Itlays IMF erroneous forecastsI've been warning about Italy's troubled banks since 2010, and last year I pushed two very detailed reports about what was essentially Italy's Bear Stearns and Lehman Brothers. Italy is a mess and the IMF and EC have been too optimistic regarding its prospects for 7 years (not just lately), see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Fast foward to today and Bloomberg reports: Italy Approves $21 Billion Fund to Shore Up Its Troubled Banks

Italy’s parliament approved a law to plow as much as 20 billion euros ($21 billion) into Banca Monte dei Paschi di Siena SpA and other troubled lenders as part of the nation’s efforts to revamp its banking industry.

 

Published in BoomBustBlog

During the financial crisis of 2008, money market funds who subjectively agreed to hold their NAV (net asset value) unit prices at $1 “broke the buck”. That is, the unit of share of the fund fell below $1 (the $62.5 billion Reserve Fund, to be specific, one of only two funds to “break the buck”), which was a significant problem for the investors who used (and considered) said money market funds as cash in the bank. All of a sudden, everyone’s cash account at the Reserve Fund just dipped in value. Uh Oh! This caused short term credit to literally freeze, worldwide, because others were concerned that their bank-like security and liquidity was no longer that secure nor liquid.

Regulators stepped in to make sure this didn’t happen again by demanding that all money funds who do not invest in sovereign securities (those entities who “should” be able to print their own monies, but we’ll get into that in a later post) allow their NAV to freely float with market prices.

The result? Money flew out of prime money funds into perceived safer vehicles.

Published in BoomBustBlog

Last week I posted a rather scathing diatribe, basically ridiculing the fact that Dick Bove get's so much MSM airtime for his virtually consistently wrong calls and analysis (see the repost of that particular rant towards the bottom of this article. It appears as if Mr. Bove may have read said diatribe and used his cache with the MSM to post a response. To wit:

Bove: Why I Was Wrong on Bank Stocks

With a month left in 2011 and—barring a miracle—bank stocks headed for a negative year, Dick Bove is admitting he was wrong.

This is both commendable and respectable. It is honorable and healthy to admit when you are wrong, and we all have the opportunity to do so since nobody is right all of the time!

The widely followed Rochdale Securities analyst has been telling investors for a good portion of the year that banks have recovered from the financial crisis and are in much better shape they were three years ago.

Yes and no! They are in much better shape than they were three years ago, but that is highly misleading because they were nearly all virtually bankrupt. Now they are merely borderline bankrupt, but only if marked to reality. ... And no, they have not recovered from the financial crisis or rates would be above virtual ZIRP zone!

Investors, though, haven’t been biting.

Because they read BoomBustBlog!

Heading into Monday’s aggressive rally, the Standard & Poor’s 500 financials were off 26.3 percent on the year, and the KBW Bank Index had fallen 31 percent.

For Bove—Rochdale’s vice president of equity research—the decline has been a maddening ride spurred not by bank fundamentals but rather by investors’ belief that no matter how good the earnings look or how loans are performing or where capital levels stand, investor worry over bigger factors takes precedence.

“The macro factor will continue to be more important than the micro factors,” Bove conceded over the weekend in a moderate mea culpa to investors.

“On periods like this analysts, like me, who rely on traditional parameters like company results and historic relationships between interest rates and earnings yields, are going to have a tough time.”

In essence, Bove argues that he was wrong for the right reasons.

This is nonsense. With all due respect, you were a Dick that was wrong for all of the wrong reasons. Earnings looked good because reporting standards have been gutted allowing for the facade of performing loans and reserve releases padded losses. Capital levels looked impressive to the great unwashed because mark to fantasy allowed gaping capital deficiencies to be glazed over.

Liquidity, capital, loan performance, revenue, profits—all the metrics by which one would traditionally analyze banks—look good.

But worries over the world’s debt crises, particularly in Europe and the U.S., are making risk-averse investors unwilling to buy the banks in Bove’s coverage universe.

My Dick! European liquidity issues threaten a US liquidity issue. Massive uncertainty caused by unreliable and downright untrustworthy financial reporting has caused a deserved discount to financial assets, which is why valuations have tumbled.

“The divergence between the economic and financial fundamentals, on the one hand, and the stock prices, on the other, reflects a change in risk assumptions,” he wrote.

“For multiple reasons, investors keep demanding a higher and higher risk premium on common stock investments, in general, and in bank stocks, in particular.”

Someone please see my statement above and explain it to Dick!

Boiling down what he got wrong this year, Bove said: “I failed to understand that the fears in the market concerning banking were so great that the fundamental improvements in the economy, the industry, and companies like Bank of America [BAC  5.2017  0.0317  (+0.61%) and Citigroup [C 25.03 1.40  (+5.92%)] would simply be ignored.”

Still, Bove believes that an improving economy and—in his view—the European crisis actually benefiting rather than harming U.S. banks will justify his optimistic outlook that persists for 2012, even if he’s been dead wrong so far.

“Bank stocks are being driven by fear despite the significant improvement in the industry and individual company fundamentals. Presumably, at some point, fear will either be realized or dissipate,” he told clients. “My assumption is that it will dissipate. At this point, the industry’s fundamentals will drive bank stock prices higher. This was my view at the beginning of 2011 and it is my view at present.”

Yeah, okay...

A BoomBustBlog Deep Dive on Dick

You also have the not so prescient headline akin to a fireman ariving at a smolding pile of ashes, brandishing his brand new fire hose waiting to put out said house fire - Two Thirds Chance of 2012 Europe Recession: Survey. Subscribe to BoomBustBlog, my friend (early 2010) The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
Now, speaking of Europe, particular Dexia (France, Belgium Wrangle About Dexia Deal: Reports), this brings to mind another highlighted headline focusing on the oft quoted sell side banking analyst US Stress Tests Not Worrying: Bove... Dick Bove is one of the, if not most oft quoted sell side bank analyst in the mainstream media. I disagree with him, regularly. As the uber independent investor/analyst that I am, I will never be accurately accused of kissing [up to] Dick - regardless, let's grab Dick by the base [of his assumptions] and see if we can yank something usable out of it, shall we?

The Federal Reserve announced Tuesday it plans to stress test U.S. banks—including the six largest—against a hypothetical market shock, such as an escalation of the European debt crisis.

Dick Bove
cnbc.com
Dick Bove

But noted banking analyst Dick Bove said there is nothing for investors to get upset about because the stress tests are pro forma and are not an indication that the Fed  has any particular concerns about the state of American banks.

“It was really required by the Dodd-Frank law that they have a stress test,” the Rochdale Securities analyst told Larry Kudlow. “So every year at about this time you have the Fed setting up a new stress test for the banking industry.”

The six big banks to be tested are Bank of America [BAC  5.37    -0.12  (-2.19%)   ], Citigroup [C  24.46    -0.54  (-2.16%)   ], Goldman Sachs [GS  89.40    -1.90  (-2.08%)   ], JPMorgan Chase [JPM  29.41    -0.50  (-1.67%)   ], Morgan Stanley [MS  13.52    -0.08  (-0.59%)   ] and Wells Fargo [WFC  23.93    -0.25  (-1.03%)   ].

