Note to my subscribers and readers for the year end and the new year.

I will be the first to admit that 2009 was a disappointing year for my investment results. Although the first quarter of the year was the strongest that I ever had during the Asset Securitization Crisis, and I clearly saw the trend reversal coming at the end of the quarter (actually almost to the day since I put a comment out on BoomBustBlog that I was preparing for a very aggressive bear rally, but that granularity in timing was more luck than anything else), I significantly underestimated the length, breadth and depth of the trend reversal. I want all to be clear that I am not making excuses, but the probably reason for the lack of clarity was rampant and clandestine intervention in the equity and debt markets (moe on this later). There has been a lot of chatter in around the web about my performance, and although I am very disappointed at how the year turned out, I would like to put this into perspective. I am not a daytrader nor a swing trader and my research is not aimed in those directions. My stated investment horizon for the research on the blog is 3 to 18 months with a likely targeted range of action of 6 to 9 months. Since I rely primarily on the fundamentals and can't control markets and stock prices, I need to wait for my thesis to pan out.This entails taking some volatility at times. Of course I am the first to admit that the most aggressive rally in 70 years may be a bit much, but one must be able to ride the ups and downs of irrational market moves until one's thesis plays and your are proven right or wrong.This recent bear market rally was probably a once in a lifetime event, and in the case that it was not, we now have the tools to deal with it on an invested basis - even as a pure fundamental investor.

Click any graphic to enlarge.

historical_performance_-_2_years.png.png

Published in BoomBustBlog

Yesterday, I commented on Goldman's CMBS offering through the government's leverage program known as TALF. I was very nice and diplomatic, yet despite such I still received what I would consider, inappropriate feedback. Okay, let's take the politically correct gloves off - they never fit me anyway. This deal probably flew because Goldman Sachs underwrote it. Goldman thrives off of brand name value primarily, other than that nothing really sets them apart. Contrary to mainstream media inspired belief, they are not better than everybody else at everything. I posit, they are probably not better at anybody else at anything other than marketing and lobbying which allows them the perception of being better than everybody else and the protection from the government to get away with things other banks can't (or are afraid to try). I want to delve further into that CMBS deal I outlined yesterday (so be sure to read through this, particularly if you're with an insurance company), but before I do let me try to dispel the Goldman myth once and for all...

Goldman is a bank, just like everybody else. They hire the same people who went to the same schools, taught by the same teachers to use the same models to do the same things as the other big banks. When Goldman hires a banker with experience, where do you think they hire them from? When Goldman loses a banker, where do you think they lose them to?

Think about it:

  • Financial shares slumped, their stock fell - just like everybody else.
  • The market turned on big broker/dealers, they had to run for government protection - just like everybody else.
  • The market recovered, their shares recovered - just like everybody else.
  • Goldman pays the vast majority of its net revenue out as compensation, not dividends! I haven't checked, but I would wager that they probably paid more than their outstanding market cap as bonuses since going public. What does this mean? It means that you are much better off working at Goldman than you are as a client or as a shareholder. Keep that in mind as we review the CMBS offering from an anecdotal perspective later on in this post.

From Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street:

image005.png

Their stock is fraught with risk that the sell side never bothers to analyze, which is why they are considered superstars when they have good quarters. Adjust for risk, and Goldman actually underperforms - see "Who is the Newest Riskiest Bank on the Street?" where I break it down in detail, showing Goldman as the leader in leverage, cost of capital and VaR as compared to the decrease in Risk Adjusted Return. I addressed similar points in the previous year in Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street.

Goldman Sachs Equity Guidance Would Have Made You a Fortune on Lehman!

I have outran their equity analysts and asset management arm on practically every stock I covered and I have a skeleton staff. Now, to be honest, I am devoid of the massive conflicts of interests that run through that company, but that is the point! To this day, we still have institutions that buy financial widgets because Goldman told them to, regardless of the fitness or viability of said widget.

