Tuesday, 03 June 2008 01:00

In the "Worst is behind us!" world of financial news

Written by

I always thought Paulson would eat those "worst is behind us" words. I wonder if he likes his verbs bland or spicey??? In today's news (and I mean early today, it is only1:44 am and already my puts are bursting at the seems with premium reading to match the week Bear Stearns went bust):

From Bloomberg:

Bradford & Bingley Plc, the U.K. lender struggling to raise cash in a rights offering, must honor a 2006 deal to buy about 2.1 billion pounds ($4.1 billion) of mortgages by the end of next year from GMAC LLC.

Customer payments are more than three months late on 5 percent of loans already purchased from Detroit-based GMAC, the car and home lender trying to avert bankruptcy for its residential mortgage unit. That's more than double the average rate for mortgagesheld by the Bingley, England-based bank, it said yesterday in a statement.

``This is what has spooked everybody,'' said Alan Beaney, who manages $2.1 billion of stocks as head of investments at Principal Investment Management in Sevenoaks, England. ``They are committed to keep buying these things.''

Rising loan defaults were ``by far the biggest factor'' in Bradford & Bingley's decision to sell a 23 percent stake to U.S. leveraged buyout firm TPG Inc., Chairman Rod Kent told analysts on a conference call. The bank fell 24 percent in London trading yesterday, the most since an initial public offering in 2000, after it slashed the price of the rights offering by a third and said the U.K. housing market is deteriorating.

The bank first agreed in 2002 to buy loans from GMAC. Steven Crawshaw, who stepped down June 1 as Bradford & Bingley's chief executive officer, renewed the deal in December 2006 and committed to buy as much as 4 billion pounds of loans a year through 2009.

Wachovia, Alt-A speculators , Countrywide, WaMu and Merrill weren't the only one's who binged on bad debt during the top of a bubble!

From WSJ:

Lehman Brothers Holdings Inc., set to report its first quarterly loss since going public, is considering raising billions of dollars in fresh capital to help shore up its balance sheet, according to people familiar with the matter.

The exact amount of the capital hike isn't known, but analysts and Wall Street executives estimate it is likely to be $3 billion to $4 billion. They said Lehman would probably announce the capital raising in conjunction with its quarterly results, due the week of June 16. The amount of new capital under consideration suggests Lehman's quarterly loss could be larger than the $300 million or so that some analysts have been expecting. Now I made it very clear that Lehman was guaranteed to take a loss this quarter because, they took an economic loss last quarter but covered it up with accounting shenanigans and smoke and mirrors. Lehman was one of the few companies that I shorted heavily despite not performing a full forensic analysis because they had too much smoke and too many inconsistencies. Starting in September of last year, I started uncovering a lot of Lehman lemmings. See my chronological smoke trail below.

On Monday, shares in the 158-year-old firm fell $2.98, or 8%, to $33.83 on the New York Stock Exchange after negative comments from two Wall Street analysts. The shares are down almost 50% this year compared with year-to-date drops of about 20% for rivals Goldman Sachs Group Inc. and Morgan Stanley. The Street's Riskiest Bank will have some surprises for us. Amazingly, S&P picked up on my view of riskiness with MS, I was shocked, and concerned to be in such company - considering their accuracy in these matters over the last year or two. The new capital would likely be raised by issuing common shares, diluting current shareholders, people familiar with the matter said.

Lehman is Wall Street's smallest independent firm now that the sale of Bear Stearns Cos. to J.P. Morgan Chase& Co. is complete (see Is this the Breaking of the Bear?). Lehman says it is well-positioned to weather the current credit-market turmoil, and its management has been aggressive at facing down its critics. Isn't that what Bear Stearns, Thornburg Mortgage, Indymac Bank and Countrywide said??!!! I am not one for litigation, but these guys seem to be pushing their luck!

In the past year, Lehman has raised $6 billion in capital, including $4 billion last quarter. The firm's financial position was further strengthened in March when Lehman, like all U.S. investment banks, was allowed to borrow directly from the Federal Reserve against a variety of collateral, which gives it ready access to considerable funding. The availability of Fed funding significantly reduces any worries that Lehman and other firms might suffer a cash crunch.

Nonetheless, some investors remain concerned that relative to its size, Lehman is holding more securities tied to both residential and commercial real estate than any other big Wall Street broker, according to Bernstein Research.

Mortgage Exposure

"Lehman still has a lot of exposure to the mortgage market, and they are going to need capital to get through it," said UBS analyst Glenn Schorr.

On Monday, Standard & Poor's cut long-term debt ratings on Lehman, Merrill Lynch& Co. and Morgan Stanley. The credit-rating agency focused in particular on Lehman, saying it expects a "relatively meaningful deterioration" in the firm's earnings for its second quarter, which ended May 31.

Also Monday, Merrill Lynch analyst Guy Moszkowski lowered his rating on Lehman stock to underperform from neutral. Oppenheimer & Co. analyst Meredith Whitney swung her earnings forecast to a loss from a profit. What took so long Meredith? You are usually lock step with me...

The immediate impact of the S&P downgrade will likely be minor, but the downgraded firms may face slightly higher borrowing costs. The cost of buying protection against a default at Lehman Brothers increased by $15,000 Monday, bringing the cost to $245,000 for five years of protection on $10 million of debt.

