Using Veritas to Construct the "Per…

29-04-2017 Hits:72317 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:70840 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:69316 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:72300 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:70571 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:72962 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:43045 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:71572 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:71339 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:71717 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:75132 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:73377 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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Note to readers: a formatting issue caused the 2nd half of this article to get cut off. I urge interested parties to reread the article to get the full message.

Since I write for a diverse audience, I will start this off with an overview of securitization. If you are in the industry or are just a smart ass dude, feel free to skip down to the JP Morgan specific section below. I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is.

Overview

Securitization is still a very significant source of leverage and opacity in the US and European economies, in spite of its predominant role in the most recent global financial turbulence. It is a practice where loans and other debt instruments are aggregated in a pool and thereby used to issue new securities. Banks and financial institutions started establishing Special Purpose Vehicles (SPV) and Qualifying Special Purpose Entity (QSPE) under the FASB rules to securitized loans and thereby reducing, from an accounting perspective (but more accurately put), or transferring from an economic perspective, financial risks on their balance sheets. Although these new founded QSPE's were rated by rating agencies (Moody's, Fitch, S&P among the few) prior to the issuance of securities, the underlying ratings failed to capture the actual economic value of the underlying collateral. Furthermore, the ratings established by the rating agencies are an assurance of performance.

According to analysis conducted by Ann Rutledge of RR Consulting, subordinate tranches have performed more predictably than senior tranches since subordinate tranches had already built in high default rates and prepayment assumptions.  The mezzanine tranches during downturn tends to be relatively stable. Quoting Ms. Rutledge, "Paradoxically, because the underlying collateral experienced such high rates of default and prepayments early on, the risky tranches now tend to be very stable because they were only really ever worth 20 cents on the dollar when the deals went out!". Further, since most of the deals are not done on DCF analysis on the underlying collateral, they were heavily mispriced at inception. According to Ann Rutledge if a risk is analyzed correctly, most ABS deals will converge to "AAA" rating regardless of the initial rating of the security. For instance, securitization from Countrywide did not converged to AAA suggesting that the deal was heavily mispriced at inception. For those interested in hearing more about what Ms. Rutlege had to say, see "If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?" and scroll down to the second half.

JP Morgan securitization activities and QSPE exposure

JPMorgan securitizes and sells a variety of loans, including residential mortgage, credit card, automobile, student, and commercial loans through Special-Purpose Entities (SPEs) as a part of the securitization process. These SPEs are structured to meet the definition of a Qualifying Special-Purpose Entity (QSPE) and accordingly, the assets and liabilities of securitization-related QSPEs are not reflected on the Company's consolidated balance sheets.

As of June 30, 2009 total assets held by these QSPEs stood at $574.4 bn while assets held by QSPEs with continuing involvement stood at $424.0 bn.  Of the total assets held by QSPEs, prime mortgages, commercial mortgages and credit card receivables formed majority of investment portfolio with total assets of $211 bn, $160 bn and $102 bn, respectively.

As of June 30, 2009 total interest held by JPM in these securitized assets stood at $37.4 bn, or 39.5% of tangible equity with credit card leading the pack with an 89% contribution. The table below details QSPE's exposure for JPM as of June 30, 2009.

jpm_qspe.jpg

JPM provides servicing for mortgages and certain commercial lending products on both a recourse and nonrecourse basis. In nonrecourse servicing, the principal credit risk to the company is the cost of temporary servicing advances of funds while in case of recourse servicing, the servicer agrees to share the credit risk.

Although JPMs loan sale transactions have primarily been executed on a nonrecourse basis, the company still has a substantial credit risk from recourse transactions as well. As of December 31, 2008 the unpaid principal balance of loans sold with recourse was at $15.0 bn, or 15.8% of tangible equity compared with only $557 mn as of December 31, 2007. You have read that correctly, a 270% increase in full recourse risk in a year and a half. The increase in loans sold with recourse basis was driven by none other than the Washington Mutual acquisition ((i,e) substantial portion of loans acquired from WaMu were principally on recourse loans). If you recall from the previous forensic reports:

 

You will realize that JPM's loan portfolio is performing horribly, and although they purchased the WaMu portfolio at a very deep discount after restructuring, they are still under water and the deflationary phase of the underlying is only 50% or so along its cycle. This is surely a widely unrecognized problem for JPM!

Credit card securitizations

WMM Trust:

At the time of the acquisition of the Washington Mutual banking operations, the assets of the WMM Trust were comprised of Washington Mutual subprime credit card receivables which had a much lower quality of assets relative to that of JP Morgan's. In order to closely conform WMM Trust's quality to the overall quality of a typical JPM credit card securitization master trust, during 4Q08 JPM randomly removed $6.2 bn of credit card loans from the WMM Trust and replaced them with $5.8 bn of higher-quality receivables from the JPM's portfolio.

However, during 2009 the credit quality of the WaMu portfolio deteriorated so sharply that it could have led to an early amortization event unless additional actions were taken. On May 19, 2009, JPM removed all remaining credit card receivables originated by Washington Mutual. Following this removal, the WMM Trust collateral was entirely comprised of receivables originated by JPMorgan Chase. As a result of the actions taken by the company, the assets and liabilities of the WMM Trust were consolidated on the balance sheet of JPMorgan. Consequently, during the 2Q09 JPM had recorded additional assets with an initial fair value of $6.0 bn, additional liabilities with an initial fair value of $6.1 bn, and a pre-tax loss of approximately $64 mn. This was the VIE consolidation referenced in the forensic research reports linked above.

During 2Q09 JPM securitized $12.5 bn of credit card receivables. The expected loss rate built into these credit card receivables is at 8.7%. The Company's assumption regarding expected loss rate build seems highly optimistic, rosy and reminiscent of that of a Goldilocks fairy tale considering the current charge-off rate for JPM's credit card loan portfolio stands at 12.5%.

Of the $23.2 billion securitized interests held by JPM, 25% is classified as noninvestment grade. Interest in noninvestment grade securities form 6.0% of tangible equity while interest in investment grade securities form 18.5% of tangible equity.

jpm_qspe1.jpg

 

Next up is Bank of America...