I would like to make it clear that MBIA and the other
monolines have assisted the investment, commercial and mortgage banking
industry in the significant inflating of the perception of capital available.
If (or more aptly, when) this charade comes to an end (apparently
imminently) the banking system will recieve another, quite significant
shock to the system. One of several very interesting emails that I
received over the weekend.


Reggie,


I am e-mailing about MBIA's recent restructuring announcement, which
involves the transfer of $5B out of MBIA Insurance Corporation to one
of its subsidiaries, MBIA Illinois (to be renamed). $2.9B of the $5B
was paid for MBIA Illinois to reinsure 100% of MBIA Insurance
Corporation's public finance exposures. The remaining $2.1B was
transferred via a return of capital to MBIA Inc., MBIA Insurance
Corporation's parent. Concurrent with the transfer, MBIA Insurance
Corporation's ownership interest in MBIA Illinois has been confiscated
and transferred to another MBIA subsidiary. On the surface, this
wreaks of blatant theft and fraud.

Published in BoomBustBlog
Sunday, 22 February 2009 23:00

Questions Abound Concerning Intrepid Potash

I have been looking into this company (Intrepid Potash, IPI) at the behest of a reader who felt that there may have been some hanky panky going on. I will leave it up to my readers to draw their own conclusions from what I have found - better yet if anyof you can shed some light on this it would be helpful.

My Take on IPI

According to initial prospectus filed on April 07, 2008 (registered users can download it here as a zip file: pdf Intrepid Potash Prospectus Apr 23, 2008 2009-02-23 14:39:12 491.91 Kb ) the company offered 24 mn shares at price band of $24-$26 per share (P/E band of 96.0x -104.0x). Subsequently according to Free Writing Prospectus filed on April 17, 2008 shares offered were raised to 30 mn with price band of $27-$29 (P/E band of 108.0x-116.0x). Later, the company filed another to offer 30 mn shares to public at $32 per share (P/E of 128.0x).

According to prospectus, the company intended to use the proceeds to acquire Intrepid Mining for $757 mn and re-pay debt of $82.5 mn and the balance $60 mn towards general corporate expenses. As per the cash flow statements for subsequent periods, the company seems to have allocated the IPO proceeds in line with the objectives stated in IPO. The company had used $87 mn for repayment of its long term debt and $893 mn to Intrepid Mining LLC.

o Although technically the proceeds of IPO were used according to stated objectives, it is interesting to note that Intrepid Mining was controlled by the promoters with Harvey Operating and Production Company, Intrepid Production Corporation and Potash Acquisition, each having 40%, 40% and 20% stake, respectively in the Intrepid Potash.

§ Robert P. Jornayvaz III, Chairman of the Board and Chief Executive Officer of Intrepid Potash, had 100% ownership interest in Intrepid Production Corporation

§ Hugh E. Harvey, Jr, Executive Vice President of Technology and Director of Intrepid Potash , had 100% ownership interest in Harvey Operating and Production Company.

  • The company offered 30 mn (40%) shares to the public while the balance 44.8 mn was held by 3 promoters - Harvey Operating and Production Co (24%), Intrepid Production Corporation (24%) and Potash Acquisition, LLC (12%). As of December 8, 2008 (last reported filings) Harvey Operating and Production Company and Intrepid Production Corporation both had reduced their holdings by 10% to 16.1 mn shares (each having 21.6% of total shares outstanding). On November 14, 2008, Potash Acquisition distributed 8.0 mn shares to its members and certain persons with indirect interests in Potash Acquisition according to pro rata interest in the company.
  • Insiders have sold a nominal amount of shares to the public worth $5.72 mn with an average price of $17.9 per share between November 24, 2008 to December 5, 2008.
  • As regards accounting shenanigans relating to inventory on the prima face, we believe the facts stated in your mail may not be correct. Although the company's inventory have increased marginally from $18.5 mn as of December 2007 to $$23.1 mn as of September 2008, its backed by 6% increase in sales. Inventory turnover days of the company as of September 2008 is also comparable at 37.2 compared with 31.6 as of December 2007.
  • Also, we wanted to highlight that the company's gross margins have increased substantially to 61% in 3Q2008 from 24.6% in FY07 on back of considerable increase in potash price. Average sale price of potash had increased 223% to $623 in 3Q2008 from $193 in 3Q2007.

Registered users can download the financial statistics and things of interest spreadsheet here: pdf Intrepid Potash Financial Statistics of Interest 2009-02-23 14:40:50 96.00 Kb

