Using Veritas to Construct the "Per…

29-04-2017 Hits:24108 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:25480 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:25163 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:26708 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:26501 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:28867 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:18122 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:27692 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:27731 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:27937 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:29674 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:29268 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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I have finally updated my Alt-A and Subprime delinquency, charge-off and loss data using FDIC, NY Fed, Corelogic, First American, and Bloomberg (among others) as sources. If you thought things looked bad last year or this spring, they are getting worse - with no reprieve for the 3rd quarter despite the extreme amounts of liquidity and capital thrown at the situation by central bankers and the US government. As soon as I started writing this piece, CNBC comes out with "US to Push Mortgage Lenders To Modify More Home Loans: The US Treasury announced plans to push lenders to modify more loans after the administration's $75 billion housing rescue plan, called Making Home Affordable, fell short and foreclosures continued rising."

Hmmm... $75 billion is a lot of money. Mayhap the problem is that the banks know how useless pushing on a string is, or mayhap $75 billion is not enough to stem $304 billion (and counting) in Alt A and subprime losses that are still in the pipeline (see graphic below). 

It gets worse though. Let's glance at the non-conforming loan losses that have already occurred in comparison to the SCAP projections that justified the return of TARP in many cases. Recovery rates had the illusion of increasing ever so slightly due to an increase in prices as illustrated by the Case Shiller index. I have expressed my doubts about this housing price recovery for several reasons, the least of which is the construction flaws in the index itself which fail to capture the nature of the transient price increases, namely the activity of short term investors and flippers (see On the Latest Housing Numbers). There are some areas that have witnessed some firming of pricing though, but that firmness is the result of the Fed and Treasury trying to blow another bubble within a bursting bubble and is more than outdone by the rampant deterioration in credit quality of loans that result in the dumping of foreclosures -> REOs -> short turnaround sales/flips (via investors, which are not captured by Case Shiller, hence the illusion of a firming market in the lower end of housing prices) all over the place.

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Subprime delinquency, charge-off and foreclosure rates are still flying through the roof - with many other categories rushing to keep up. This is as I described from the beginning (2007) through the Asset Securitization Crisis series - there was an underwriting induced crisis and never a true "subprime crisis". As such, there is a very strong chance that many other loan categories may outstrip subprime loans in terms of aggregate losses. It hasn't happened yet, but the Alt-A category is hot on subprime's heels (see below). Construction and CRE will follow up the rear with unsecured consumer (ex. credit cards) and commercial loans fighting to get into the race.

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Below, you see the loss trend as of October 2009. These are losses that have most likely NOT been claimed by the banks, and they are significant. In addition, the credit deterioration trend is climbing, not falling. If I am correct in my assumption on the validity of the Case Shiller index in capturing true inventory price depreciation across investor related sales and bank "hold outs", then prices will soon start dropping again, killing recovery rates and causing losses to spike even further.

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The mainstream financial media has led many to believe that the "subprime crisis" has passed. FRB and FDIC data actually show that subrpime credit deterioration is increasing in the face of lowered interest rates through QE/dollar debasing and HAMP government efforts. This is also despite certain bank policies that mask delinquencies, such as lagging the time it takes to mark a loan delinquent. We found Wells Fargo doing this last year with its HELOC portfolio. 

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As you can see, every reprieve seen since the crisis started has been followed by a spike in delinquencies. I expect the same to occur for 2010.

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As can be expected, ARMs sport more than twice the delinquency rate as fixed rate loans. The drop in rates has caused a leveling of ARM delinquencies, but it is clear that rates can't remain at zero forever, and the bulk of these loans are close to if not passed the underwater mark. Literally any move by interest rates in the direction of equilibrium (read as the cessation or failure of the Fed's direct intervention in the interest rate markets) will cause a flood of delinquencies and foreclosures that are bound to overwhelm the banks. This is an inevitable occurrence. It is not a matter of if, but a matter of when. The interesting issue is that all of the categories are at currently a level that scream solvency alert!

  image022.png

The Case Shiller index has shown price increases for the last two quarters. Despite my reservations about its accuracy, the increases have done nothing to stem the onslaught of credit deterioration. As a matter of fact, actual losses are increasing despite the increase (and its requisite rise in recovery values) due to the amount of charge-offs and the rate in whch they are occurring. If you lool closely at the chart, the credit quality deterioration actually picked up as Case Shiller was showing price improvement.