For those with short term, or worse yet, media induced brand name fever, let's rehash "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) and Is this the Breaking of the Bear?. Then peruse Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!), Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 and Funny CLO business at Lehman Friday, 04 April 2008

The esteemed Goldman Sachs did not agree with my thesis on Lehman. Reference the following graph, and click it if you need to enlarge. Notice the tone, and ultimately the outright indication of a fall in the posts from February through April 2008, and cross reference with the rather rosy and optimistic guidance from the esteemed Goldman (Sachs) boys during the same time period, then... Oh yeah, Lehman filed for bankruptcy!!!

image006.png

Does anybody think that Lehman was a "one off" occurrence? Well download Blog vs. Broker Analysis - supplementary material and you will be able to track the performance of all of the big banks and broker recommendations for the year 2008 for the companies that I covered on my blog. I can save you the time it takes to read it and just tell you that it ain't all its cracked up to be. Again, I inquire as to why these companies' clients do not wise up?

Now, back to that CMBS Offering

Pray tell, educate me as to where Goldman's clients actually think they get all of their money from? Let's take that latest CMBS offering that they hawked Monday. In Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off, I blogged about the 4% (unlevered yield) Goldman was able to get for their underwriting clients (Developers Diversified Realty, a REIT that came up in another blog post of interest - "Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!"). This was actually a big win for DDR for they got access to 4% money at a time when commercial real estate is in the crapper. It was also a big win for Goldman, for they moved a big CRE/CMBS deal through a government leverage plan when such deals really haven't moved much. Was it a good deal for the institutions that Goldman peddled the securities to, though? Yet, I query further, who does Goldman really work for? To whom do they have a fiduciary duty? Is that duty to their bankers, traders, and analysts to get the biggest fees, commissions, and spreads possible? Quite possibly, since they are on track to announce record bonuses. I don't see clients putting out press releases touting record returns from dealing with Goldman! Is that duty to the share holder? Well, it doesn't look like it from a risk adjusted return perspective (see "Who is the Newest Riskiest Bank on the Street?"). Is that duty to DDR to get them the lowest rate possible? Quite possibly, for 4% is pretty damn good, and they lowered the rate due to being oversubscribed (high demand). But wait a minute, If their fiduciary duty is to DDR (or themselves), then they can't have a fiduciary duty to the insurance companies and asset managers who they are pitching these CMBS to, can they? Buyers should want a higher yield to compensate for the risk, no? The Wall Street Journal reported that this was a low risk deal. Really!!!??? Let's look deeper into that assertion from an anecdotal perspective, shall we?

In the WSJ.com article, it was stated the collateral (the mall properties) was conservative because they were occupied by discount chains where shoppers flock during hard times. Then they go on to contradict themselves by saying that occupancy is in a material downtrend:

The deal reflects the high bar the Fed has set for loans eligible for TALF financing. The 28 shopping centers in 19 states securing the bonds have stable cash flow because they often are occupied by discount retailers that tend to attract business even in a recession. For instance, one of the properties is Hamilton Marketplace, near Princeton, N.J., a 957,000-square-foot property whose tenants include Wal-Mart Stores, Lowe's, BJ's Wholesale Club and supermarket ShopRite. According to Fitch Ratings, the property has maintained an average occupancy of 96.7% since 2006 and is 95.1% occupied.

Isn't 95.1% about 151 basis points less than 96.7%? Will this downtrend continue? Will it intensify? Do you see commercial real estate getting better in the next 5 years or worse? If you wanted buyers to perceive safety, you would quote an UPTREND in occupancy, would you not?

"It's a great execution for the borrower," says Scott Simon, managing director and head of mortgage- and asset-backed securities portfolio manager at Pimco, a leading bond house. "If other real-estate investors can borrow money at that rate, it would be a real game changer for the commercial real-estate market that has been so devoid of financing."

Mr. Simon declined to comment on whether Pimco would buy any of the Diversified Realty bonds. Bids for the securities are expected to come from many mutual funds, insurance companies and other institutional investors. Firms that are considering the deal include Babson Capital Management, the investment-management unit of Massachusetts Mutual Life Insurance Co. and Principal Financial Group, according to people familiar with the matter. Babson Capital declined to comment. A representative at Principal Financial didn't respond to requests for comment.