The company managed to raise 67% more than the initial expectations.
Date of filing Shares offered to public (mn) Price band P/E Band Expected amt to be raised ($ mn) Underwriters' option to purchase Shares O/S
(mn)
% increase (per share from initial minium offering) % increase in total offer from initial minium offering
Minimum Maximum Minimum Maximum Minimum Maximum
07-Apr-08 24.0 24.0 26.0 96.0x 104.0x 576 624 3.60 74.8
17-Apr-08 30.0 27.0 29.0 108.0x 116.0x 810 870 4.50 74.8 21% 51%
21-Apr-08 30.0 32.0 128.0x 960 4.50 74.8 33% 67%
$757.4 mn, or 84.4% of the net proceeds tol be paid to Intrepid Mining in exchange for all of Intrepid Mining's assets other than cash
$82.5 mn, or 9.2% of the net proceeds, to be used by for repayment of debt assumed from Intrepid Mining pursuant to the exchange agreement, leaving the company with no outstanding debt
$59.5 mn to be used to fund production expansions and other growth opportunities and for general corporate purposes.
Shareholding pattern Just after IPO Current Position
Public stockholders 40.1% 30.0 56.2% 42.1
Harvey Operating and Production Company 24.0% 17.9 21.6% 16.1
Intrepid Production Corporation 24.0% 17.9 21.6% 16.1
Potash Acquisition, LLC 11.9% 9.0 0.0% 0.0
Other propmoters 0.4% 0.3
Sissel 0.3% 0.2
Total 100.0% 74.8 100.0% 74.8
IPO Investors had immediate dilution impact of $29.78 per share after the offering
Pro forma combined net tangible BVPS as of Dec 31, 2007 0.12
Increase in net tangible BVPS attributable to new investors 11.99
Decrease in net tangible BVPS distributed to existing stockholders -9.89
Pro forma combined as adjusted net tangibleBVPS after the offering 2.22
Initial public offering price per share 32.00
Pro forma dilution per share to new investors -29.78
On November 14, 2008, PAL distributed 8,058,000 shares of Common Stock pro rata in accordance with its governing instruments to its members. The members of PAL and certain persons with indirect interests in PAL thereupon successively distributed substantially all of the shares received pro rata in accordance with their respective governing instruments to their partners and members

Additional observations from an astute BoomBustBlogger whose opinion I value:

"Still looking into this.
But I had a couple things which smelled a bit funny the first time through.

This
was a little weird - their Interim CFO was the primary owner of Quinn &
Associates, a really small accounting firm. In 2006, Q&A got a full
33% of their revenues Intrepid Mining. We've seen a few instances now where
small accounting firms are a "tell" that the quality of the old
accounting might not have been much good.

"Relationship with
Quinn & Associates, P.C.

Mr. Quinn,
our Interim Chief Financial Officer, is an independent contractor and performs
services for us through the accounting firm of Quinn & Associates, P.C., of
which he is the primary owner. In 2006, we paid Q&A $468,456 for services
rendered on our behalf by Mr. Quinn and other employees of Q&A,
$175,175 of which was attributable directly to services performed by
Mr. Quinn. In 2006, payments from Intrepid Mining represented
approximately one-third of Q&A's annual revenue.
" (source - 12/20/07)

It
also looks like management emptied out the piggy bank before getting Intrepid
Mining bought out, with "special distributions" and interests in
other entities:

"Intrepid Mining
Transactions with Members

Intrepid Mining declared
special distributions to its members of $3.9 million and $15.0 million in June
2007 and October 2007, respectively. These distributions were funded by draws
upon the existing revolving line of credit, and were permitted under the
existing senior credit facility.

In early 2007, Intrepid
Mining decided to distribute its remaining interests in Intrepid Oil and Gas,
LLC (IOG) to its members. The amount of the equity distribution was $0.8
million.

Intrepid
Mining made advances from time to time to its managing members. At
December 31, 2006 and 2005, the outstanding advances were approximately
$0.4 million and $0.2 million, respectively. All such advances have been repaid
to Intrepid Mining.
" (source - 12/20/07)

Regarding
Jornayvaz's fiduciary duty to Intrepid Potash, I totally agree with you.
At the same time though, while their contract specifies they must devote their
full time to the company, the contract also says basically "except they
can also manage their personal investments" [see red below]:

"We expect to enter into
employment agreements with Messrs. Jornayvaz and Harvey in connection with
the completion of this offering
in order to secure their
services on a long-term basis and to protect the company following their
termination of employment by securing their agreement not to compete with us.
The anticipated terms of the employment agreements were developed based on
recommendations by Towers Perrin and input from counsel and the principal
owners.

Pursuant
to the terms of these agreements, Mr. Jornayvaz will agree to serve as our
Chairman and Chief Executive Officer and Mr. Harvey will agree to serve as our
Executive Vice President of Technology. We expect that Messrs. Jornayvaz and
Harvey will devote substantially full-time attention to their employment with
us.
In addition, they may continue to manage
their personal investments owned in whole or in part by each executive,
including Intrepid Oil & Gas, provided the management of such
investments does not interfere substantially with the performance of their
duties for Intrepid Potash
. We expect the
employment agreements to be for initial terms of 18 months from the completion
of this offering, with automatic extensions for successive terms of 12 months
each, unless notice of termination is given by us or the executive 90 days
prior to the end of the initial or any successive term. The agreements will
provide for an annual base salary of $487,500, subject to annual review by the
compensation committee with adjustments to be consistent with salaries paid to
executives holding similar positions at peer group companies. We expect that
the agreements will provide for the executives to be eligible for all benefits
offered generally to senior management, for participation in the senior
management bonus programs established by the compensation committee, for grants
under the Intrepid Potash Inc. 2008 Equity Incentive Plan in such amounts and
subject to such terms and conditions as are established by our compensation
committee and for all perquisites available generally to senior management.
Each of Messrs. Jornayvaz and Harvey shall be entitled to a company-provided
automobile of his choice valued at under $75,000, to personal use of our
aircraft for 45 hours of flight time per year and the right to dry lease our
aircraft for personal use on the same terms as we dry lease the aircraft to
unrelated third parties.
" (source - 12/20/07)

This doesn't make his actions any less
slimy. But in terms of legality, he does seem to have some wiggle
room. He is clearly pushing it hard though.




I need more time to think through this special dividend, and just work out the
numbers."


