Wednesday, 02 March 2011 08:20

JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now

Check out the screen shots below from yesterday. Whoa!!! What happened? How did we get here? Let's just keep in mind that what may look like analytical/intellectual superiority on my part in comparison with to the literal army of Wall Street analysts and pundits may actually simple end up being intellectual honesty and a dearth of truth destroying conflicts of interests. Then again, it does make me feel good to say that I may be smart, doesn't it?

Let's reminisce, but before we do, here's a direct challenge to the mainstream media and the sell side of Wall Street - A DIRECT CHALLENGE!!! I will gladly debate anyone who claims that either their wasn't an obvious and substantial risk of under-reserving in order to prop up sagging bank profits or worse yet anyone who doesn't believe we are still in the meaty end of a cyclical downturn in real assets - worldwide, on international television. I'm ready to go on a truth telling, fact finding mission with ANYONE, preferably from one of those esteemed institutions that get too much airplay as it is for their mass consumption marketing, pump and dump schemes, and generally crappy advice that they are totally overcompensated for. The only ground rules is that we get ample time to flesh out our arguments vs. having a soundbite battle. This list intellectual counterparties should be quite long since there were little to no outright warnings of real trouble on the horizon in 2009 for JP Morgan, Bank of America or the other big banks, and the NAR said last year (and the year before that, and the year before that) was the best time to buy a house.

Goldman Sachs anyone? Any major Wall Street bank?

National Association of Realtors???

Anyone!!!?? There's the challenge, let's see who bites. In the meantime, let's use this blogging medium to steamroll over the disinformation formally known as SEC mandated financial reporting, and better yet we will examine why blogs have taken over the role as auditor and analyst... For shame... For shame...

Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! Monday, January 10th, 2011, as excerpted..

The day after I posted wherein I made clear my opinion that the legal and litigation risks that the banking industry faces is woefully underestimated, theMassachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifies and vindicates my post from the day before, which also contained links to other posts which any declared sensational just a few days before, ex., The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. This is a very big deal since it actually unravels many thousands of foreclosures and sets precedent to be examined across the country (all 50 state’s attorney generals are looking into fraudclosure issues) that will really cause material damage to the banks that are pursuing (have pursued) said foreclosures.

BoomBustBloggers were thoroughly and explicitly warned of JP Morgan's accounting profit pumping optimism in releasing reserves and under reserving for put pack risk since 2009!

See As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves or “After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????” As excerpted from the The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!

This is the part that everybody seems to be overlooking…

All you really need to do is find the banks that accepted a lot of broker business, factor in the expense of the class action suit litigation that is popping up in nearly every state (try Googling it, you will be amazed as big firms and store front lawyers alike are throwing their hats in the ring), and you will see the easiest way out of a potentially tough bind for investors is the put back. Where does this land? Squarely on the balance sheet of the banks – who, BTW have the money to attract even more predatory lawyers. A forensic review of high LTV loans between 2003 and 2007 should find that at the very least 30% were aggressively valued, with a more realistic number coming in at about 60%. Ask anyone who was in in the business at that time, I doubt they will disagree.

When I warned of this LAST YEAR, it was not taken very seriously. I suggest all should think again – Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results. Let’s reminisce…

Warranties of representation, and forced repurchase of loans

JP Morgan has increased its reserves with regards to repurchase of sold securities but the information surround these actions are very limited as the company does not separately report the repurchase reserves created to meet contingencies. However, the Company’s income from mortgage servicing was severely impacted by increase in repurchase reserves. Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08.

Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud. I expect this activity to pick up significantly, and those banks that made significant use of brokers and third parties to place mortgages will be at material risk – much more so than the primarily direct writers. I’ll give you two guesses at which two banks are suspect. If you need a hint, take a look at who is increasing reserves for repurchases! JP Morgan and their not so profitable acquisition, WaMu!

As I said, losses should be ramping up on the mortgage sector. Notice the trend of housing prices after the onset of government bubble blowing: If Anybody Bothered to Take a Close Look at the Latest Housing Numbers…

PNC Bank and Wells Fargo are in very similar situations regarding acquiring stinky loan portfolios. I suggest subscribers review the latest forensic reports on each company to refresh as the companies report Q4 2009 earnings. Unlike JPM, these banks do not have the investment banking and trading fees of significance (albeit decreasing significance) to fall back on as a cushion to consumer and mortgage credit losses.

