Financial, Real Estate, Stock Markets Trends and Current Affairs

I received a few emails about this monkeybusiness.com blog, and as it turns out - I like them.

Hears an excerpt:

"It appears that AIG needed to post $20 billion of collateral on credit default swaps with Goldman and they didn't have the cash!

Remember when Hank Paulson did an immediate about face on lending
AIG somewhere between $70 and $85 billion? Turns out he had a meeting
September 15 with Lloyd Blankfein, CEO of Goldman Sachs. Mr. Blankfein
was the only bank CEO in attendance. Imagine that. I'm sure he was
there because as the head of Goldman, he was obviously smarter than
everyone else. Couldn't have had anything to do with Goldman going
down the toilet if AIG went down right? Of course Treasury and Goldman
are completely denying it. Richie and I have been scratching our heads
for over a year now because we KNEW that Goldman was a huge player in
AAA rated CDO's and they did TONS of negative basis trades (buying
monoline wrapped AAA CDOs paying L+50 and then buying credit default
insurance from SOMEONE and paying then L+10). We assumed it was Ambac
and MBIA, but when those guys got downgraded, nothing really happened
to Goldman. Who the hell did they lay the risk off with? Now we
know. It was AIG!

When AIG was taken into conservatorship the Fed appointed Edward
Liddy, a member of Goldman's board (he resigned upon his AIG
appointment), to run AIG!! AIG immediately drew $37 billion to meet
collateral calls. We are told $20 billion was due to Goldman Sachs. I
honestly don't think I can do another Goldman Superheroes! What a
joke. All the talk and all the articles about how superior Goldman is
and how their risk management is so fantastic. All a bunch of
bullsh*t. They get the jump on everyone because they know the plays
ahead of time."

See also "The Goldman Superheroes, parts 1 and 2", funny enough.

I have had a few readers caution me on shorting Goldman, because Goldman has effectively convinced the world that their Sh1t doesn't stink. Well, guess what my loyal readers. It smells the same as just about everybody elses. The Goldman trades are approaching one of the most profitable for this year. There is still 20 or 30 points of potential profit.

For those who don't know my position on Goldman, see:

1. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
   
2. Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
3. 
   Reggie Middleton on Goldman Sachs Q3 2008
4. Goldman Sachs valuation update: Buffet's strategic investment and public offering

Note to Commissioner Cox: You have doomed the last
two independent investment banks. Congratulations. By actually trying
to directly manipulate the US capital markets by literally banning the
short selling of a certain cadre of stocks (while allowing the long
buying of those same stocks) you have upset the natural equilibrium of
our capitalistic environ. You must learn to wrap you mind around, and
grasp the difference between, price and value. The short sellers were
driving the prices of these investment banks down to match their value.
Now, with your short sighted intereference, you have allowed - no,
let's be more accurate, you have overtly facilitated the divergence
between price and value.

For one, you
cannot prevent astute investors from taking bearish positions on a
company. You preside over the most advanced, and complex financial
markets in the history of the world, not some third world nation that
is just opening its first exchange as an extension of the town food
market!

Word has it that the clients of
Morgan Stanley are fleeing, despite (or maybe even because - due to the
drastic socialist nature of) your actions. Because you have allowed
longs to bid prices up way above their intrinsic economic value, you
have injected an unprecendented amount of volatility into the system.
This increases the cost of capital, my friend, not decrease it. When
the truth meets reality, what do you think will happen to share

prices?
That's right, they will fall that much more. A market needs two sides
to a trade, not just one. I hear you plan on preventing investors from
selling stocks at a loss next, which will be music to the ears of those
at the IRS!

From FT Alphaville:

This is a pretty stunning line to read:

"We need a merger partner or we're not going to make it,"
Mr. Mack told Mr. Pandit, according to two people briefed on the talks.
Mr. Pandit, a former senior investment banker at Morgan Stanley, said
Citigroup was not interested.

What might Mack have had on his mind? Afterall, only the other day
he was supposedly telling MS employees that everything was just fine,
notwithstanding the destructive antics of rumour-mongering short
sellers.

Ban on short-selling

US: The Securities and Exchange Commission on Friday issued an emergency order temporarily banning short selling in the shares of 799 financial institutions until midnight on October 2, 2008. The SEC said it may extend the order if it's necessary to protect investors, but it won't last more than 30 days. In a pre-trading market GS and MS have gained 10%.

The U.S. Securities and Exchange Commission may require hedge funds to disclose their short-sale positions and plans to subpoena the funds' communication records. The SEC would hedge funds and investors managing more than $100 mn to publicly report their daily short positions. SEC has also made it a securities fraud when sellers deceive brokers about delivering shares to buyers. The SEC would also impose penalties on brokers if their clients haven't delivered shares to buyers within three days of a short sale. The SEC also approved a rule drafted in March 2008 that it would amount to be a fraud for investors to lie to their brokers about locating shares to be sold short. Currently, brokers rely on their customers' assurance that they had located shares that could be used to cover a sale.

