Friday, 02 September 2011 07:23

You Know Those Bombastic Warnings I Gave About Banks Being The New Tobacco Industry? Well, You Might As Well Light Your Stogies Featured

Just last week I penned and posted "The Banking Industry Still Looks Dismal Despite Rising Share Prices". Well, it looks as if the Chickens Are Coming Home To Roost! The NY Times reports U.S. Is Set to Sue a Dozen Big Banks Over Mortgages:

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

Hmmm... Let's go back as far as 2008 and as recently as last quarter to see if this was hard to anticipate for the followers of BoomBustBlog...

For those that have followed me over the past 4 or 5 years, I am known to definitely go against the tide of popular opinion. One of those heterox moments was when I directly challenged the most well respected banks in the world, JP Morgan. Why did I do it? Because much of that oft lavished, pop media respect was not deserved and didn't reflect the reality on the ground (or in the books). For justification of said statement, I pray thee reference As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies

JPM also increased its mortgage repurchase reserves increased $1.0 billion pretax in anticipation of pressures from GSE’s for repurchase of troubled mortgages and made a provision of $1.3bn for litigation reserves. I explicitly outlined this risk this time last year (Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results) and reiterated it days before JPM’s earnings release (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!) wherein I told BoomBustBlog readers to carefully follow the “warranties and representations” numbers, which is nearly guaranteed to spike – and spiked it has.

I would like to note that I don’t recall anyone making a big deal about this topic when it first reared its head last year, although the trend was quite obvious. Now, it is one of the biggest issues of discussion in the earnings call Q&A. Was it potentially my advice on watching the spike in the repurchase requests? I do hope somebody was paying attention!

If you haven’t noticed, despite the fact JPM is pulling provisions to, IMO, pad accounting earnings ahead of what I feel to be a tsunami of macro and fundamental issues, they are at the same time going to the capital markets for a re-up, and willing to pay a premium to do so…

So, the question is, "Was JPM management correct in releasing reserves ahead of what appeared to be improving credit metrics?". After all, said reserve releases do wonders for the bottom line, at least from an accounting perspective which is what most investors pay attention to. Well, now with the benefit of hindsight, we have a preliminary answer to that question - that is assuming the collapse in housing prices were the cause for drop in the first place. After all, the more houses underwater, the riskier these mortgages are, right? Let's peruse As Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their Downward Price Movement In Search Of Equilibr; ium Scraping Depression Levels Tuesday, December 28th, 2010

Before we go on, this is an ideal time for subscribers to review our latest JPM Forensice Research and Valuation - file iconJPM Q1 2011 Review & Analysis.

JPMorgan Chase & Co. and the biggest U.S. banks face billions of dollars in legal costs related to their role in the financial crisis, threatening their profits and the stock price gains they made in 2010, analysts said.

JPMorgan, the second biggest bank by assets, reported $5.2 billion of legal costs in the first nine months of 2009, compared with a gain of $10 million in the same period a year earlier. The costs would rise if the bank reserves for multibillion-dollar lawsuits by Lehman Brothers Holdings Inc. and the trustee liquidating Bernard L. Madoff’s firm.

... JPMorgan’s third-quarter net profit of $4.4 billion, up 23 percent from the year earlier, would have been larger if it hadn’t set aside $1.3 billion of pretax income for lawsuits and $1 billion for mortgage repurchases. Banks haven’t yet reported their results for the fourth quarter.

Of course, there are a few tidbits missing from this statement that can add to its accuracy. Let's see... Where did those profits come from? Again, you will find divergence between how BoomBustBlog reports and that of mainstream financial reporting. See JP Morgan’s 3rd Quarter Earnigns 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!!! Sunday, October 17th, 2010

For public consumption of additional JPM material, I released a long form excerpt of our subcriber material to the public in late 2009,  An Independent Look into JP Morgan. Again, more warning that just weren't heard in the pop media or the sell side of Wall Street... Oh Yeah! JPM IS the sell side of Wall Street... You see, with that being the case, maybe there is no one to truly take an "INDEPENDENT LOOK" at JPM, at least outside of the blogoshere. Let's delve into the aforementioned document...


As you can see from the 2 year old doc above, there is a very significant reason why the government and monolines want their money back. Hey, how about all of those foreign buyers of MBS? You think they'd want to get "unrobbed" too, eh? As for how significant this really is, let's reread the telling part of the aforementioned document, once again, shall we?

The acquisition of Washington Mutual and a degeneration of the overall credit environment have caused JPM’s non-accrual loans to increase to an astounding $18.9 billion (2.8% of loan portfolio, or just a little more than the GDP of

Macau, which is $18.6 billion) in 2Q09 from $6.9 billion (1.3% of loan portfolio) in 2Q08. Furthermore, including securitized loans’, nonaccrual loans increased to a massive $77.8 billion, or 7.1% of loans. To put this into perspective, since the beginning of this "Asset Securitization Crisis" seems to have numbed many with the constant bandying about of large numbers – JP Morgan’s deadbeat mortgages + deadbeat securitized loans are greater than (with the slight exception of the first entrant) the GDPs of:

    1. Bangladesh $78.9 billon
    2. Croatia $69 billion
    3. Belarus $60 billion
    4. and Sudan $58 billion

JPM’s bum mortgages and related loan products are more than half the GDP of the United Arab Emirates at $163 billion, and that’s with all of that oil that they sell to us at $60 to $146 per barrel!


As you can see, the WaMu mortage portfolio has turned out much worse than JPM management has anticipated, but just about exactly as I had expected back in 2008.


On Wednesday, 29 June 2011, I wrote The Beginning of the End of the Beginning of the Gutting of the Big Banks Has Begun! I felt it was a very powerful piece consisting of then current newsclips that proved prescient my prognostications from the previous three years, of which I excerpt as follows...

You've Been Had! You've Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do!

As far back as 2009  (yes, over a year ago) I have been warning readers and subscribers of the (not so) hidden risks of putbacks, warranty and rep reserves, and the overly optimistic under reserving of the big commercial banks. I used JP Morgan as an example (see link list below), but made it clear this warning stood for several big banks(several of the big banks – As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves, As a matter of fact I said that the banks ‘ due to legal risk. This risk was significantly exacerbated the day after making that post, Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! wherein the Massachusetts 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 justifying and vindicating my post from the day before and clearly demonstrates that 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!

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!

Step one: Hide the Truth!


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

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…

I have plenty of additional, fresh subscriber research and analysis as well as free commentary and opinion on this topic coming up. Next, we review the effects of JPM's continuing legal woes on other parts of its business and how those parts then effect the rest of the banking industry ala 2008! Then we will discuss the problems of other name brandname US banks and the issue of contagion! 

Subscriber ony:

JPM Q1 2011 Review & Analysis

JPM 3Q 2010 Forensic Update

icon Federal Reserve MBS Purchasing Analysis (1.96 MB 2010-12-15 13:10:09)

icon BAC Q1 2010 Earnings Review (272.63 kB 2010-04-21 11:32:13)

icon Bank Charge-offs and Recoveries 2Q10 (272 kB 2010-10-01 12:06:03)

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