While the Fed's stress tests will see whether U.S. banks can withstand any further deepening of the European debt crisis crisis, Bove isn't worried about contagion from the EU.

“If [the European banks] run into significant difficulties, it is not going to create a massive crisis in American banks,” he said. “American banks are benefiting meaningfully as a result of the European banking crisis and it’s showing up in their earnings.”

Will someone buy Mr. Bove an Insitutional BoomBustBlog subscription. Of course it won't create a massive crisis in American banks... The 8th largest bankruptcy in this country's history doesn't even scratch the radar, right??? The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications

That’s because European banks are selling American assets to American banks at discounted prices.

However, Bove thinks it’s highly unlikely that the European banks will collapse. He believes the European Central Bank will ultimately bail them out.

Okay, where do I start? Well, I must admit, I don't look, speak, think nor act like any of the sell side analysts. If you are into convention, and not into hard hitting analysis and outspoken brothers, then I'm just not your man. If that's the case, I suggest you simply get you some Dick. For those who (like me) don't favor dick, I have a slightly different flavor to offer in terms of analysis and perspective.

For those not familiar with Mr. Bove, he made an interesting call on Bear Stearns which was essentially antithetical to my research. I will copiiously (I apologize Karl) excerpt a post from the Market Ticker which explains the story explicitly: Dick Bove, Bear Stearns, And Controversey

  Apparently Mr. Bove does not like my ticker from last night, and believes that I have been in some way "unreasonable" in my characterization of him, specifically this paragraph:

"The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!"

He was kind enough to send me a copy of the full report which I have edited to remove his email address and phone number (at his request), but which is otherwise reprinted here with his permission. You are urged to read the report in full and draw your own conclusions about whether the market performrating was reasonable or not. Links are at the bottom of this post. There apparently is one word he can legitimately complain about in my original ticker - the word "PUT". In fact, he maintained a "Market Perform" rating on the 11th of March; the upgrade to Market Perform from SELL appears to have occurred in February.

You can find an archived copy of that story here. It says among other things, in reference to Bear and Lehman:

"He said private equity may once again be able to fund activities in the high yield markets, while adding that credit derivatives markets were unlikely to go lower, and that the mortgage business may actually be quite strong this year.

New York-based Lehman will likely recover faster than its peers due to the expected strength in mortgages, Bove said."

Ok, I apologize for the error in not noting that the actual upgrade apparently came a month earlier, not that I think its material, but when you're wrong, you admit you're wrong. Mr. Bove, of course, didn't bother to mention when the rating was issued by him during our phone call, nor that when he issued the rating the price of the stock was even HIGHER (by nearly $20!) than it was in March when the rating was "maintained" (even though he claims it really wasn't if you read the narrative.) Now let's get to the meat of the matter and why I raised a stink about it in The Ticker - the rating. Dick claims that "anyone who read the report in full would see that I had told them to stay away from the stock."

After reading the report in full, I agree - the stock, by the narrative of the report, is indeed a sell - albiet a sell $20, or 25% of your money, too late!

But here's the problem - the report clearly cuts the price target from $90 to $45 (a 50% haircut!) and further is a reduction of 25$ (from $59 to $45) from the closing price on the day the report was issued.

The report is intended only for institutional clients who pay his firm, but it, like the report yesterday, was picked up and widely quoted in the media. Take a look at the second page of that report, directly above Mr. Bove's certification, under the definition of "Market Perform":

"Common stock is expected to perform with the market plus or minus five percentage points."

Since I took the liberty of excerpting so much, I urge all who are interested in this story to read Karl Deningers full post on his page - Dick Bove, Bear Stearns, And Controversey. In regards to me, let's contrast my opinions of Lehman and Bear in January of 2008, as opposed to Dick's - Is this the Breaking of the Bear?

Bear Stearns is in Real trouble

Bear Stearns will soon be, if not already, in a fight for its life. It is beset with the possibility of a criminal indictment (no Wall Street firm has ever survived a criminal indictment), additional civil litigation, and client defection and alienation. Despite all of these, the biggest issues don't seem all that prevalent in the media though. Bear Stearns is in a real financial bind due to the assets that it specialized in, and it is not in it by itself, either. For some reason, the Street consistently underestimates the severity of this real estate crash. If you look throughout my blog, it appears as if I have an outstanding track record. I would love to take the credit as superior intelligence, but the reality of the matter is that I just respect the severity of the current housing downturn - something that it appears many analysts, pundits, speculators, and investors have yet to do with aplomb. With a primary value driver linked to the biggest drag on the US economy for the last century or so, Bear Stearn's excessive reliance on highly "modeled" and real asset/mortgage backed products in its portfolio may potentially be its undoing. This is exacerbated significantly by leverage, lack of transparency, and products that are relatively illiquid, even when the mortgage days were good...

Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back

Okay, I’ll admit it. I watch CNBC. Now that I am out of the confessional, I can say that when I do watch it I hear a lot of perma-bulls stating that this and that stock is cheap because it is trading at or below its book value. They then go on to quote the historical significance of this event, yada, yada, yada. This is then picked up by a bunch of other individual investors, media pundits and other “professionals,” and it appears that rampant buying ensues. I don’t know how much of it is momentum trading versus actual investors really believing they are buying on the fundamentals, but the buying pressure is certainly there. They then lose their money as the stock they thought was cheap, actually gets a lot cheaper, bringing their investment down the crapper with it. What happened in this scenario? These investors bought accounting numbers instead of true economic book value...

Level 2 and Level 3 Assets – Model Risk

Model risk, or the risk of the bank living in a spreadsheet in lieu of the market, has already reared its head in the summer of ’07 with the blow up of two of BSC’s hedge funds, which have left them in litigation with their own customers. Basically, many of the assets of the fund were levered highly, and valued based upon modeled cash flows from assets, and not from the actual tradable value of the assets. This is fine, until you need to liquidate by selling assets. As luck would have it, they found no market they felt was acceptable and were forced to market value down significantly, approaching zero. It has also manifested itself more recently in the recent announcement that they will be moving at least 7 billion dollars to the level three (the most BullSh1+) category. Bear Stearns has recently announced another hedge fund blow up, which doledout significant losses to investors and is attempting liquidation. For my laymen’s plain English take on level 1, 2, and 3 asset accounting, see the Banks, Brokers and Bullsh|+series (Banks, Brokers, & Bullsh1+ part 1 for model risk,).

Level 3 Assets at 231% of Total Equity; Amongst the Highest on Wall Street

Weighted average price (US$)
Methodologies Weight assigned Fair Price Weighted average price
Fair price using P/Adj. BV approach 50.00% 33.84 16.92
Fair price using P/E approach 50.00% 39.00 19.50
Weighted average fair price     36.42
Current price     87.03
Upside from current levels (US$)     -58.2%

The book value numbers are after our economic marking and adjustments, of course. The “E” portion of the P/E ration is quite conservative, since the we built model incorporated BSC doing much better during the next 4 fiscal quarters than their peers are reporting for this quarter, and in my opinion BSC will not only fail to match their peers, but underperform due to the loss of their primary value drivers – mortgage derivative and related fixed income products – not to mention their asset management, legal, and litigation distractions as well as client and talent retention issues.