Institutional investors are attracted to the deal because it is viewed as a low-risk investment with relatively healthy returns when compared with five-year Treasurys, which are yielding about 2%.

Well, Treasurys don't have rollover issues (at least not yet), and CMBS do. There is usually a reason for higher yield, and that is often higher risk, actual and/or perceived. I will walk through why these CMBS buyers are getting twice the yield of treasuries in a moment, as well as explaining how they are so woefully under-compensated as to be tantamount to a crime (or is it a break in fiduciary duty?)

Investors buying the triple-A slice of the deal, totaling $323.5 million, can get an unleveraged return of about 4%, according to price information distributed to possible investors by Goldman late Friday and reviewed by The Wall Street Journal. If they finance their purchases with TALF funding, their returns can rise to about 6%.

I went into Fitch and its AAA ratings in "Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off". Anyone who believes Fitch's ratings actually mean anything should click that link scroll down to around the middle, then read tightly from a secure device. If you are carrying a pda, iphone, or notebook you may drop it from uncontrollable laughter!

The $400 million loan represents about half of the value of the underlying properties. By comparison, in the years before the financial crisis erupted in 2007, banks were willing to lend more than 70% of a property's value because the debt could be easily sold as CMBS. Even under a "stress" scenario, according to Fitch, the Developers Diversified properties would produce a cash flow of about 1.44 times what is required to service the debt. Back when credit was easy, the ratio for stress scenarios would even fall below one for many CMBS offerings.

This is the kicker, here. Loans can't get rolled over at 70%, 65% or even 60% LTV these days, and things are getting worse, not better. See Fitch's warning (that's right, the same guys that gave those very same tranches above AAA ratings) warning that Insurers Face $23 Billion Loss on Commercial Property.

The credit crisis has driven $138 billion worth of U.S. commercial properties into default, foreclosure or debt restructuring, according to New York-based Real Capital Analytics Inc. Commercial real estate prices have plunged almost 41 percent since October 2007, the Moody’s/REAL Commercial Property Price Indices show.

So, let's do a little simple math here. Goldman's salesman talks a good game (as the pimp) to the sweet little investor looking for yield (as the little girl just getting off the bus from a small town in the midwest looking for fame and stardom in the big city). They say, hey, I'll write these CMBS for this conservative CRE portfolio at only 50LTV. What could go wrong? This happens in October of 2007. In November of 2009, you find that your collateral is now around 89LTV (due to the 41 percent drop up to October in a rapidly decreasing asset value environment) and still dropping fast, with the LTV rapidly approaching 100, wherein you start taking guaranteed haircuts on your Fitch AAA rated (you can just imagine me cracking up in the background) tranched CMBS. Boy, those 400 measly basis points don't look like much compensation now, does it? You also see why Treasuries are yielding 2%, don't you? You are at risk of losing significant principal, for according to the WSJ article, the only deals getting done are at 50 LTV. Who the hell is going to cover that 390 point spread? You call your Goldman rep for help, but you can't reach him because he is in the Mediterranean with those TWO (that's right, not one but two) bad ass Italian chicks  testing out his new Azimut 86S he just bought in a recession with YOUR commission dollars and the vig (oops, I mean spread) from your deal which is currently underwater! azimut_86s.jpg

If this deal would have went down this time, next year would GS have been in breach of their fiduciary duties: Dodd bill would make reps fiduciaries

A better question I know all of you are pondering, will this actually happen to the DDR deal? Well, let's bring back the chart of the week for the Japanese perspective from the "Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?" post. japanese_land_vs_gdp.jpg

You tell me if these CMBS aren't worth more than 4 points?

Now, don't get me wrong. I have nothing against Goldman Sachs. It does rather irk me when everybody, and I mean everybody truly believes that their sh1t doesn't stink, though. I actually have to bring my kids to school, so I will finish this post up with what it means to insurance companies who buy things such as this DDR CMBS deal from Goldman later on today or tomorrow. I'll include tidbits of what my subscribers know about the insurance industry, and I will also release some sneak peaks of the upcoming REIT research to subscribers as well.

