Tuesday, 31 May 2011 01:23

Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn

Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:

I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.


Well, I’ve a confession to make. I really do know why there is such a distinct difference. A very similar situation was illustrated in my article on Apple's presence on the Goldman Sachs' "Convict"ion buy list, which I fear is a must read before you finish this article. Reference Goldman Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client’s Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now! These shenanigans were clearly and plainly illustrated in two recent mainstream articles, believe it or not. Here they are…

Matt Taibbi’s Rolling Stone article does a deep dive, reference The People vs. Goldman Sachs:

They weren’t murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.

And the Street.com explicitly states why the Street, and more specifically Goldman Sachs, put a Conviction Buy Reco on JPM in the face of such staunch macro-fundamental headwinds, not to mention being in direct contravention to BoomBustBlog analysis: Goldman Sachs Sells ItsConviction Buys

A so-called Chinese Wall is supposed to exist between investment banks’ research and asset-management divisions, but recent calls, especially coming from subprime-securites proponent Goldman Sachs, warrant further scrutiny. Goldman helped to catalyze the recent commodity sell-off as its researchers expected little upside when the economy hit a soft patch. Crude oil tumbled beneath $100 on that report. Then, two days ago, with few fundamental changes in the demand outlook, Goldman reversed its stance, advising clients to buy.


This flip-flopping from Wall Street’s most closely followed researcher is being perceived by some as client-fleecing since the bank is able to trade in proprietary accounts before it releases research and the markets react, as they often do to Goldman’s calls.


Similarly, many sell-side researchers award stocks “buy” or “overweight” ratings even as their internal asset-management units unload shares, presenting a conflict of interest and ethical dilemma. Goldman’s most famous front-runs to date were the Abacus transactions, through which the bank allegedly postured for high ratings for its mortgage-backed CDOs, sold them to clients and then shorted them.

According to research from the Street.com, Goldman put a Conviction Buy Recommendation on JP Morgan Chase shares and issued it to their clients, and then sold 4,200,009 shares of JPMorgan Chase. At an average of $45/share,  that means that Goldman had a lack of conviction in its own "Conviction Buy" recommendation to the tune of $189,000,405. I'd hate to see what the company would do if they recommended clients sell, or worst yet short sell, stock. Oh yeah! We already know, don't we.

Bloomberg reports: Dexia Takes 3.6 Billion-Euro Charge on Asset Sales

Dexia SA (DEXB), the French-Belgian bank forced to shrink its balance sheet by 35 percent by 2014, said it will take a charge of 3.6 billion euros ($5.1 billion) for the anticipated sale of mostly U.S. residential mortgage-backed securities and long-term bond disposals.


The second-quarter provision to cover future losses will reduce Dexia’s Tier 1 ratio, a measure of the bank’s ability to absorb losses, to about 11 percent from 13.4 percent at the end of March, the bank, based in Brussels and Paris, said today in an e-mailed statement. That ratio will increase to at least 12 percent by the end of this year, Dexia said.


Dexia is using the surplus capital accumulated over the past two years to accelerate the reduction of its balance sheet, which had slipped behind the targets agreed with the European Commission, and cut risks linked to the evolution of the U.S. housing market. The bank anticipates it will sell the asset- backed securities in the FSA Financial Products portfolio and most of the bonds before June 2012, reducing its need for short- term funding by an additional 20 billion euros.

Somebody over at JPM better instruct those Dexia fellows to get a clue! Don't they know that JP Morgan, et. al. is REDUCING provisions, not ADDING to them!

Here's Dexia on the sale of US residential mortgage and mortgage backed assets:

... the French-Belgian bank ...said it will take a charge of 3.6 billion euros ($5.1 billion) for the anticipated sale of mostly U.S. residential mortgage-backed securities and long-term bond disposals.The second-quarter provision to cover future losses will reduce Dexia’s Tier 1 ratio, a measure of the bank’s ability to absorb losses, to about 11 percent from 13.4 percent at the end of March, the bank, based in Brussels and Paris, said today in an e-mailed statement.