Am I right about the Bear?

Despite the Bear Stearns negative developments, and my opinion of its value, Bear Stearns has managed to find investors as was mentioned earlier in the insider transaction section. These are accomplished and wealthy investors to boot. My concern is that so many astute, accomplished and economically powerful investors have failed to realize and fully appreciate the depth and breadth of the current real asset recession, burst bubble, and quite possibly asset depression we have recently entered. This has destroyed the value of many bottom fishing value investors, both intitutional and retail.

image018.gif

And this is a summmary of my takes on Lehman Brothers from a similar period:

(February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “Can they monetize those hedges?”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody’s radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I’ll have to pay up to participate or go in short. There is too much attention focused on Lehman right now. ) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 | May 2008

Now that we've established a small base of potential credibility when it comes to bank failure, back to today and Dick's proclamations on CNBC, let's start with Bank of America, who Dick says won't be affected by European malaise. This is Reggie's take...

Then there's Goldman Sachs, the bank where Reggie is just so loved...

After all, I'm sure there'll be no volatility in the markets if Europe blows up. Then again, even if there is volatility in the markets, Goldman's prop desk can handle it, right? I sure hope you guys don't think I'm being a Dick, do you?

What Was That I Heard About Squids Raising Capital Because They Can't Trade? Well, you guys know where I stand on this, and I have warned you ad nauseum...the Squid Can't Trade!

 

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

 

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

I'm Hunting Big Game Today: The Squid On A Spear Tip

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies

On to the next Banque de Dick... You'd think with Dexia in the news, one would know to either stay clear of JP Morgan or at least subscribe to the BoomBust, eh? CNBC reports today (as highlighted in the introductory graphic) France, Belgium Wrangle About Dexia Deal: Reports. Why is this important? Well, look at why Dexia's in trouble in the first place. In the (must read) post 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 you will find..

...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

That charge taken by Dexia was more than necessary, and most likely not nearly enough. But wait a minute, why did JP Morgan do the exact opposite regarding the exact same asset class?

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.

'Nuff said! Let's move over to Morgan Stanley... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? You know, I'm still quite bearish on Asian, European and American banks. Just look at the facts as they're laid before you...

Published in BoomBustBlog

Bloomberg reports unsaleable Spanish real estate nearly three years after I warned of this situation, in explicit detail. See ‘Unsellable’ Real Estate Threatens Spanish Banks:

Spanish banks, under pressure to cut property-backed debt, hold about 30 billion euros ($41 billion) of real estate that’s “unsellable,” according to a risk adviser to Banco Santander SA (SAN) and five other lenders.

“I’m really worried about the small- and medium-sized banks whose business is 100 percent in Spain and based on real- estate growth,” Pablo Cantos, managing partner of Madrid-based MaC Group, said in an interview. “I foresee Spain will be left with just four large banks.”

Spanish lenders hold 308 billion euros of real estate loans, about half of which are “troubled,” according to the Bank of Spain. The central bank tightened rules last year to force lenders to aside more reserves against property taken onto their books in exchange for unpaid debts, pressing them to sell assets rather than wait for the market to recover from a four- year decline.

Land “in the middle of nowhere” and unfinished residential units will take as long as 40 years to sell, Cantos said. Only bigger banks such as Santander, Banco Bilbao Vizcaya Argentaria SA (BBVA), La Caixa and Bankia SA are strong enough to survive their real-estate losses, he said. MaC Group is an adviser on company strategy focused on financial services.

The banks will face increased pressure if Mariano Rajoy becomes prime minister as expected after national elections on Nov. 20. The People’s Party leader has said the “clean-up and restructuring” of the banking system is his top priority as he seeks to fuel economic recovery by boosting the credit supply.

... Land in some parts of Spain is literally worthless, said Fernando Rodriguez de Acuna Martinez, a consultant at Madrid- based adviser R.R. de Acuna & Asociados. More than a third of Spain’s land stock is in urban developments far from city centers. About 43 percent of unsold new homes are in these areas, known as ex-urbs, while 36 percent are in coastal locations built up during the real-estate boom.

“If you take into account population growth for these areas, there’s no demand for them, not now or in ten years,” he said. “Around 35 percent of Spain’s land stock is in the ex- urbs, which means it’s actually worth nothing.”

... Spanish home prices have fallen 28 percent on average from their peak in April 2007, according to a Nov. 2 report by Fotocasa.es, a real-estate website, and the IESE business school. Land prices dropped by more than 60 percent in the provinces of Lugo, A Coruna and Murcia, and 74 percent in Burgos since the peak in 2006, data from the Ministry of Development and Public Works showed. Land values fell 33 percent nationwide.

If there were to be a proper mark to market of real estate assets, every Spanish domestic bank would need additional capital,” said Daragh Quinn, an analyst at Nomura Holdings Inc. in Madrid, in a telephone interview.

Santander has 9.2 billion euros of foreclosed assets, followed by Banco Popular SA with 6.05 billion euros, BBVA with 5.87 billion euros, Bankia with 5.85 billion euros, Banco Sabadell SA with 3.6 billion euros and Banco Espanol de Credito SA (BTO) with 3.36 billion euros, according to an analysis by Exane BNP Paribas.

... Dozens of Spanish banks have failed or been absorbed since the economic crisis ended a debt-fueled property boom in 2008. Spain’s bank-bailout fund took over three lenders on Sept. 30, valuing them at zero to 12 percent of book value. Bank of Spain Governor Miguel Angel Fernandez Ordonez said the overhaul of the industry was complete after 45 savings banks merged into 15 and lenders increased capital levels.

... The cost to the public of cleaning up the industry’s books has so far been 17.7 billion euros in the form of share purchases from the government bailout funds known as the FROB.

Banks have made provisions for a potential 105 billion euros of writedowns since the market crashed. Lenders may need to make another 60 billion euros in provisions to clean up their balance sheets, including real-estate debt, according to Rafael Domenech, chief economist for developed nations at BBVA.

...“Since the crisis began, banks have only put their lowest- quality assets on sale while they waited for a recovery, so as not to sell the better properties at a loss,” said Fernando Encinar, co-founder of Idealista.com, Spain’s largest property website. Idealista currently advertises 45,912 bank-owned homes in Spain, up from 29,334 in November 2010. In 2008 it didn’t list any.

Spain is struggling to digest the glut of excess homes in a stalling economy where joblessness is among the highest in Europe. Unemployment has almost tripled to 22.6 percent from a low of 7.9 percent in May 2009, according to Eurostat.

Property transactions fell 28 percent in September from a year earlier, the seventh consecutive month of decline, according to the National Statistics Institute.

Financial institutions have foreclosed on 200,000 homes and that will balloon to as many as 600,000 in coming years as unemployment continues to rise, according to a report by Taurus Iberica Asset Management, a Spanish mortgage servicer which manages 35,000 foreclosed properties for 25 lenders.

