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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

 

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

Friday, 29 January 2010 18:00

Quick Bank Thoughts

The lead story this morning of ZH is "The Only Thing Better Than A Zero Hedge? Wells Fargo's "Never Lose" Economic Hedge", explaining more accounting shenanigans (if you read the links below, you will see that I have caught Wells in a few rather aggressive interpretations) related to MSR's. One thing that was noted was the inputs for valuing MSRs using interest rates as was extolled by management. Well...

The biggest input for MSRs are foreclosures, not interest rates. The interest rate argument is academic (assuming a refinance, that may or may not happen when few can qualify) while the foreclosures are happening at a much more rapid and prevalent clip and are much more likely to happen. The foreclosures are also a guaranteed end to MSR income. You can't service a loan on an REO, now can you? So while interest rates are remaining steady and can be put into an MSR valuation formula for a positive GAAP dollar generating result, foreclosures are on the rise and will continue to be, which will (and rightfully so) drive down the values of MSRs. This is probably why (the more academic) interest rates are used for inputs in lieu of a straight pipe to the foreclosure rates. 

For those who haven't read my take on Well's Q4, you can read it here: http://boombustblog.com/Reggie-Middleton/1293-The-Wells-Fargo-4th-Quarter-Review-is-Available-and-Its-a-Doozy.html.

This is also a reason why assets need to be market to market, and not to model. Outside of the possibility of the models actually being faulty or just plain old wrong, they are subject to bias and fraud. If one were to simply force he banks to reveal cash flows and yields on the MSRs, as in raw revenues less all expenses divided by acquisition costs, I am sure you will find an inverse relationship with localized foreclosure rates, much tighter than that of interest rates. You will also find that, on a discounted basis, these MSRs are highly overvalued on bank's books. Unfortunately, banks don't do this so the easiest way to get to the values is to let the market set it. 

Anybody who is a member of my blog should download the forensic reports from 2009 to remind themselves of the amount of issues that reside within Wells. It is very, very overrated.    

 

 

 

Friday, 29 January 2010 18:00

Quick Bank Thoughts

The lead story this morning of ZH is "The Only Thing Better Than A Zero Hedge? Wells Fargo's "Never Lose" Economic Hedge", explaining more accounting shenanigans (if you read the links below, you will see that I have caught Wells in a few rather aggressive interpretations) related to MSR's. One thing that was noted was the inputs for valuing MSRs using interest rates as was extolled by management. Well...

The biggest input for MSRs are foreclosures, not interest rates. The interest rate argument is academic (assuming a refinance, that may or may not happen when few can qualify) while the foreclosures are happening at a much more rapid and prevalent clip and are much more likely to happen. The foreclosures are also a guaranteed end to MSR income. You can't service a loan on an REO, now can you? So while interest rates are remaining steady and can be put into an MSR valuation formula for a positive GAAP dollar generating result, foreclosures are on the rise and will continue to be, which will (and rightfully so) drive down the values of MSRs. This is probably why (the more academic) interest rates are used for inputs in lieu of a straight pipe to the foreclosure rates. 

For those who haven't read my take on Well's Q4, you can read it here: http://boombustblog.com/Reggie-Middleton/1293-The-Wells-Fargo-4th-Quarter-Review-is-Available-and-Its-a-Doozy.html.

This is also a reason why assets need to be market to market, and not to model. Outside of the possibility of the models actually being faulty or just plain old wrong, they are subject to bias and fraud. If one were to simply force he banks to reveal cash flows and yields on the MSRs, as in raw revenues less all expenses divided by acquisition costs, I am sure you will find an inverse relationship with localized foreclosure rates, much tighter than that of interest rates. You will also find that, on a discounted basis, these MSRs are highly overvalued on bank's books. Unfortunately, banks don't do this so the easiest way to get to the values is to let the market set it. 

Anybody who is a member of my blog should download the forensic reports from 2009 to remind themselves of the amount of issues that reside within Wells. It is very, very overrated.    

 

 

 

I feel that I have handed this company's transgressions to the SEC on a silver platter (see the latter part of this post). We shall see what comes of it. From Reuters:

Oct 6 (Reuters) - Pre-Paid Legal Services Inc (PPD.N) said it received a subpoena from the Division of Enforcement of the U.S. Securities and Exchange Commission (SEC) as part of a fact-finding inquiry, sending its shares down as much as 21 percent.

I feel that I have handed this company's transgressions to the SEC on a silver platter (see the latter part of this post). We shall see what comes of it. From Reuters:

Oct 6 (Reuters) - Pre-Paid Legal Services Inc (PPD.N) said it received a subpoena from the Division of Enforcement of the U.S. Securities and Exchange Commission (SEC) as part of a fact-finding inquiry, sending its shares down as much as 21 percent.
Friday, 31 July 2009 20:00

New subscriber research available

The tricky dick bank's quarterly review is available for download. They have pulled what appears to be extremely aggressive accounting maneuvers to produce paper profits for two quarters in a row now. One would think that the regulatory authorities would bear down on them, for I feel their reporting is highly misleading as to the health and profitability of the institution. Alas, the accounting gimmickry appears to be good for their share price in the short term, though. The first quarter review is also included below for the sake of comparison.