UK: Britain's Financial Services Authority has imposed temporary ban on investors from taking new short positions in financial stocks from midnight on Thursday, September 18. The ban has been imposed until January but would be reviewed each month.

In reading an article in the NY Times just now, I came across this poignant statement:

The Treasury secretary, Henry M. Paulson Jr.,
who won authority from Congress last month to use taxpayer money to
bolster the companies, always maintained that he hoped never to use
that power. But, as the companies’ stocks continued to languish and
their borrowing costs rose, some within the Treasury Department began
urging Mr. Paulson to intervene quickly.

Then, last week, advisers from Morgan Stanley
hired by the Treasury Department to scrutinize the companies came to a
troubling conclusion: Freddie Mac’s capital position was worse than
initially imagined, according to people briefed on those findings. The
company had made decisions that, while not necessarily in violation of
accounting rules, had the effect of overstating the companies’ capital
resources and financial stability.

Indeed, one person briefed on
the company’s finances said Freddie Mac had made accounting decisions
that pushed losses into the future and postponed a capital shortfall
until the fourth quarter of this year, which would not need to be
disclosed until early 2009. Fannie Mae has used similar methods, but to
a lesser degree, according to other people who have been briefed.

Is
anybody truly surprised? These companies used massive leverage to write
and/or insure trillions of dollars of loans, many of which were written
on top of the largest real asset and credit bubble in modern history.
It was bound to happen. I have went through this in excruciating detail
(see The Asset Securitization Crisis).

Does
anybody truly think that "real" privately owned and publicly traded
banks operated any differently. Reread the NY Times quip above, then
visit my findings (yes, I was the first) on Wells Fargo accounting
proclivities below. An excerpt:

Increasing provisions and chare-offs

· In
1Q2008, WFC’s NPAs increased to over 1.16% of total loans from 1.01% in
4Q2007. Overall NPAs increased to $4.5 bn from $3.9 bn in 4Q2007. NPAs
in real estate construction loans witnessed highest increase of 49% to
$438 mn in 1Q2008. NPAs of C&D loans stood at 2.32% of total
C&D loans, followed by real estate 1-4 family mortgage (1.91%) and lease financing (0.83%)

· Wells Fargo’s gross charge offs increased to 0.46% of total loans compared to 0.37% of total loans in 4Q2007. C&D
loans witnessed the highest increase in charge-offs with an increase of
nearly three-fold to $29 mn in 1Q2008, showing signs of increased
stress in these loans. Real estate 1-4 family junior
lien mortgage, credit card loans and Other revolving credit and
installment had charge-offs of 0.61%, 1.68% and 0.98% to total loans,
respectively.

· However
despite increase in NPAs and increase in charge offs, Wells Fargo
provision for credit loss sequentially declined to $2.0 bn in 1Q2008
from $2.6 bn in 4Q2007. (0.52% of total loans in 1Q2008 from 0.68% of
total loans in 4Q2007) raising concerns over possible inadequacy of
provision amount.

· From
April 1, 2008 onwards, Wells Fargo has changed its home equity
charge-off policy to 180 days from 120 days previously. Amid current
deteriorating credit markets with residential sector showing no signs
of recovery, it is quite understandable that the bank has changed the
policy in a bid to defer recognition of provision and charge-offs.

Regarding the financial projections for Navistar.

Although we do no rely entirely on company’s guidance while making
financial projections and instead take into account the overall macro
economic picture, global and industry trends and company’s competitive
position within the industry, we do give reasonable consideration to
management guidance as well. We do not altogether ignore the
management’s discussion and statements about future industry and
company scenario and critically examine management’s guidance in light
of current environment to see if the company could meet the guidance.

Based on our independent analysis of the auto
industry and Navistar, following is the variance between the financial
projections for Navistar and company’s guidance.

The following
stemmed from a conversation I had with a financial journalist for a
prominent international finance rag after her perusal of my two blog
articles: Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis and Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street.
The converstation ended up centering around the "alleged" deleveraging
of UBS and their shedding of risk. The following highlights the UBS
situation in more detail...

From http://uk.reuters.com/article/businessNews/idUKL2112783220080521

UBS AG provided 75
percent of the funding used by U.S. asset manager Blackrock to buy a
$15 billion (7.63 billion pounds) portfolio of distressed U.S. real
estate assets from UBS, the bank said on Wednesday.

UBS provided
$11.25 billion in loans to Blackrock, the Swiss-based bank said in a
statement. Blackrock raised $3.75 billion in equity from investors to
pay for the rest of the package, UBS said...

... The face value of the portfolio was $22 billion, meaning UBS received about 68 cents to the dollar on the sale.