... “Spain has 1 million new homes that won’t be completely absorbed by the market until the middle of 2017,” Fernando Acuna Ruiz, managing partner of Taurus Iberica, said in an interview in Madrid. “Prices will fall a further 15 to 20 percent in the next two to three years.”

About 13 percent of Spain’s 25.8 million homes are vacant, according to LDC Group, an Alicante-based specialist in real- estate management. The hardest-hit areas are Madrid, with 337,212 empty properties, and Barcelona with 338,645, LDC said in a report published yesterday.

Lack of financing and concern about economic growth has choked investment in Spanish commercial real estate, currently at its lowest level in a decade, according to data compiled by U.K. property broker Savills Plc. (SVS)

A total of 1.25 billion euros of offices, shopping malls, hotels and warehouses changed hands in the first nine months, 52 percent less than a year earlier, Savills estimated.

... There is an “enormous” gap between prices offered by banks and what investors are willing to pay, preventing sales of large property portfolios, MaC Group’s Cantos said.

He proposes that banks create businesses, in which they can hold a maximum stake of 19 percent, that attract other investors to help dispose of their real estate assets over five to eight years. The investors would manage the businesses.

Cantos says that prime assets can be sold at a 30 percent discount, while portfolios comprised of land, residential and commercial real estate may only sell after 70 percent discounts.

“Therein lies the problem,” he said. “Banks have already provisioned for a 30 percent loss, but if you are selling at 70 percent discount, you have to take another 40 percent loss. Which small and medium size banks can take such a hit?”

I discussed European real estate yesterday in the post Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly? If you have an economic interest or even curiosity in European Real estate, it is suggested you read the afore-linked post as well as...

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

Excerpted from yesterdays CRE post focusing on the Dutch, but suitable for most of the EU:

As clearly stated in the very first posts of the Pan-European sovereign debt crisis in 2010, this is a pandemic contagion. The media's focus on specific countries must be mollified and modified. Reference the first five posts of the aforemetioned series, published a year and a half ago...

    1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.

    2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

    3. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.

    4. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

    5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

Now, reference yesterday's Bloomberg headlines - Spanish, French Debt Auctions Disappoint; Yields Rise: Yield spreads of Spanish and French 10-year government bonds over German equivalents hit euro-era highs on Thursday.

What do you think happens when contagion spreads to Spain? Please don't tell me you think that Italy, France, Greece, Portugal and Ireland are having rate shit fits, but somehow Spain will remain unscathed - with all of those NPAs and highly overvalued, uber leveraged, supposed assets floating around in their bank's balance sheets?

I warned of this happening nearly three years ago. I issued several reports to subscribers. Of course, about a quarter after I warned, Goldman comes around (changing their stance of course, because they were bullish on European banks, cough.. cough... nasty phlegm being held down...). Hey, has anyone ever told you that Goldman's investment advice SUX! Don't believe me? Well, follow the two links below, or you could just continue reading this article...

  1. Is It Now Common Knowledge That Goldman's Investment Advice Sucks???
  2. I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!!

Over a full year and a quarter after I warned of Spanish banks, and a full quarter after I gave the full out warning of European banks in general, guess who comes to the party late bearing stale party favors....

This impetus of this video stemmed from the post Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, as excerpted:

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

image015.png

This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

image009.png
Notice how Ireland is the nation with the second highest NPA to GDP ratio. This was definitely not hard to see coming. In addition, Ireland has significant foreign claims - both against it and against other countries, many of whom are embattled in their own sovereign crisis. This portends the massive exporting and importing of financial contagion. Reference my earlier post, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? wherein I demonstrate that Ireland's banking woes can easily reverberate throughout the rest of Europe, affecting nations that many pundits never bothered to consider. Irish banks will be selling off assets, issuing assets and bonds in an attempt to raise capital just as the Irish government (contrary to their proclamations) will probably be issuing debt to recapitalize certain banks. This comes at a time when the Eurozone capital markets will be quite crowded.

Expected higher fiscal deficit and bond maturities due in 2010 have increased the need for bond auction financing for all major European economies. Amongst all major European economies, France and Italy have the highest roll over debt due for 2010 of €281,585 million and €243,586 million, respectively.

BoomBustBlog Susbscribers, if you're paying attention, this was the one year warning of this series of posts:

eurodebt1.png

While Germany and France are expected to have the highest fiscal deficit of €125.1 billion and €96.0 billion, respectively in absolute amount for 2010 (this is without taking into consideration any possible bailout of Greece and/or the PIIGS, which will be a very difficult political feat given the current fiscal circumstances), Ireland and Spain are expected to have the highest fiscal deficit as percentage of GDP of 12% and 11%, respectively. See our newly released Spanish fiscal analysis for a more in-depth perspective, see our premium subscriber report on Spain's fiscal condition and prospects: Spain public finances projections_033010 Spain public finances projections_033010 2010-03-31 04:41:22 705.14 Kb...

As you can see, when properly researched, one can literally write the Bloomberg/CNBC/MSM headlines a full year and a half into the future. Notice the date on the post excerpt you just read, then reference this post from yesterday concering the bickering between Germany and France: When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!

CNBC reports: France and Germany Clash Over ECB Crisis Role

France and Germany, Europe's two central powers, have stepped up their war of words over whether the European Central Bank should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets. 

Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France urged stronger ECB action, adding to mounting global pressure spelled out by U.S. President Barack Obama.

BoomBustBlog readers and subscribers saw this coming a mile away. The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue.

Is it eastern European mysticism or west African Voodoo magic? No, it's a spreadsheet and an objective mindset, something that the EU leaders apparently don't have nor are willing to hire me for!

Oh yeah! Back to that little side thesis about Goldman's investment advice sucking till the lips bleed...

LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog Warns Of Failure! Saturday, 24 April 2010

Will someone explain to me why the world is so enamored with Goldman. It appears that their research department is now recommending clients to bet on European bank contagion risk. LTTP (Late to the Party), we first warned on European bank risk in Spain with BBVA in January of last year (The Spanish Inquisition is About to Begin...). Starting in January of this year, I went in depth into the European contagion thing when practically all of the banks, pundits, analysts and rating agencies said this was contained to Greece.

In February, I posted "The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one."

In January of 2009, that's right - 35 months ago, I made it clear that Spanish banks will suffer years from Spanish real estate bubble's that had more effort behind being reblown than cured, coupled with I coined the Pan-European Sovereign Debt Crisis a year later...

The Spanish Inquisition is About to Begin…

Now, it is time to see if fundamentals return to the market.

From Bloomberg: BBVA Fourth-Quarter Profit Plunges 94% to $44 Million on Asset Writedowns

Jan. 27 (Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA said fourth-quarter profit slumped to 31 million euros from 519 million euros a year earlier as the lender wrote down the value of some assets.

BBVA fell the most in eight months in Madrid trading after saying net income fell to 31 million euros ($43.6 million) from 519 million euros a year earlier, the Bilbao, Spain-based bank said in a filing today. That missed the 1.05 billion-euro median estimate in a Bloomberg survey of nine analysts as the bank took a 704 million-euro writedown for its U.S. franchise.

