Wednesday, 21 January 2009 23:00

Re: JP Morgan, when I say insolvent, I really mean insolvent

Do you remember what I said on January 6 (Amid the rally, I look at the Doo Doo 32 and their receipt of the TARP)? Well, believe it or not, Mr. Market along with members of the Bush Administration and certain CEOs are allowing members of BoomBustBlog to actually get paid from the same set of research for a 5th time in less than a year. This has got to be a record! I am of the mindset that this type of behavior will not continue for much longer, for I get the feeling that Barack and crew are a bit more serious about putting the bank issues to bed than the previous administration. Be that as it may, until they get their machinations firmly entrenched, and as long as banks are shuffling taxpayer money out the door in the form of dividends ala ponzi scheme et Madoff, my subscribers have the opportunity to profit immensely.

I have said it before, and I'll say it again - JP Morgan is insolvent! Anybody from JPM who wants to correct can simply email me via the contact form at the top of my site to show me where I'm wrong. I am always willing to admit that I am wrong when I actually am. I don't think this is one of those times. Keep in mind that throughout this entire credit debacle, I haven't been wrong about a bank or insurer yet. I have called all 32 of the Doo Doo 32, Bear Stearns, Lehman, GGP, MBIA, Ambac. Simply search my blog for the articles, for most of these companies have fallen in share price more than 98% (with the Doo Doo 32 being an exception since that was more of a macro call).

Despite heavy government subsidies (in my opinion, JPM is the beneficial recipient of over $100 billion of government aid and other capital, between the Bear Stearns subsides, backstops and guarantees, WaMu seller's concessions and TARP) I am still confident in declaring JPM insolvent. They have pre-announced earnings to coincide with the feel good aura of the Obama inauguration - good move, but it didn't work. I can still count even if I do feel good. JPM incurred an operating loss, masked by accounting shenanigans (these things don't fool me, I can count) and one time asset sales. Basically, the JPM dividend is being funded by tax payer monies (TARP) and asset sales, hidden by accountants who may been smoking some of those creativity tea leaves I hear they sell in Jamaica, you know that dark green Sensimilia! I've decided to divulge a bit of the top secret subscriber research to the public through an open post available to all. I've done this as to illustrate to those who are not part of our closed community the travesty and trouble that is what appears to be the MSMs (mainstream media) most respected and well run bank. The real juicy stuff (valuations and a sample trade optimized for risk/reward) will be available for download to retail and pro subscribers, accordingly.

Here is some JPM accountant's Sensimilia inspired food for thought:

  • While the banking world is bustin' their ass to delever, JPM is currently sporting a ~30x leverage ratio.
  • In
    4Q2008 derivatives increased substantially to $163 bn from $118 bn in
    3Q2008 and $77 bn in 4Q2007. Much of the increase in 3Q2008 was due to
    acquisition of Bear Sterns. As of September 2008 JPM has a $118 bn worth
    of derivatives on its balance sheet while the notional value of these
    derivatives is $84.3 bn.
  • As a reminder, JPM is the WORLD's largest credit derivative counterparty. With that note in mind, realize that JPM's trading VaR is up 50% while its increase in derivatives receivables are up nearly 40%. This all occuring as JPM is trying to delever by shedding assets,
  • According to September 2008 filings although bank had sold credit
    derivatives of $4.5 bn and purchased credit derivatives of $4.6 bn (net is
    nearly 0) the bank has recorded a fair value of $28.5 bn (as of Sep' 08)
    against notional amount of $9.2 bn.
  • JPM’s level 3 assets
    have increased significantly due to purchase of Bear Sterns, reaching 17.5% of
    total assets at fair value from 11.2% as of December 2007.
  • As of Q3 08, JPM sported an adjusted leverage of 32x! That is just what we could find on balance sheet. You know there has to me some stuff off balance sheet somewhere that is hidden from me. And to think, some people thought Bear Stearns and Lehman were highly leveraged... Oh yeah, that's right! JPM bought Bear Stearns and Lehman went bankrupt. Hmmmm!