Published in BoomBustBlog

I decided to make this post in response to the discussions in the comment thread of "Investment Advice in the MainStream Media: Hedge against Success???" For those don't know, the JPM discussion started due to this insolvency post: Re: JP Morgan, when I say insolvent, I really mean insolvent (a must read for anyone with economic interest in JP Morgan). WaMu, which was recently purchased by JPM, was the leader in Option ARM sales, and (from personal experience) has one of the most convoluted, inefficient and error prone 2nd lien underwriting processes out there. I explained the Option ARM dilemma in "The banking backdrop for 2009". To make a long story short:

Option ARMs to Reset Earlier than Expected

In 2009 and 2010, loans with 2004 and 2005 vintages would be recast. Besides these vintages, loans with negative amortization are expected to recast early. With more than 65% of borrowers electing to make Minimum Monthly Payment (reaching a staggering 85% for 2006 and 2007 vintages), loans which recast on account of negative amortization caps are expected to increase drastically.

The problem ahead: According to Fitch, of the nearly $200 bn of option ARMs outstanding, roughly $29 bn of loans are expected to recast by 2009. Of this $6.6 bn constitute 2004 vintage (that would be recast as a result of completion of the end of five-year term in 2009) and $23 bn constitute 2005 and 2006 vintage loans that would recast early due to the 110% balance cap limit.

Further an additional $67 bn is expected to recast in 2010 of which $37 bn belong to 2005 vintage (that would be recast as a result of completion of the end of five-year term in 2010) and the balance $30 bn consist of 2006 and 2007 vintage loans that would be recast early due to the 110% balance limit cap.

The potential average payment increase on the loans recast is 63%, representing an additional $1,053 due each month on top of the current average payment of $1,672. These large payment increases could cause delinquencies to increase, and increase dramatically, after the recast. The fact that only 65% of borrowers have elected (or are able) to make only minimum payments underscores the magnitude of the potential problem. The potential payment shock combined.

Other Blogs are reporting Reserve requiring downgrades: "Wednesday's downgrade of 2,446 classes of mixed RMBS caught traders off guard - even though it was viewed as an eventuality. While the market had largely priced in below-investment grade ratings to alt-A bonds following Moody's Investment Services' announcement that it would increase loss assumptions, the swiftness with which the rating agency acted has traders bracing for even more supply.

While the market was already trading bonds to these higher loss assumptions, the banks and insurance companies that own this paper are now going to have to hold more capital against these assets, and the increase given that these bonds are now junk [rated] is not a small matter," said one trader. . .

Moody's warned in a report last week that loss assumptions would be increased for RMBS and that downgrades could be expected. Moody's is projecting that alt-A deals originated in the second half of 2007 will experience 25.5% losses of original balance, compared to 23.9% of 1H07 deals, 22.1% for H206 deals and 17.1% for 1H06 deals. The rating agency in May expected average losses for 2006 and 2007 vintage deals to reach 11.2% and 14.7%, respectively.

Massive selling is not expected immediately though it is only a matter of time before a substantial portion of the downgraded bonds are put out to bid, a second trader said ..."

with the continuous deteriorating outlook for home prices and lack of refinancing opportunities could be a negative cause of concern for investors in Option ARM securities. Even more ominous, is pall cast upon the banks that hold these assets and are additionally exposed to other forms of consumer credit, ie. HELOCs, credit card debt and other unsecured loans (remember the links from the Asset Securitization Crisis above).

Alt-A

What bank has that"Other forms of consumer credit" exposure stated above? JP Morgan who doubled up on the exposure when it bought Washington Mutual, the Option ARM king.

We will get back to Option ARMs and what they will do to JPM in a later post. For now, let's realize that the JPM/WaMu combo has the highest concentration of 2nd lien loans (and Option ARMs) in the absolute worse housing areas in this country, CA, FL, and NV. Keep in mind that 2nd lien loans have diminished priority in terms of claims on assets, so if a house sells for 70% of its previous sales value, and there was a 70 LTV loan combined with a 80 CLTV (combined LTV) HELOC on top, the HELOC lender takes a 100% loss. Let me repeat that, "a 100% loss". How likely is this to happen JPM? Well, let's investigage a little further, shall we? JPM currently has these impaired loans from WaMu marked down 25%, and is currently not classifying them as non-performing even thought the mortgagees are not paying. Let's take a visual tour across the land to see if this 25% mark is realistic.

Well, now we know that there is a high concentration of 2nd lien loans on the books. A very high concentration, leveraged up nearly 200% (we're not even going to broach the topic of C&D and CRE loan risk).

Geographic and/or Product Concentration is a Bad Thing. WaMu has both

Do you see the two states that have been in the news the most lately have big spikes in my pretty little graph.

Now, if we drill down into those two big stalks we see above and observe who has the most concentrated exposure there, we see the following...

The JPM/WaMu combo has TWICE the California 2nd lien exposure as Countrywide, and we all know what happened to Countrywide! And in Florida, the condo capital of world, we have...

The JPM/WaMu combo is 2nd only to Suntrust. This is how I feel about Sun Trust: Sun Trust Forensic Analysis. Don't take this lightly, my triple digit returns didn't just pop out of thin air. I do my homework and can boast a pretty strong track record. Remember, concentration is a very risky thing in investing. You can hit a home-run short term, but long term the odds will catch up to you and hurt a lot. These banks rolled the die, and crapped out. The shareholders just don't know it yet. Below, I put a FICO score chart in just for the fun of it. FICO scores are a lot less relevant than many believe. They are still useful, but far from the be all and end all that they were marketed as.