In contrast to Bear Stearns, Lehman has successfully raised capital, sold off risky securities and responded forcefully to rumors about its situation. After its most recent capital raising on March 31, its gross leverage ratio -- a measure of borrowing relative to assets -- fell to a more conservative 27.3 from 31.7 at the end of its first quarter in February. The figure is expected to be down to 25 as of the end of the second quarter. Semantics! There's more conservative, and then there is conservtive. None of the banks that use proprietay trading as a revenue source have conservative leverage ratios. In addition, I believe this reduction to be smoke in mirrors, in part because they have reduced the balanc sheet but retained the risk of the assets that that they shed, simply in another form. It can be seen as actually concentrating the risk in and attempt to placate naive investors (as in less knowing, not meaning to be offensive) shareholders. See the CLO funny business towards the end of the long list below.

In a statement, a Lehman spokesman said: "It is our clearly articulated strategy to reduce the size of our balance sheet this quarter." What you need to do is reduce the risk of your balance sheet, and make that your stated goal. No more smoke an mirrors.

Lehman's long-serving chief executive, Richard Fuld Jr., has experience in tough situations. In 1998, he fought off rumors about a cash crunch that were triggered by the near-collapse of hedge fund Long-Term Capital Management.

But Lehman's second-quarter results are expected to show some fresh difficulties. The firm is saddled with billions of dollars in hard-to-sell commercial real-estate assets and leveraged loans and is expected to face further write-downs on these portfolios. That has led the firm to consider raising additional capital. Wall Street firms including Merrill Lynch and Morgan Stanley have also raised billions of dollars as losses from the mortgage meltdown have mounted.

If Lehman proceeds with plans to raise capital, it is expected to do so by issuing common stock, the first such issue since it went public in 1994. In its earlier capital raising over the past year, it issued preferred shares, a stock-bond hybrid that doesn't dilute the ownership of common shareholders. D-I-L-U-T-I--V-E at a time when there are scant earning to go around to the shares that are already in existence. When will (foreign) investors learn that you are throwing your money down the tubes by funding these institutions at this point in the game. Just sit back and look at how much money was loss with the BSC, C, MS, and the whole list that is too long to run through, gamut of I-bank investments that were made over the past year. I don't want to hear that "this is a long term commitment nonsense either. Why don't you guys make your long term commitment at HALF the price by waiting until next year. Hey, I'm a long term player too. That doesn't mean I voluntarily burn my money like matchsticks.

While a common-share issue will hurt Lehman's already-suffering shareholders by diluting their ownership stake, rating agencies and regulators like to see a balance of common and preferred shares. That is why Lehman will likely go the common-share route.

Stung by Hedges

During the second quarter, Lehman was stung by hedges used to offset losses in real estate and other securities, according to people familiar with the matter. The firm bet that indexes tracking markets such as real-estate securities and leveraged loans would fall. If that happened, it would book profits that would make up some of its losses from holding these securities and loans.

However, in an unexpected twist, some of the indexes rose, even as the assets they were supposed to hedge against continued to lose value or stayed relatively flat. Lehman's losses from both write-downs on assets and ineffective hedges will likely top $2 billion, people familiar with the matter said. Lehman will also realize additional losses related to its decision to reduce its work force, according to a person familiar with the matter. I warned about bad hedges in February in the Morgan Stanley opinion: Street's Riskiest Bank .

The S&P downgrades came after the ratings agency completed a review of the entire securities industry. S&P said it believes Lehman and other securities dealers' revenues may decline more than anticipated based on the firms' still large exposures to illiquid and hard-to-value assets.

S&P analyst Scott Sprinzen said the Federal Reserve's decision to allow brokers to borrow money directly from the Fed, "gave us the comfort not to go further with some of the downgrades that we did," he says. "But we can't count on that indefinitely."

S&P cut Lehman's rating to A from A+, and also cut the ratings of Morgan Stanley to A+ from AA- and Merrill Lynch to A from A+. Despite the downgrades, the firms are still considered high-quality investment-grade credits. S&P affirmed Goldman Sachs's ratings at AA-, but revised its outlook of the firm to negative.

Now reflecting on why I haven't doubled down on Lehman more than the once or twice that I dipped in to the coffers... I am resource constrained. If I had more analytical firepower I would have really had a homerun position. I have hefty proportionate position as it is, but let's reminisce on the ruminations that was (notice the dates on each snippet while remembering that I started bloggin in September). Call this the chronological anatomy of a short selling blogger's tale of speculative anecdotal research and use the chart to peg the comments to Lehman's share price...

lehchart.gif

52. Opinions on Countrywide's Business Practices and Management
(Reggie Middleton's Boom Bust Blog/MyBlog)
...e other one? I do not know, and I am guessing. Bear Stearns? Bear was looking for liquidity in China. But Lehmanis also a possibility. If it sounds odd that Warren would consider owning a bank/thr...
Wednesday, 05 September 2007

... homeowners and more profitable to Countrywide. From my experience, there is evidence of this from LehmanBrothers, Washington Mutual and potentially IndyMac Bank as well. I am fairly sure that...
Saturday, 08 September 2007

...t 10 percent of that group's head count, people familiar with the situation told Reuters on Oct. 11. Lehman Brothers Holdings said it will fire another 850 workers, or about 3 percent of its work...
Friday, 26 October 2007

...their shares more than halved in the last few months. I was short these companies. CFC may go bankrupt); Lehman brothers has some losses to contend with as well, but I don't know to what extent s...
Thursday, 29 November 2007
57. Dangerously Close to a Money Panic by Martin D. Weiss Ph.D.
(Reggie Middleton's Boom Bust Blog/MyBlog)
...oney panic could ... Threaten the solvency of major Wall Street firms like Bear Sterns, Goldman Sachs, LehmanBrothers, Merrill Lynch or Morgan Stanley. Increase the risk of future failure amo...
Wednesday, 05 December 2007