BBVA said it took the writedowns after analyzing its “most problematic portfolios” as it prepares for a tough year with recessions in its biggest markets of Spain and Mexico. This was foreseen nearly one year ago, to date. This bank got caught up in the bear rally and apparently (like many banks) was not deserving of the outrageous boost in the share price. Reference the past analysis.

Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank Wednesday, 28 January 2009

Declining housing and stock prices, and rising unemployment levels are squeezing consumer wealth globally and are expected to weigh heavily on the banking system in the form of rising loan defaults. Until very recently, the global banks have experienced most of the impact in the form of distressed securities, capital shortages and funding problems, however the problems have now started to engulf their consumer and commercial loan portfolios as well.

In Spain, BBVA, the second largest domestic bank, could see a massive deterioration in its real estate and consumer loan portfolio. The Spanish real estate sector is making a high horsepower a U-turn after years of a massive housing bubble that has burst - culminating in an unemployment rate that has risen to an outrageous 13.4% level. The power skid is showing no signs of reaching an inflection point, and we believe is only in the beginning throes of a sharp downturn. In addition, the banks' other key growth areas including Mexico, the U.S and South America are witnessing a slowdown in economic activity, restricting BBVA's growth prospectus amid the current turbulent environment. With increasingly challenging economic conditions in each of these economies, BBVA's asset quality has deteriorated sharply with non-performing loans rising to 36% of its tangible equity without corresponding (equal) increase in provisions. As the bank deals with these tough times ahead, we expect BBVA's bottom line growth to remain subdued due to a slower credit off-take and higher provisions in the coming quarters....

...

Key Highlights

Sharp slowdown seen in Europe - According to the European Commission forecasts, the European economy is expected to contract 1.9% in 2009 with a modest recovery in 2010. Spain, in particular, is expected to be one of the worst hit due to the humbling of its housing sector which had, for several years, been a significant contributor to the country's economic growth. This will impact BBVA by slowing down its credit and loan growth in addition to significantly deteriorating the credit quality of its loan portfolio.

BBVA's asset quality is set to deteriorate rapidly as Spain enters recession - Problems in Spain are more pronounced than in most of its European counterparts. The Spain's budgetary deficit has already crossed the 3% threshold limit set by the European Commission and is expected to cross 6% by 2009, only behind Ireland. The unemployment has reached a 12-year high of 13.4% in November 2008, the highest in the Euro zone, while the real estate sector bubble (particularly residential vacation homes purchased by foreigners), the pillar of economic growth engine, has burst. BBVA, with nearly 40% of its total loan exposure tied to real estate & construction loans and individual loans in Spain could see massive deterioration in its asset quality.

Besides Spain the bank has to deal with other challenging economies including Mexico and the U.S - In 3Q2008, U.S and Mexico contributed nearly 29% and 16% of total revenues, respectively. The downturn in the U.S economy is showing no signs of stabilization, with an unabated fall in housing prices and frozen credit markets continuing to shatter consumer confidence. Recession in the U.S has also led to a sharp slowdown in Mexico which is highly dependent on US for exports and remittances. The slowdown in both of BBVA's key markets will not only impact the pace of BBVA's growth but also augment the risk profile for the bank as it now has to deal with vagaries of these economies to navigate itself in these turbulent times.

BBVA's NPAs have skyrocketed on back of economic slump - Since January 2008, BBVA's non-performing loans have increased 92% to €6.5 bn. As at the end of 3Q2008, BBVA's loan losses as a percentage of tangible equity stood at an astonishing 36%. Eyles test, a measure of banks' delinquent loans (net of reserves) as percentage of its tangible equity, has increased to 12% in 3Q2008 from 4% in 2Q2008. This sharp rise in the bank's NPA levels, particularly in context of its lower equity cushion, could substantially erode shareholders' equity.

Inadequate provisioning to impact BBVA's bottom line - Owing to deteriorating loan portfolio, BBVA's NPAs have almost doubled to 2.0% of the total loans in 3Q2008 from 1.1% in 3Q2007. Despite an increase in NPAs, the bank's provision has declined to 2.3% of the total loans from 2.4% a year ago. As loan losses are expected to increase in the wake of economic slowdown, BBVA will have to increase its provisions considerably, denting its near-to-medium term net income.

BBVA's valuation at... Subscribers can download the full archived report Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-01-28 16:04:04 439.80 Kb

For those who haven't been to the Spanish coastal areas to see for themselves or are not familiar with the Spanish situation, I have included random research on Spain from pundits around the Globe!

Now, speaking of Spain, Pan-European pandemic and War... Yesterday, I gave an interview with Benzinga radio wherein I referenced the distinct possibiity of European war as the natural result of the collapse of the European banking and sovereign debt system. You can hear the interview here. It appears that certain rather outspoken British MEPs have a very similar outlook.

That's not all. Here are two other occasions, one as recently as yesterday...

This is early 2010...

I've been asked in the past why I don't run for political offce. Well, the answer is I'm just too damn honest and straightforward. I'd make this guy look shy, and probably end up with a car bomb in trunk before long... Has anyone ever seen the movie Bulworth, starring Warren Beatty? If you haven't seen it, take six more minutes of your time to view this clip before you move on...

And the British version of Bulworth returns as of yesterday. You can call him whatever you want, but you have to call him right, as well...

And in closing, here are the two Dutch real estate videos I posted yesterday that were never released before...

Part 1

Part 2


As usual, I can be reached via the following (or directly via email), and urge all who rely on the perenially wrong sell side to subscribe to BoomBustBlog:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube
Published in BoomBustBlog

Earlier this week I interviewed with Benzinga radio discussing my views on the Economic Circle of Life, and the global cartel of central bankers who have conspired to manipulate said cycle, to the detriment of fundamental investors, tax payers and market pricing worldwide! See an excerpt below and click the link to here the full audio of the interview.

Reggie Middleton: Economic Cycle Frozen at Top of the Bubble

 

Benzinga Radio recently had a chance to speak with Reggie Middleton, the founder of boombustblog.com. Mr. Middleton is an investor who guides a small team of independent analysts. His research is widely circulated among banks, hedge funds, and institutional and individual investors. Reggie has appeared on Bloomberg Television, CNBC, BBC World News, and CNN among others, and his prescient investment calls have been detailed in publications such as Fortune and Crain's New York.

The primary topic of Benzinga's discussion with Mr. Middleton centered on the unfolding Eurozone sovereign debt crisis, which continues to hold financial markets hostage. According to Middleton, the term "contagion" or "virus" when describing what is taking place in Europe is misleading. It is less a matter of market distrust and rising sovereign yields in one country spreading to another, and more a problem of a faulty foundation with regard to the entire EU and euro currency.

He said, "the problems were inherent from the beginning - from the inception of the Eurozone and the euro in general." He added, "a building was built upon a faulty foundation." Middleton noted that one of the core problems that is taking place in the EU is the fact that countries such as Greece lack true sovereignty due to the structure of the monetary union.

Follow this link for the full article and the full audio of the interview: http://www.benzinga.com/content/2138614/reggie-middleton-economic-cycle-frozen-at-top-of-the-bubble#ixzz1e4KdG349

The reasoning behind my comments in this interview stemmed from the posts Do Black Swans Really Matter? Not As Much as the Circle of Life and What Happens When That Juggler Gets Clumsy?:  As excerpted...