Below are the loss rates by state. Be aware that these are "LOSS RATES", not delinquencies or charge offs. This is what the actual losses will end up being (sans admin and legal costs, which will driver the losses higher). These loss rates are calculated as follows: Overall default rate - Recovery rate (Case Shiller - LTV) = Loss Rate 

California, Florida and Nevada have been held up as loss "icons" by the media, but there are pockets of significant loss throughout the country. States such a Wisconson and Michigan are pushing 50% in subprime losses, yet still pale to the near 60% in losses from states such as Florida. I query, "How can a bank with 10% equity, and 90% leverage wither 30% to 60% losses on its loans and still be considered solvent?" For those not versed in these matters, imagine you sold 100 million dollars in stock to the public to start a bank, and borrowed 900 million dollars to write mortgages on $3 billion worth of houses. You consequently take a 50% loss on those mortgages - to the tune of $500 million. How much is that initial $100 million of stack worth, even assuming you can make $30 million dollars a year trading risky assets with inflated spreads? You are now totally insolvent and still owe your investors $300 to $400 million in order for them to break even. Now, imagine that your stock just shot up 300% in price because.... Well, just because. Tongue out.

There are many banks that literally specialize in underwriting these (among others) high risk loans in the hardest hit of the areas below. There is no way in hell they are carrying those loans anywhere near their actual value.  

A good example of this is PNC Bank. They were running a 41% loss rate in Wisconsin (according to our birds-eye view calculations using FRBNY and FDIC data) in May, and now are exposed to a 45.8% loss rate. Florida is even worse! Many states have seen a 5% INCREASE in LOSS rates. Again, it is no wonder why they aren't returning their TARP monies.

 

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Realize that the losses graphed above are mostly losses that have not been marked yet by the banks. They are quite significant. For a birds-eye view of the situation, simply apply the state loss metric to your favorite bank's portfolio, on a state by state basis. 

This is PNC's granular break down using the government data from May of this year - before the roughly 5% jump in economic losses that we have calculated for the most recent quarter.

pnc_stress4.png

As you can see, going through each major loan category in PNC's books reveals a much LESS optimistic scenario than ANY portrayed in their SCAP take home test results... If one were to factor in the more recent information, the SCAP test and the return of TARP look more like fodder for litigation than any true attempt at solving the banking problem.

 Sources: FirstAmerican CoreLogic, LoanPerformance Data, U.S. Census Bureau, and Federal Reserve Bank of New York

(a) Statistics calculated on first-lien and active (includes REO) loans.
(b) Statistics calculated on first-lien, owner-occupied, active (includes REO) loans.
(c) 'Prepayment penalty in force' denotes that the loan age is less than the prepayment penalty term.
(d) Statistics calculated on first-lien, owner-occupied, active (includes REO), variable rate loans.

Let's also revisit some data from "You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?" with which we can compare the assumptions that justified the bank's return of TARP monies with the actual unfolding of events. 

In terms of unemployment, we are already breaching the worst case scenario projection of two years into the future.  

scap_unemployment.png

As you can see, the major driver of future bank credit losses has been woefully underestimated, and thus the capital requirements of said banks have been woefully underestimated, among other things.

Below is subscriber content that reveals what the banks REALLY needed in terms of capital and cushions to whether the true rate of losses and unemployment to come. You may subscribe here to access this content.

Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb

Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb

MS Simulated Government Stress Test MS Simulated Government Stress Test 2009-05-05 11:36:25 2.49 Mb

MS Stess Test Model Assumptions and Stress Test Valuation MS Stess Test Model Assumptions and Stress Test Valuation 2009-04-22 07:55:17 339.99 Kb

PNC SCAP Results recast using FDIC and NY Fed data - Pro PNC SCAP Results recast using FDIC and NY Fed data - Pro 2009-05-15 07:31:21 455.37 Kb

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PNC Stress Test Pro PNC Stress Test Pro 2009-04-13 02:10:17 3.11 Mb

PNC Stress Test update - Professional PNC Stress Test update - Professional 2009-04-21 15:55:56 3.00 Mb

PNC Stress Test Retail PNC Stress Test Retail 2009-04-13 02:11:08 323.51 Kb

PNC Stress Test update - Retail PNC Stress Test update - Retail 2009-04-21 15:53:52 777.50 Kb

PNC stress test write up - public lite PNC stress test write up - public lite 2009-07-27 02:37:11 995.30 Kb

Sun Trust Banks Simulated Government Stress Test Sun Trust Banks Simulated Government Stress Test 2009-05-05 11:37:13 1016.17 Kb

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-22 14:33:53 1.51 Mb