Last week I wrote a scathing expose on Bank of America and its [fraudulent?] transfer of over $50 trillion worth of suspect derivatives into its FDIC insured depository arm - Bank of America Lynch[ing this] CountryWide's Equity Is Likely Worthless and It Will Rape FDIC Insured Accounts Going Bust. It drew quite a bit of attention, but the story doesn't end there. Actually, that was just the beginning. It gets worse, much worse. The next question Du Jour is, "What exactly did Bank of America Lynch[ing this] CountryWide put in Aunt Mabel's retirement savings account? Well, I have already answered that question for subscribers two years ago, but I will explore it further in public now because it leads me to the most recently released BoomBustBlog subscriber research (click here to subscribe) in which we have identified entities that are ripe for a fuse to be lit under their contagion infused ass, and Bank of America Lynch[ing this] CountryWide just so happened to of dumped 5 trailer loads of matches into YOUR bank accounts. Oh, it's so good to be [Bank of] American. Those who don't subscribe, and particularly those who haven't seen the RT/Capital Accounts interview, should spend take the time to view the most "Intellectually Aggressive Analysis on Wall Street" video below, wherein through Reggie Middleton vs Bruce Lee vs BAC, the type and composition of said swap derivatives purportedly dumped into your bank accounts are detailed and explained and illustrated. Be warned, this is not your Daddy's investment analysis, and is not for the feint of heart.
The swaps illustrated and explained in this video are nearly guaranteed to be written with the subject bank of our most recent analysis, compounding the on-balance sheet derivative exposure, which is already the highest in the world once proper TEC adjustements are taken into consideration. This is the same bank, apparently unrecognized by the markets, media and sell side, that will literally go boom when the match is put to the dry gunpowder (subscribers only, click here to subscribe): Haircuts, Derivative Risks and Valuation.
To fully appreciate the risks at stake here, just remember that Bank of America Lynch[ing this] CountryWide bought both CountryWide and Merrill Lynch, the most aggregious mortgage operators in thier respective categories. It's quite possible that CountryWide's litigation liabilities alone could sink the whole bank, while Merrill Lynch was collapsing under its own weight as BAC purchased them at a PREMIUM! Let me attempt to hit this point HARDER! In 2007, I posed the question,"Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?"
I know I wouldn't. I believe there are better investments out there from a risk/reward perspective. Countrywide is in a bit of a jam, and it is not just from bad loans on the books. Looking at the Countrywide Foreclosures Blog (yes, there actually is one), I found this article:14,196 Homes Offered For Sale on Countrywide Financial's Website. I browsed through some of the site, and the small sample of numbers that I looked at seemed accurately reported. It also seems to mesh with Housingtracker.net. Browsing through the comments, someone noticed that the bank and trust offerings were not included. I looked, and at first glance, it seemed like he had a point. Now,it is a lot of work to verify all of this, but if it does pay out (and it looks like it does), Countrywide has nearly 100% of it market capitalization outstanding as REOs - in a market where houses just aren't selling and property values are falling fast. This is totally discounting each and every under performing and underwater mortgage asset they have on their books.
|Held by Countrywide Mortgage Co.||$ 2,910,876,468|
|Held by Countrywide Trust and Bank||$ 2,969,067,322|
|CFC Market Capitalization||$ 6,180,000,000|
|% market cap held as REO||95%|
You see, CountryWide was insolvent way back in 2007, even if you were able to ignore the biggest problems that they have (had). Throw in the soured, souring, and soon to be soured PrimeX style mortages then add in the massive litigation liabiities and CountryWide is so insolvent that they would have brought down anything that would have dared stand next to them, not to mention acquire them. Which begs the question, "Why in the hell did Bank of America do it?". I posed this in the following month in January of 2008, Quick Opinion on Bank of America Buying Countrywide...
It is a mistake, plain and simple. I normally don't like to tell people who specialize in a business how to run it, since they probably know more about their business than I do - but sometimes the mistakes are just so glaring. I don't care how many analysts are poring over how many books at Countrywide. BAC's error is not misjudging the value of Countrywide now, but misjudging the macro environment in which Countrywide operates.