Well, it looks as if I was onto something.

... On the over exuberant JPM Management...

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And now on to the main story of the day...

JP Morgan Faces $4.5 Billion in Worst-Case-Scenario Losses (WSJ):

NEW YORK—J.P. Morgan Chase & Co. said it faces up to $4.5 billion in legal losses, in excess of its established litigation reserves, should its worst-case legal scenario occur. The New York bank made the disclosure in its annual Securities and Exchange Commission filing on Monday, saying the additional losses represent a range of reasonably possible losses. The SEC has requested the additional disclosures on what banks could potentially face on legal losses on top of what they have set aside. The banks all face a rash of lawsuits regarding the financial crisis and collapse of the housing market, particularly from investors who purchased mortgage-backed securities that later tumbled in value.

The bank already accounts for what it considers a reasonable estimate of losses in a litigation reserve, a number it doesn't make public. The $4.5 billion figure would be a worst-case scenario on top of that number. It said the additional losses could be zero, though it could also go higher as the bank can't yet make estimates on the more than 10,000 legal proceedings it faces. Last week, Citigroup Inc. warned the high end of its worst-case scenario was $4 billion, while Bank of America Corp. warned of up to $1.5 billion in additional losses and Wells Fargo & Co. said its extra disclosure was $1.2 billion above its reserves.

J.P. Morgan was also the latest bank to include a disclosure that it has received "a number of subpoenas and informal requests for information" about its mortgage business. The bank said those requests include questions about its underwriting of mortgage-backed securities. The bank said some of the investigations also arose after it announced a foreclosure moratorium last year when it found problems in its foreclosure practices. The investigations, J.P. Morgan said, could result in "material fines," penalties, or other enforcement, including forced changes to its processes.


The bank added repeatedly to its litigation reserves in 2010, and legal costs soared last year to $7.4 billion from $161 million a year earlier.

So what's going on here? Tangible, tradable fraud. Unlike FASB bending over and allowing the retail investor to get fudge-packed like the 78 accountants who actually still had respect for their profession, institutional investors are not so quick to grab ankles. As a matter of fact, the only way to prevent the banks from getting steamrolled by investor AND borrower law suits is to literally legalize fraud by statute, retroactively. To skip directly to Reggie Middleton on tradable fraud, move to 15:18 in the video, or from 11:55 for the whole spiel on Tradable Fraud, Goldman’s Facebook Deal & Phantom Bank Earnings.
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JPMorgan Chase & Co. sold a $1.5 billion commercial-mortgage bond as Middle East turmoil slows a three-month rally for the debt. Top-rated securities tied to skyscraper, shopping mall and hotel loans are yielding 1.95 percentage points more than Treasuries, up from a spread of 1.88 percentage points on Feb. 18, the lowest level in at least three years, according to a Barclays Plc index. Investors are demanding higher yields as protests gain momentum in Libya, sparking concern that rising oil prices could hamper an economic recovery, said Brian Lancaster, a Stamford, Connecticut-based analyst with Royal Bank of Scotland Plc.

JPMorgan Chase & Co. sold a $1.5 billion commercial-mortgage bond as Middle East turmoil slows a three-month rally for the debt. Top-rated securities tied to skyscraper, shopping mall and hotel loans are yielding 1.95 percentage points more than Treasuries, up from a spread of 1.88 percentage points on Feb. 18, the lowest level in at least three years, according to a Barclays Plc index. Investors are demanding higher yields as protests gain momentum in Libya, sparking concern that rising oil prices could hamper an economic recovery, said Brian Lancaster, a Stamford, Connecticut-based analyst with Royal Bank of Scotland Plc.

Investors obviously aren't demanding that much. Considering how risky much of this stuff is combined with where we are in the rate cycle, I wouldn't touch this with your money - oh yeah, they probably are using other people's money, aren't they? Remember, commercial real estate returns are essentially a risk adjusted spread off of the (allegedly) risk free benchmark rate, which is already risky enough as it is since Ben B. has been artificially suppressing rates and stoking demand. As excerpted from 


Listen up people, HERE ARE THE NASTY FACTS!!!

