Financial, Real Estate, Stock Markets Trends and Current Affairs

This is part 3 in my quest for the truth in what lies off balance sheet of the big banks in America. Please reference If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? and If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan for the prequels. As was noted before, I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is. Now, on to the bank to be owned by America - I'm sorry, that's Bank of America...

Bank of America Securitization Activities

Bank of America securitizes residential mortgages, commercial mortgages, credit card receivables, and home equity loans and automobile loans that it originates or purchases from third parties. As of June 30, 2009, the total principal balance outstanding of securitized portfolio was nearly 1.7 trillion (including 1.1 trillion of mortgage backed securities, securitized by Government sponsored entities). The total senior securities and subordinated securities held by BAC on its balance sheet amounted to about $27 billion (28% of tangible equity) and $10 billion (10% of tangible equity), respectively.

Note to readers: a formatting issue caused the 2nd half of this article to get cut off. I urge interested parties to reread the article to get the full message.

Since I write for a diverse audience, I will start this off with an overview of securitization. If you are in the industry or are just a smart ass dude, feel free to skip down to the JP Morgan specific section below. I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is.

Overview

Securitization is still a very significant source of leverage and opacity in the US and European economies, in spite of its predominant role in the most recent global financial turbulence. It is a practice where loans and other debt instruments are aggregated in a pool and thereby used to issue new securities. Banks and financial institutions started establishing Special Purpose Vehicles (SPV) and Qualifying Special Purpose Entity (QSPE) under the FASB rules to securitized loans and thereby reducing, from an accounting perspective (but more accurately put), or transferring from an economic perspective, financial risks on their balance sheets. Although these new founded QSPE's were rated by rating agencies (Moody's, Fitch, S&P among the few) prior to the issuance of securities, the underlying ratings failed to capture the actual economic value of the underlying collateral. Furthermore, the ratings established by the rating agencies are an assurance of performance.

One of the quandaries of running a subscription service is that when you have some really juicy stuff, you inherently limit the audience that you are able to reach. Normally, this isn't that big a deal. When you believe that there is a mass cover up aiming to prop up the largest cadre of zombie, insolvent companies in modern history it becomes a much bigger deal. This leads me to distribute a significant amount of research for free. On that note, I have been following the breadcrumb trail of hidden (or more aptly put, concealed) corporate liabilities, and it has led me to (of all places) off the balance sheet of the big banks. I have spent a lot of time concentrating on exactly where the losses, if any, will come from in these banks. We have already established that the smaller banks had, have and will totally drain the FDIC's insurance fund over a year and a half ago (see As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades Friday, 23 May 2008, notice how many of the banks have went under since then) in the post "I'm going to try not to say I told you so...

I would also like to add that I have raised the flag on this regional bank/commercial real estate issue many months before the sell side and the main stream media said a peep. This is not to brag or boast, for I am a fundamental investor and the market has definitively ignored the fundamentals for 7 months running. The point that I am trying to convey is that analysts in the big sell side banks work for their trading desks, underwriting and sales departments, and not for the investor (be it retail or institutional). Thus, proclamations of "Buy! Buy! Buy!" do not necessarily mean we have entered into a fundamentally firm area in which to buy stocks, bonds or any other risky assets covered by these guys. For a sterling example, see "The sell side is pushing with all of their might to inflate the market...".

As a matter of fact, I have also focused on those very same brokerages, banks, insurers and REITs that went bust, starting as far back as 2007, again before it was fashionable to do so (see Is this the Breaking of the Bear? January 2008, GGP and the type of investigative analysis you will not get from your brokerage house November 2007 to December 2008, A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007, etc.)

Now, that everyone feels the coast is clear and we will be entering a new bull market amid a broad economic recovery sprouting green shoots all over the place, I am intent on quantifying what remaining risks there are - if there are any remaining risks I am also in the process of fine tuning the market neutral strategy that can produce profits up until and through the period that these banks bring the market and economy back down (see Option Strategy Analysis Update for the strategy analysis and their performance thus far).