My experience has been primarily understanding and evaluating companies from the equity perspective, but that definitely doesn't mean that I ignore the fxed income side. I am just not better at it than the other guys. What I have been noticing of late is that credit markets have been screaming murder for some time now, and the equity markets have been humming along new bullish highs and trading runs as if nothing is truly wrong. This is a strong indicator that momentum trading has again taken control of the markets. It is an environment where price trumps value. The last time this came to a head was the dot com bust. It took many institutional and individual investors 5 to 6 years to break even. Some never recouped their losses. Well, my gut has been telling me for about a year and change now that we are back there again. 2008 thus far has done nothing but confirm that we have come to a head. The pic above was an actual shot (one of very many at various locations) of the run on Northern Rock Bank in the U.K. This was real, and it was indicative of a real problem.
Well, we had a very recent run on the bank here in the states as well. There were pictures all over the web when it occurred, and now mysteriously, they are all gone. All I was able to retrieve was this screen capture of a thumbnail from Blownmortgage.com. Just as the pictorial remnants of the run have somehow disappeared, so has the equity markets prudence in the face of such a run. You can guess which bank got ran on.
There were companies in the dot com era that made purchases that they thought were risky but potentially profitable, and in more severe cases such as the internet media companies, many have dwindled down to mere pennies per share, ex. Razorfish, et. al. So, historically, companies have had the hubris of BAC to go on and lose most or all of thier investment.
I have been using this chart a lot lately, and it looks like I will be using it a lot more.
If the housing market goes anywhere NEAR its historical trends, we are going to see 30% to 40% drops in real prices. Many people poo-poo this notion, calling it apocalyptic. This is silly to me. Why didn't they poo-poo the notion of 40% to 200% price increases in the same time frame? Isn't that even more dramatic? For some reason, investors - individual and professional alike - have a hard time avoiding following the crowd. They try to catch bottoms (a risky and foolhardy endeavor in my opinion), time tops, and always seem to believe something will bounce back or XYZ asset will never go down in price over the long term (ala Fitch Ratings HPA models or the Japanese real estate market).
But BAC is Value Investing Like Buffet
No they are not. They are gambling like cowboys. The caveat to the Buffet argument is that BAC didn't buy the assets of Countrywide, they bought the whole company, kit and kaboodle - including the liabilities. I can understand if they bought just the servicing arm, but they didn't. Believe me, it is possible to pay less than zero for a company. The last time Buffet bought a financial company steeped in liabilities and risks on the cheap, he regretted it and realized that no matter how cheap he got the assets, he still overpaid. Risk vs. Reward: don't just stare at the reward side of the equation. If you must, simlpy reminisce on Solomon Brothers. In other words, the cost for buying Countrywide could easily be more than what is paid for it.
CFC is dangerous, plain and simple. The residential housing chart clearly shows how far out of whack housing values are in historic real terms. Come on, this makes the remnants of the Gold Rush look mild. If values come anywhere near the mean values of growth, BAC will be paying the CFC bill for a long time, and they will be paying a lot more than $6 billion, the cost of acquisition. Now, I hear there are performance covenants and guarantees in the purchase which may smooth out the pain, but CFC is in a world of hurt, and doesn't have much wiggle room to offer incentives. As I have stried my best to insinuate, it is possible to get CFC for free and still lose money. I know BAC has been in the business longer than I have been short CFC, but I made more money on that short than they did on their $2 billion investment. Sometimes, you are just wrong.
As of last month, CFC had more nominal dollars in REOs than they did market cap. Now, just add all of those garbage loans, the plethora of law suits, a few SEC and state banking authority investigations in a pot with a market where housing value corrects 30% in real terms with inventory building higher and higher, and we have a bitter tasting brew indeed... I hope those BAC shareholders have strong stomachs.
So, was I Right?
Let's let the BoomBustBlog archives tell the tale...
Reggie Middleton's Real Estate Recap: As I Have Clearly Illustrated, It's a Real Estate Depression!!!
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): JPM Q1 2011 Review & Analysis.
(1) Land and Debt are four letter words. One of the golden rules to being a homebuilder is to finance land with equity and use debt for financing your homebuilding operations. Why? Because when you are highly levered and the market turns on you, then you will not be able to last during the downturn. It is a rule that has proved out in every housing recession period. Why then do builders double up their positions and try to grow faster than the market average? Greed. The bigger your company the bigger your compensation package. If not greed, then stupidity. This is such a basic concept and it holds true in every downturn.
(2) There is a dis-connect between the land and housing markets. When a housing market takes off, the first to know are the builders because they are looking at the sales data. Eventually, the land market catches on and begins raising prices. However, when a market is in decline, the builders are the first to know and the land owners hold their pricing until it is too late and they realize the downturn is for real. Did you hear that banks?