Real estate is a highly rate sensitive asset class. Capitalization rates (the popular method of pricing real estate) is explained in Wikipedia as:

Capitalization rate (or “cap rate”) is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.[1] The rate is calculated in a simple fashion as follows:

 \mbox{Capitalization Rate} = \frac{\mbox{annual net operating income}}{\mbox{cost (or value)}}

Without going into a CRE class, when interest rates go up, cap rates generally go up as well and the value (or cost to purchase) of the property goes down in sympathy unless the rise in interest rates is offset by a commensurate or greater rise in net operating income. Now, either everybody believes that unemployment is going to drop towards zero  in an era of US austerity (reference Are the Effects of Unemployment About To Shoot Through the Roof? then see Budget AusterityGoldman Sees Danger in US Budget Cuts – CNBC) at the same time that historically low interest rates that actually went negative are going to get lower (see the Pan-European Sovereign Debt Crisis) —- or cap rates are about to skyrocket. I’ll let you decide!

As you can see above, CRE drops in value whenever yields spike more than the + delta in NOI. Looking below, you can see that US CRE actually runs to the inverse of the 30 year Treasury.

That visual relationship is corroborated by running the statistical correlations…

The relationship is obvious and evident! In addition, we have been in a Goldilocks fantasy land for both interest rates and CRE for about 30 years. CRE culminated in the 2007 bubble pop, but was reblown by .gov policies and machinations. The same with rates. Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down???

And now back to that Bloomberg story...

JPMorgan’s largest top-rated portion of the commercial- mortgage bond, a $485.4 million slice maturing in 9.77 years, yields 112 basis points more than the benchmark swap rate, according to a person familiar with the transaction who declined to be identified because terms aren’t public. The New York-based bank had originally offered the debt for 105 basis points over swaps, according to marketing materials distributed to investors on Feb. 23.

Call me stupid, but why would I accept that level of risk for only 105 or even 112 basis points? That, my dear BoomBustBloggers, is the stuff crashes are made from!

$45 Billion Forecast

Banks have arranged about $6.5 billion in commercial mortgage-backed securities this year, compared with $11.5 billion in all of 2010, according to data compiled by Bloomberg. JPMorgan has forecast sales will rise to $45 billion this year after plunged to $3.4 billion in 2009 amid the financial crisis. Issuance peaked at a record $234 billion in 2007, Bloomberg data show.

... Competition among lenders has led to riskier loans being included in more recent deals, Standard & Poor’s said in a Feb 24 report. Current offerings are more highly leveraged and have less income to cover debt payments than those completed in late 2009, S&P said.

“In the short 15 months since we began seeing new CMBS issuance again, transaction structures are becoming more complex and underwriting standards are loosening somewhat,” the analysts wrote.

'Nuff said! Yeah, those CMBS deals are the shiznit! I remember speaking on them a year or two ago, detailing exactly the type of fraud, misinformation and disinformation that is needed (and perpetrated) to elevate worthless trash to the level that it was (and very much still is) at...

  1. As If On Cue, Goldman Upgrades REITs As It Pumps TALF CRE Offerings Thursday, December 3rd, 2009
  2. Reggie Middleton Personally Congratulates Goldman, but Questions How Much More Can Be Pulled Off
  3. The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?
  4. Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees! Wednesday, June 30th, 2010
  5. Reggie Middleton vs Goldman Sachs, Round 1 Tuesday, December 8th, 2009

The Biscayne Landing developments in North Miami are a perfect example of obvious overexuberance (or highly skilled CMBS sales persons and bankers, or just one hell of a corporate tab run up at Tens late night, you know where the steak and wine comes up on the receipt for $12Gs - remember fellas, whatever she was doing with you she was most likely doing with the dude that was there right before you. Things don't get any cleaner when you tip harder off the corporate card). Hmmm, but wasn't Biscayne Landing supposed to be a monumental luxury development. As a matter of fact, it is one, isn't it.Check out one broker's developer renditions...