Published in BoomBustBlog

Yes, you've been bamboozled! Hoodwinked! You're being taken for suckers that not only can't count, but whose memories have been washed away by threats of swine flu and reality TV shows. Do not fret, though. What I have is PROOF of the great Banking Bamboozle, for all to see. Now, armed with this proof, all I need for you is to go out and do something about it. Don't sit there staring at your screen, thinking "damn, he's got a point". Send a copy of this proof along with your comments to all of your elected officials, congressspersons, senators, bankers, insurers, business partners and the media outlet of your choice. The other alternative is... Maybe the powers that be have a point and threats of swine flu combined with the latest episode of survivor and flowery proclamations of "green shoots" amid 10.2% unemployment is all it takes to pull the wool over your eyes. We shall see, shall we??? This is a fact and figures packed blog post, complete with a plethora of downloadable models and references. Please do take the time to read through it before you return to your daily dose of government recommended "American Idol"... Yes, my goal is to piss you off! To goad you into action! To elicit a response.... and it gets worse as you read on.

I have compartmentalized this rather lengthy, yet interesting (to the right people) diatribe into major segments. Feel free to skip ahead or pick and choose the ones which most interest you - or if you have been freshly unplugged from the Matrix, I suggest you sit back with a good glass of wine and read through this entire missive:

  1. Social mobility: The reason why the big banks are being protected at all costs and on the breaking backs of the unemployed taxpayer
  2. The truth behind the Stress Tests and Unemployment
  3. The truth behind credit loss assumptions: Where the hell did the stress test numbers come from?
  4. The Grand Finale: So, what banks are in trouble and how much trouble are they in? A very granular and unprecedented look at the weaknesses of some of the anointed 19 that you cannot get from anywhere else!

You may have seen bits and pieces of stress test analysis in other blogs and news sites, but I doubt if you have seen all pieces of the pie stitched together, as below. You see, many complain about Goldman Sach's $40 billion of bonuses during a time of near depression, but as all who bother to even consider have probably summarized - this government is ran by, and ran for, the capitalist class. If you even have to ask a question after this statement, you can be rest assured you are not part of that class that the government truly serves. In preparation for the social mobility thesis behind the protection of the banks below, you should download this handy-dandy model that shows you (in full detail) where YOU stand in the grand scheme of socio-economic stratification, or to put it more simply, how much the powers that be believe CNBC can effect your behavior (quick registration is required, you may choose the free option to subscribe) - Socio-economic stratification model Socio-economic stratification model 2008-11-07 13:47:25 156.00 Kb. For many, going through this model is the equivalent of choosing between the blue and red pill in the Matrix, literally risking an unjacking from the network of make believe.

For those who feel you must get offended when social class is discussed, I strongly suggest you stop here and watch Cramer scream BUY! BUY! BUY! or otherwise get a solid dose of MSM, mind numbing programming. For the rest of you who choose to continue reading, you have just chosen the Blue Pill - prepare to be unplugged from the Matrix!

Published in BoomBustBlog

In case you haven't noticed, I am pretty much anti-establishment. In keeping with that streak, I feel obligated to highlight the sham that is the global asset management industry. Many high net worth individuals and institutions pay big fees to alledged geniuses to essentially have their money sit in the stock and bond markets. Here's a surprise, you can do that for free. Hedge fund performance basically tracks the performance of the stock markets, particularly in the US. There is a small amount of alpha generated, but relatively little in comparison to what is marketed and publicized. Granted, a little alpha is better than none, but that is not necessarily what the alternative asset class mantra preaches, is it?

The results of this blog and my proprietary trading accounts run circles around hedge fund results, multiple circles. Granted, I had a bad quarter, and that bad quarter was sandwiched between two calendar quarters, which pulled on the performace of two (calendar-wise) quarters, but that was nothing but giving back some profit due to my underestimating the extent to which news flow and markets were to be manipulated by the powers that be while being net short. I knew it was coming, I just significantly underestimated the extent. Even so, BoomBustBloggers should be running circles around the crowd. I will release new performance figures at the end of this quarter to see how we stand (the most recent ones were from March). To date, my valuation, forensic and macro calls have been on point for two years running. It appears there are some who don't understand that prices can, and often, diverge from fundamental valuations - but despite that, fundamentals ALWAYS win in the end. That is how you make money. When something is mispriced, you take a position in it and wairt for reality to hit. Those that have a problem understanding that are usually the hot money crowd.