58. Banks, Brokers, & Bullsh1+ part 1
(Reggie Middleton's Boom Bust Blog/MyBlog)
A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered... Last week, Morgan Stanley called Citibank the “short play o
Wednesday, 19 December 2007

59. Banks, Brokers, & Bullsh1+ part 2
(Reggie Middleton's Boom Bust Blog/MyBlog)
... 29.8 188.0 20.3 Lehman Brothers 79.2 168.4 34...
Wednesday, 19 December 2007

60. Bubble, Banks and Builders
(Reggie Middleton's Boom Bust Blog/MyBlog)
... saying they saw billions of dollars of charges as a result of the fallout from the recent credit crisis. LehmanBrothers Holdings Inc. (LEH) last month reported a 3% slide in its third quarter earnin...
Monday, 24 December 2007
61. Fitch finally found my blog and cut Ambac's rating, So what's next...
(Reggie Middleton's Boom Bust Blog/MyBlog)
... $199 $199 Lehman Brothers $62 ...
Saturday, 19 January 2008
63. The Riskiest Bank on the Street
(Reggie Middleton's Boom Bust Blog/MyBlog)
... spread increased to 150 basis points, the five-year CDS spread increased to 180 basis points compared to Lehman Brothers’ spread of 192 basis points and Goldman Sachs’ 102 basis points. ...
Monday, 11 February 2008

64. Here comes the CRE bust!
(Reggie Middleton's Boom Bust Blog/MyBlog)
From the WSJ: Now, Lehman Gets Pelted Many investors have been surprised at the ability of Lehman Brothers Holdings Inc. to navigate the credit crunch, given the size of its expo
Tuesday, 19 February 2008

65. Is Lehman really a lemming in disguise?
(Reggie Middleton's Boom Bust Blog/MyBlog)
This is an email I got from one of the individual investors of who frequent the blog before Lehmanannounced its record writedown. It appears as if he was onto something! "I think Lehman may be
Thursday, 21 February 2008

66. Nuggets of Reggie Wisdom for today's asset backed market
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ritten down $100 million off of its CMBS portfolio. It is not even a top ten player --- Wachovia is #1, Lehman has $40B of this on books, then you have BSC and MS. Sell side analysts are ...
Thursday, 21 February 2008

67. I know who's holding the $119 billion dollar bag!
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ley $22,956,101,796 $31,269,000,000 73.41% MS ABS Inventory Lehman Brothers $3,151,328,632 $22,490,000,000 14.01% LEH ABS ...
Monday, 25 February 2008

68. As I was harping on relying on Name Brands...
(Reggie Middleton's Boom Bust Blog/MyBlog)
...alysis and opinion on the topic, not to mention the banks that will suffer from it such as Bear Stearns, Lehman (contributed by a reader) and Morgan Stanley . Name brands issue the same warning 6 mo...
Monday, 03 March 2008
70. Beware of the bullsh1t, it has come back to bite the banks and brokers
(Reggie Middleton's Boom Bust Blog/MyBlog)
...lysts estimate could leave the funds' 14 lenders -- including Deutsche Bank AG, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co., Morgan Stanley (Banks, Brokers, & Bullsh1+...
Friday, 07 March 2008

71. Counterparty risk chatter around the Web
(Reggie Middleton's Boom Bust Blog/MyBlog)
... Ritholtz: Brokers' exposures to CCC: numbers making the round on trading desks: -Citibank (C) $4.7B -Lehman(LEH) $3B -BoA (BAC) $2B -UBS $1.8B -Bear Stearns (BSC) $1.7B -ING $1.5B -JPM...
Friday, 14 March 2008

72. Companies that I'm keeping my eye on
(Reggie Middleton's Boom Bust Blog/MyBlog)
Lehman Brothers has a lot of risk in common with BSC. You all know how I feel about Morgan Stanley. I am short these, as well as any other company that I am negative on, of course.
Friday, 14 March 2008

73. Lehman speculaters looking for blood
(Reggie Middleton's Boom Bust Blog/MyBlog)
...acute contagion from the liquidity disease afflicting Bear Stearns today appears to be festering at Lehman Brothers, which joins fellow brokerages in reporting earnings next week. New jitters...
Saturday, 15 March 2008

74. The "Short Me, Please" phrase!
(Reggie Middleton's Boom Bust Blog/MyBlog)
...Inc., Merrill Lynch & Co. and Morgan Stanley. Aside from Bear, whose shares fell 47%, Lehman Brothers Holdings Inc. incurred the most investor wrath. Shares of the firm, which i...
Saturday, 15 March 2008

75. Web chatter on Lehman Brothers
(Reggie Middleton's Boom Bust Blog/MyBlog)
WSJ: Lehman's liqudity position stronger than BS was but weaker than other peers. Lehmanlearned lesson from 1998 liquidity crunch: less reliance on short-term funding. Cumberland: Main diffe
Sunday, 16 March 2008

76. A closer look at the exposure of the other brokers
(Reggie Middleton's Boom Bust Blog/MyBlog)
In looking at the brokers, trying to get a handle on how much risk Lehman has versus Morgan, I see that many are looking at Lehman Brothers due to their RMBS and CMBS exposure. Those are very good re
Sunday, 16 March 2008