Despite all of this, JPM actually rallied 40% up after the bank rout the other day and continued to drift up after hours. Cool, the kids gotta eat! You see, the counter-argument to the JPM short is that it the government has set up juicy wide spreads in certain trades that will allow banks such as JPM to earn their way out of insolvency. Well, this will work for solvent banks, but the very insolvent one's are just about out of time. The trades entail borrowing low and lending high, but who will you lend to? Think about it. If you are a very strong credit risk right now, you are probably not in the market to borrow money unless you have a relatively risky deal you are trying to finance. Of course, there are a lot of other entities and persons who are in the market for loans right now, but those are the one's that should have never been lent to in the first place and are definitely not the ones you want to lend to now. Adverse selection via Taxpayer subsidy! That's what I call it. The insolvent banks are between a rock and a hard place.

In addition, and as the article below illustrates, banks are using TARP to do the same thing that Madoff allegedly did. They are placating investors in an unprofitable business (remember JPM had an operating loss this quarter) by taking the capital received from new investors (the US tax payer) and paying off older investors (shareholders through dividends and bond holders through interest). The technical finance term for this is called, PONZI scheme. To see the Ponzi scheme in detail, as well as valuations, download the subscription material. For the first time, I will also include sample trades with an optimized risk/return profile based upon the findings of the report for professional level subscribers and above. The samples include a vertical ratio spread vs straight shorting of stock vs long only put purchases. Keep in mind that there is no need to get fancy with solid research. As both my long time subscribers and the 2008 Blog Research Performance attest, all you really have to do is buy a simple position and hold in the case of a company that is bankruptcy (or receivership) bound. Alas, since subscribers have been clamoring for trade info, I will occasionally remit such. I want to make it clear that these sample trades do not necessarily reflect what I do in my own proprietary account (which is I call it "proprietary") but are feasible assuming a relatively strong background in options and stock trading.

pdf JP Morgan Q408 quarterly valuation opinion - Retail 2009-01-22 08:49:26 79.24 Kb

pdf JP Morgan Q408 Quarterly opinion with sample trades - Professional & Institutional 2009-01-22 08:48:02 211.69 Kb

Subscription plans and pricing

Click any picture below to enlarge

image001.png

Even on an unadjusted, accountant polluted basis, the economic value of non-performing assets just about wipes out shareholder's equity.

image002.png

When adjusting for intangibles, JPM's equity holders are underwater 1.4x over!

image005.png

The Eyles test shows JPM's current reserve for loan losses shortfall as % of tangible shareholders' equity (non-accrual loans on an economic basis). No matter which way you look at it (as long as you REALLY look at it) the common shareholder's of JPM are done for. Maybe this is why they are still paying a dividend. "Get as much (taxpayer) money out of the door as possible before the one of those damn bloggers start spewing the truth and the feces hits the fan blades"!

image008.png

Yeah, you think the subprime category is eating heavily into equity, wait until the Option ARMs start to recast AND guys like me make it known the accounting BS that JPM is trying to pull in order to hide the fact that WaMu's purchase is killing it!

Bloomberg: Kill JPMorgan’s Dividend, Save America’s Banks: Jonathan Weil

Memo to JPMorgan Chase & Co.: Your
dividend needs to go.

For all the complaints that U.S. banks aren’t lending enough
money, the bigger problem may be they’re giving too much away.
Here we are amid the greatest banking crisis in 80 years, and
some of the biggest, purportedly shrewdest banks keep acting as
though they can spend their way into solvency by plying
shareholders with outsized quarterly checks.

The latest numbers from JPMorgan say it all. Last week, the
nation’s largest bank by market value reported $702 million of
net income for the fourth quarter. That was about half as much as
the $1.4 billion it paid in dividends to common shareholders. The
company barely earned its dividend for the year, too, when net
income and common dividends each were about $5.6 billion.

JPMorgan’s chief executive officer, Jamie Dimon, says the
dividend is sustainable. “This company has enormous earnings
power,” he said on the company’s Jan. 15 earnings conference
call. “We feel an obligation to pay the dividend. So we feel
pretty good about it, and so we’re not that concerned about it.”

That’s hardly convincing. JPMorgan would have reported net
losses the last two quarters were it not for $1.9 billion of
nonrecurring gains from accounting adjustments, related to the
company’s purchase last September of the banking units of the
failed thrift Washington Mutual Inc.

...

JPMorgan already has received $25 billion of government
bailout cash. It would pay almost a fourth that much in common
dividends this year. That doesn’t include the interest the bank
separately must pay to the U.S. Treasury on its preferred stock.

After Bernard Madoff’s Ponzi scheme, it should be out of
fashion for financial companies to pay returns to old investors
with money raised from new investors. Put aside the unseemliness
of paying dividends with taxpayer bailout cash, though. The best
reason for JPMorgan to slash its dividend is self-preservation.