Guess who has the 3rd lowest aggregate FICO out of the crew. Now, the bank at the lower and of the 2nd lien FICO graph has bought what is probably the most troubled large mortgage lender in the world in what is probably the worst macro environment in the last 7 decades. We can now see how that is ending. The 3rd lowest scorer is dragging down the bank who bought the most poisoned of the Investment banks, albeit with ample government assistance. Hmmmm... Was that smart???

As someone with direct experience in the residential lending arena can tell you, there is a big difference in the quality of loans written directly versus those sourced from a third party, ex. a broker. The reason, obviously, is that the brokers don't (didn't) have any skin in the game in terms of risk retention, and have significant incentive to "fudge" the numbers in order to push loans through (that is how they are paid). Then we have glorified brokers who post margin, got a warehouse credit line and call themselves "mortgage banks". These guys are just brokers with a fancy credit card that they parked loans on till they could sell them off to investors. The problem is, this forced minimum risk retention, but enough to drive 100's out of business when the market collapsed in 2007. Long story short, it is much more dangerous to rely on what you hope to be prudent underwriting from a brokered loan than from a direct channel loan. Amazingly enough, we had the exact same problem with brokers in the S&L crisis. I guess 1,200+ lending institution failures wasn't enough to teach a lesson that lasted more than 15 years. For more on this, see A comparison with the same during the S&L crisis.

Well, you see who has been relying on the brokers. "Nuff said. Don't be fooled by large asset bases and big brand names either. Bear Stearns was a big brand name, and Citigroup had the largest asset base out there.

So, all of this stuff ultimately leads to loans not getting paid. When loans don't get paid, foreclosure occurs. We can fairly easily map out what will happen to the JPM/WaMu/Bear Stearns combo when the foreclosures start hitting (which is right about now), using the widely followed Case-Shiller index. Let me warn you right now, though, these numbers will be highly optimistic due to the fashion in which the index is put together. It is an econometric marvel, yes, but it excludes so much economic reality as to be misleading in a fast trending market. See "A reminder concerning popular housing indices" for more on this topic.

Now, keep in mind that I am using optimistic numbers in these calculations and graphs, and then take a gander at the sharp drop in housing prices that have already occurred in the problem areas identified as JPM/WaMu/Bear Stearns hot spots. That is one hell of a roller coaster ride.

Now, in Re: JP Morgan, when I say insolvent, I really mean insolvent (a must read for anyone with economic interest in JP Morgan) I made clear (through the subscription content portion) that JPM has taken 25% marks on its WaMu credit impaired portfolio. Is that enough? Let's walk through the high concentration areas using this overly optimistic numbers that are 3 months old (the more recent numbers look worse since the housing price slide, foreclosure rate and unemployment is increasing in velocity and volume, not to mention the coming Alt-A debacle described earlier).

Assume the typical property in these hot spot areas had a 70% 1st lien mortgage (that means that the buyers put 30% down in cash - and we all know better than that!) and then somewhere along the line in 2007 to 2007 the homeowner took out a mere 10% home equity loan, which brought the CLTV (combined loan to value) ratio up to 805. These are very conservative numbers, for I know for a fact and through personal experience that these banks gave 90, 95, 100, and 110 LTV loans out like it was candy. Some loan packages were underwritten outright at those very high LTVs, while others had very optimistic, no SUPER OPTIMISTIC (if you know what I mean) appraisals that effectively put the true LTV way over 100%. It is an academic argument though, for as you can see, JPM/WaMu takes a total loss using the most conservative numbers imaginable.

CA-Los
Angeles
CA-San
Diego
CA-San
Francisco
FL-
Miami
FL-
Tampa
Composite-
10
Composite-
20
Decline from 2 years ago (2/2007) -35% -35% -37% -39% -30% -26% -24%
Assumed loss on 1st lien 0.7 LTV -5% -5% -7% -9% 0% 4% 6%
Assumed loss on 2nd lien 0.8 CLTV HELOC on top of 0.7 LTV 1st -105% -105% -107% -109% -100% -96% -94%

As you can see, the marks on the HELOC's and 2nd lien loans should be 100%, not 25%. Even using the 10 and 20 city composite index, once you factor in the cost and expenses of foreclosure, holding and remarketing the property, you will have close to, if not greater than a 100% loss. If one were to factor those 100% marks into the entire portfolio, would you come up with an average of 25%? Subscribers should reexamine the sensitivity analysis that we did here JP Morgan Forensic Highlights 2009-01-06 19:18:08 133.34 Kb, here JP Morgan Q408 Quarterly opinion with sample trades - Professional & Institutional 2009-01-22 08:48:02 211.69 Kb (retail users, click here JP Morgan Q408 quarterly valuation opinion - Retail 2009-01-22 08:49:26 79.24 Kb) remaining cognizant that the base case valuation numbers and the call on JPM's insolvency was based on a mere 40% mark down. That is not taking into account the massive negative amortization and/or the expiration of teaser rates coming off of the Option ARMs described earlier. Let's take another look at that graph...

Starting right about now (February), the negative amortization recast should start to bring in a rash of Option ARM foreclosures as the housing values shoot downward, and the amounts owed on the houses actually shoot upwards. A nasty combination, indeed, and one in which JPM will suffer.

Now, let's take a look at the first liens that were written on what was the customary 10% down payment.