77. The newest on BSC
(Reggie Middleton's Boom Bust Blog/MyBlog)
...errill Lynch, where middle managers are bracing for cuts of 10 percent across the board. Also sources say LehmanBothers will likely be in for turbulence given its own holdings of risky commercial rea...
Sunday, 16 March 2008

78. WSJ on brokerage liquidity
(Reggie Middleton's Boom Bust Blog/MyBlog)
...rokerages, Bear's cash reserve gives it the least cushion for a cash crisis. This same analysis makes Lehman's cash cushion look slimmer than its peers', although on other measures it is just ...
Sunday, 16 March 2008

79. This is going to be an exciting, and scary morning
(Reggie Middleton's Boom Bust Blog/MyBlog)
... I believe in medium to long term investment horizons, but there is a LOT of opportunity to be had here. Lehman is probably going to get a drubbing. Morgan Stanley is being overlooked by the Street....
Monday, 17 March 2008

80. Additional points to look at as trading starts
(Reggie Middleton's Boom Bust Blog/MyBlog)
...p it. Even if they could, they can't stop all of them by supplying money. If there is a run on the bank, Lehman is next in line. I mention this because if you really read my pieces - Banks, Brok...
Monday, 17 March 2008

81. I just got this email on Lehman from my clearing desk
(Reggie Middleton's Boom Bust Blog/MyBlog)
"Please be advised that current margin requirements for LehmanBrothers Holdings Inc (LEH) are currently under review by our Risk Management group and will likely be increased shortly. Please tak
Monday, 17 March 2008

82. More real time LEH blogging
(Reggie Middleton's Boom Bust Blog/MyBlog)
Lehmanis now officially in trouble, losing almost 50% of their value from last week. I couldn't fathom the put prices so went in naked short. Turning out well on top of my extant deep in the mone
Monday, 17 March 2008

83. On the insolvencies of non-bank financial institutions
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ight The Breaking of the Bear The Riskiest Bank on the Street Here comes the CRE Bust (Quip on Lehman Brothers) Is Lehmana Lemming in Disguise (from a conributing individual investor) ...
Tuesday, 18 March 2008

84. Thoughts for the day
(Reggie Middleton's Boom Bust Blog/MyBlog)
According to the WSJ.com, Lehmandid a phenomenal job at damage control, most likely learning their lesson from Bear Stearns. Goldman and Lehmanbeat estimates, but that is not as posi
Tuesday, 18 March 2008

85. I believe the rally may continue, but for I banks it is not deserved
(Reggie Middleton's Boom Bust Blog/MyBlog)
From CNBC.com : LehmanBrothers Holdings is unlikely to face the kind of liquidity crisis that brought down Bear Stearns over the weekend because of the Federal Reserve's decision
Wednesday, 19 March 2008

86. Something stinks!
(Reggie Middleton's Boom Bust Blog/MyBlog)
As far as I can discern, Lehmaneffectively had a run on the bank Monday. They admitted portions of it in the WSJ article I linked to earlier, and word is that many clients left to the tune of several
Wednesday, 19 March 2008

87. Overview of recent Fed activities
(Reggie Middleton's Boom Bust Blog/MyBlog)
March 19: Lehman, Goldman, Morgan Stanley tap dealer's discount window: "no stigma attached, just alternative source of financing" March 16: Federal Reserve Board: Federal Reserve Bank of New Y
Thursday, 20 March 2008

88. Quick Morgan Stanley update from my lab
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ne with other brokerage firms, is expected to show a decline in investment-banking revenues. In 1Q08, Lehman brothers and Goldman Sachs reported a 20% and 16.4% y-o-y decline in net revenues. As...
Thursday, 20 March 2008

89. Nouriel Roubini on many of the concerns that I have touched upon
(Reggie Middleton's Boom Bust Blog/MyBlog)
...his lending is now toxic – are not achieving their goals: in the short run the risk of a run on a Lehman may have been reduced; but what is happening in the money markets and in the agency m...
Thursday, 20 March 2008

... Goldman Sachs Group Inc. said yesterday that they borrowed to ``test'' the new lending facility. LehmanBrothers Holdings Inc. Chief Financial Officer Erin Callan said in a Bloomberg Televisi...
Friday, 21 March 2008

...te-downs of over $3bn for Barclays, RBS and SocGen, and of over $6bn for UBS . Lehman has been in my bearish sites, but until now I have not put the microscope on them. Th...
Saturday, 22 March 2008

92. I bank ratings, CMBX and condos
(Reggie Middleton's Boom Bust Blog/MyBlog)
...as a whole, is entering steep cyclical decline. From the Wall Street Journal : S&P Flags Goldman, LehmanStandard & Poor's, in a continuing sign of loss of confidence in investment banks...
Monday, 24 March 2008

93. Interesting article on bank risk analytics, BSC and JPM
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ause of the conflicted role played by the Fed of New York. Does anyone believe that the Fed would force Lehman Brothers (NYSE:LEH) or Goldman Sachs (NYSE:GS) into such a fire sale? Indeed, it looks...
Tuesday, 25 March 2008

94. It looks as if Lehman is under assault againg
(Reggie Middleton's Boom Bust Blog/MyBlog)
Their share price is down about 10% and they came out with a public statement saying that they believe short sellers are spreading negative rumors. I think this company is extremely vulnerable, not o
Thursday, 27 March 2008