See The Great Global Macro Experiment, Revisited for more on my investment style, and click here for historical performance posts and towards the latter portion of 2008 - Updated 2008 performance. You can download a model that will give you an idea of performance for all but the latest research, which as I mentioned earlier had a bad quarter (you will have to search the site for it, I will post the link in the comments section once I find it). The most recent tabulated results are here:

BoomBustBlog Performance, year to date.

About 35% to 45% of those returns (profit) were given back in the recent bear rally, but this still leaves competition dominating performance. I am also quite confident that the upcoming quarters will be quite profitable for my bearish research, recouping if not besting the top line numbers from the March tabulation. It has become quite obvious that one must be fairly prolific trader through the bear market rallies, and that is not my cup of tea. I find trading to be laborious and time consuming, but the volatility and apparent market manipulation forces one, even one such as I, to take shorter duration positions than would normally be necessary.

As the research and ideas have gotten more complicated, I will have to institute a new, more realistic method of tabulating results for distributing through the blog. The buy and hold concept unfairly skews results downwards in an envrironment when a real investor is forced to trade more often. My dilemma is that I don't want to give the impression that I am soliciting through the proffer of results. I'll have it figured out by the time I retabulate results.

Now, about those other professionals...

We have analyzed hedge fund performance by computing hedge fund alpha in both down trending and up trending markets. We used Barclay's Hedge Fund Index asa proxy for hedge fund performance. To compute alpha (Rp-Rb) we have used S&P 500 index as the benchmark index. In addition to alpha we have also computed tracking error and information ratio to give additional insights relating to hedge fund performance during up trending and down trending markets.

Published in BoomBustBlog

Brokers will soon be expected to put their clients' interests above their own. Well, it's about time.

In the WSJ:

In Obama's Overhaul, Big Change for Brokers

Buried in President Obama's proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher "fiduciary" standard that would compel them to place their client's interests ahead of their own.

Currently, brokers are only required to offer investments that are "suitable," which means as long as they don't put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.

"This is a smart

Published in BoomBustBlog

I dedicate this article to those loyal readers who tell me that there
are times that you can't rely on fundamentals. I respectfully disagree.
Over time, 1+1 will always equal 2. As a matter of fact, when people
tell me 1+1 = ANYTHING other than 2 is when I start looking for
opportunity. That's what I do for a living. See more about my
occupation here, "The Great Global Macro Experiment, Revisited".
Now is the most appropriate time to make use of the fundamentals. You
see, when you are able to master a high level of analysis, you can
actually SEE PEOPLE LYING! Lies lay the seeds for significant financial
profit, for somewhere behind the lie lays the truth.

The Supervisory Capital Assessment Program: Revisited

We have conducted analysis of Fed's assumption for loan losses for
Supervisory Capital Assessment Program by taking into account current
delinquencies, foreclosure and charge-off to determine severity of
assumptions. Below is the summary findings of the potential "WORST
CASE" losses over the next two years for all 19 of the bank holding
companies that were subject to the government's stress test (taken from
page 7 of the official stress test results).

19_bank_scap_results.gif

Now, this is supposed to be Armageddon numbers for up to two years into
the future. Let's compare this to the data we have gathered from
credible sources, and potentially even some incredible sources. The
primary source of default and delinquency data was actually the Fed itself,
believe it or not, the same guys who gave the stress test in the first
place and currently stating that banks are well capitalized!

The table below presents a comparison of the Fed's SCAP (stress test)
assumption for cumulative 2 year loss rate and likely two year
cumulative expected losses based current trends in charge-off's,
foreclosure and delinquency taken in large part from the Fed's public
website. When looking at this table, be sure to reference the actual
results above, and the definition of Fraud.