MONTH CA-Los
Angeles
CA-San
Diego
CA-San
Francisco
FL-
Miami
FL-
Tampa
Composite-
10
Composite-
20
Decline from 2 years ago (2/2007) 35% 35% 37% 39% 30% 26% 24%
Assumed loss on 1st lien 0.9 LTV -25% -25% -27% -29% -20% -16% -14%
Assumed loss on 2nd lien @1 CLTV HELOC on top of 0.9 LTV 1st -125% -125% -127% -129% -120% -116% -114%

As you can see, JPM's 25% mark is rather aggressively optimistic for 1st lien loans, and that is using numbers from 3 months ago before the unemployment and foreclosure wave of the quarter hit. When combined with the extremely large 2nd lien loans, the mark should be more like 125% instead of 25% (I'm being a smart ass here, since it must be capped at 100%, but there is more to this 125% number, as we will see in a minute).

Now, these numbers are entrenched in the past, we are living in the present, and any additional marks are contingent upon future price movement. What does the future hold? Considerably higher marks, that's what.

Even using the highly optimistic Shiller index, we are in for a very pessimism generating fall, as can be seen from the graph in "When someone tells you they are seeking stabilization in the housing markets, show them this graph!"

I figure, we are about 50% through the housing price downfall cycle. That means there is a lot, and I mean a lot, more devaluation once it comes to residential housing prices. This doesn't even begin to scrape the surface of JPM's problems, either. Commercial real estate loans, consumer finance loans, credit cards, commercial leasing and business loans, leveraged loans, private equity loan - it doesn't look rosy going into a depression or severe recession. How many loans do you ask? Well, I pointed this out over a year ago...

  1. More on the banking backdrop, we've never had so many loans!
  2. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  3. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux

Before I go, I just want to let all know that as pessimistic as all this sounds, it is actually optimistic. If I were to be a realist, I would have mentioned that many of the mortgage assets that JPM bought/owns are highly leveraged derivative assets. These numbers in the article are referencing WHOLE loans, not loan derivatives. That means that the numbers mentioned here, both positive and negative, have to have a multiple applied to them. I believe JPM to be insolvent simply by examining the portfolio as if it contained all whole loans, which we all know it does not. If factor in the reality of the leverage, illiquidity, and murkiness in pricing of their leveraged mortgage derivatives.... Well, I think you guys are smart enough to figure out the rest.

Published in BoomBustBlog

Before reading the following article excerpts, I want to point out a few things that I am in absolutely no way ashamed of (for those that follow me regularly and have this list memorized, please bear with me, I'm trying to make a point):

  1. My investment performance for 2008, 335% for my prop account, 106% for the blog (think Reggie Middleton, prodigious blogger and entrepreneurial global macro/micro investor)
  2. My prognostication that Bear Stearn's would fail (in full detail) 3 months before they failed in " Bear Fight - A most bearish view on Bear Stearns in a bear market " and the follow-up piece and seminal "Is this the Breaking of the Bear" (think Alan Schwartz, former C.E.O. of Bear Stearns)
  3. My prognostication that Lehman would fail 5 months before they failed (think C.E.O. Dick Fuld of Lehman Brothers), see Is Lehman really a lemming in disguise? and Lehman, the lying lemon lemming anecdotal timeline?
  4. My prognostication that General Growth Properties (the nation's 2nd largest REIT) would fail (in explicit detail) 1 year before they failed (think Bernie Freibaum, former CFO of GGP), see GGP and the type of investigative analysis you will not get from your brokerage house and pay special attention to "My Response to the GGP Press Release, which seems to respond to blogs..." and "For those who were wondering what sparked that silly press release from GGP..." for the blow by blog on the company's CFO actually trying to disparage lil' ole innocent me and paint me as incompetant and out for no good. Take particular not of the date of the release and the comments made, then reference the stock chart and the recent news clips warning of bankruptcy.
  5. My warnings on insolvency of MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton
  6. My warnings on the insolvency of AMBAC, see Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion and Follow up to the Ambac Analysis and Download a "Window" into Ambac's Problems.
  7. Countrywide and Washington Mutual's early signs of insolvency, see Yeah, Countrywide is pretty bad, but it ain't the only one at the subprime party... Comparing Countrywide to its peers
  8. My many warnings on the Doo Doo 32 regional banks and the insurance industry (a collapse or two to happen very soon in company near YOU! See icon Hartford Insurance Group Forensic Analysis - Pro (619.29 kB 2008-11-22 06:30:43), icon HIG Actionable Item (189.75 kB 2008-11-22 06:32:24), icon HIG Actionable Intelligence Update 8-12-08 (49.96 kB 2008-12-08 08:54:33), icon Hartford Insurance Group spreads and counterparty/debt holders - pro (149 kB 2008-11-22 06:31:47), and icon Principal Financial Group Actionable Intelligence Note - Pro version (252.74 kB 2009-01-15 11:18:50) and As I Continue My Analysis of Global Insurers.(thus far the failures have effectively been limited to AIG and arguabley Ambac and MBIA, but give it time).
  9. I can go on, but its 2 am and I need to get enough sleep to be cheerful when my daughter comes to wake me up in 4 hours, but hopefully you feel the flow that I am trying to convey...

Every now and then I look at comments about me and my work and every now and then there is always someone screaming "Short seller scum of the world" or some similar absurd nonsense. There is still a significant contingent that can't come to grips with the blatant fact that there are a lot of inefficient companies, insolvent companies, and some downright fraudulent companies that are running around masquerading as stock market darlings turned victims of short sellers and a rough economy. When the bull market was in full effect, there was no similar "hating of the hater" for those who profited from going long - and lord knows there was a fair share of pump and dump going on.

Look at the list above, cross reference the dates of the opinionated articles and research with a graph of each companies' share price and tell me, do you really think this was just luck?