95. Lehman stock, rumors and anti-rumors that support the rumors
(Reggie Middleton's Boom Bust Blog/MyBlog)
From CNBC : NEW YORK (Reuters) - Shares of Lehman Brothers fell by nearly 10 percent in early New York trading on Thursday on rumors that the fourth largest U.S. investment bank could
Friday, 28 March 2008

96. Lehman rumors may be more founded than some may have us believe
(Reggie Middleton's Boom Bust Blog/MyBlog)
From WSJ.com: LehmanMoves to Raise$3.45 Billion in Fresh Capital Lehman Brothers Holdings Inc., facing persistent if vague rumors of financial trouble that have driven down the value of
Tuesday, 01 April 2008

97. Interesting article from Forbes on the Street
(Reggie Middleton's Boom Bust Blog/MyBlog)
...o 2006 the five big independent firms - Goldman Sachs (GS, Fortune 500), Merrill Lynch, Morgan Stanley, LehmanBros. (LEH, Fortune 500), and Bear Stearns - tripled earnings to more than $30 billio...
Tuesday, 01 April 2008

99. Henry Blodget on Lehman
(Reggie Middleton's Boom Bust Blog/MyBlog)
... one interesting point here that I need to followup on, and that is counterparties running away. I heard Lehmanlost a few billion worth of clients and counterparties. Lehman Brothers Too Big ...
Wednesday, 02 April 2008

100. Super SIV, part deux
(Reggie Middleton's Boom Bust Blog/MyBlog)
...d assets, which have been responsible for more than $30bn of losses so far. The banks – among them LehmanBrothers - aim to move at least some troubled assets off their balance sheets by selli...
Thursday, 03 April 2008

101. Funny CLO business at Lehman
(Reggie Middleton's Boom Bust Blog/MyBlog)
From Bloomberg, we have a case where Lehman has quickly degrading assets that are producing significant losses which it is selling to a shell entity type that has caused tens of billions of lo
Friday, 04 April 2008
These are in reverse chronological order:
52. Crystal balls with strong batteries and the pursuit of the truth
(Reggie Middleton's Boom Bust Blog/MyBlog)
...on the banking sector, after Standard & Poor's lowered its ratings on several securities giants - Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley. In its commentary ...
Monday, 02 June 2008

53. Doo-Doo bank drill down, part 1 - Wells Fargo
(Reggie Middleton's Boom Bust Blog/MyBlog)
... with little or no market, and sell them at a gain of $323 million on top of it. The guys at Countrywide, Lehman, Bear Stearns, Morgan Stanley, Merriill Lynch, UBS, HBOS, and a whole hell of a lotta o...
Friday, 30 May 2008

54. Will this be the first domino in the CDS collapse?
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ley $22,956,101,796 $31,269,000,000 73.41% MS ABS Inventory Lehman Brothers $3,151,328,632 $22,490,000,000 14.01% LEH ABS ...
Tuesday, 27 May 2008

55. It appears that I should have dug deeper into Lehman!
(Reggie Middleton's Boom Bust Blog/MyBlog)
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. Th
Friday, 23 May 2008

56. I warned you about the risk of those I Banks
(Reggie Middleton's Boom Bust Blog/MyBlog)
...part 2. Well, it looks like this quarter the chickens will start coming home to roost. Lehman, Goldman and Morgan Stanley have experienced (on a larger scale) similar issues that I ...
Wednesday, 21 May 2008

57. Lehman has already spent all of the "confidence" money it just raised
(Reggie Middleton's Boom Bust Blog/MyBlog)
Lehman Brothers raised $4 billion dollars to allegedly "prove" to the market that it was liquid and had confident investors and trading partners. I didn't believe that to be the real reason then an
Wednesday, 21 May 2008
59. Discounts? Yes. Firesale? Just wait...
(Reggie Middleton's Boom Bust Blog/MyBlog)
...al securities and of alternative investments at Credit Suisse Group. Among the notable reductions: LehmanBrothers Holdings Inc., which had $36.1 billion in commercial mortgages and CMBSs when...
Friday, 09 May 2008

... 14% 14% 25 LEHMAN BROTHERS COML BK 5,834 0...
Thursday, 08 May 2008
61. Patience is a virtue
(Reggie Middleton's Boom Bust Blog/MyBlog)
...d. The five biggest Wall Street firms had their largest share- price declines in at least a month. Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, led the way, losing $2...
Thursday, 08 May 2008

62. Mr. Mortgage on Lehman, again
(Reggie Middleton's Boom Bust Blog/MyBlog)
This guy explains the fodder that went into the Lehman portfolio. It makes one wonder exactly how they "hedged" all of that risk. I think it's safe to assume that those hedges have a decent amount o
Tuesday, 06 May 2008

63. Lehman legal issues should bring to light some interesting discovery
(Reggie Middleton's Boom Bust Blog/MyBlog)
... of those subprime questions you had about the Wall Street banks. Questions like that posed by the guy on LehmanTV ! This could be it. Reference the following press release: Schiffrin Barroway...
Wednesday, 30 April 2008

64. Banks, Brokers & Bullsh1t - v.3.1
(Reggie Middleton's Boom Bust Blog/MyBlog)
...rt 1 Banks, Brokers, & Bullsh1+ part 2 Banks, Brokers & Bullsh!t part 3 - Shenanigans at Morgan and LehmanI know who's holding the $119 billion dollar bag! Is this the Breaking of the Bea...
Friday, 25 April 2008