The Supervisory Capital Assessment Program

Fed 2 yr cumulative loss rate

Current trend

Base Case

Adverse Case

Net Charge-off rate 1

Foreclosure2

Deliquency3

These scenarios trends have already breached the worst case scenario

First Lien Mortgages

5 - 6

7 - 8.5

8.86%

3.92%

<---------

Prime

1.5 - 2.5

3 - 4

4.89%

<---------

AltA

7.5 - 9.5

9.5 - 13

19.98%

5.00%

9.69%

<---------

moratriums have temporarily kicked foreclosure filings down the road

Alt‐A ARM

15.03%

<---------

Subprime

15 - 20

21 - 28

36.18%

13.7%

21.88%

<--------- (charge offs) moratriums have temporarily kicked foreclosure filings down the road

Second/Junior Lien Mortgages

9 - 12

12 - 16

Closedend Junior Liens

18 - 20

22 - 25

HELOCs

6 - 8

8 - 11

4.00%

2.45%

C&I Loans

3 - 4

5 - 8

2.70%

2.58%

CRE

5 - 7.5

9 - 12

>12%

5.36%

<----- Trend is already higher than predicted, but current losses in range

Construction

8 - 12

15 - 18

10.24%

Multifamily

3.5 - 6.5

10 - 11

1.30%

Nonfarm, Nonresidential

4 - 5

7 - 9

Credit Cards

12 - 17

18 - 20

>20%

5.56%

<----- Trend is already higher than predicted, but current losses in range

Other Consumer

4 - 6

8 - 12

5.38%

3.32%

Other Loans

2 - 4

4 - 10

2.15%

1.05%

Notes

1)
Computed for Alt A First Lien Mortgage, Alt A ARM and Subprime based on
Fed data for Foerclosure and past due loans adjusted for LTV and
housing price change.

1)
HELOC, C&I, Other consumer and Other loans are as of December 31,
2008 representing 2 yr cumulative loss rate and are sourced from FDIC
and Federal Reserve. Credit Card charge-off as per Moody's estimate.
CRE charge-off's as per Deutsche Bank estimates.

2)
Foreclosure as of March 31, 2009 from Bloomberg except for Subprime
foreclosures which is as of December 31, 2008 and is sourced from
Mortgage Bankers Association.

3) Delinquency as of December 31, 2008 sourced from MBA, FIDC and Federal Reserve

First Lien Mortgage

Mortgage foreclosure rate stood at 8.86% as of March 31, 2009 with US
home foreclosure filings increasing 46% to 341,180 as of March 31, 2009
over last year. This number is significantly understated due to the
fact that many, if not most, of the largest lenders were either under
or just exiting a moratorium on foreclosures in the US. This
moratorium, or more accurately, the lack thereof, will cause an extreme
spike in foreclosure fillings in the upcoming months. As U.S housing
prices continue to decline (with S&P Case Shiller Index declining
5% in 2009 in the first two months) mortgage forecloses and
delinquencies are expected to reach additional historical peaks
resulting in higher loan losses for banks on real estate loans. The
Fed's 2 year cumulative loan loss rate for Alt A loans (7.5%-9.5%)
appear overly optimistic and is even lower than current delinquency as
of December 31, 2008 (9.69%). Based on the Fed's data (that's
right, this data is sourced directly from the Fed itself, which
explicitly contradicts the data that the Fed released for its stress
tests
) for Loan losses for Alt -A loans as of March, 2009 (for
loans past due and current foreclosures) adjusted for recovery based on
LTV taking into consideration price decline and original LTV, 2 yr
cumulative losses for Alt A is expected to reach 19.98% which is
significantly higher than Fed's adverse case of 9.5-13% - nearly twice
as much
! The Alt-A category is probably one of the most dangerous
for the banks, for this is expected to literally explode over the next
24 months (and is in part masked by moratoriums), as is confirmed
through our independent research and, ironically, through the Fed's
data itself! I strongly suggest that those who are interested in this
mosy on over to Mr. Mortgage's blog, for a peek at what is "really"
happening in regards to foreclosures in California - see "4-23 March Final Loan Default Wrap-up". This is the man that sounded the trumpet along with myself regarding Lehman Brother's RE exposure.