Or was I using my blog to manipulate share prices (and at the same time forcing all of the trash, excess leverage, on their balance sheet as well as faulty business models to be perceived as,,,, Well,,,, trash, excess leverage, on their balance sheet and faulty business models!

Okay, let's move on to the excerpt from this piece in Conde Nast's Portfolio.com:

In the view of many C.E.O.'s, short-sellers do more than just profit from corporate misfortune; they inflame it. C.E.O. Dick Fuld of Lehman Brothers and Alan Schwartz, former C.E.O. of Bear Stearns, [Hey, didn't I blog and research their companies in the link list above?] in their own recent appearances before congressional panels, blamed rumormongers and short-­sellers for the demise of their firms [Hmmm!!! Rumors such as "I have a bunch of underwater assets leveraged to the hilt on my balance sheet", or "we are facing a hell of a liquidity crisi because we financed risky long term assets with fickle short term debt", or "that Reggie guy is a damn pain in the ass!" Rumors like those???].

"The shorts and rumormongers succeeded in bringing down Bear Stearns," Fuld ­asserted. "And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers." [Yeah, okay!] Schwartz gave similar testimony when he appeared before the Senate Banking Committee in April, saying that there was a run on the bank despite a "capital cushion well above what was required to meet regulatory standards." He testified that "market forces continued to drive and accelerate our precipitous liquidity decline." Banking Committee chairman Christopher Dodd chimed in that "this goes beyond rumors. This is about collusion."[Keep this term, accusation, and concept of "collusion" at the forefront of you thoughts as you read on, my dear followers]

But was it? Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns’ Schwartz to make his point.

The day before the Fed’s rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller I.D. and took the call.

“Jim, hi, it’s Alan Schwartz.”

“Hi, Alan.”

“Well, Jim [I'm not calling that rat bastard Blogger Reggie Middleton because the less people know about him, the better], we really appreciate your business and your staying with us. I’d like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything’s fine.”

“Alan, how do I know everything’s fine? Is everything fine?”

“Jim [F#ck, that was swift of him, did that damn rat bastard blogger Reggie guy get it him first!], we’re going to report record earnings on Monday morning.” 

“Alan, you just made me an insider. I didn’t ask for that information, and I don’t think that’s going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that’s resulting in a funding squeeze.”

“Well, yes, to some extent, but we should be fine.” [Okay, that's it. I'm banning all of those F#@%ing blogs from all of the computers at Bear Stearns for the 24 hours that I anticipate remaining a going concern!]

“This is now 6:15 on Thursday night, the night before the collapse,” Chanos says. “It was after a meeting with Molinaro”—Bear Stearns C.F.O. Sam Molinaro—“who basically told him at that meeting, ‘We’re done. We’re gone. We need money overnight we don’t have.’  So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything’s fine when clearly it’s not. And he knew it wasn’t.” [Nawwwww!!! Get the hell outta here! Seriously????! I am shocked! Absolutely flabbergasted! I mean, really dude... I feel irreparably bamboozled!!!]

Chanos refused to go on CNBC [smart move, my friend!]. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized that he could have been on CNBC while that was ­announced. “I thought, That fucker was going to throw me under the bus no matter what.” [You know, if I wasn't so naive, I may - no, I just might, get the impression that the CEOs of the companies that I have covered and blogged about may have colluded with each other, and others in the media and business/finance circles to make things appear just a TAD bit rosier than they really were. That is, if I wasn't so naive. Then again, if I wasn't so naive, I would have believed that that rat bastard blogger guy Reggie just might be a pretty valuable counterbalance for the propagandized, accountant engineered (this is the new financial engineering, if you haven't got the memo!) disfigured trash often disguised as corporate reporting and corporate communications, and often disseminated though the MSM (the mainstream media). That's, of course, if I wasn't so naive...]

“So here it is,” Chanos says. “Alan Schwartz takes the position ‘Short-sellers were our problem,’ and who did he try to get to vouch for him on the morning of the collapse? The largest short-seller in the world. You want to talk about ethics and who’s telling the truth on these things? It’s unbelievable.” [Hey, you should have talked to me my friend. I could have told you they were lying about their financial situation months before your converstaion, reference the links above. I'm shocked you even left your accounts in there that long! It wouldn't have been me.]

Schwartz, not surprisingly, has a different version of events [Now, there's a damn surprise if I ever hear of one!]. “I did not make the statements attributed to me by Mr. Chanos,” he says through a spokesperson. According to someone who has spoken to Schwartz, the ex-C.E.O.’s side of the story is that the conversation took place on Wednesday, not Thursday, and that it was entirely different from what was related by Chanos. His contentions are that the call was an effort to obtain a public statement from Chanos that “a group of short-sellers out there are trying to take Bear Stearns down” and that no information on Bear’s financial strength was conveyed to Chanos. [Yeah, okay...]

Published in BoomBustBlog


As I sit back and look at the market go through its bear rally, performing a myriad of what if scenarios on my various bearish positions and generating cash where feasible by selling off profits, I revisited the Doo Doo 32 and a few big name banks. I say to myself, "This year will not be as easy as last year, now that nearly everybody should be aware of the extent of the problem, and the violent bear market rally/option spreads that makes shorting and put buying very expensive." Then I listen to talking heads in the media and the "everbull", long only professionals. I ponder, "Hmm, maybe there is a little low hanging fruit to be had after all". To be sure, we will have to sit through this bear market rally which has to hurt anybody not in all cash or hedged, and there seems to be a willingness of traders to push this one relatively far. The FACTS still remain though, if the stocks of the BoomBustBlog bear targets move much farther, this could very well be another repeat of last year's triple digit performance. Yes, it's risky, but risk is the price of reward, isn't it.