BOK 1Q09 1Q09 2009-05-07 06:34:52 460.74 Kb

BOK 2Q09 review 2Q09 review 2009-08-01 05:04:06 1.05 Mb

Friday, 31 July 2009 20:00

New subscriber research available

The tricky dick bank's quarterly review is available for download. They have pulled what appears to be extremely aggressive accounting maneuvers to produce paper profits for two quarters in a row now. One would think that the regulatory authorities would bear down on them, for I feel their reporting is highly misleading as to the health and profitability of the institution. Alas, the accounting gimmickry appears to be good for their share price in the short term, though. The first quarter review is also included below for the sake of comparison.

BOK 1Q09 1Q09 2009-05-07 06:34:52 460.74 Kb

BOK 2Q09 review 2Q09 review 2009-08-01 05:04:06 1.05 Mb

As I anticipated, Wells Fargo fails the stress test under all the three active scenarios (base case, optimistic and pessimistic scenarios) by a significant degree and will have to raise capital in order to achieve a Tangible Common Equity (TCE) ratio of 4.0%. The bank's TCE ratio stands at 3.06% which is significantly lower than the prescribed limit of 4.0%. Further, based on our projections, the bank's TCE will likely fall to 2.37% at the end of 2010 after adjusting for losses (both accounting as well as economic losses on account of its significant off-balance sheet exposure towards the QSPE's and SIV's) worth US$64 billion. In the base case scenario, to bring the TCE up to 4%, the bank would require to raise US$23.5 billion. Furthermore, in the pessimistic and optimistic cases, the bank must raise US$23.9 billion and US$22.8 billion respectively. 

Additionally, the bank's Tier 1 Capital stood at 8.28% as of March 31, 2009, which is marginally above the prescribed limit of 8%. However, due to significant off-balance sheet exposure of US$1.8 trillion as of December 31, 2008 and the risk associated with it, the bank Tier 1 capital will likely fall to 7.59% at the end of 2010 and WFC will have to raise significant capital to sustain the loan and lease losses and losses pertaining to off-balance exposure. According to our estimates, in the base case scenario, the bank would have to raise US$5.08 billion. In the pessimistic and optimistic cases, the bank would need to raise US$5.6 billion and US$4.3 billion respectively. Moreover, the deeper recessionary threat necessitates the bank to maintain higher capital. Depending on the asset quality of Wells, we have pegged the Tier 1 Capital to 9% instead of prescribed 8%. As per this measure, the bank would require to raise US$17.6 billion in the base case scenario.  WFC is actually up $1.74 as I type this, 10:41 am EST.

Note: Since leaks are starting to come out, I'll release my findings for the rest. Goldman and American Express can, according to my calculations, clear the 4% TCE hurdle without raising extra capital. I will not have the time to run JP Morgan, but I would not be shocked if it was found that they wouldn't be found to need more.

As I anticipated, Wells Fargo fails the stress test under all the three active scenarios (base case, optimistic and pessimistic scenarios) by a significant degree and will have to raise capital in order to achieve a Tangible Common Equity (TCE) ratio of 4.0%. The bank's TCE ratio stands at 3.06% which is significantly lower than the prescribed limit of 4.0%. Further, based on our projections, the bank's TCE will likely fall to 2.37% at the end of 2010 after adjusting for losses (both accounting as well as economic losses on account of its significant off-balance sheet exposure towards the QSPE's and SIV's) worth US$64 billion. In the base case scenario, to bring the TCE up to 4%, the bank would require to raise US$23.5 billion. Furthermore, in the pessimistic and optimistic cases, the bank must raise US$23.9 billion and US$22.8 billion respectively. 

Additionally, the bank's Tier 1 Capital stood at 8.28% as of March 31, 2009, which is marginally above the prescribed limit of 8%. However, due to significant off-balance sheet exposure of US$1.8 trillion as of December 31, 2008 and the risk associated with it, the bank Tier 1 capital will likely fall to 7.59% at the end of 2010 and WFC will have to raise significant capital to sustain the loan and lease losses and losses pertaining to off-balance exposure. According to our estimates, in the base case scenario, the bank would have to raise US$5.08 billion. In the pessimistic and optimistic cases, the bank would need to raise US$5.6 billion and US$4.3 billion respectively. Moreover, the deeper recessionary threat necessitates the bank to maintain higher capital. Depending on the asset quality of Wells, we have pegged the Tier 1 Capital to 9% instead of prescribed 8%. As per this measure, the bank would require to raise US$17.6 billion in the base case scenario.  WFC is actually up $1.74 as I type this, 10:41 am EST.

Note: Since leaks are starting to come out, I'll release my findings for the rest. Goldman and American Express can, according to my calculations, clear the 4% TCE hurdle without raising extra capital. I will not have the time to run JP Morgan, but I would not be shocked if it was found that they wouldn't be found to need more.

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