Now, in case my bold font and italics are wasted on some of you, let me
state this again. The Fed says X through the stress test assumptions,
and now the results, yet if you simply surf over to the other side of
the government's own web sites, they offer actual default and
foreclosure rates (among other data), that are considerably more dire
than they asked you (the tax payer and investor) to believe is credible
and "not that bad". My previous post requested that BoomBustBlog
readers consider the technical and legal definitions of Fraud - see "Preparations for Monday's and Tuesday's Articles". Keep this in mind as we move forward.

Published in BoomBustBlog

It is Mother's Day weekend, so I will be spending sparse time on the blog, but I will have some very interesting stuff concerning the government and the banking sector over the next 48 hours or so. In preparation for the posts I urge all readers, visitors and subscribers to familiarize themselves with both the technical, laymen, and legal definitions of "Fraud". Methinks that some members of the government and many of the big banks are, to put it in colloquial terms, "Busted"!

I really would appreciate a grass roots group effort from the legal minds and academics in the audience as well as I lay out the evidence and framework of what I believe to be the biggest web of deceit in the history of the finance industry. For your reference:

Wikipedia on Fraud (this is the actual definition from Wikipedia, seriously):

In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and is also a civil law violation. Defrauding people of money is presumably the most common type of fraud... In criminal law, fraud is the crime or offense of deliberately deceiving another in order to damage them - usually, to obtain property or services unjustly. [1] Fraud can be accomplished through the aid of forged objects. In the criminal law of common law jurisdictions it may be called "theft by deception," "larceny by trick," "larceny by fraud and deception," or something similar (ex. Stress tests, or PPIP).

Fraud for profit involves industry professionals. There are generally multiple loan transactions with several financial institutions involved (ex. PPIP). These frauds include numerous gross misrepresentations including: income is overstated, assets are overstated, collateral is overstated, the length of employment is overstated or fictitious employment is reported, and employment is backstopped by conspirators. The borrower's debts are not fully disclosed, nor is the borrower's credit history, which is often altered.

Now, I want all who participated in the secondary equity and bond offerings, in addition to all retail investor sheep who honestly bought financial stocks in this latest rally or those who lost money going short or bearish in it to keep this Wikipedia definition of fraud in their back pocket, for if it rings true (and I am no lawyer), my understanding that significant damages through the potential of RICO, securities fraud (a practice in which investors make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws) and a plethora of other remedies may be within reach if you suffer significant damages. You know, damages as in reality settling in, the truth escaping, these insolvent banks stocks dropping back down to earth along with all of your money. Again, I am no lawyer, but these are the thoughts and uneducated legal opinions that pop into a laymen's mind. My next post will start laying the groundwork that I used to come to these conclusions and opinions.

Published in BoomBustBlog

I've decided to add this topic, as a way for the retail and high net worth investors to see if their advisors are on their toes. These are the type of questions I would as if I paid an investment advisor (feel free to just hit the "email to friend" link the end of the article, or copy and paste).