With that disclaimer espoused, let's look at how accurate my longer term thesis have fared. The graph below was taken from the Doo Doo 32 article.


In order to determine how likely the aforementioned event
is, let's create a metric by which Reggie Middleton measures risk. This metric
will be units of risky or non-performing assets as a percentage of statutory
equity. This, of course, can be refined by removing goodwill, Bullsh1t, and the
various accounting pollutants to plain old economic earnings, but less just
start with this. When applying Reggie's Risk Metric to the graphs above, we can identify more banks.

image006.png

Looking at risk from this perspective, we not only see who has no
clothes on when the tide goes out, but also how well (un)endowed they
are in addition.

Now, compare the companies from the Doo Doo 32 article and the allocation of the TARP program below (sans the companies that have already failed or have been driven into other firms), and you will see that I am on to something. After all, the Doo Doo 32 article was penned on

The credit crisis is (not) waning

Reggie
Middleton says don't believe Paulson: S&L crisis 2.0, bank failure
redux
)

Allocation of TARP Capital Injections ($ billions) 100% = $250
bn

Others (201 in total count)

$ 48

Citigroup

$ 45

AIG

$ 40

Bank of America/Merrill Lynch/CountryWide

$ 25

JP Morgan Chase/Bear Stearns/WaMu

$ 25

Wells Fargo

$ 25

Godlman Sachs

$ 10

Morgan Stanley

$ 10

PNC

$ 8

US Bancorp

$ 7

Sun Trust

$ 5

Unallocated

$ 3

Now "the worst is behind us" Secretary Paulson wants to claim the balance of the TARP that is not already spent. WHY??? Well let's look at it visually.

Big on this list are the recipients of much of my research from early last year. Never let it be said that I don't have a clue about what's going on.


Well, I have some other thoughts on certain financial institutions, the first of which is available below (with at least one other following). Subscribers can view my opinion here. I trust you will find the inconsistencies that I have found to be quite interesting. You will also be wise to beware of those "name brands" that are "too big to fail"! Keep the recent post, "
The banking backdrop for 2009 " in mind as you read the following:

pdf JP Morgan Forensic Highlights 2009-01-06 19:18:08 133.34 Kb

Published in BoomBustBlog
Thursday, 01 January 2009 08:17

Reggie Middleton's BoomBustBlog.com Press Room

Who is Reggie Middleton?: A Backgrounder 

For the Media Only 

Call +1.718.407.4751 or email our customer relations


Reggie Middleton's Bio


What does Reggie Middleton do and how does he do it

Performance & Research: Reggie beat ALL of the major Wall Street analysts, hedge fund indices, pop investment personalities and global market indices by at least 100%


Facts & Figures
Reggie had nearly 5 million visitors since September of 2007, and over 3,000 subscribers
  •  Seventy five percent of BoomBustBloggers are executives and professionals
  • Over 35% of Reggie's readers make over $100,000 per year, and over 25% make over $200,000 per year.
  •  Thirty two percent of Reggie's readers are millionaires.
  • 18%are multimillionaires
  •  Five percent have net worths over $10 million.
  •  Seventeen percent have investable assets over a million dollars
  •  Nine percent have currently investable assets over $2 million
Reggie's BoomBustBlog research model has produced returns of approximately 100% for the year ending December 31st, 2008 while practically every other professional investor and index was deeply negative
 
Reggie's proprietary trading account finished the year up well over 400% on a time weighted basis for the year ending December 31st, 2008 




  Reggie has appeared in the following: Forbes, Las Vegas Business Press, NY DailyNews, CNNfn: Digital Jam, Fortune, PC Magazine, BET, PC World, Real Estate Finance Today, Interactive Week, eWeek, Computer Shopper

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree. You can consider me the individual investor of the new millenium.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not make my living from selling advice, I make my living from acting upon my own advice, I am not a reporter hence do not sell stories. I am not a broker/bank, hence I do not have to hawk my services. I am an entrepreneur who exists just outside of main

stream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it!

 

I find most research lacking, in both quality and quantity. Thus, the reason why I had to create my own research staff of high caliber analysts and forensic accountants was due to my dissatisfaction with what was currently available - to both individuals and institutions. 

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public at highly subsidized prices or free of charge. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned commercial banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities.

 

Our Subscribers - Social Proof:

  • Banks (Morgan Stanley, UBS, Citibank)
  • Consultants (Deloitte)
  • Hedge Funds (Citadel)
  • Central Banks and global quasi-government agenices (the European Central Bank, the Central Bank of Canada, The International Monetary Fund)
  • Insurance companies (The Hartford)
  • The nations largest real estate companies (General Growth Properties)
  • High net worth and very high net worth individuals .
    • 75% of the BoomBustBloggers are executives and professionals
    • Over 35% of Reggie;s readers make over $100,000 per year, and over 1/4 make over $200,000 per year.
    • 32% of Reggie's readers are millionaires.
    • 18% are multimillionaires
    • 5% have net worths over $10 million.
    • 17% have investable assets over a million dollars
    • 9% have currently investable assets over $2 million

 

Praise from our readers/subscribers

  • wanted to say hello and thank you for all the work thats done here. i know nothing, basically about investments, markets, stratagy etc. i'm a working a playwright-actor-director. thats my line. therein lies my cash supply. ive not traded on your advise as yet, i do indeed think that may change over time. i stuck my 550 in the pot and the langauge of the martkets i'm taking in from you is eyepopping. the curve is breaking down quickly and i thank you and your team.