...Dimon, who also is JPMorgan’s chairman, already may have
waited too long to hack the bank’s dividend. That’s no excuse for
further delay. JPMorgan’s bosses should start showing they’re
prepared for the worst. The longer they dither, the greater the
risk for us all.

Last modified on Wednesday, 21 January 2009 23:00

74 comments

  • Comment Link Rumi Friday, 16 October 2009 02:28 posted by Rumi

    /Again, just for argument's sake, what probability of success would you assign to the proposition that powers that be can keep the current bubble inflated for another five years?/

    IMO, a more relevent question would be what probability is there of the powers that be simply shutting down the exchanges or doing something else to ensure that you can't get your money even if you win the bet. I'd suggest that one's a bit higher...

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  • Comment Link Reggie Middleton Thursday, 15 October 2009 14:30 posted by Reggie Middleton

    My guess would be zero, but my guesses mean very little in the scheme of things.

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  • Comment Link Mark A. Goldman Thursday, 15 October 2009 14:25 posted by Mark A. Goldman

    Again, just for argument's sake, what probability of success would you assign to the proposition that powers that be can keep the current bubble inflated for another five years?

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  • Comment Link Reggie Middleton Thursday, 15 October 2009 13:53 posted by Reggie Middleton

    Probably 5 years or so, unless they have some esoteric long dated stuff on the books. It is really guess work though, since they don't report much of it. What they do report is in the subscription material.

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  • Comment Link Mark A. Goldman Thursday, 15 October 2009 13:19 posted by Mark A. Goldman

    OK Reggie, you make a good point, but just for argument's sake, if they never wrote another derivative, how long would it take for JPM's $89 Trillion of derivative contracts to expire? Do you have any idea or guess?

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  • Comment Link Reggie Middleton Thursday, 15 October 2009 12:53 posted by Reggie Middleton

    JPM's biggest risk is its huge counterparty exposure. Its second biggest risk is its credit quality of assets (rapidly deteriorating). then you have the derivative positions themselves. your questions are predicated upon the belief that corporations somehow learn their lessons. They don't.

    If you remember banker's trust in the early 90's who pioneered swaps traded to corporate clients to transfer risk (from Wikipiedia):
    [quote]It was originally set up when banks could not perform trust company services. A consortium of banks all invested in a new trust company, which was called Bankers Trust, so that they could refer clients to that company knowing that Bankers Trust would not try and poach their customers.

    Under the management of Charlie Sanford, Bankers Trust became a leader in the nascent derivatives business in the early 1990s. Having de-emphasized traditional loans in favor of trading, the bank became an acknowledged leader in risk management. Lacking the boardroom contacts of its larger rivals, notably J. P. Morgan, BT attempted to make a virtue of necessity by specializing in trading and in product innovation.

    Despite all its prowess in managing the risks in the trading room, the bank suffered irreparable reputational damage in early 1994, when some complex derivative transactions caused large losses for some major corporate clients. Two of these - Gibson Greetings and Procter & Gamble (P&G) - successfully sued BT, asserting that they had not been informed of or [in the latter case] had been unable to understand the risks involved. The bank's row with P&G made the front page of major US magazines. This was worsened when several Bankers Trust bankers were caught on tape remarking that their client [Gibson Greetings] would not be able to understand what they were doing.
    BT Alex. Brown logo in use between 1997 and 1999 following its acquisition of Alex. Brown & Sons

    In 1997, Bankers Trust acquired Alex. Brown & Sons, founded in 1800 and a public corporation since 1986, in an attempt to grow its investment banking business.

    The bank suffered major losses in the summer of 1998.

    Shortly before the Deutsche Bank acquisition in November 1998, BT pled guilty to institutional fraud due to the failure of certain members of senior management to escheat abandoned property to the State of New York and other states. Rather than turn over to the states funds from dormant customer accounts and un-cashed dividend and interest checks as required by law, certain of the bank's senior executives credited this money as income and moved it to its operating account.

    Bruce J. Kingdon, the head of the bank's Corporate Trust and Agency group spearheaded the fraud and entered into a guilty plea in the US District Court for the Southern District of New York and was sentenced to community service. Certain of his subordinates were thereafter barred forever by the SEC from working in the securities markets.