65. Banks, Brokers & Bullsh1t 3.0: Shenanigans at Morgan and Lehman
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ks collude or if a sufficient number change their behaviour." In another story regariding the Lehman packaging of leveraged loans to sell ,sorry about that, I meant "lend" to the Fed, in o...
Wednesday, 16 April 2008

66. 3 day old fish does smell pretty bad, regardless of where you put it
(Reggie Middleton's Boom Bust Blog/MyBlog)
...tail today, sharing a part of my model to show how bad the earnings actually were from Morgan Stanley and Lehman last quarter. Lehman actually took a loss, while Morgan practically doubled their "...
Monday, 14 April 2008

67. Herb Greenberg, et. al. make my point on Lehman's CLO better than I did
(Reggie Middleton's Boom Bust Blog/MyBlog)
When the LehmanCLO story first broke, I jumped all over it for the bullsh1t that it really was. I was working with incomplete information, though. Here is a more complete vetting of the bovine excr
Saturday, 12 April 2008

68. The bankruptcies that I predicted are here
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ning now and addition... Thursday, 20 March 2008 10. Funny CLO business at Lehman / Comments by 2and20 (Funny CLO business at Lehman / Comments by 2and20) ...
Friday, 11 April 2008

69. Reggie Middleton on the Street's Riskiest Bank - Update
(Reggie Middleton's Boom Bust Blog/MyBlog)
...nbsp; 42.7 43.9 3.95 5.73 5.83 Lehman Brothers LEH 43.3 554 17,128 20,113 ...
Sunday, 06 April 2008

70. Funny CLO business at Lehman
(Reggie Middleton's Boom Bust Blog/MyBlog)
From Bloomberg, we have a case where Lehman has quickly degrading assets that are producing significant losses which it is selling to a shell entity type that has caused tens of billions of lo
Friday, 04 April 2008

71. Lawsuits are making that turn at Wall Street and Broad
(Reggie Middleton's Boom Bust Blog/MyBlog)
...he last 15 months—the subprime-related class-action suits include cases against J.P. Morgan Chase, LehmanBrothers, Regions Morgan Keegan funds, and TD Ameritrade, as well as two class actions...
Friday, 04 April 2008

72. A quick thought on the recent Lehman offering
(Reggie Middleton's Boom Bust Blog/MyBlog)
Being that Lehman's common stock historical volatility is a tad shy of 201%, implying a significant risk premium, are preferred buyers of Lehman stock being adequately compensated for the risk the
Friday, 04 April 2008

73. Lehman TV
(Reggie Middleton's Boom Bust Blog/MyBlog)
I am impressed by the energy of this Mr. Mortgage guy! He's right about Lehman's lending practices as well. Unlike Bear, they were vertically integrated and actually underwrote loans to feed thier
Friday, 04 April 2008
Th
Monday, 02 June 2008 01:00

Doo-Doo Bank 32 Drill Down - part 3, Sun Trust Bank

Written by

This is the 16th installment of Reggie Middleton on the Asset Securitization Crisis series. It was supposed to end at 15 parts, but by popular demand and partially due to the fact that I can't count, we will be extending it considerably past 20 parts. This is part is a drill down on Doo-Doo 32 member, Sun Trust Bank.

The Asset Securitization Crisis Analysis road-map to date:

•5. Municipal bond market and the securitization crisis - part I

And here we go...

SunTrust Bank observations

Loan Portfolio:

image015.png

Large exposure to real estate loans: SunTrust Bank (STI) has a significant exposure to real estate loans which together stood at around 60% of its total loans of around $124 bn as on March 31, 2008. Within the real estate category, residential mortgages accounted for the largest share at 27% of the total loans while home equity lines and real estate construction loans accounted for 12% and 10% of the total loans, respectively. Such a high proportion of real estate loans in the loan portfolio makes STI highly susceptible to rising troubles in the real estate market which have not shown any signs of waning over the past few quarters. Further, in spite of the bank's balance sheet asset/liability and risk management strategies, there has not been any significant change in its loan composition over the last year. This causes me to significantly question the capability of management to whether, or even to recognize, the coming storm. The real estate loans have only marginally declined to 60% as on March 31, 2008 from 61% a year earlier, which makes no sense unless the company believes that the real estate market will turn positive some time soon (see graph below for the likelihood of that happening).

Increasing NPAs and charge-offs are on a very strong uptrend in just the one past year, one that cannot and should not be ignored:

STI's nonperforming assets (NPAs) as a percent of loans have been increasing consistently over the last few quarters, having gone up to 1.88% in 1Q08 from 0.64% in 1Q07 - considerable 294% increase.

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Non-performing loans in real estate construction category have recorded the most significant upward movement from 0.39% of total real estate construction loans in 1Q07 to 4.01% in 1Q08 - a NIGH UNBELIEVEABLE 1,028% increase!

The increase in residential mortgages NPLs has also been noteworthy, with NPLs as a percent of residential mortgages rising to 3.95% from 1.30% over the period - an alarming 304%.

image009.png

Gross charge-offs in the real estate loans have also witnessed a stupendous rise over the last year commensurate with rising delinquency levels in the US economy. Gross charge-offs in real estate loans as a percent of real estate loans increased to 0.31% in 1Q08 from 0.04% in 1Q07 (775% - nearly an 8 fold increase) with most significant increases recorded in home equity lines, real estate construction and residential mortgages.