Yes, Goldman Sachs, the big, powerful, influential Wall Street bank put out a big buy reco on the very same banks that I have called insolvent. You can guess what happened, in damn near real time... First, Wells Fargo, JPMorgan `Attractive' on Earnings Outlook, Goldman Sachs Says - then... Stocks in U.S. Climb as Goldman Upgrades Banks, ISM Index Beats Estimates. I know I don't carry that Goldman pedigree, you know being a brother from Brooklyn and all. Yet, Goldman and I have disagreed on this very same issue before. Let me refresh your collective memories...

As many of my subscribers know, I have caught many companies on the short side as they imploded. One company that I did not get was American International Group. The reason it escaped me? I was too close to it. I have met Frank Tizzio (then president), Maurice Greenburg (then CEO and Chairman), and a several of their upper management to collaborate on deals, and was impressed with the way they ran their shop. Because of this, I didn't apply the same critical, skeptical eye that I used with the other prospects. Alas, because of such, I overlooked the inevitable. Well, I have learned my lesson. The lesson learned from AIG was not wasted on me, but does seem to have been wasted on many others. With this thought in mind, let's review the net, unhedged swap exposure of a few of our analysis subjects. I think a few subscribers may have their eyebrows raised. Some things are actually hiding in plain sight. See Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb.

For the sake of nostalgia, here is an old post of the same company's ABS inventory: ABS Inventory 2008-02-25 06:48:09 0 bytes

I will be releasing similar analysis of other banks and insurers over the next day or two.

The other shoe is dropping on the banking industry, and market reaction seems muted. This is interesting, for the demands of cash, deviations from expected returns (the technical definition or risk) and murkiness in realistic valuation of assets and liabilities are all converging to a point that bank insiders fear to tread.

First we will go through yesterdays news, then prance through some BoomBustBlog.com exclusives in a separate post...

For those that need a quick giggle, or a basic walk through of the basics, I bring you Street Cred - the tutorial. You can use the controls in the right pane to navigate at will. Feel free to pass it around. The links below are the blog posts that substanstiate the "tutorial". I will be releasing some juicy stuff on Wells Fargo a little later on.

Relevant links of interest:

1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
3. As the markets climb on top of one big, incestuous pool of concentrated risk...
4. Any objective review shows that the big banks are simply too big for the safety of this country
5. The ARE trying to kick the bad mortgages down the road, here's proof!
6. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
7. A Must Read: An Independent Look into JP Morgan. This contains the "public preview" document (JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is free to download.

For subscribers:

JPM Forensic Report (092209) Final- Retail 2009-09-24 03:12:17 130.93 Kb

JPM Report (092209) Final - Professional 2009-09-24 03:13:31 550.72 Kb

OCC Reports Second Quarter Bank Trading Revenue of $5.2 Billion

WASHINGTON — U.S. commercial banks reported trading revenues of $5.2 billion in the second quarter of 2009, compared to record revenues of $9.8 billion in the first quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

“After such a strong first quarter, we expected to see a seasonal decline in trading revenues, and indeed that occurred,” Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. “Still, second quarter trading revenues were the sixth strongest since we’ve been keeping records.” With the advent of the relaxation of the mark to market rules, I am suspect of some of this trading revenue gain. I know the reduced competitive landscape led to higher spreads which leads to higher profits, but the ability to print your own profits with the adjustment of assumptions is scary, to say the least.

I could have sworn that I posted I was taken small positions against the publicly rated ratings agencies a month or so ago, but when I searched for the post to comment on it I couldn't find it. My apologies. Well, it seems as if the chickens have come home to roost for this group, and none too soon if I have anything to say about.

I have written alot about these clowns, you can search my site for the term "ratings agencies' for a list, but a picture (or two) is worth a thousand words (from A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton)...

The JP Morgan forensic preview is now available. Remember, this is not subscription material, but a "public preview" of the material to come. I thought non-subscribers would be interested in knowing what my opinion of the country's most respected bank was. There is some interesting stuff here, and the subscription analysis will have even more (in terms of data, analysis and valuation). As we have all been aware, the markets have been totally ignoring valuation for about two quarters now. It remains to be seen how long that continues.

Click graph to enlarge