  1. How is is that some are able to produce strong returns in this down market? This guy Reggie Middleton is boasting about 106% return based upon blog research, and a proprietary account (personal investment) return of over 330% for 2008 - all while taking less risk per unit of reward gained than nearly all of the popularly published money managers. His 2007 returns aren't too shabby either. He apparently has a significant amount of detailed documentation to back up his numbers available for free on his blog. How is he able to produce such numbers when most, if not all, of my money managers turned in negative numbers for the year? Is this a fluke? Why, or why not? Will you be able to produce similar numbers?
  2. Who do you work for and why? The extreme makeover of Wall Street has seen many firms morph, merge, and disappear - from Neuberger Berman, Merrill Lynch, Bear Stearns, Lehman Brothers, and others to the big commercial banks which are now basically extensions of the government such as Citibank and the (now) aptly named "Bank of America". I would presume that the meritorious compensation caps and general downturn in Wall Street business in general will put significant pressure on brokers, traders and bankers who have fixed living expenses (mortgages, tuition, etc.) and suddenly extremely variable (to the downside) income. This would make any person anxious to generate more money. How can I be assured, or can I be assured, that I won't be the recipient of unnecessary churn, burn or pushing of inappropriate products? This Reggie Middleton guy posted an article that appears to show the investment performance of sell side brokers to be sub par - Super Brokers form to push Super Broken products to make those with High Net Worth Super Broke.
  3. So, if the banks are not truly insolvent, why does Reggie Middleton's research differ so widely from that of the analysts at practically every bank and advisor that I deal with?
      1. About this Bank Plan - It Won't Save the Truly Insolvent Banks!
      2. Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful!
      3. Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank
      4. Re: JP Morgan, when I say insolvent, I really mean insolvent
      5. The Doo Doo 32 : the gift that keeps on Giving!
      6. 666: That's the sign of your big broker giving you bad investment advice
      7. The banking backdrop for 2009
      8. A few grim thoughts for the New Year, as I reflect upon the past year
  4. Am I being placed with managers because of their brand names? Reggie Middleton has pointed out that many brand name investors have underperformed their "brand" (see Quickly revisiting name brand investors...). At first I simply thought this was another competitive investor talking his book, but upon doing a little digging I noticed that he has a very valid point. Do you have me with any brand name investors who seem to have more "brand" than investment return? How do I determine if I am?
  5. What risk is posed by insurers and foreign bank risk? Reggie Middleton has been crowing the systemic risk over-leveraged insurers face with their surplus heavily invested in financial equities and fixed income products. To date, he has successfully called the near demise and share downfall of: the Principal Financial Group (Principal Financial Group Actionable Intelligence Note - Pro version Principal Financial Group Actionable Intelligence Note - Pro version 2009-01-15 11:18:50 252.74 Kb), the Hartford Insurance Group (Anyone who subscribes to my blog should have earned their initial investment back several times over), MBIA, Ambac, as well as a few other insurers he anticipates taking a fall, which are currently only available to his blog subscribers (ex. As I Continue My Analysis of Global Insurers). His track record has been pretty impressive and causes me to query if my coverage is intact with the insurers that I am with. What fallbacks and protections are available from my state insurance departments? Are there a system of mandatory reserves that will protect me? If Reggie is right about the condition of the insurers, why would the insurance departments consider allowing insurers to release reserves to shore up their operating capital? Doesn't this weaken my position as a policyholder? Why or why not?

  6. How significant is my real estate exposure? As a subscriber to Reggie Middleton's blog, I have witnessed him call the fall of both the residential and commercial real estate industries with uncanny accuracy. What is most disturbing about this is that his initial calls are contrary to practically every analyst and pundit that I see or hear. Despite this contrarian perspective, he has proven to be right much more often than not. In considering his accuracy and the rate or deterioration in the CRE retail and office space, should I be concerned about my direct and indirect exposure to the commercial real estate market? I know this is is a cyclical business and we just had a cyclical downturn after 9/11, but is this one going to be particularly severe? Reggie's calls on the downfall of commercial real estate and the share price collapse of the big REITS:
      1. Will the commercial real estate market fall? Of course it will.
      2. Do you remember when I said Commercial Real Estate was sure to fall?
      3. The Commercial Real Estate Crash Cometh, and I know who is leading the way!
      4. Generally Negative Growth in General Growth Properties - GGP Part II
      5. General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
      6. More on GGP: A Granular View of Insider Selling and Lease Rate Growth
      7. GGP part 5 - The Comprehensive Analysis is finally here
      8. GGP and the type of investigative analysis you will not get from your brokerage house
      9. Macerich Forensic analysis: Undervalued REIT or the Commercial Real Estate Bankruptcy
      10. The Macerich Sensitivity Analysis
      11. Commercial REIT update
      12. The next GGP??? A timely actionable note, and a new large REIT that is available to subscribers.
Published in BoomBustBlog
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