About 4 months ago, I claimed that In summary:

Without an economic incentive to foreclose, it would not be in the bank shareholders best interests to pursue foreclosure even though borrowers clearly defaulted & owe money to the lender. The economics of distressed assets in mortgage and commercial banking are quickly changing. I am quite open to discussing this in the mainstream media if any are interested in hearing the “Truth go Viral!” I want all to keep this in mind when pondering the release of reserves by the banks.

This was taken by many readers as sensationalist and unlikely. As a matter of fact, much of my writing is taken in a similar way, most likely due to the fact that I have an uncommon proclivity to state things exactly as I see them, sans the sucrose patina. This is not a pessimistic (bearish) outlook, nor an optimistic (bullish) outlook. It is simply called, the TRUTH! Realism! Something that is increasingly hard to come by in these days of media for a purpose and embedded agendas.

You see, the United States, much of Europe, and China have sever balance sheet issues that are ravaging their respective economic prospects. The media, analysts, and investors are gingerly mozying along as if this is not the case. Well, no matter how hard you ignore certain problems, no matte how hard you try to kick the can down the road - the issues really do not just "disappear" on their own.

With these points in mind, let's peruse this piece I picked up from the Chicago Tribune: More banks walking away from homes, adding to housing crisis blight: the bank walkaway.

Research to be released Thursday, the first of its kind locally, identifies 1,896 "red flag" homes in Chicago — most of them are in distressed African-American neighborhoods — that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found.

Abandoned foreclosures are increasing as mortgage investors determine that, at sale, they can't recoup the costs of foreclosing, securing, maintaining and marketing a home, and they sometimes aren't completing foreclosure actions. The property, by then usually vacant, becomes another eyesore in limbo along blocks where faded signs still announce block clubs.

"The steward relationship between the servicer and the property is broken, particularly in these hard-hit communities," said Geoff Smith, senior vice president of Woodstock, a Chicago-based research and advocacy group. "The role of the servicer is to be the person in charge of that property's disposition. You're seeing situations where servicers are not living up to that standard." City neighborhoods where 80 percent of the population is African-American account for 71.1 percent of red-flag properties, according to Woodstock.

Don't fret, this is definitely not an "African American" thing. As a matter of fact, the reason that this is concentrated in this primarily "African American" community is that this is one of the demographic groups that have been heavily targeted by predatory lenders. You will see other demographic "concentrations" start to show similar attributes and behavior from the banks - lower income, lower educated, higher LTV, lower mean rental income, lower property value, higher mean time to disposition from commencement of marketing areas, etc.

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The day after I posted wherein I made clear my opinion that the legal and litigation risks that the banking industry faces is woefully underestimated, 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 justifies and vindicates my post from the day before, which also contained links to other posts which any declared sensational just a few days before, ex., 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! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. This is a very big deal since it actually unravels many thousands of foreclosures and sets precedent to be examined across the country (all 50 state's attorney generals are looking into fraudclosure issues) that will really cause material damage to the banks that are pursuing (have pursued) said foreclosures. As reported in the Massachusetts Law Blog:

Breaking News (1.7.11): Mass. Supreme Court Upholds Ibanez Ruling, Thousands of Foreclosures Affected

Update (2/25/10)Mass. High Court May Take Ibanez Case

Breaking News (10/14/09)–Land Court Reaffirms Ruling Invalidating Thousands of Foreclosures. Click here for the updated post.

None of this is the fault of the [debtor], yet the [debtor] suffers due to fewer (or no) bids in competition with the foreclosing institution. Only the foreclosing party is advantaged by the clouded title at the time of auction. It can bid a lower price, hold the property in inventory, and put together the proper documents any time it chooses. And who can say that problems won’t be encountered during this process?... Massachusetts Land Court Judge Keith C. Long

“[W]hat is surprising about these cases is … the utter carelessness with which the plaintiff banks documented the titles to their assets.” –Justice Robert Cordy, Massachusetts Supreme Judicial Court

Today, the Massachusetts Supreme Judicial Court (SJC) ruled against foreclosing lenders and those who purchased foreclosed properties in Massachusetts in the controversial U.S. Bank v. Ibanez case...