Actually, it is not the Black Swan events themselves that do the damage but said event do serve as the catalyst that either bust a bubble that was waiting to pop anyway, or break a structure that was hobbling along on one leg as it was  - where we happen to be now in many places of the developed world - sans rampant propaganda, misinformation and disinformation from less than disinterested sources.

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the "Peak" phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality...

The result of this "Great Global Macro Experiment" is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.

All four corners of the globe are currently "hobbling along on one leg", under the pretense of a "global recovery".

Simply sit back and look at the (supposed, none of these should truly be considered surprises) Black Swan Catalysts that we now face:

    1. US Housing, you know, the the thing that kicked this all of to begin with - The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011
    2. US and/or European Commercial Real Estate - Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
  1. MENA, the Middle East & North Africa - Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!! Friday, January 28th, 2011  or First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? Wednesday, February 2nd, 2011
    1. Japan - Can Contagion Be Avoided Considering The Magnitude Of Japan’s Woes? Tuesday, March 15th, 201

The list can go on. The most likely catalyst is described as follows...

The advice coming from both the government agents (ex. central bankers) and those whom these government agents have pledged to rescue at the absolute cost to the average tax payer (the FIRE sector, particularly the banking cartel)  has been absolutely horrendous. First let's take a look at the most respected of these agency protected players - Goldman Sachs. From my missive, Is Another Banking Crisis Inevitable? posted last month, I excerpt the following:

Today, Bloomberg reports that Goldman Sachs Turns Bullish on Europe Banks as Debt Risk Eases.The report goes on to state:

The U.S. bank that makes the most revenue from trading advised investors to take an “overweight” position on banks, raising its previous “neutral” recommendation, according to a group of equity strategists led Peter Oppenheimer. Investors should pay for the trade by lowering holdings of consumer shares, he wrote.

“For financials the narrowing of sovereign spreads in peripheral eurozone, which our economists expect to continue, is a clear positive,” London-based Oppenheimer wrote in the report dated Feb. 3. “Banks are one of the least expensive sectors in the market and the trade-off between their growth prospects and earnings in the next few years looks especially attractive.”

Unfortunately, the risks of this particular trade were not articulated, and I feel that the risks are material. Far be it for me to disagree with the “U.S. bank that makes the most revenue from trading”, but they have been wrong before – many times before. Reference Is It Now Common Knowledge That Goldman’s Investment Advice Sucks??? or Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?for more on this topic.

Attention subscribers: A new subscription document is ready for download File Icon The Inevitability of Another Bank Crisis

So where is the risk?

The impact of the Asset Securitization cum Sovereign Debt Crisis to bank balance sheets should become the market and media focus. The full cost of cleaning up the balance sheets of financial institutions particularly against the backdrop of adverse macro shocks emulating from sovereign defaults is not fully known. Structural weaknesses in sovereign balance sheets could easily spill over to the financial system due to the fact that most banks are stuffed to the gills with sovereign debt – highly leveraged, and marked as risk free assets at par. This can have broad, adverse consequences for growth in the medium term.

Click here for the rest of this entry »

BoomBustBlog has taken the opposite stance: The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike. I have queried many times in the past, Is It Now Common Knowledge That Goldman’s Investment Advice Sucks???. Those who follow me regularly know that I have no problem running up against these big investment houses in terms of analytical accuracy and veracity. See Did Reggie Middleton Best Wall Streets Best of the Best? to ascertain who has been most accurate throughout this entire fiasco since 2007. I am not that smart, and I don't have a crystal ball. I simply understand and respect the Circle of Life and I do not need to screw my clients in order to make my profits. Let's see where the news of today puts those Goldman proclamations in reference to my perspective...

Published in BoomBustBlog

20111005_235005This is the BoomBustBlog view of the "Occupy Wall Street" protests, the view that you just won't get through the MSM... It's ironic that the police came out in force to protect the institutions whose massive bonus's were derived, in large part, from raping and pillaging professional sheeple pools such as police pension funds. That's the sound of the beast...

Here's some more evidence of the risks of journalism when cops are out to defend those who pillage their pensions...

It appears as if I may have went over the head of a few skeptical readers with the "rape the police pension" bit, so here's an indepth tutorial of how it works for those so inclined to learn...

The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?

Key excerpts... 

 

re_fund_returns.pngre_fund_returns.pngre_fund_returns.png

re_fund_returns_tables.pngre_fund_returns_tables.png

Let’s take a look at another big bonus development exercise, marketing push they made into residential MBS a few years ago…

Apathy and the need to masochistally follow name brand investors is what enables this malarchy, and is what has allowed CRE prices to be artificially elevated this high for this long. Believe you me, reality will reassert itself and will do so in quite the destructive fashion. Again, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”

Believe it or not, very few institutional investors are interested in seeing the mechanics of how they have been bilked to fund Wall Street bonuses. I have been very generous with the CRE analysis on BoomBustBlog, but there have been relatively few takers for custom analysis. For those institutional investors who actually care about making money, or at least not losing 91% of it, I suggest you go through the public version of the model designed to create the analysis above. You can download it here: Real estate fund illustration & Interactive model Real estate fund illustration & Interactive model 2009-12-23 12:54:21 174.50 Kb. For those with even more interest, you should download our 2010 CRE outlook: CRE 2010 Overview CRE 2010 Overview 2009-12-16 07:52:36 2.85 Mb and our CRE consulting capabilities statement: CRE Consulting Capabilities CRE Consulting Capabilities 2009-12-17 14:17:01 655.48 Kb. I must say, any client of mine would have been very hard pressed to lose 91% of their money in a Goldman or Morgan Stanley fund.

Published in BoomBustBlog

If readers remember back in 2009 I warned of the excessive risk of mortgage buybacks in the banking industry. Many analysts dismissed this risk then and still do (at least as recentely as the 1st quarter).Yes, I know my wording can be a tad,,, "bombastic", but that does not detract from the validity of said words. Let's parse recent history, shall we?

The Putback Parade Cometh: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages

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!

fasb_mark_to_market_chart.png

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…

By now I can assume you either catch my drift or never will. If you do catch said drift, realize that the WSJ reports:

BofA Nears Huge Settlement

Bank of America Corp. is close to an agreement to pay $8.5 billion to settle claims by a group of high-profile investors who lost money on mortgage-backed securities purchased before the U.S. housing collapse, said people familiar with the matter. The payment would be the largest such settlement by a financial-services firm to date, exceeding the total profits of the Charlotte, N.C., bank since the onset of the financial crisis in 2008. Bank of America's board approved the settlement during a meeting Tuesday to discuss the matter, one of these people said.

... A settlement would end a nine-month fight with a group of 22 investors who hold mortgage-backed securities originally valued at $105 billion, including the giant money manager BlackRock Inc., the insurer MetLife Inc. and the Federal Reserve Bank of New York.