 Biscayne Landing II photo

 Biscayne Landing II photo

15045 Biscayne Blvd, North Miami, FL 33181

Here's what the broker has for sale on his site. Lucky for those fortunate condo owners, you can still sell those luxury units for MORE than they were going for a year after they were built in 2007 at the top  of the market. Whewww!!!

Here's the Wall Street Journal's take on it - More Pain in Wake of Deal Froth(WSJ)

North Miami, Fla., officials are moving to seize control of the Biscayne Landing development site. Bondholders are likely to see no principal returned from the deal. In 2007, Credit Suisse Group sold $163.5 million in mortgage-backed securities backed by a virtually empty former Superfund site in North Miami, Fla. Investors didn't even blink at the $475 million appraisal of the property's value. Now, city officials are moving to seize control of the 188-acre development site. The commercial mortgage-backed securities sold to investors are on track to become the second-biggest flop ever among such securities. Holders of the bonds likely will see little or no principal returned from the deal.

I'll let you guess who holds the title for the biggest flop in such securities, but don't be surprised if it rhymes with tax... Speaking of which... Goldman Sachs Estimates Possible Losses From Legal Cases at $3.4 Billion. As was explicitly forewarned by yours truly in Banks, Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street Hustlers! Its a Sucker’s Bet, Who’s Going to Fall for it in QE2? Let's not forget The 3rd Quarter in Review, and More Importantly How the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies! Before we drift too far from the crux of the current thought, namely those lovely and smartly collateralized CMBS, let's tour 15045 Biscayne Blvd, North Miami from Google Maps...

And a the lovely view across the street - after all real estate is really about location, locations, location!

Hey, check out the pic of Biscayne Landing that appeared in the WSJ article above. I'm not even sure if its the same location, but it damn sure is the same economic and financial theme.

[BISCAYNE_0302j] Jason Henry for The Wall Street Journal



Then there's those other banks in the news... HSBC Halts U.S. Mortgage Foreclosures After Joint Examination by Fed, OCC and Citigroup Says It May Face $3 Billion in Claims From Lehman. Sounds like a trend to me. What do you think? Hey, JPM is managed by the best and the brightest, right? Nothing shall become of them. Of course this mantra is much harder to believe after I put their Q3-10 earnings into perspective - JP Morgan’s 3rd Quarter Earnings Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! You true believers have been Had! You’ve Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do! Everyone should be asking themselves if Another Banking Crisis Inevitable? Hey, I don't believe the last one ever ended. It was just painted over with trillions of global, inefficient stimulus that is now showing its age.

The full JPM Q2 2010 review can be downloaded by subscribers (click here to subscribe) here: File Icon JPM 2Q10 review

Subscribers should also review our forensic valuation reports, which have (thus far) proven to be right on the money in terms of JP Morgan:

The JP Morgan Professional Level Forensic Report (subscription only)

The JP Morgan Retail Level Forensic Report (subscription only)

Those that don’t subscribe still have a lot of BoomBustBlog JPM opinion and analysis to chew on, including a free, condensed (but still about 15 pages) version of the forensic analysis above. You can find it below this pretty graphic from “An Unbiased Review of JP Morgan’s Q1 2010 Results Yields Less Roses Than the Maintream Media Presents“…

  1. An Independent Look into JP Morgan (subscription content free preview!)
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 – JP Morgan
  3. Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!
  4. Anecdotal observations from the JP Morgan Q2-09 conference call
  5. Reggie Middleton on JP Morgan’s Q309 results
  6. Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results
  7. Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!
  8. Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
  9. Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
  10. Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
  11. Because 105% LTV On Depreciating Property Wasn’t Good Enough for the US Taxpayer…
  12. I Told You Housing Was Going to Take a Downturn for the Worse. I’ll Tell You Something Else, We Are in a Housing Depression! It’ll Get Worse Until Market Forces Rule Over Government Bubble Blowing!
  13. As I Made Very Clear In March, US Housing Has a Way to Fall
  14. It’s Official: The US Housing Downturn Has Resumed in Earnest
  15. The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream Media




Last modified on Thursday, 11 August 2011 02:31


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