... For those new to the case, the problem the Court dealt with in this case is the validity of foreclosures when the mortgages are part of securitized mortgage lending pools. When mortgages were bundled and packaged to Wall Street investors, the ownership of mortgage loans were divided and freely transferred numerous times on the lenders’ books. But the mortgage loan documentation actually on file at the Registry of Deeds often lagged far behind.

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Anyone who regularly follows me knows that I have been adamant in disagreeing with any who actually assert that the US has entered a housing recovery. The bubble was blown too wide, supply is too rampant, with demand too soft and credit tighter than frog ass. Today, the Case Shiller numbers have come out, and after a few months of showing price increases, have come around full tilt to reveal the truth - Reggie Middleton style!

From CNBC:

U.S. single-family home prices fell for a fourth straight month in October pressured by a supply glut, home foreclosures and high unemployment, data from a closely watched survey showed Tuesday.  AP  The Standard & Poor's/Case-Shiller composite index of 20 metropolitan areas declined 1.0 percent in October from September on a seasonally adjusted basis, a much steeper drop than the 0.6 percent fall expected by economists.  The decline built on a revised decrease of 1.0 percent in September and took prices down 0.8 percent from year-ago levels. It was the first year-on-year drop in the index since January.  The housing market has been struggling since home buyer tax credits expired earlier this year. To take advantage of the tax credits, buyers had to sign purchase contracts by April 30.

"The (housing) double dip is almost here [there was no double dip, just a result of .GOV bubble blowing] , as six cities set new lows for the period since 2006 peaks. There is no good news in October's report,'' said David Blitzer, chairman of the index committee at S&P.

Eighteen of the 20 cities showed weaker year-on-year readings in October and all 20 cities showed monthly price declines.

Unadjusted for seasonal impact [in other words, closer to the truth], the 20-city index fell 1.3 percent in October after a 0.8 percent decline in September.

To begin with, the Case Shiller index is highly flawed in tracking true price movement in a downturn such as this since said downturn is being led mostly by elements that the CS index purposefully omits. This means that those price drops that are being shown by the Case Shiller index are actually highly optimistic and seen through spit shined rose-colored glasses. The reality is a tad bit uglier. See The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression as well as Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!

I discussed my thoughts on the Case Shiller index (a complex statistical construct that excludes many of the factors currently dragging on the housing market) being quoted in the mainstream media as if it was the S&P 500, its shortcomings, the true state of housing sales value in America and what's in store for the near future.

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The newest home sale numbers are in. I was going to quote the various MSM news outlets, but ZeroHedge's Tyler Durden did such a superb job of congealing the essence of the various reports, I'll just quote him:

Stocks are up which means another fundamental data indicator must have missed expectations (following the earlier GDP miss). Sure enough, the NAR just reported November existing home sales, which came at 4.68 million units, a slight improvement to the almost all time lowest number posted in October (4.43 million), a miss to expectations of 4.75 million, and 27.9% off the cyclical peak of 6.49 million from November 2009, when the first-time buyer tax credit expired, and was shockingly not extended. The data follows this morning atrocious MBA numbers which showed a plunge of 18.6% in mortgage applications, and 24.6% drop in refinancings. But if you listen to Goldman, the recent surge in mortgage rates is actually beneficial for everyone involved and buy the f#&$ing dips! Sure enough, the ever cheerful Larry Yun had this to say: "Continuing gains in home sales are encouraging, and the positive impact of steady job creation will more than trump some negative impact from a modest rise in mortgage interest rates, which remain historically favorable." Um, continuing gains from all time record low levels? Also, the part-time job creation which is the only thing that is being created on steady basis is sure to be the ground for a fertile surge in home prices. And with that the sarcasm is off.