This means
that UBS effectively financed $18.25 billion dollars of the purchase,
or 83%, a good portion being absolutely non-recourse since it was given
in the form of a seller's concession (eg. a discount). I have not seen
the full terms of the deal, but other similar deals appear to have
additional non-recourse characteristics. This is a very sweet situation
for the buyer, but as I said, it is not an absolute transfer of risk
from UBS balance sheet or an elimination of said risk for UBS
shareholders.

I have fixed the archived links, so all links to all articles are
now working properly. This is the Asset Securitization Crisis roadmap
to date. Feel free to spread it around.

The Asset Securitization Crisis Analysis road-map to date:

1. Intro:
   The great housing bull run - creation of asset bubble, Declining
   lending standards, lax underwriting activities increased the bubble - A
   comparison with the same during the S&L crisis
2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
5. Municipal bond market and the securitization crisis - part I
6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
9. More on the banking backdrop, we've never had so many loans!
10. As I see it, these 32 banks and thrifts are in deep doo-doo!
11. A little more on HELOCs, 2nd lien loans and rose colored glasses
12. Will Countywide cause the next shoe to drop?
13. Capital, Leverage and Loss in the Banking System
14. Doo-Doo bank drill down, part 1 - Wells Fargo
15. Doo-Doo Bank 32 drill down: Part 2 - Popular
16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
17. The Anatomy of a Sick Bank!
18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
19. GE: The Uber Bank???
20. Sun Trust Forensic Analysis
21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
22. Goldman Sachs Forensic Analysis
23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
24. Pt one of three of my opinion of HSBC and the macro factors affecting it

Those that follow my blog know that I have thought the Golden Boys have been overvalued for many months now. I have harped on this fact throughout the summer and released analysis in July, a precursor - Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street and the actual forensic analysis. Like much of my research, it ran contrary to popular opinion - at least at the time that I released it to the public. Now, it appears that the media is catching on to Wells Fargo as well as Goldman, just as they did MBIA, Ambac, Lennar, General Growth Properties , Morgan Stanley, Bear Stearns (I called for the collapse of Bear Stearns two months in advance of thier downfall), the Doo Doo 32 regional banks , etc. Again, I offer to the media access to my analytical services if you will have it. I can give you insights to this insight months before you hear it from the sell side.

See the following article from Bloomberg:

Goldman, JPMorgan May Prove `Mortal' as Earnings Drop, UBS Says

By Lynn Thomasson

Aug. 15 (Bloomberg) -- Goldman Sachs Group Inc. and JPMorgan Chase & Co., which weathered the credit crisis better than most of their peers, may prove ``mortal'' in the third quarter as loan losses increase and banking revenue drops, UBS AG said.

Goldman Sachs is ``not immune'' to declining profits even after the biggest U.S. securities firm ``escaped many of the pitfalls that have snagged rivals,'' said UBS analyst Glenn Schorr in a research note today. JPMorgan, the second-biggest U.S. bank by market value, faces more asset writedowns and deteriorating consumer credit, he said.

... Since both "have been viewed as safer places to hide during the credit crisis, we think investors may reduce exposure to these names in the near term,'' Schorr wrote. ... Schorr also reduced his estimate of Citigroup and Morgan Stanley, citing weakness ``across the board'' in the industry. Since the start of August, Goldman and JPMorgan have fallen 13 percent and 9 percent, respectively, more than three times the 3 percent decline of the S&P financials index.

Weekly Drops

Goldman Sachs shares are down 7.6 percent this week, the most in a month. Oppenheimer & Co. analyst Meredith Whitney and Deutsche Bank AG's Mike Mayo cut third-quarter profit estimates for the company on Aug. 12. JPMorgan also reduced earnings estimates for Goldman today.

To contact the reporter on this story: Lynn Thomasson in New York at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Lest we forget the unforeseen risk that I was months ago, see Merrill, Goldman Pressured by Cuomo on Auction-Rate Debt; Wachovia Settles.

From a reader in Florida:

I have some very interesting news about how Bank of America:

One of my buddies is struggling to keep paying one of his rental properties. He has a 2nd mortgage (line of credit) on the property with BoA. BoA froze this line a couple of months ago. He has now fully amortizing payments.

Yesterday he contacted the bank and notified them he cannot make the payments anymore. He requests a way to change the payment back to Interest Only. He is transferred to the loss mitigation department where they ask all kind of questions about his financial condition.

After 24 hours, he gets a call back from the bank. Here is what he gets from BoA.

1) Loan amortization changed back to Interest Only

2) Interest rate lowered to 2.75% for 12 months.

3) The payment for the next two months is waived (fully, nothing added to the principal)

4) This will not affect his credit

Let me emphasize that Bank of America offered this without asking. He only requested the change back to Interest Only.

To me, this confirms the deep crisis boiling behind the curtains. What a sneaky way for BoA to delay facing the reality of coming write-offs, while helping the execs get a decent bonus at the end of the year. Just a different way of doing what Well Fargo did to delay write-offs by changing the definition of "delinquent".