STI's loans 90 days or more past due and still accruing have also witnessed significant increase over the last year, doubling from 0.32% of the total loans in 1Q07 to 0.60% of the total loans in 1Q08. Be aware that this figure is susceptible to manipulation by management - ala Wells Fargo. I haven't encountered any firm evidence of such, but I haven't looked for it with a fine tooth comb either.

Higher provisions have diminished the bank's net earnings: As a result of rising NPAs and charge-offs, STI has been forced to increase its provisions to cover its expected loan losses which seem to be on a consistent rise. STI's provision for loan losses has increased nearly 10 times to $560 mn in 1Q08 from $56 mn in 1Q07. STI's rising provision levels are eroding its income levels as is apparent from the fact that while the bank's net interest income before provision for losses in 1Q08 has fallen a nominal 2.1% over the last year, its net interest income after provision has dipped a drastic 47.7% over the period. Consequently, STI's diluted EPS has declined 43.8% to $0.81 from $1.44 in 1Q07.

STI's provision for losses as a percent of NPAs has more than tripled to 24.14% from 7.57% over the period indicating the bank's rising expectation of its NPAs converting to losses. However, STI's reserve for loan losses still seems inadequate considering its large exposure to real estate loans. The bank's end-of-the-period allowance for loan losses has dipped to 66.61% as at the end of 1Q08 from 138.61% a year earlier which indicates that rising charge-offs are fast eating up the bank's reserve cushion which is not being sufficiently compensated by the provision charge to the income statement.

Rising Texas ratio a cause for concern: As a proportion of shareholders' equity, STI's NPAs have risen from 4.2% in 1Q07 to 12.6% in 1Q08. Owing to corroding cushion of shareholders' equity and loan loss allowance to cover rising NPAs, STI's Texas ratio (NPAs including 90 days past accruing loans to the sum of tangible shareholders' equity and reserve for loan losses - a measure that proved to be quite predictive of failures in Texas during the S&L crisis) has risen steeply over the past few quarters as depicted below. Keep in mind that I have not performed a full blown forensic accounting of STI, thus I am sure there is a lot of trash in the published, spam out-o-the-can tangible equity figures that would not be in my home brewed calculations. Thus, this Texas ratio is quite possibly understated (100%) means effectively insolvent). I will update these figures for the full Doo-Doo 32 and add my own twist to it in order to make it more realistic in today's environment.

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Declining trend in real estate construction and consumer loans off set by growth in other loans: Over the last four quarters, STI has witnessed continual decline in its real estate construction loans which have gone down 5.8% in 1Q08 over 4Q07 following a 4.1% decline in 4Q07 over the preceding quarter. However, the other classes of real estate loans have each witnessed a nominal growth with a result that the total real estate loans have increased 4.5% in 1Q08 over the level one year before. This has resulted in the bank's total real estate exposure to total loans remaining nearly same over the year. The continual deterioration in the housing sector has now spread to the other categories of loans as well, including commercial loans, home equity and consumer loans, besides bringing the entire US economy in its ambit. Under such worsening conditions, STI faces a serious threat to its future earnings in the form of rising loan losses. Why this company has not reduced its balance sheet exposure and unadjusted leverage ratio of 6.9x (most likely greater when economically adjusted) is beyond my reckoning! I may not be a successful bank exec, but I can sure see a train wreck coming when that beaming bright light starts to bounce off of my forehead!

SUNTRUST 1Q-2008 4Q-2007 3Q-2007 2Q-2007
US$ mn
Loan Composition
Commercial

37,306.9

35,929.4

34,969.7

34,362.8

Real Estate:

Home equity lines

15,134.3

14,911.6

14,598.8

14,303.7

Real estate construction

12,980.9

13,776.7

14,359.0

14,417.9

Residential mortgages

33,092.4

32,779.7

31,603.9

30,759.2

Commercial real estate

12,893.7

12,609.5

12,487.3

12,416.3

Total Real Estate

74,101.4

74,077.5

73,049.0

71,897.2

Total commercial and real estate

111,408.2

110,006.9

108,018.7

106,260.0

Consumer:

Consumer direct

4,192.2

3,963.9

4,419.3

4,391.7

Consumer indirect

7,305.2

7,494.1

7,642.1

7,739.4

Credit card

807.6

854.1

668.4

396.6

Total consumer

12,305.0

12,312.1

12,729.7

12,527.7

Total Loans

123,713.2

122,319.0

120,748.4

118,787.7

% Change over preceding quarter

1Q-2008

4Q-2007

3Q-2007

2Q-2007

Commercial

3.8%

2.7%

1.8%

2.6%

Real Estate:

Home equity lines

1.5%

2.1%

2.1%

1.9%

Real estate construction

-5.8%

-4.1%

-0.4%

1.7%

Residential mortgages

1.0%

3.7%

2.7%

1.7%

Commercial real estate

2.3%

1.0%

0.6%

-0.3%

Total Real Estate

0.0%

1.4%

1.6%

1.4%

Total commercial and commercial real estate

1.3%

1.8%

1.7%

1.8%

Consumer:

Consumer direct

5.8%

-10.3%

0.6%

2.3%

Consumer indirect

-2.5%

-1.9%

-1.3%

-1.3%

Credit card

-5.4%

27.8%

68.5%

5.5%

Total consumer

-0.1%

-3.3%

1.6%

0.1%

Total Loans

1.1%

1.3%

1.7%

1.6%

On an overall scale, STI's total loans are 5.8% up from 1Q07 levels primarily off growth in commercial loans, home equity loans, and residential mortgages. We believe that the strategy of offsetting exposure to real estate construction and consumer loans through higher commercial and residential mortgage loans would not help the bank in mitigating the overall risk to its balance sheet in the form of risky loans prone to higher delinquencies. My analysts wrote that last bit. You know I'm much more of a smart ass than that. They put it nicely. My take is, "Their out of their damn minds!"

