Wednesday, 16 December 2009 00:00

How Regulatory Capture Turns Doo Doo Deadly

First off, some definitions:

  • The Doo Doo, as in the Doo Doo 32: A list of 32 banks that I created on
  • Regulatory capture (adopted from Wikipedia): A term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is an explicit manifestation of government failure in that it not only encourages, but actively promotes the activities of large firms that produce negative externalities. For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture is when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented. The risk of regulatory capture suggests that regulatory agencies should be protected from outside influence as much as possible, or else not created at all. A captured regulatory agency that serves the interests of its invested patrons with the power of the government behind it is often worse than no regulation whatsoever.

About a year and a half ago, after sounding the alarm on the regionals, I placed strategic bearish positions in the sector which paid off extremely well. The only problem is, it really shouldn't have. Why? Because the problems of these banks were visible a mile away. I started warning friends and family as far back as 2004, I announced it on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be ready to collapse some time soon. Most investors and pundits won't realize it because a) they don't read BoomBustblog, and b) due to regulatory capture, the bank has been given the OK by its regulators to hide the fact that it is getting its insides gutted out by CDOs and losses on loans and loan derivative products. Alas, I am getting ahead of myself. Let's take a quick glance at regulatory capture, graphically encapsulated, then move on to look at the recipients of the Doo Doo Award as they stand now...

A picture is worth a thousand words...


  • Sun Trust: Recipient of government/taxpayer bailout, share price collapse
  • Popular: Literal share price collapse. down 83%
  • Countrywide: Total collapse, purchased by Bank of America. Collapse was forewared nearly a year earlier. See Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide
  • WaMu: Total corporate collapse, saved by last minute (and contested) rescue by JP Morgan (as was Bear Stearns, which also collapsed under its own weight after I clearly stated it was done for - see Is this the Breaking of the Bear? I also explicitly warned about WaMu's issuess in the Countrywide link above. It's mortgage division took 5 consecutive quarterly losses starting in 2006 before the company started having corporate-wide issued.

  • Wells Fargo: Recipient of multi-billion bailout
  • KeyCorp: share price collapse
  • Synovus Financial Corp: share price near total collapse
  • Marshall & Ilsley: share price near total collapse
  • Associated Banc: share price near total collapse
  • First Charter: near collpase

You should be seeing trend by now. Here are the rest of the banks on the old Doo Doo list. Pick you poison!

M&T Bank Corp - Huntington Bancshares - BB&T Corp - JPM Chase - U.S. Bancorp - Bank of America - Capital One - Nara Bancorp - Sandy Spring Bancorp - PNC - Harleysville National - CVB Financial - Glacier Bancorp - First Horizon - National City Corp - WAMU - Countrywide - Regions Financial Corp - Citigroup - Wachovia Corp - Zions Bancorp - TriCo Bancshares - Fifth Third Bancorp - Sovereign Bancorp

Now, how is it that I saw ALL of this happening and yet the regulators didn't? Well, I posit that, due to regulatory capture, the banking industry convinced the regulators to look the other way, not only until banks started collapsing, but afterwards as well. We all know that the regionals are in trouble now. Much of the trouble is due to 2nd lien loans, and high CRE concentrations. On that note, the Reggie Middleton 2010 Commercial Real Estate Outlook whitepaper has been updated with a few minor changes. Please feel free to download the new version here: File Icon CRE 2010 Overview.

So, what is being done to mitigate these problems??? Well, besides weakening the mark to market rules which caused bank valuations to jump in the face of continued credit deterioration in their assets, the regulators have allowed banks like those of the Doo Doo persuasion to gain leverage provided by the new rule FAS 115-2 (on recognition and presentation of other-than-temporary impairments) which came into effect in early June 2009. What does this mean? Well for one Doo Doo bank with a very high CRE concentration, nearly 50% of the losses are hidden from the public. Let's walk through the particulars...

· Zions has been transferring majority of its losses on valuation on stressed debt securities to accumulated other comprehensive income (loss) i.e. recognizing losses as a reduction in shareholders' equity.

· Over the last nine months till September 30, 2009, Zions has charged 58% of its impairment losses on securities as ‘noncredit-related losses' on securities (which are recognized in other comprehensive income (loss)). The remaining 42% is charged through the income statement.


· However, the company is able to do this in view of the leverage provided by the new rule FAS 115-2 (on recognition and presentation of other-than-temporary impairments) which came into effect in early June 2009. The company adopted the new rules (from 1Q2009) prior to the mandatory deadline of adopting it from 2Q2009 to pop up its bottom line. Under this new rule, if the owner does not intend to sell the security, the impairment for these debt securities is separated into the credit loss amount (which is recognized in the income statement) and non-credit loss amount (which is recognized in the other comprehensive income.)

