mother Market will have her way one way or another. Let me walk you through an example of how expensive it is to save the banks (this is a continuation of Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! which itself is a continuation of Re: JP Morgan, when I say insolvent, I really mean insolvent).  

 Much of the data below came from the Wells Fargo Forensic Analysis that I released exactly 8 months ago, before I started charging for premium content. It appears the report has been quite prescient. There is ample evidence in that report to indicate that WFC is due for a downfall, but strong institutional coverage and media favoritism, plus the brand name effect (see my take on Brand Names and those that follow them), seems to have kept the price elevated for some time. That is alright, though, I have a lot of patience. I would like to make clear, contrary to popular (albeit, probably just current) belief, that I cannot predict the future. I can count my ass off, though, and that's how I find companies that eventually tank, and often tank hard.

wc_share_price_-_8_mos_to_22009.png 

 

Keep in mind this is OLD data from last year, before the employment bust, before the steepening of housing price depreciation, before the other big bank failures, and most importantly - before the assinine acquisition of Wachovia and its poisonous option ARM, HELOC and 2nd lien mortgage portfolio that it shouldn't have been able to GIVE away at cost. The excerpt from the report:

The states of California, Nevada and Florida reported the steepest y-o-y drop in home prices. Wells Fargo, with large construction loans exposure in all of those regions, is highly likely to be negatively impacted.

 





Wells Fargo’s Loan Portfolio

image002.gif

Source: Company data

 

Rising defaults in home equity portfolio could result in higher losses

During the housing boom, Wells Fargo expanded its real estate portfolio and avoided making option Adjustable Rate Mortgages (ARMs) or negative amortizing loans. Despite avoiding these riskier loans, Wells Fargo’s home equity portfolio is deteriorating due to rising defaults and declining home prices. Consequently, the bank segregated US$11.5 billion of home equity loans into a liquidating portfolio, representing approximately 3% of total loans outstanding in 1Q 08. These home equity loans that are concentrated in the California, Florida and Arizona markets accounted for a significant portion of credit losses. The liquidating loan portfolio is mainly confined to geographic markets that have witnessed the steepest decline in home sales and housing prices. The liquidating portfolio resulted in an annualized loss rate of 5.58% for 1Q 08, compared to 1.56% in the remaining core home equity portfolio.

Wells Fargo’s home equity losses are concentrated in the third-party correspondent channel. Approximately 55% of the liquidating home equity portfolio of US$12 billion has a combined loan to value (CLTV) of 90%. Such a high LTV will likely result in major losses for the bank in this liquidating portfolio. The core home equity portfolio was worth US$72.1 billion in 1Q 08. Of this, approximately 45% of the exposure was in the states of California, Florida and Arizona (36%, 4% and 5%, respectively), representing nearly 70% of the bank’s shareholders’ equity. The worsening housing scenario in these markets as prices continue to tumble and defaults rise, is expected to result in higher losses in the near future.

 





Home equity portfolio – geographical breakup

image006.gif

 

Source: Company data

 

  Now, since I had nothing else to do, I decided to sit up for two nights in a row to calculate more realistic marks by hand, using the Case-Shiller index which any who follow me know that I feel this index is much too optimistic when dealing with urban areas (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful!). Below you will find various categories of 2nd lien loans with various CLTVs over various LTV primary loans.

 

Markdown on 0.85 CLTV 2nd lien over an 0.8 LTV primary mortgage



  Average Markdown, Case-Shiller WFC Inventory Weight Adjusted Markdown
Others ~ Comp 20 -38% 0.44 -17%  
Texas 0% 0.04 0%  
Minneapolis -55% 0.06 -3%  
Florida -67% 0.04 -3%  
California -89% 0.37 -33%  
Arizona -83% 0.05 -4%  
Appropriate Mark     -60%  
         





Markdown on 0.9 CLTV 2nd lien over an 0.8 LTV primary mortgage



  Average Markdown, Case-Shiller WFC Inventory Weight Adjusted Markdown
Others ~ Comp 20 -78% 0.44 -34%
Texas 0% 0.04 0%
Minneapolis -96% 0.06 -6%
Florida -79% 0.04 -3%
California -93% 0.37 -34%  
Arizona -87% 0.05 -4%
Appropriate Mark     -82%





Markdown on 0.95 CLTV 2nd lien over an 0.8 LTV primary mortgage



  Average Markdown, Case-Shiller WFC Inventory Weight Adjusted Markdown
Others ~ Comp 20 -80% 0.44 -35%
Texas 0% 0.04 0%
Minneapolis -100% 0.06 -6%  
Florida -80% 0.04 -3%
California -93% 0.37 -35%
Arizona -87% 0.05 -4%
Appropriate Mark     -83%





Markdown on 0.95 CLTV 2nd lien over an 0.9 LTV primary mortgage



  Average Markdown, Case-Shiller WFC Inventory Weight Adjusted Markdown
Others ~ Comp 20 -80% 0.44 -35%
Texas 0% 0.04 0%  
Minneapolis -100% 0.06 -6%  
Florida -80% 0.04 -3%
California -93% 0.37 -35%
Arizona -87% 0.05 -4%
Appropriate Mark     -83%





Markdown on 1 CLTV 2nd lien over an 0.9 LTV primary mortgage



  Average Markdown, Case-Shiller WFC Inventory Weight Adjusted Markdown
Others ~ Comp 20 -100% 0.44 -44%  
Texas -60% 0.04 -2%
Minneapolis -100% 0.06 -6%
Florida -80% 0.04 -3%
California -100% 0.37 -37%
Arizona -93% 0.05 -5%
Appropriate Mark     -97%

 

No matter which way you slice it, Wells Fargo has to take a significant hit to its equity if these loans are marked any where near market. Mar-08 (dated) shows net tangible assets at $35,011,000,000.  The average writedown here is about 81%, times the 19% of loans the OLD WFC had (which is about $500 billion, I haven't looked it up) and you have just about wiped Well's Fargo's tangible equity right off the table. These numbers are not even close now, due to the Wachovia acquisition, but they will be looking a lot worse, not better. 

I am going through all this to illustrate a point. Let's suppose the government decides to over pay for the asset by 30%, that still leaves a gaping whole in the equity of this bank, and that is not taking into consideration the massive amounts of other debt that is going bad in the bank. This is just one subclass of residential real estate lending. If you go through the Wells Fargo Forensic Analysis you will see a plethora of other problems that will need to be bought out. Long story short, the US does not have the capital to support these rotting assets. They will fall one way or the other. 

Now, let's suppose that the US just prints enough to buy the assets. Well, there is still a loss there. The loss was purchased from the banks and passed to the US taxpayer, who will bear the loss in higher taxes which will come out of that tax payers discretionary consumption which then comes out of industries revenues which dampens demand for bank services (or which there are still too many banks anyway). Again, long story short, there is no way out of this other than to let the truly insolvent banks fail. It's just a matter of whether they fail now, or later - but it will happen. 

Unfortunately, I had to write this at 3 am, so I will go back and correct lapses in logic and typos withing 24 hours.