What is actually entertaining is to here quotes from NAR chief economists in the mainstream media (MSM). At what point do these guys lose credibility? The mere quoting of some  such as the NAR's Yun, or to a greater extent, his predecessor, is enough to permanently lose some valuable (as in more intelligent, higher paid) eyeballs to alternative media. To wit, as excerpted from Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!:

On the topic of the National Association of Realtors, and their marketing gurus chief economists, I assert that BoomBustBlog’s regular constituency is much too bright to fall for the pumping of real estate by the economist of a national realtor association. For those that may be a little more trusting, or a little less mathematically inclined, I will walk through previous proclamations that have come from the NAR and their chief marketing strategists economists…

July 2008 Yun stated “I think we are very near to the end of the housing downturn,” Yun said (AP News).

Lawrence Yun, chief economist for the Realtors, said that the housing rescue bill should play a major role in helping the housing market to rebound. He said an especially significant feature is a tax break worth up to $7,500 for first-time home buyers who purchase between April 9 of this year and July 1, 2009. Yun estimated that up to 3 million first-time home buyers could qualify for that tax break, providing a significant boost to sales at a critical time. “I think we are very near to the end of the housing downturn,” Yun said.

As a point of reference..

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There are more and more "professionals" in the mainstream media stating that they expect European defaults. What is interesting is that as there is at least a minority of pundits that are facing this inevitable event. European (and American) equity markets are still chuggling the global liquidity elixir awash in the markets and moving ever higher. From Bloomberg: Shrinking Euro Union Seen by Creditors Who Cried for Argentina

Nine months before Argentina stopped paying its obligations in 2001, Jonathan Binder sold all his holdings of the nation’s bonds, protecting clients from the biggest sovereign default. Now he’s betting Greece, Portugal and Spain will restructure debts and leave the euro.

Binder, the former Standard Asset Management banker who is chief investment officer at Consilium Investment Management in Fort Lauderdale, Florida, has been buying credit-default swaps the past year to protect against default by those three nations as well as Italy and Belgium. He’s also shorting, or betting against, subordinated bonds of banks in the European Union.

“You will probably see at least one restructuring before the end of the next year,” said Binder, whose Emerging Market Absolute Return Fund gained 17.6 percent this year, compared with an average return of 10 percent for those investing in developing nations, according to Barclay Hedge, a Fairfield, Iowa-based firm that tracks hedge funds.

He’s got plenty of company. Mohamed El-Erian, whose emerging-market fund at Pacific Investment Management Co. beat its peers in 2001 by avoiding Argentina, expects countries to exit the 16-nation euro zone. Gramercy, a $2.2 billion investment firm in Greenwich, Connecticut, is buying swaps in Europe to hedge holdings of emerging-market bonds, said Chief Investment Officer Robert Koenigsberger, who dumped Argentine notes more than a year before its default.

No disrespect intended to these fine gentlemen and distinguished investors, but the default of several of these states is simple math. You cannot take 8 from 10 10 from 8 and come up with a positive number. It really does boil down to being just that simple in the grand scheme of things. I actually released a complete road map of Portugal's default yesterday (see ), and today I will walk those who are not adept in the area through it with simple graphs and plain vanilla explanations.

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I feel this month has thrown enough events at the market to force it to start taking the real fundamentals into consideration. Of course, battling this ideal is the US Federal Reserve and their QE 2.1 policy. This should be a time to reflect upon exactly where we stand thus, I will review my thoughts and observations over the last 30 to 45 days and then summarize a truly unbiased and independently calculated view of the downright nasty side effects of the US shadow inventory of distressed housing. All paying subscribers can download the full shadow inventory report here: File Icon Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel - Shadow Inventory.

Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves and provisions to pad lagging accounting earnings under the auspices of increasing credit metrics are simply setting their investors up for a major reversal which will bang those very same accounting earnings: JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! and ).

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Summary: Banks, Insurers and ratings agencies conspired to move junk assets that were guaranteed to implode. They were (Wall)Street hustling, 3 Card Monte style.

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From an astute BoomBustBlogger that reads the fine print buried in the middle of a 250 page servicer agreement...