A deal could embolden mutual-fund managers, insurance companies and investment partnerships to seek similar settlements with other major U.S. banks by arguing that billions of dollars in loans they bought before the housing collapse didn't meet sellers' promises or were improperly managed. Bank of America, Wells Fargo & Co and J.P. Morgan Chase & Co. collect loan payments on about half of all outstanding U.S. mortgages.

The dispute between Bank of America and the mortgage investors began last fall when they alleged in a letter to the bank that securities they scooped up before the financial crisis from Countrywide Financial Corp. were full of loans that didn't meet sellers' promises about the quality of the borrowers or the collateral. The investors also alleged Countrywide failed to maintain accurate files while managing the loans. Bank of America purchased Countrywide in 2008 for $4 billion.

... Bank of America would take a corresponding pre-tax charge against earnings for the second quarter, these people said. The after-tax cost to the bank would be roughly $5 billion, they said. The charge would increase the chances that Bank of America will report a loss in the second quarter.

...On Wednesday, the bank is expected to announce it is taking a separate provision of billions of dollars during the quarter to cover future repurchase claims and other mortgage-related issues, these people said. The trustee expects to submit a filing soon asking a New York state court to approve the transaction.

...Earlier this year, the bank said its maximum possible loss from private mortgage put-back demands was $7 billion to $10 billion—above and beyond the $6.2 billion already reserved for probable mortgage-repurchase losses.

A multibillion-dollar charge would "wipe out most earnings in the first half of the year," said banking analyst Mike Mayo earlier this month, before news of the potential settlement. Bank of America earned $2 billion in the first quarter. Mr. Mayo had lowered his 2011 earnings-per-share estimate to 50 cents, from $1, based on an expectation that a settlement could amount to $7 billion.

I urge all readers to look back through your sell side analysts notes and ascertain whether these putback risks were adequatliy delineated back in 2009, like they should have been. As the WSJ article stated, "A deal could embolden mutual-fund managers, insurance companies and investment partnerships to seek similar settlements with other major U.S. banks by arguing that billions of dollars in loans they bought before the housing collapse didn't meet sellers' promises or were improperly managed. Bank of America, Wells Fargo & Co and J.P. Morgan Chase & Co. collect loan payments on about half of all outstanding U.S. mortgages.". Oh, this is guaranteed. The insolvent monoline industry (the very same industry whose leaders - Ambac and MBIA - we declared insolvent in 2007) has been at the forefront of the putback brigade, and for good reason.

For the record, from Amercian Banker:The deal could set the stage for settlements by the other big banks sued for mortgage securities losses — JPMorgan Chase, Citigroup and Wells Fargo. Paul Miller of FBR Capital Markets estimated B of A's total losses from soured mortgages could reach $25 billion. Miller predicted Chase's losses could reach $11.2 billion, Wells Fargo could lose up to $5.2 billion, and Citigroup could see losses of at least $3.3 billion. Before reports of B of A's settlement came out on Tuesday, FDIC Chairman Sheila Bair said, "Unresolved legal claims [related to these mortgages] could serve as a drag on the recovery of the housing market." The Journal added the $8.5 billion is more than "the total profits of the Charlotte, N.C., bank since the onset of the financial crisis in 2008." Wall Street Journal, New York Times, Washington Post

BoomBustBloggin'

Relevant BoomBustBlog Research

For public consumption: An Independent Look into JP Morgan

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)

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

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

Published in BoomBustBlog

We are in the process of updating the very revealing work we performed last year, identifying which banks were most likely to do the "Lehman Brothers" thing. I believe we were the only media source to predict the collapse of Lehman Brothers, CountryWide, WaMu, Bear Stearns, etc. months in advance - with each of these calls being precedent setting calls from both a profit and strategic preparation perspective. The thought process that went into the research and taking speculative positions behind said research against the crowd, resulted in an interesting experience -to say the least. Reference  the introductory paragraph from Is this the Breaking of the Bear? from January 27, 2008, two months before this banks collapse (I gave a similar diatribe for Lehman, several months before their collapse or even mere negative presence in the media as well):

Anybody who follows my blog knows that I am extremely bearish on the global macro environment, particularly risky and financial assets. As I see it, the Doctor(s) FrankenFinance are constantly percolating econo-alchemical brews such as that of the ongoing “Great Macro Experiment,” eliciting undulating waves of joy and elation from amateur speculators such as myself while simultaneously creating risk/reward traps that many a financial and real asset concern may never escape from. While discussing with my team how best to move forward to find a target of our “Macro Experiment” victim analysis in the financial sector, I was queried as to what to look for in creating the short list. Evaluating investment banks, like evaluating the monolines, is not necessarily a straightforward endeavor. No matter how you do it, someone is going to disagree. This is what makes what I do so appealing. All I have to answer to is performance. I just need a profitable result in order to be successful. No corporate politics or conflicts of interests to get in my way. In the end, absolute return is the ultimate criteria, and not whether it is accepted by the ivy league or academia, industry practitioners, sponsors, clients or whether or not XZY bank has been doing it differently for the last 25 years. Investing for your own account enforces a certain code of realism that, at times, may not be shared by others. So, I used that realism as my strength and my focal point to guide the creation of a short list, the ultimate target, and the valuation/risk analysis methodology. I simply said, in the REAL world where I would have to make some money from some REAL assets,throwing off REAL cash flows and REAL market transactions? Using this “Reggie REALity Engine” (so to speak) to power the analysis proved very enlightening. We found banks that counted spread guesstimates as assets. We found banks that could not afford to keep their best employees. We found too many banks that faced insolvency in the very near future. We found a lot. To keep this story short, let’s just say we used the engine to find that truth that nobody really wants to hear. That truth as marked to reality. This resulted in a short list of 2 firms. The first one is Bear Stearns, which we will delve into here. The second one is what I call, “The Riskiest Bank on the Street”, and the blog post and analysis will be out in a few days. Using a Sherlock Holmes style of forensic analysis, we have tried very hard not to leave anything out of our scope of analysis. In the case of Bear Stearns, it was not easy since very little info was available outside of the plain vanilla 10Q, 10K, etc. They also volunteered very little information. Much of this is investigative analysis and it would be much more detailed if we had access to the Bear Stearns inventory. We wrote to Bear Stearns’ investor relations department asking for more information on the company’s exposure to risky assets and their breakup. So far, no word back. No need to be concerned for my health, I’m not holding our breath…

Alas, as I stated earlier, it is that truth that no one wants to hear. So if you are one of those "no ones" that don't want to hear the truth, cover your ears, cause here we go...

Well, here we go again, but this time on a much, much larger level. In addition, the investment portion of the game has become much more complicated for now you don't just have to know what the disease is and who has it, but you have to be able to navigate the fact that our dear Fed Chairman has eliminated all inoculations against said disease (or put more aptly, poked holes in all of our condoms) by artificially suppressing volatility and rates and distorting normal price discovery through market mechanisms, see Did Bernanke Permanently Cripple the Butterfly That Is US Housing? The Answer Is More Obvious Than Many Want To Believe and as excerpted: 

... Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!, Bernanke et. al. have snipped the chrysalis of the US markets and economy one too many times. He has interrupted the circle of life...