    With the Bank's guilty plea in the escheatment lawsuit, and thereafter its status as a convicted felon, it became ineligible to transact business with most municipalities and many companies which are prohibited from transacting business with felons. Consequently the acquisition by Deutsche Bank was a godsend to the bank's shareholders, who avoided being wiped out.

    In November 1998, Deutsche Bank agreed to purchase Bankers Trust for $9.8 billion; the purchase was finalized on June 4, 1999. Newman received $110 million in severance[/quote]

    How about Drexel Burnham a few years before that?
    [quote]Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was driven into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the fifth-largest investment bank in the United States.[1][/quote]

    Did Countrywide, WaMu, Leh or BSC learn their lesson? I don't see any reason to believe banks will stop taking outsized risks, particularly when it has already been proven that the US government will come to the rescue, even the rescue of the equity holders.

    Notice how, after being bailed out, and after becoming a financial holding company with access to the Fed, Goldman has taken more risk than ever as can be measured by VaR.

    There is little reason to believe these stor

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  • Comment Link Mark A. Goldman Thursday, 15 October 2009 12:20 posted by Mark A. Goldman

    Reggie-- Thanks for your great posts. Regarding JPM I have this question: I think you are saying that the major risk facing JPM is that they have a lot of risky derivatives on the books. But isn't it true that all derivatives have expiration dates after which the risk disappears? Don't you have to know when the most risky derivatives will expire to assess the risk? Is it possible that the FED/Teasury/JPM are just trying to keep the bubble inflated as they run out the clock on these contracts, after which, JPM would be out of the woods? I realize that JPM will continue to be in the business of writing these contracts but now that they see where they screwed up in the past, aren't they more likely to be more prudent in the future. Can it be that they are just holding their breath until the current inventory of derivatives expire so that they can breathe easy again? Can you comment on this. Thanks much and thanks for your great posts.

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  • Comment Link Frankly123 Monday, 16 March 2009 19:29 posted by Frankly123

    Reggie,

    Your post on January 25th repeated here below fascinated me:

    Do you apply the same or a similar method for other stocks as long as there has been no material change in your outlook based on your fundamental analysis?

    I am a newbie to your site, and so far I am very impressed especially with your handling of your "challenger" with clear, dispassionate explanations with just the facts.

    Thanks in advance for your response.

    I'm on my 3rd go around profiting from PNC (every time it shoots up to $70-80 or so, I pile on again). There has been no material change in my outlook except for the recent acquisition putting it in an even worst position than it was previously, which (form an anecdotal observation perspective) pushes the valuation band down. Since the research is driven by my investment outlook and I have already extracted significant profit from PNC (several times) it is not worth it for me to revisit the report with more resources. I (like you, hopefully) should be playing with the house money by now with either very deep in the money puts, several series of expired calls sold, or short positions that should have turned over considerably more than 100% profits, thus providing plenty of cushion to ride out the volatility caused in case it spikes again.

    I'm prepared to ride out my current position for quite some time. For those who may get trigger happy or nervous, I suggest you lock in your profits now, assuming you have been catching it at $70 to $80 as many on this blog has suggested when the price shot up.

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  • Comment Link Reggie Middleton Monday, 16 March 2009 04:26 posted by Reggie Middleton

    I'm sorry, but I don't give investment or stock timing advice. Once it comes to the services offered on the site, I offer fundamental research and opinion only. I will share my opinion on the recent market run up briefly though. Not much has changed from last week, last month, or last year, sans things have gotten a bit worse. Keep that in mind and don't bite off more than you can chew or afford to lose then you wouldn't feel the need to close your positions out every time a momentum trader succeeds in pushing prices higher.

    As Druff stated, liquidity is the key here.

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  • Comment Link Reggie Middleton Monday, 16 March 2009 04:23 posted by Reggie Middleton

    This was an opinion piece on JP Morgan. It was not a forensic analysis. The more in depth analysis are the forensic one's available via PDF download. I have a very small staff, so I don't cover a large universe of companies and topics like a sell side bank does. I cover specific opportunities and situations. Peruse the download link in the main menu in the left margin for historical reports, or look for the latest downloads in the subscription content section in the right margin. There is also a FAQ available through the top menu.

    Since this was a just an op ed piece, I didn't go into every aspect of JPM, just the extent to which a small subsect of the WaMu acquired loans were far enough under water to affect solvency. This amounts to a very small amount of the total asset portfolio of JPM, and if this small sliver can give them such problems, imagine what the whole shebang is doing.