3.12 Realization on defaulted mortgage loans CitiMortgage will use its best efforts, consistent with its customary servicing procedures, to foreclose upon or otherwise comparably convert the ownership of properties securing any mortgage loans that continue in default and as to which no satisfactory arrangements can be made for collection of delinquent payments pursuant to section 3.2. Consistent with the foregoing, CitiMortgage will use reasonable efforts to realize upon defaulted mortgage loans in a manner that will maximize the receipt of principal and interest by the certificate holders, taking into account, among other things, the timing of foreclosure proceedings.

If a deficiency action is available against the mortgagor or any other person, CitiMortgage may proceed for the deficiency. CitiMortgage may retain 25% of the net proceeds received from a mortgagor pursuant to a deficiency action as compensation for proceeding with the deficiency action.

The reader's interpretation was slightly off. The servicer get's to go after the mortgagor in a delinquency action. Please let it be known that this in know way alters the conflicting dynamic that allows for the servicer to push certain mortgagors into foreclosure vs a mod work out. If you are self-employed and judgment proof, you are more likely to get a mod than if you are high income with a steady job with garnishable wages. The profits could very well keep rolling in. Let's engage in some chart porn...

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I included this sidebar for those of you who have not followed me in the past. You can save some time and just review , but this is probably a lot more entertaining! I took the time to pour through my blog's archives, and...

Hey, Big Wall Street Bank Execs Always Tell the Truth When They're in Trouble, RIIIIGHT????

Here's more of Alan Schwartz lying on TV in March of 2008

Meredith Whitney downgraded Bear Stearns today Friday, March 14th, 2008: "Yep, she did it. The ratings agencies are considering a downgrade. I thought it was a joke when I first heard it. Let's just imagine that I used these wise sources as an info source to make my money! The ratings agencies and sell sides are jokes that I can no longer laugh at."

It's a good thing no one listened to that damn blogger who has the gall to charge money for his research and opinion. We had to listen to him bitch and moan for 2 months before... Is this the Breaking of the Bear? (January 2008)"

Bear Stearns is in Real trouble

Bear Stearns will soon be, if not already, in a fight for its life... 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."

Notice how the worse case scenario is economic insolvency - as in less than ZERO!

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

...  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. Anything outside of simple widget manufacturers are bound to have some twists and turns to ascertain actual book value, actual marketable book value that is. This is what the investor is interested in, the ECONOMIC market value of book, not what the accounting ledger says. After all, you are paying economic dollars to buy this book value in the market, so you want to be able to ascertain marketable book value, I hope it sounds simplistic, because the premise behind it is quite simple – How much is this stuff really worth?. The implementation may be a different matter, though. I set out to ascertain the true book value of Bear Stearns, and the following is the path that I took.

Then he had the nerve to come back with Bear Stearn’s Bear Market – revisited Friday, February 22nd, 2008

So, who was right?

The Bust that Broke the Bear’s Back? Monday, March 10th, 2008: My ruminations on Bear Stearns look to come into their own…

It looks as if the prudent should start debating the ability of Bear Stearns to remain a going concern Thursday, March 13th, 2008

Despite the Federal Reserve’s efforts Wall Street fears a big US bank is in trouble Thursday, March 13th, 2008: While I can't know for sure which IB it may be, my studies tell me it is either the Bear with the Broken Back or the Riskiest Bank on the Street, and that's where I'm concentrating my bets…

From the London Business Times: Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed's unprecedented move to pump $280 billion (£140 billion) into global markets was seen as a sure sign that at least one financial institution was struggling to survive. The name on most people's lips was Bear Stearns. [Hey, it pays to read the boombustblog.com. ...] “The only reason the Fed would do this is if they knew one or more of their primary dealers actually wasn't flush with cash and needed funds in a hurry,” Simon Maughan, an analyst with MF Global in London, said. Bear Stearn's new CEO states unequivocally that his balance sheet hasn't changed since November and that they have $17 billion of cushion. [He did not outright say that they were in good shape though. My concern was looking forward. They are a significant counterparty risk (along with Morgan Stanley) and they have significant illiquid level 2 and 3 assets as a percentage of tangible equity. In addition, 17 billion is not much considering the leverage and amount of illiquid assets held by this bank.]