(3) Types of Land Owners. The most ignorant is the farmer or long time owner. This person has a basis of practically zero because it has been in the family forever or 30 plus years. They are not sophisticated and don't really understand the full value of their land. Next up are the speculators. These guys bought land 5-20 years ago hoping growth would come there way. Their basis is higher, but they have no debt and don't have to do a deal if they don't want to. The next group of land owners is the Investor who put together an LLC...
Land is illiquid and for the most part does not generate income but does generate expenses. The exception being leasing land for someone to use for agricultural purposes. If the very nature of land is illiquidity, then what is its liquidity in the biggest real estate crisis since the depression? What is liquidity? Isn't liquidity the ability for a buyer and seller to meet at current market rates? Stocks for the most part are liquid because when I hit sell on my fidelity account someone else is on the buy side. With land, it is difficult to find a buyer at your price in a timely manner. How about now? How much is land really worth if you had to liquidate it today for cash. I believe as do many of the people in private equity, that land is down 50%, thus the land on builders books are down 50%. Bye bye equity.
For those who didn't catch it, I espoused my opinions of JP Morgan's overt optimism on CNBC a couple of months ago, and things are turning out exactly as have stated with bank reserves being shoved into the accounting profit bucket just as the foreclosure pipeline is being backed up by robo-signing scandals which exacerbates the largely under appreciated shadow inventory problem (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!), MBS investors are demanding significantly increased put backs (see 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 "Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…"
Add all of this up and consider the junk portfolio of the subject bank in question as well as the tight knit incestuous circle of swap writers, and you have a recipe for disaster. Oh yeah, this is just the fallout from the mortgage operations of the Countrywide acquisistion. Keep in mind that although there a lot of CDS on BAC's books, the other swap category (TRS) illustrated in the video above is much more dangerous, particularly as it relates to this housing market.
Subscribers, reference pages 4,5 and 6 of Haircuts, Derivative Risks and Valuation to see how not only the housing and CRE market losses can affect this bank, but the losses on the TRS referenced in the video, or more aptly put, the potential failure of counterparties such as Bank of America Lynch[ing this] CountryWide to pay these "faux" hedges without another massive government bailout. You see this bank is a powder keg sitting atop a tinder box in a match factory with sparks flying all around it!
Let's move on to Merrill Lynch[ing], who was one of the biggest swap writers on the street, credit and total return. What do you think will happen to those swap lines as Europe implodes? Yes, I know many say Greece is not big enough to do damage, but that is said because many can't see the forest due to excessive tree bark in their face...
In French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days! I made it clear that the French banks were the canaries in the coal mine that nobody hear chirping. At the time of the original analysis, no on was harping on the French banks, besides the BoomBust.
Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!
As excerpted from our professional series Bank Run Liquidity Candidate Forensic Opinion:
This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above. Here I demonstrated what more realistic numbers would look like in said model... image008image008
To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...
So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipe out, or is it? On to page 10 of said subscription document...
Thursday, 28 July 2011 The Mechanics Behind Setting Up A Potential European Bank Run Trastde and European Bank Run Trading Supplement
I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.
Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer
In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.
I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!
- French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
- Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers
Subscribers, reference pages 1-4 and 5 of Haircuts, Derivative Risks and Valuation to see how the losses through European contatgion can compound the loan exposure problems of this bank and its likely TRS "faux" hedges (remember, its not really a hedge if it doesn't get paid), not to mention direct PIIGS exposure and holdings. Again, reference the video for potential failure of counterparties such as Bank of America Lynch[ing this] CountryWide to pay these "faux" hedges without another massive government bailout.
So, What's the Next Shoe To Drop? Read on...
For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.
Now, let's refresh the output from And The European Bank Run Continues...and more importantly BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional, I strongly urge those who haven't to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP. Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price...
This is the European bank that either will set off the global chain reaction or end up being a very significant part of it (subscribers only):
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the NYC meet and greet within the next 24 hours or so, so we can chat,
drink, debate, argue and fraternize with pretty woman together in a
trendy spot in the Meat Packing District or the Bowery (I apologize in
advance to all of my female readers/subscribers). Those who are
interested in attending should email customer support.
the venue - I simply need to get the travel and venue organized due to a
change of plans. For those that are new to the blog, these are pics of previous meet and greets...
BoomBustBlog in the 79th Street Boat Basin, NYC
BoomBustBlog at BuddhaKahn, Meatpacking District, NYC