Here's JP Morgan's treatment of that very same asset class, in the very same country:

JPMorgan’s Q1 net revenue declined 9% y-o-y ad 3% q-o-q to $25.2bn as non-interest revenues declined 5% y-o-y (down 5% q-o-q) to $13.3bn while net interest income declined 13% y-o-y and (-2% q-o-q) to $12.5bn. However, despite decline in net revenues, non-interest expenses were flat at $16bn. Non-interest expenses as proportion of revenues went was 63% in Q1 2011 compared with 58% a year ago and 61% in Q4 2010. However, due to substantial decline in provision for credit losses which were slashed 83% y-o-y (63% q-o-q) to $1.2bn from $7.0bn, PBT was up 78% y-o-y (15% q-o-q).

Lower reserve for loan losses and consequent decline in Eyles test (an efficacy of ability to absorb credit losses) coupled with higher expected wave of foreclosures which is masked by lengthening foreclosure period and overhang of shadow inventory, advocate a cautionary outlook for banking and financial institutions. As a result of consecutive under-provisioning since the start of 2010, JP Morgan’s Eyles test have turned negative and is the worst since at least the last 17 quarters. The estimated loan losses after exhausting entire loan loss reserves could still eat upto 8% of tangible equity.

Hmmmm... Up is down, and down is up, I bendeth you over if you spilleth my cup! Again, as excerpted from There’s Something Fishy at the House of Morgan":

Again, I have warned of this occurrence as well. See my interview with Max Keiser where I explained how the Fed's ZIRP policy is literally starving the banks it was designed to save. Go to 12:18 in the video and listen to what was a highly contrarian perspective last year, but proven fact this year!

[youtube jQwlElVfdHY]



Provisions and charge-offs: I have been warning about the over-exuberant release of provisions to pad accounting earnings since late 2009!




Declines in provision was one of the major contributors to bottom line. JPMorgan reduced its provision for loan losses to $1.2bn (0.7% of loans) in Q1 2011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% of loans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans) in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9% of loans) in Q4 2010. Although banks delinquency and charge-off rate has declined, the extent of decline in provisions is unwarranted compared to decline in charge-off rates. As a result of higher decline in provisions compared to charge-offs, total reserve for loan losses have decreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At the end of Q1 the banks allowances to loan losses is lowest since 2009.


Although the reduction in provisions has helped the banks to improve its profitability it has seriously undermined the banks’ ability to absorb losses, if economic conditions worsen. As a result of under provisioning for the past five quarters, the banks Eyles test, a measure of banks’ ability to absorb losses, has turned to a negative 7.7% in Q1 2011 compared with +6.4% in Q1 2010. A negative Eyles test has serious implications to shareholders – the losses from banks could not only drain entire allowances for loan losses which are inadequate but can also wipe off c7.7% of shareholder’s equity capital. The negative value of 7.7% for JPM’s Eyles is the lowest in this downturn.




For those of you who believe the housing market has put in a bottom, JPM may be the company to believe in. For those a bit more grounded in reality, realize...

Of course, I could just be one of those negative, doom and gloom, attention seeking bloggerss... After all, there's still plenty of collateral behind all of those residential loans, right??? Even if it isn't the economy is strong and business margins are probably expanding since the equity markets took a near 100% run. [Hit: There’s Stinky Gas Inside Of This Mini-Housing Bubble, You Don’t Want To Be Around When It Pops! Wednesday, May 4th, 2011 by Reggie Middleton]


When adjusted for reality, these numbers and this turn of events corroborate what I have dug up regarding the shadow inventory available to subscribers, (see the latest Shadow Inventory Analysis Spreadsheet online) in that although shadow inventory looks bleak, there is a massive wave of unseen inventory waiting in the banking rafters. This is online tool is a very, very under appreciated asset that I would expect to get much wider use in the near to medium term.

I warned thoroughly of this occurrence throughout last year and this - see The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium Monday, February 7th, 2011. The .gov bubble blowing accomplished the mission of taking observers eyes off of the fundamentals and macro environment and back into optimism central. To Bloomberg TV's credit, they gave me the opportunity to call it like it is, as did Herb Greenberg of CNBC:

Reggie Middleton on Bloomberg TV's Fast Forward

Bloomberg TV: "The risk/reward ratio in commercial real estate does not look good!"

Bloomberg TV & Reggie Middleton on the Flawed Case Shiller Index: "That's what they said in Japan about 12 years ago, look where they are now!"

Last modified on Wednesday, 23 November 2011 08:23


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