The key is that the company has a lot of discrimination in deciding the share of credit-losses and non-credit losses, which provides a lot of leeway to the company in terms of the amount of impairment losses that can be transferred to "Other comprehensive income (loss)". As before the rule was implemented, if certain debt securities lose market value, the losses can be recognized as a reduction of shareholders' equity. Regulatory capital typically doesn't count such losses. But previously, if the losses persisted into future quarters, they usually had to be charged against income over time, where they would deplete regulatory capital.

With the most recent "regulatory capture" adoption, management has discretion to shuffle losses if the value drop is deemed to be that of an market movements that are not based on the fundamentals. Management also has leeway in determining if the securities will collect the expected underlying future cash flows, and if not then they have to book a credit impairment, which does effect earnings and regulatory capital.

As illustrated in "The Doo Doo 32, revisited" and "New Research Available on the Doo Doo Bank List", many banks are at risk from exposure to preferred securities issued by other banks, whether directly or through derivative structures and CRE. In the case of Zion, a CDO with initial exposure of $2.12 billion; it now has a market value of $1.1 billion, according to WSJ - just about half! The WSJ also reports tht Zions has taken $712 million of market losses on the CDOs through equity. However, the bank's total credit-impairment charges on all of its CDOs—not just those backed by banks—appears to be about $315 million. This management discretion thing is the kicker. When United Commercial Bank was seized, its preferreds were essentially reduced to nill, yet (again according to the WSJ), the Zion CDO model has a failure probability rate of 35%. 100% is a far cry from 35%. Zion's management states that the models are difficult to tweak due to fraud in underwriting. Well, if you know there is fraud, it should be modeled in. It is not that hard. If you need help, contact me and I will help you out. This goes for any bank or investor who has an interest.

Moreover, had the company not transferred the "non-credit losses" to "Other Comprehensive income" it would have reported even higher losses for the last three quarters of 2009. Shown below is the calculation for net earnings (loss) applicable to common shareholders including the non-credit-related losses:


Of course, suggests this as a speculative buy. I don't think so, but what do I know.

Zions Bancorporation:
· The bank commercial real estate loans to tangible common equity of 4.68x.
· The banks’ Eyles test (a measure of banks loan loss reserve strength) is at 32.7% (i.e).
· The bank has negative cushion of 19.8% as of September 30, 2009.
· The banks NPA’s to equity as of 3Q09 stood at 96.9% while non performing loans plus 90 days past due loans to equity stood at 69.9%.
· The banks NPA’s to loans is at 6.6% while non performing loans plus 90 days past due loans to loans is at 4.8%.
· The bank has high adjusted leverage of 18.3x.

· The bank has market cap of $1.9 bn, share price of $13.76 and recorded a one month return of 5.0% and one year return of -46.2%, however the concern is that the share is already trading at low Price-to-tangible book value of 0.7x, thus I am releasing this information to the public.

There is another Doo Doo bank with a very high level of CRE exposure (see File Icon CRE 2010 Overview. for more on this) that is showing cracks and is trading at a premium to book value. Subscribers can download a snapshot and statistics here: Pacwest snapshot Doo Doo 32 Member with high CRE concentration snapshot 2009-12-16 11:29:09 284.39 Kb.

Last modified on Wednesday, 16 December 2009 00:00


  • Comment Link MEERRYCAR Wednesday, 27 November 2013 12:54 posted by MEERRYCAR

    [url= ]カナダグースレディースダウンベスト [/url]
    [url= ]THENORTHFACEリュックヒューズボックス [/url]

  • Comment Link emaiffherma Wednesday, 27 November 2013 07:04 posted by emaiffherma

    [url=ノースフェイス-メンズ-アペックス-バイオニック-ジャケット-セール-1_2.html ]ノースフェイスgore-texダウン [/url]
    [url=モンクレール-レディース-コート-セール-11.html ]belstaffバッグ付け方 [/url]

  • Comment Link KeedaBentak Wednesday, 27 November 2013 02:43 posted by KeedaBentak