    JPM was able to acquire WaMu assets sans unsecured debt obligations if I am not mistaken, which was a big plus for them, but still not enough to make these assets worthwhile in my opinion. The branches acquired weren't worth it (The rents could probably be had cheaper next year), and JPM is closing quite a few anyway. As for BSC, I didn't even broach this topic, but they have both significantly torrid assets and ample backstops, plus that building on Park.

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  • Comment Link persistentone Sunday, 15 March 2009 20:59 posted by persistentone

    Reggie, one thing I don't see discussed here is the US Governments supposed promise to backstop bad assets from the Bear Stearns acquisition. Is there any documentation to quantify this? I got the feeling at the time of the acquisition that the government had not put any ceiling on the amount they would backstop.

    For the WaMu acquisition, was there another backstop, and again the question would be whether there is any ceiling on that? If there is no ceiling maybe JPM is taking the position that it doesn't need to account for any non performing assets there as they are covered implicitly by the backstop?

    Finally, I still don't know how to use your site very effectively as a paid subscriber. When I did a search on JPM I find this article and one other since 1/2009, but I didn't find the paid research. What is the best search strategy to locate that?

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  • Comment Link nvguser Friday, 13 March 2009 09:22 posted by nvguser

    Reggie, I definitely need your guidance on this one. I have been patiently waiting for higher prices to buy puts on all your recent actionable intelligence. Based on the past few days, this is either a golden opportunity or a sign that despite the underlying fundamentals, washington's actions, will move the markets much much higher...

    So I come back to you once again... Has the game been changed to force a higher market or is this just a short term bounce....

    Thanks in advance....

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  • Comment Link Reggie Middleton Tuesday, 10 March 2009 01:43 posted by Reggie Middleton

    [url]http://news.yahoo.com/s/mcclatchy/20090309/pl_mcclatchy/3184724[/url]

    Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31 . Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

    The banks' quarterly financial reports show that as of Dec. 31 :
    — J.P. Morgan had potential current derivatives losses of $241.2 billion , outstripping its $144 billion in reserves, and future exposure of $299 billion .
    — Citibank had potential current losses of $140.3 billion , exceeding its $108 billion in reserves, and future losses of $161.2 billion .
    — Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
    — HSBC Bank USA had current potential losses of $62 billion , more than triple its reserves, and potential total exposure of $95 billion .
    — San Francisco -based Wells Fargo , which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion , below the banks' combined reserves of $104 billion , but total future risks of about $109 billion .
    Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
    ________________________________________
    OCC Derivatives
    [url]http://www.occ.treas.gov/ftp/release/2008-152a.pdf[/url]
    From Table 1 Page 22
    JP Morgan has total derivatives (Notional) of 87.7 Trillion
    Bank of America has total derivatives (Notional) of 38.7 Trillion
    Citibank has total derivatives (Notional) of 35.6 Trillion
    Wachovia has total derivatives (Notional) of 4.2 Trillion
    HSBC has total derivatives (Notional) of 4.1 Trillion
    Wells Fargo has total derivatives (Notional) of 1.4 Trillion
    ________________________________________
    3 problem childs (by size) with one monster in the room who all have derivatives that are growing in losses at an annual rate of 200%
    An interesting aspect is who is holding all the rest of the derivatives?
    The OCC has the US holding 175 Trillion in derivatives.
    Yet the BIS has world total at 700 Trillion
    Some of the biggest players have yet to come clean with what they are holding!!!

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  • Comment Link YAYANKEE Thursday, 19 February 2009 15:42 posted by YAYANKEE


    Meredith Whitney: JP Morgan dividend cut is "on the table"

    On CNBC interview.


    Reg, are you sure she is not a subscriber!!

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  • Comment Link YAYANKEE Wednesday, 18 February 2009 11:59 posted by YAYANKEE

    NEW YORK, Feb 18 (Reuters) - Concerns about the credit risk of U.S. and European banks rose to a three-month high on Wednesday due to worries about how effective government plans would be in shoring up bank liquidity, a credit derivative index showed.
    The CDR Counterparty Risk Index, which averages credit default swap spreads of the largest credit derivative dealers, rose to 207 basis points, higher than when Bear Stearns collapsed last March but below highs reached after Lehman Brothers failed in September.
    "Since the dysphoria surrounding Geithner's vagaries, counterparty risk has risen dramatically, breaking out of a high (yet stable) region between 150 and 190 basis points," Tim Backshall, chief strategist at Credit Derivative Research, which administers the index, said in a statement.
    Treasury Secretary Tim Geithner last week announced a plan to provide between $500 billion and $1 trillion of financing to private sector funds which will use the money to buy risky assets including residential mortgages from banks.
    (Reporting by Karen Brettell; Editing by Chizu Nomiyama)

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  • Comment Link cube660 Friday, 30 January 2009 20:30 posted by cube660

    This JPM thesis is starting to unfold. slowly but surely. The traders are starting to get restless. I could here the rumbling starting to grow. This is going to be shock and awe!