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

 

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

This brings us back full circle to today, where (despite the protestations of many in the sell side such as "Buy the Euro Banks Goldman" and those in the mainstream media who proclaim that risks are beimgn overblown, Europe's banking system is sitting on the nuclear version of a veritable powder keg that could very well make the Bear Stearns/Lehman days look like a veritable bull market. I plan on delivering an update to our European bank exposure analysis for subscribers:

Take note that this update will include several American banks and the risks they face from writing nearly all of the richly priced CDS purchased by said European banks. This is an interesting and complicated story because all of those IMF/EU bailouts, besides adding more debt to already debt laden countries, have considerably subordinated the claims of the stakeholders involved. The following was written over a year ago, and has proven to be quite prescient:

The year 2013, with a IMF-proclaimed debt ratio of a tad under 150%, is the time when Greece will have to refinance the debt to pay the IMF. However, since the current debt raised by Greece is at fairly high rates, new debt will only be available at much higher rates (as markets should price-in the risk of high debt rollover) unless there is some saving grace of a drastic plunge in world wide interest rates and a concomitant plunge in the risk profile of Greece. At a 150% debt ratio, historically low artificially suppressed global interest rates that have nowhere to go but higher and prospective junk ratings from the US rating agencies, we don’ t see this happening. Thus, the cost of borrowing for in 2013 is likely to be much higher in the market than the nearly five percent for the existing debt. Greece will either be unable to fund itself in the markets at all, and will have to convince the Euro Members and the IMF to extend the three-year lending facility just announced (reference What We Know About the Pan European Bailout Thus Far) or, it will get the debt refinanced at very high rates. In both cases the total debt as a percentage of GDP will continue to rise, and this is not a sustainable scenario over the longer-term. In addition, if it accept the EU/IMF package and there is an event of default or restructuring, the IMF will force a haircut upon the private and public debtors beyond what would have normally been the case. This essentially devalues the debt upon the involvement of the IMF, a scenario that we believe many sovereign bondholders (particularly Greek, Spanish and Irish) may not have taken into consideration. This also leaves the possibility of a significant need for many banks to revalue their sovereign debt – particularly Greek sovereign debt – holdings.

As illustrated above, there is a higher probability for a Greek sovereign debt restructuring in 2013, which will definitely not hurt IMF (since it has a preferred right) but the Euro Members and other investors who will be holding the Greek debt.

image021

LGD: Loss Given Default... ~100%???

We're talking damn near complete wipeouts boys and girls. There are practicaly no entities holding this debt at par that are leveraged under 30x. The starting point in case of default for Greece is between roughly 48% to 52% of par. You've seen the math on BoomBustBlog many a time - Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
 

image003

Add forced subordination due to IMF and US imperialitic dictate, and discussion of recoveries may very well be moot. On that oh so cheery note, let's move on to the basis of the refresh of our European bank exposure note for subscribers, who have voted overwhelmingly to have us pursue this venue...
BoomBustBlog
I woild like to take this time to warn those who may have a waning interest in real estate due to the fundamentals defying act of REITs over the two years, that party is likely quite over if and once the Europeans blow up. The real long term risks still sitting on US, Asian and European bank balance sheet are still real asset based, and because it is so labor intensive to hide tons of bricks, dirt and mortar under pulp based ledger sheets using creative yet relatively meek accountants, these chickens are coming back home to roost to.
 

I will end this post with some graphs that show the bubblistic mentality of the German and French banks as they gorged on soon to be 2 for 1 sale sovereign debt at the height of the US induced credit and real asset bubble. You see, many outside of the Americas blame the US for instigating the last world wide crash (and admittedely rightfully so), but this time around the crash will be much bigger, and we all know whose fault it will be (hint: it doesn't rhyme with jaflerican). Remember, these supposedly risk free assets are being accumulated with somewhere between 30x to 72x leverage.

 image003
image006
In preparation for what will probably be a very, very valuable subscriber update, I will start off my next post on this topic with a public display of what we published this time last year regarding French and German banks. In passing, remember: 
  1. The US still has the right to singularly vote down a supermajority in the IMF, and it is the only single state to be able to do that.
  2. We see how well the EU has agreed on things in the past when time was of the essence.
  3. The EU voluntarily took subordinate positions to existing claimholders, that was the purpose of the bailout. The IMF has never inferred such.
  4. The Fed has opened up the swap lines in the past, and didn't do so for charitable reasons. Read my post on FICC risk and bank implosions on my blog. The Fed can't afford for Euro banks to start calling on those faux hedges. That's why the lines are open.
  5. Any haircut you get before adding on a trillion dollars of debt and the IMF standing in front of you for $120 billion is going to be less then the one you get afterwards

As always, may the BoomBust be wth you! Interested parties may feel free to follow me on twitter, email me directly, or register for/subscribe to BoomBustBlog.

Published in BoomBustBlog

After having just stating in an interview earlier this week that although many banks are probably guilty of what Lehman was caught doing with Repo 105's pursuing those actions based upon semantics may be fruitless (it may be called depo 106?), Reuters comes out with this interesting story: Major US banks masked risk levels: report

(Reuters) - Major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky, the Wall Street Journal said, citing data from the Federal Reserve Bank of New York.

The paper said on Friday 18 banks, including Goldman Sachs Group , Morgan Stanley , J.P. Morgan Chase Bank of America and Citigroup , understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each period.

The banks had increased their debt in the middle of successive quarters, it said.

Citi, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley were not immediately available for comment when contacted by Reuters outside regular U.S. business hours.

Excessive leverage by the banks was one of the causes that led to the global financial crisis in 2008.

Due to the credit crisis, banks have become more sensitive about showing high levels of debt and risk, worried their stocks and credit ratings could be punished, the Journal said.

Federal Reserve Bank of New York could not be immediately reached for comment by Reuters.

 

The Wall Street Journal (see their interactive model) and ZeroHedge broke a similar storty with some meat behind it to justify the allegations. Ahhh!!! The return of real reporting, and not just from blogs!

After having just stating in an interview earlier this week that although many banks are probably guilty of what Lehman was caught doing with Repo 105's pursuing those actions based upon semantics may be fruitless (it may be called depo 106?), Reuters comes out with this interesting story: Major US banks masked risk levels: report

(Reuters) - Major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky, the Wall Street Journal said, citing data from the Federal Reserve Bank of New York.

The paper said on Friday 18 banks, including Goldman Sachs Group , Morgan Stanley , J.P. Morgan Chase Bank of America and Citigroup , understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each period.

The banks had increased their debt in the middle of successive quarters, it said.

Citi, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley were not immediately available for comment when contacted by Reuters outside regular U.S. business hours.

Excessive leverage by the banks was one of the causes that led to the global financial crisis in 2008.

Due to the credit crisis, banks have become more sensitive about showing high levels of debt and risk, worried their stocks and credit ratings could be punished, the Journal said.

Federal Reserve Bank of New York could not be immediately reached for comment by Reuters.

 

The Wall Street Journal (see their interactive model) and ZeroHedge broke a similar storty with some meat behind it to justify the allegations. Ahhh!!! The return of real reporting, and not just from blogs!

Page 1 of 21