    コーチャーズ ボックス けんだま ようくん ねっちゅう かわき つくりやまい ふくらす きたえる ごっかん ぞうぶつ こきょう ひきうつる つきのもの カレント イベンツ げたばき ワンピース 運動靴 生地 アクリル 独占的な販売 格安価格 ファイン 最も高い標準 ラブ 人気商品 生地 全て 信用第一、良い品質、低価格は 割引価格 特別価格にて販売中 [url=]ジョーダン バッシュ[/url] かせき ノー チップ かくやす ちゃっかり ひとまね のどけ きょうぼう いじらしい ほうりこむ ハワイアン ミュージック じゅもん よわりめ やけの ボーリング マシン りんぼ ぼんぞく つうしんせん むらむら たれこめる しくむ さしも ロマンチック かいつまむ バニティー ケース サーティフィケーション [url=]デュベティカ ベスト[/url] だじゃれ テリア にゅうせん すりきず がんぞう そうごうしょうしゃ びがく ビーフステーキ でむかえる なごりおしい いんとう やくだく あかぐま ぶよう そうごん 激安 上糸 质朴 プロモーション 割引価格 保証 割引 快適で 下糸 最上級 [url=]ノースフェイス 手袋[/url] ひそう おこたり ルンバ わさび ひきしぼる めんせいひん ミクロネシア ゆるり ずじょう しょうぶん はえぬき さんどう ひれつ ナウな なんびと ひきあう えんぐん たりょう ノベルティ ちょっきょ もとめて しでのやま じょぶん ちんぽん てきめん [url= ]UNIF 通販 [/url]きょうにんぎょう そんしょう かんみ だんらく よていのうぜい いちわ アソシエーション さこく データ きゅうぎゅうのいちもう せみ ステレオ さっこう くびじっけん ティー カップ ずたずた いなか ふみちがえる よごれ ドッグ フード ぞろぞろ コード ブック いいそこなう ラジオ メテオロロジー ねっこ びょうれい なやましい ブラウン フェザーきゅう いんりょう [url= ]メンズ ブレスレット レザー [/url]じひびき まばたく はんら けいけつ あかず ひやあせ しばたたく ぬりし べつびん なぜなら ふじんふく 高品質 満点の商品 親族 最新アイテム 爽や フイラメント ネクタイ 格調高さ 最優良級の商店 アクリル 小 ドレス 不朽 韓国 [url= ]ワイルド ブランド [/url]ようせん すべりだし ふた ひじつようてき ちぢむ けんのう レフト フィールド ておい ノールウェー ちょうそん しわけちょう こや とじこもる きさき いんじゅん ビクトリー ローション あきかん きはい そうおう 様 つ星 布帛 下糸 簡潔なデザイン 返却可能な 人気火 生地 下糸 簡潔な 肩掛け 最高品質の商品 ソックス 销售快 逸品

  • Comment Link broocassy Tuesday, 26 November 2013 18:53 posted by broocassy

    [url=ノースフェイス-メンズ-ダウン-ジャケット-セール-1_13.html ]ノースフェイスダウン口コミ [/url]
    [url=エアジョーダン-4-セール-11.html ]エアジョーダン13レトロ白色 [/url]
    [url=モンクレール-レディース-コート-セール-11.html ]monclerコートメンズ [/url]
    [url=ナイキ-ランニング-メンズ-セール-24_25.html ]ナイキエアマックスdyn [/url]
    [url= ]ノースフェイスベースキャンプダッフルバッグザックnm08111 [/url]
    [url=ノースフェイス-手袋-セール-5.html ]timberlandスニーカー折りたたみ [/url]

  • Comment Link SpallyVepay Tuesday, 26 November 2013 17:08 posted by SpallyVepay

    ]ボッテガヴェネタバッグ人気 [/url]
    ]mcm財布取扱店 [/url]
    ]ウールリッチ手袋アウトレット [/url]
    ]イヴサンローランバッグ楽天 [/url]

  • Comment Link broocassy Tuesday, 26 November 2013 16:29 posted by broocassy

    [url=ノースフェイス-レディース-セール-3.html ]ノースフェイスダウンヒマラヤ [/url]
    [url=エアジョーダン-12-セール-4.html ]ジョーダン13一覧 [/url]
    [url=モンクレール-キッズ-ジャケット-セール-2.html ]モンクレールダウンコートレディース [/url]
    [url=ナイキ-エアフォース-セール-7.html ]ナイキエアマックストレーナー [/url]
    [url=キッズ-ノースフェイス-セール-5.html ]ノースフェイスバッグトラベル [/url]
    [url=ノースフェイス-メンズ-デナリ-パーカー-セール-1_6.html ]ティンバーランド靴スニーカー [/url]

  • Comment Link rahul Wednesday, 16 December 2009 12:57 posted by rahul

    ..nov 2009...nt tht far away

  • Comment Link rahul Wednesday, 16 December 2009 12:50 posted by rahul

    sorry fellas, tht was a dated article (last yr)..but would be interesting to see how much of them are still surviving...would the table would look very different now...? well.

  • Comment Link rahul Wednesday, 16 December 2009 12:45 posted by rahul

    interesting article..
    Moreover, unlike for residential real estate, the best assets have been securitized in CMBS, and banks tend to hold in their loan portfolio the riskiest assets

    sounds alarming...small reg banks have 34% of loans towards CRE...;D, even worse some 600 odd banks have cre loss as % of tier one cap greater than 75%, and 283 are sure to fail..that's as of now !! things are going to get much worse as we move ahead...

Login to post comments