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See the following for my take and research on the prospects of growing your balance sheet in those "other" loan categories:

  1. Capital, Leverage and Loss in the Banking System
  2. The Commercial Real Estate Crash Cometh, and I know who is leading the way!

Hmmm! See the following (in order) and then perform your daily scan of the today's news stories. Your friends may think you have a crystal ball, or know a blogger that pursues the truth for a living...

  • Banks, Brokers, & Bullsh1+ part 1
  • Banks, Brokers, & Bullsh1+ part 2
  • The Riskiest Bank on the Street
  • Reggie Middleton on the Street's Riskiest Bank - Update
  • Excerpted from WSJ's Market Beat Blog:

    Banks Hammered On S&P Report

    Posted by David Gaffen

    The market's slump in the last half-hour can be attributed to more negative analysis on the banking sector, after Standard & Poor's lowered its ratings on several securities giants - Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley.

    Lehman

    In its commentary the ratings agency said earnings improvement for the brokerages will not be as strong as had been previously expected. They lowered the "counterparty credit ratings" on the three brokerages, and moved several banks, including Citigroup Inc., to a negative credit watch, putting it on notice for potential downgrades at a later date.

    The securities firms have struggled since the blow-up of the subprime mortgage sector in the middle of 2007, and have since written off billions in bad debts related to securitizations of mortgages, as well as in other credit areas. The brokerages have attempted to assuage investors by raising capital, but S&P notes in its release that "the quality of capital has suffered in that much of the capital was in the form of hybrid securities."

    Bennet Sedacca, president of Atlantic Advisors LLC, notes in commentary today as well that these capital-raises have become increasingly pricey. "While the market has been open for those willing to raise money in the capital markets, it is open at stubbornly high rates," he writes

    Monday, 02 June 2008 01:00

    Where are the experts? Really?

    Written by

    I thought I would post this comment for more to see. It runs well with my pundit post a few months back.

    Reggie,
    Outstanding work on the Doo-Doo posts! The other day somebody posted a link to a Dick Bove article where he recommended some regional banks. Since most of what Bove recommended were on the Doo-Doo list, I put these positions on paper Friday morning. If one were to take Bove's recommendations to buy vs my personal decision to short based on what I read here, Bove would be down $2900 vs an upside of $200+ on the short side. I'll put it in a spreadsheet and send it to you. The list is buying or shorting the stock as well as purchasing calls and puts. It just depends on which side of the trade you want.
    The Doo-Doo side of the trade based upon factual data provided by you and this site or the Buy-Buy (should be by-by) side of the trade by Bove.
    Bove did have one bright moment in a Bloomberg article today. It's the article titled with: +2 + -2 = 4. A GREAT article to read, too. Bove describes "Statement 159" and how it affects company financial statements. Let's give the bozo a pat on the back for actually doing his main job as an analyst for once. Oh, if it was not already known, Bove's second job is..... well, somebody on NYSE floor should just yell: "Hey, Cool-Aid" and he'll come crashing through the wall looking like the Cool-Aid character from the adds years back (just dated myself). I'm sure many other "trusted" figures would come running in too. Wall Street, The Media, Paulson, etc. - Hopefully the public is starting to see that the Cool-Aid has been flowing for a long time.
    What I think is funny (it's actually pretty sad) is that all of a sudden, little stories of what you've been posting since LAST YEAR are starting to trickle out. The media makes it sound as if it's a recently broken story!
    Meredith Whitney will have the last laugh on those who piled on her warning comments as "overblown". There are a few trying to do the right thing!
    I'm glad I bought put positions in WB last week! I'm sure everyone will see the Wachovia CEO news today. You know, it's interesting seeing the amount of media stories that came out since the market close last Friday. Hhmmmmmmmmm??????? I wonder if it has to do with the 2nd Quarter closing? They couldn't have been hiding the balance sheet horrors in order to do some stock performance window dressing? No, that would be wrong since "the worst is over", right? Yea.... have a little more Cool-Aid America.

    Thanks for your hard work in doing the right thing with this blog. We hear all these guest speakers on the financial shows stating: "the worst is over", "now is the time to buy financial companies." If they've done half as much homework as you have, they'd be saying the opposite!

    Looking forward to the next info you have to share.

    kcdallas23

    My reply:

    I loved that commercial. I used to love Kool Aid, too! smilies/grin.gif smilies/grin.gif
    Since it may not be appropriate for me to do it, you should go to my personal page
    and download the pundit tool. Fill it out with all of the new and old
    stocks reviewed on this blog along with the stock prices on the date
    blogged. Then apply today's pricing. You will see that I don't have a
    lot in common with analysts and pundits you see on CNBC, et. al.

    As for Bove's article today, we hashed that out months ago in the discussion forums with StockenFraud and Reggie Middleton on the Street's Riskiest Bank - Update

    Post
    the updated model or send it to me and I will post it on your behalf.
    Let's see how the pundits really perform if you were to put some money
    behind their words.

    You can find the Pundit tool here The Pundit Tool
    (2099k) on my personal files page.
    All registered users can easily created pages such as these for
    themselves. Just go into the "My Website" menu in the upper left hand
    corner of the site.