And what happens after the fact? Yes, I can turn bullish as well...

Joe Lewis on the Bear Stearns buyout Monday, March 17th, 2008: The problem with the deal is that it is too low, and too favorable for Morgan. It is literally guaranteed to drive angst from the other side. Whenever you do a deal, you always make sure the other side gets to walk away with something.  If you don’t you always risk the deal falling though unnecessarily. $2 is a slap in the face to employees who have lost a life savings and have the power to block the deal. At the very least, by the building at market price and get the company for free!

BSC calls are almost free and the JP Morgan Deal is not signed in stone Monday, March 17th, 2008

This is going to be an exciting, and scary morning Monday, March 17th, 2008

As I anticipated, Bear Stearns is not a done deal Tuesday, March 18th, 2008


Reggie Turns Bearish on Lehman in February, before anyone had a clue!!!

  1. Is Lehman really a lemming in disguise? Thursday, February 21st, 2008
  2. 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.
  3. I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton

Like I said above, it's not as if upper management of these Wall Street banks would ever mislead us, RIGHT????

Erin Callan, CFO of Lehman Brothers Lying giving an interview on TV in March and again in June of 2008.

Even if the big Wall Street banks would lie to us, we have expert analysts at hot shot, white shoe firms such as Goldman Sachs, who of course not only are "Doing God's Work" but also happen to be the smartest of the smart and the "bestest" of the best, RIIIGHT!!!??? Below we have both Erin from Lehman AND Goldman lying on TV in a single screen shot. Ain't a picture worth a thousand words???

We even had the inscrutable Meredith Whitney say "To suggest that Lehman Brothers is going out of business is a real stretch!" (She OBVIOUSLY DOESN'T READ THE BOOMBUST) as well as Erin Callan, the CFO of this big Wall Street bank on TV lying interviewing again...

But that damn blogger guy Reggie Middleton put his "put parade"short combo on Lehman right about that time, and had all of these additional negative things to say...

Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008

May 2008: I never got a chance to perform a full forensic analysis of Lehman, but did put a fair size short on them a few months back due to their “smoke and mirrors” PR (oops), I mean financial reporting. There were just too many inconsistencies, and too much exposure. I was familiar with the game that some I banks play, for I did get a chance to do a deep dive on Morgan Stanley, and did not like what I found. As usual, I am significantly short those companies that I issue negative reports on, MS and LEH included. I urge all who have an economic interest in these companies to read through the PDF’s below and my MS updated report linked later on in this post. In January, it was worth reviewing “Is this the Breaking of the Bear?”, for just two months later we all know what happened. I came across this speech by David Eihorn and he has clearly delineated not only all of the financial shenanigans that I mentioned in my blog, but a few more as well. Very well articulated and researched.

So, who was right? The Ivy league, ivory tower boys doing God's work or that blogger with the smart ass mouth from Brooklyn?

Please click the graph to enlarge to print quality size.



Learn more about BoomBustBlog here: Who is Reggie Middleton!!!


Note: I will be on CNBC's Squawk on the Street Monday Morning, Oct 18th to discuss my (probably controversial) opinions on banking, technology and real estate. It should be interesting for I believe I am a very "different" type of pundit. Be sure to tune in and write CNBC with your opinions and comments

This is my opinion and analysis of  JP Morgan's 3rd quarter 2010 operating results. I have included the hefty sidebar to the right to give my readers and subscribers historical perspective into the possibility of management being,,, ah,, well, optimistic at times when confronting investors and the public about what I see as potentially devastating macro and/or fundamental developments. I also included the sidebar to illustrate and remind all that just because certain big, brand name pundits, Wall Street banks and analysts may claim the coast is clear and all is just fine, it may not necessarily be the case - particularly when your favorite, most handsome and humble blogger claims otherwise. Please take careful note of the dates next to each entry and video. The time line aids significantly in giving the reader perspective. For those who are new to BoomBustBlog or are not familiar with me and my work, please visit Who is Reggie Middleton!!! before you move on.