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  • Comment Link hmc Thursday, 29 January 2009 02:35 posted by hmc

    http://www.rgemonitor.com/blog/roubini/255310/latest_roubini_interview_with_bloomberg_on_the_global_slowdown_and_us_financial_losses

    Roubini has been on the money (as has Reggie) all of 2008. Listen to Roubini's outlook for 2009! He states that the US Banking System is presently insolovent as a whole! And he gives some insight into how to properly solve the problem via Nationalization similiar to Sweden.

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  • Comment Link hmc Thursday, 29 January 2009 02:28 posted by hmc

    Check out the current CDS Prices - MS at the top and JPM hanging around the middle with WFC and BAC

    http://seekingalpha.com/article/114106-financial-company-default-risk

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  • Comment Link YAYANKEE Wednesday, 28 January 2009 21:01 posted by YAYANKEE

    Wells Fargo's Missing Pieces

    * Article
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    more in Heard on the Street »

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    By PETER EAVIS

    Tangible common equity is a nasty piece of jargon, but it is hardly an expletive.

    But perhaps it is to Wells Fargo, since the bank made no mention of this closely watched indicator of capital strength when it reported fourth-quarter earnings on Wednesday.

    Investors in banks' common stock get hit hardest when a bank books big losses or has to raise capital. As a result, it makes sense to look at how strong a bank's common stock buffer is -- best viewed by measures of tangible common equity.

    If TCE looks low compared with assets, the bank may have to raise that ratio by taking actions that hurt existing shareholders, like issuing more common equity.

    J.P. Morgan Chase, Bank of America and Goldman Sachs Group have all recognized the popularity of tangible common equity by disclosing it in fourth-quarter numbers.

    Wells didn't.

    The bank says this is because TCE "doesn't reflect the real value of the goodwill created by the merger [with Wachovia] nor does it take into consideration the very significant actions the company took to de-risk the balance sheet."

    But Wells's TCE looks unsustainably low, at an estimated 2.68% of its assets, after buying Wachovia last year. That is well below J.P. Morgan's 3.83% and nearly 5% at Goldman. It is more in line with Bank of America's 2.6%.

    Wells would need an extra $15 billion of common equity to get its TCE ratio to J.P. Morgan's level.

    And Wells certainly has plenty of risky assets. For instance, Wells, after purchasing Wachovia, has $57.7 billion of option-ARM mortgages that weren't marked down at the time of the deal, and another $37.6 billion that were. Both totals are higher than Wells's estimated $34 billion of TCE.

    In addition, well over half of those option-ARMs are in California, where soaring unemployment and tanking house prices could continue to cause big losses.

    Wells's fourth-quarter disclosure was lacking in other places. An important exercise for investors right now is gauging the strength of banks' loan-loss reserves. Merger accounting following the Wachovia deal makes it difficult to assess how Wells's premerger loans are performing and whether the bank has built enough of a reserve for them.

    By contrast, in its fourth-quarter financials, J.P. Morgan disclosed key credit data with and without Washington Mutual's assets, acquired last year.

    Wells's stock jumped over 30% Wednesday, partly on intensifying chatter that the government is likely to set up an entity to buy bad assets from banks. But any government plan could well require banks to strengthen their common-equity ratios in return for removing bad assets. It isn't clear that Wells, which is still paying out capital through generous dividends, would be immune.

    Write to Peter Eavis at peter.eavis@wsj.com tOMORRO

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  • Comment Link ig0r Wednesday, 28 January 2009 13:16 posted by ig0r

    Ok that makes sense Rahul. I guess I don't know enough about bank accounting to see what tricks they're playing, but they've gotta be doing something. Those NPA numbers look WAY too low for the crud on their sheets, I'm sure you'd agree Reggie lol. Just looking at the assets I counted something like $40bn in additional writedowns, easily.

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