As for those who may consider it blasphemous to mention the enshrined, the exalted JP Morgan and Bear Stearns or Lehman in the same sentence - I query "Who bought Bear Stearns?". Whatever Bear had, JPM now has - of course along with some very convenient government guarantees. But, then again...

Click any graphic below to expand... (there is a typo in the graphic below, it should read "t"rillion, not "b"billion)

Excerpted from An Independent Look into JP Morgan (subscription content free preview!):

Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we???

Now, on to JP Morgan's 3rd quarter 2010 results...

In a Nutshell, JPM's quarterly results were downright horrible - as we expected and warned of in our previous quarterly analyses (see notes at bottom of page)...

JP Morgan’s Q3 net revenue declined 11% y/y (-5% q/q) to $24.8bn as investment banking revenue declined 18% y/y (-9% q/q) to $12.6bn from $13.9bn in the previous year and net interest income declined 2% y/y (-2% q/q, off of a combination of ZIRP victimization and a rapidly shrinking asset base and loan book) to $12.5bn versus $12.7bn in the previous year. Non-interest expense increased 7% y/y (-2% q/q) to $14.4bn as compensation expenses to net revenues remained broadly flat (28% vs 27.5%) while non-compensation expenses to net revenues jumped to 33% vs 23% in the corresponding period last year. As a result of "Fraudclosure" we expect this number to skyrocket next quarter. Overall, the efficiency ratio (total expenses-to-net revenues) increased to 60% vs 51% and we expect this ratio to spike next quarter as well as the banking business becomes even more expensive.

Click to enlarge...

However, despite a decline in net revenue and increase in non-interest expenses (both of which appear to be part of an obvious trend), profit before taxes was up 22% y/y as provisions for credit losses were slashed by 60%. JPM decreased its provision for credit losses despite no evidence of a substantial, sustainable improvement in credit metrics (please reference As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves). Provisions have lagged charge-offs for two consecutive quarters in a row.

As a result, banks allowances for loan losses have decreased to 4.9% in Q3 from 5.1% in Q2 and 4.7% in previous year.  Although under provisioning has helped the bank to mask its dearth in profits it has also materially undermined its ability to absorb losses if economic conditions worsen. The Eyles test, a measure of banks ability to absorb losses, has consequently worsened to 1.9% in Q3 from 3.7% in Q2 and 5.9% in Q3 09.

JPM also increased its mortgage repurchase reserves increased $1.0 billion pretax in anticipation of pressures from GSE’s for repurchase of troubled mortgages and made a provision of $1.3bn for litigation reserves. I explicitly outlined this risk this time last year (Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results) and reiterated it days before JPM’s earnings release (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!) wherein I told BoomBustBlog readers to carefully follow the “warranties and representations” numbers, which is nearly guaranteed to spike – and spiked it has.

I would like to note that I don’t recall anyone making a big deal about this topic when it first reared its head last year, although the trend was quite obvious. Now, it is one of the biggest issues of discussion in the earnings call Q&A. Was it potentially my advice on watching the spike in the repurchase requests? I do hope somebody was paying attention!

If you haven't noticed, despite the fact JPM is pulling provisions to, IMO, pad accounting earnings ahead of what I feel to be a tsunami of macro and fundamental issues, they are at the same time going to the capital markets for a re-up, and willing to pay a premium to do so...

Here Comes The Scramble For Capital: JPM To Raise $4 Billion


I suggest readers brush up on reading between the lines... I will be factoring a lot of this into the updated valuation for JPM for my subscribers next week.

As quoted from “Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results” almost a year ago:

“Warranties of representation, and forced repurchase of loans

JP Morgan has increased its reserves with regards to repurchase of sold securities but the information surround these actions are very limited as the company does not separately report the repurchase reserves created to meet contingencies. However, the Company’s income from mortgage servicing was severely impacted by increase in repurchase reserves. Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08.”

Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud. I expect this activity to pick up significantly, and those banks that made significant use of brokers and third parties to place mortgages will be at material risk – much more so than the primarily direct writers. I’ll give you two guesses at which two banks are suspect. If you need a hint, take a look at who is increasing reserves for repurchases! JP Morgan and their not so profitable acquisition, WaMu!

Now, let’s fast forward to the Q3 2010 conference call:

On outlook, what we said is for 2010 I think our outlook was plus or minus $1.2 billion of expense. Obviously you'll take a look at our third quarter numbers are a little higher. And so we're likely to come in at the high end of that range. For 2011 what we've said is $1 billion of realized repurchase losses. And what we've done is we've taken, based on what we know, we've gone back and increased our reserves by $1 billion based on the higher file requests as well as higher settlement demands. And where we are today we believe we're adequately reserved based on what we know and we'll go back periodically and review that.

Reggie Middleton (not invited nor present at the conference call, but throwing his 22 cents (2 cents levered 11x) in anyway: But why are you raising these reserves "based on the higher file requests as well as higher settlement demands" now when it was obvious this was coming down the pike anyway? Hey, I called it in Q4 of last year, and I have much, much less access to info than you guys. It seriously looks as if you were more interested in padding the quarter than in preparing for this issue - although I could always be wrong. Is next quarter gonna be an "unexpected jump" in "higher file requests as well as higher settlement demands" as well or are you guys gonna come clean and realize that the insurers, investors and borrowers are officially lawyered up and comin' after 'ya? Again, if you haven't read it, peruse 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! in its entirety!

Oh well, back to the people who were invited, welcome, and present at the conference call...

Matt O’Connor – Deutsche Bank

I realize you guys don't want to talk in too much detail on the litigation reserve, but just conceptually, you've taken a little bit greater than $4 billion reserves for litigation so far this year and I guess a lot of us are just having a hard time understanding what it might be for and are you getting ahead of it or are still trying to catch up and -

Jamie Dimon

You know our society, right? You know how many lawsuits go on, and class action suits, and stock drop suits, and [unintelligible] suits and WaMu suits and Morgan suits and it ain't going away. It's becoming a cost of doing business.

…In repurchase reserves and litigation, it's unclear exactly how or where it's going to show up, but we do think there will be some of that. And when we make the statement that some of these costs may go on for a while it relates also to that. That while we're burning through the vintages or the GSEs there are other vintages where there may have been more of a time lag than that. And I think it's also important to note that they're fundamentally different, because a lot of the private label stuff didn't have the same rules, requirements, disclosures. So they're all different, but loan by loan it's going to have some of the same characteristics that people are right. You're going to have to make them [unintelligible]. Hopefully if they're going to sue just to win they're making a huge mistake.

Jim Mitchell

Right, but you're already contemplating some of those issues in your current reserving?

Jamie Dimon

To the extent we can, you know? Reserves are - you can't guess and put up numbers, but to the extent we can. I think the question is, between the reserves we have is how long losses relating to repurchase, whether it's GSE or private label, and whether it shows up on the litigation or repurchase, how long they go on for. We don't expect it to be a blowup kind of number. We expect it will be they'll just drag out these losses as these things play themselves out.

Nancy Bush - NAB Research

Two questions. The first related to the foreclosure issues, and whether there are going to be any extraordinary expenses associated with that. And is the level of expense in that whole activity now going to be higher going forward?

Jamie Dimon

I think I already mentioned that the way I look at it we're bearing $5 billion of charge-offs a year, $1 billion in repurchase reserves a year, a lot of re-owned foreclosure, which I forget off hand, but it's big numbers. Those numbers may bounce up and down and probably will go up a little bit because of this, but I'm not sure they're going to materially change because of this. And there will be litigation, I put to the side, I don't know how it's all going to be sorted out.

… I think the way you should look at this topic is that we're bearing today $7 billion of charge-offs, foreclosure, repurchase costs - this affects reserves. That $7 billion will go up or down based upon the economy and stuff like this. I'm not sure stuff like this is going to dramatically change that number. It may extend it a little bit longer and stuff like that but - and remember we have in total, between repurchase reserves and the $11 billion, we have $14 billion of reserves for repurchases or loan losses. And look, the mortgage thing is - we're halfway through all this. We think we should continue and get done and make sure we do the right things for the consumers, the investors, and the country. And so obviously it will increase our costs a little bit and maybe we'll have to pay penalties eventually to some of the AGs, but we really think we should just continue.

…And the big one is the $200 billion runoff of stuff, a lot of which was acquired from WaMu. That will be running off for years.

I will be releasing the balance of this review to subscribers, including an updated valuation, more on the (by now probably fully disintegrated) discount on the WaMu purchase and any other issues we uncover.

As a matter of fact, the quarter ended before the “robo signing” scandal really started making waves, thus the numbers reported are only the tip of the iceberg. We contend that the “robo-signing’ subject will actually open the door to a much more critical issue for the banks (refer to our upcoming Foreclosure Crisis subscriber research for details) as RMBS securities tied to residential mortgages will experience higher loss due to longer liquidation time lines, negative ratings and potential losses arising from the repurchase of loans from GSE’s due to mortgages not meeting the investor underwriting standards – or put more directly, fraud during the underwriting process will come to the forefront and cause many an investor to attempt to disgorge these loans and derivative loan products. With GSE’s already vying for more repurchases of troubled securities, the outrage caused from falsified documents would further escalate the repurchase demands.  When combined with the issues of foreclosures, weakening pricing, and legal issues with foreclosures which materially exacerbate the economic sales and pricing situation, combined with the deluge of repurchase demands, the banks will be facing one of the toughest periods of this century.

Let's not forget about CRE!

JP Morgan's (like many other banks) real estate related issues are woefully underestimated, yet JP Morgan can get away with under-provisioning without being punished by the markets. Hmmm!!! How long will that last?

Even visitors from Amsterdam, never having been here (area in the video below) before, can see there is something fundamentally wrong with the mortgage landscape (still) in many parts of the US. The clincher, "But how do all of these people [developers] get all of this money to put up all of these [empty] buildings? [as they are still building new buildings around the empty buildings that they cannot sell or rent!]"  I reply, "Those people over there! The banks!" As I point to the local JP Morgan Chase branch in downtown Brooklyn.

[youtube WsTdV86nAGw]

For all of you CRE bulls, that clip is the same area photo-toured more than one year ago - tell me if the situation has changed in accordance with the 100%+ spike in REIT and bank share prices - “Who are ya gonna believe, the pundits or your lying eyes?”. Download my free research on the topic - CRE 2010 Overview CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. Tuesday, December 15th, 2009, then subscribe to get the juicy stuff.

The clip above is from the October 4, 2010 VPRO Backlight (Dutch public television) featuring the issues facing JP Morgan, as well as the European banking sector. This special was very well done and I look forward to the US public television stations doing similar investigative work. See the entire video (43 minutes) on the VPRO site (in Italian, Dutch and some English with Dutch Subtitles).

Teaser to our upcoming foreclosure research


More Reggie Middleton on JP Morgan

The full JPM Q2 review can be downloaded by subscribers (click here to subscribe) here: File Icon JPM 2Q10 review

Subscribers should also review our forensic valuation reports, which have (thus far) proven to be right on the money in terms of JP Morgan:

The JP Morgan Professional Level Forensic Report (subscription only)

The JP Morgan Retail Level Forensic Report (subscription only)

Those that don’t subscribe still have a lot of BoomBustBlog JPM opinion and analysis to chew on, including a free, condensed (but still about 15 pages) version of the forensic analysis above. You can find it below this pretty graphic from “An Unbiased Review of JP Morgan’s Q1 2010 Results Yields Less Roses Than the Maintream Media Presents“…

  1. An Independent Look into JP Morgan (subscription content free preview!)
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 – JP Morgan
  3. Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!
  4. Anecdotal observations from the JP Morgan Q2-09 conference call
  5. Reggie Middleton on JP Morgan’s Q309 results
  6. Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results
Published in BoomBustBlog