  • From KC Dallas – “For those ignorant to assume the style of ones writing is an indication of their investment knowledge is, well, ignorant. Those that chose to bash Reggie Middleton should check out his work. It is some of the most in-depth analysis you will find! 
While the pundits were telling everyone the worst was over and to buy, buy, buy (that includes Mr. Bove) Reggie's analysis told you how sick the financial companies were. If the pundits took the time to do their job and actually report the truth, they would have told you exactly what Reggie had been stating since 2007.Pundits have a job and that's to help Wall Street take your money.
I highly recommend those who decided to bash on Reggie to take a look at his site and his data. You WILL NOT be disappointed. You'll get the truth backed up by factual data. Look over some of the data Reggie put out there on MS, LEH, GS, and WFC.
When the pundits started reporting on earnings reports that were stretched truths, you would have already known exactly what amounts of Hide the Level 3 assets these firms had.If you want to see a difference in your accounts, check out his work. Yes, I am biased. Why? Because I've been checking out his site for months and I've been very well educated by his information as well as benefiting financially. Reggie... Thanks for an awesome year!!!! Looking forward to 2009 with you.”

 

  • From Prescient – “For those who don't know Reggie he's the best around, GGP is his crown jewel. He also called HIG and the other insurers and the downfall of the IBs. His analysis is the best. I shouldn't have closed my short on GGP in the $20s, and you shouldn't have closed it in the teens,wow! Congrats on all the success man, you've earned it.
  • From Smarty Pants “Nice summary of the Keynesian viewpoint of the economy. As your chart of US consumer credit shows, the US economy has been running on borrowed money for some time. The past four years of "growth" have been paid for by borrowing nearly $500 Billion to spend…….. That said, Mr. Middleton has presented an extensive and useful body of economic evidence that, for those who fantasize about a return to 2005, there really is more to fear than fear itself.”
  • From Mike – “Hello Reggie:I am a new subscriber. Great research reports from what I am reading this far. Question: is there a summary listing of companies that you have covered or looking at from an investment point of view? There is a lot of content here and want to get caught up and focus on where the opportunities are. I do not want to overlook any potential investment opportunities. Great write up on HIG (The Hartford). I am actually an employee of the company, so it was a very insightful read. Stock rebounded after Friday's "investor day" but I think troubles still loom..particulary is the commercial mortgage market continue to get hit. Thanks Mike
  • From Shaunsnoll -  “you've been KILLING it lately!! is this the longest streak you've ever been on?  because its the longest streak of anyone i personally know for sure.  looking forward to the emerging market stuff Reggie!
  • Reggie has been consistently bearish on the financial stocks for many months. I, for, one, am appreciative of his insights and articles, and have made a lot of money following many of his short recommendations. I would have done even better if I had followed them more aggressively!

   

  See what else my readers have been saying in our Praise section .

Published in Uncategorized
Thursday, 01 January 2009 08:17

Reggie Middleton's BoomBustBlog.com Press Room

Who is Reggie Middleton?: A Backgrounder 

For the Media Only 

Call +1.718.407.4751 or email our customer relations


Reggie Middleton's Bio


What does Reggie Middleton do and how does he do it

Performance & Research: Reggie beat ALL of the major Wall Street analysts, hedge fund indices, pop investment personalities and global market indices by at least 100%


Facts & Figures
Reggie had nearly 5 million visitors since September of 2007, and over 3,000 subscribers
  •  Seventy five percent of BoomBustBloggers are executives and professionals
  • Over 35% of Reggie's readers make over $100,000 per year, and over 25% make over $200,000 per year.
  •  Thirty two percent of Reggie's readers are millionaires.
  • 18%are multimillionaires
  •  Five percent have net worths over $10 million.
  •  Seventeen percent have investable assets over a million dollars
  •  Nine percent have currently investable assets over $2 million
Reggie's BoomBustBlog research model has produced returns of approximately 100% for the year ending December 31st, 2008 while practically every other professional investor and index was deeply negative
 
Reggie's proprietary trading account finished the year up well over 400% on a time weighted basis for the year ending December 31st, 2008 




  Reggie has appeared in the following: Forbes, Las Vegas Business Press, NY DailyNews, CNNfn: Digital Jam, Fortune, PC Magazine, BET, PC World, Real Estate Finance Today, Interactive Week, eWeek, Computer Shopper

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree. You can consider me the individual investor of the new millenium.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not make my living from selling advice, I make my living from acting upon my own advice, I am not a reporter hence do not sell stories. I am not a broker/bank, hence I do not have to hawk my services. I am an entrepreneur who exists just outside of main

stream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it!

 

I find most research lacking, in both quality and quantity. Thus, the reason why I had to create my own research staff of high caliber analysts and forensic accountants was due to my dissatisfaction with what was currently available - to both individuals and institutions. 

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public at highly subsidized prices or free of charge. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned commercial banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities.

 

Our Subscribers - Social Proof:

  • Banks (Morgan Stanley, UBS, Citibank)
  • Consultants (Deloitte)
  • Hedge Funds (Citadel)
  • Central Banks and global quasi-government agenices (the European Central Bank, the Central Bank of Canada, The International Monetary Fund)
  • Insurance companies (The Hartford)
  • The nations largest real estate companies (General Growth Properties)
  • High net worth and very high net worth individuals .
    • 75% of the BoomBustBloggers are executives and professionals
    • Over 35% of Reggie;s readers make over $100,000 per year, and over 1/4 make over $200,000 per year.
    • 32% of Reggie's readers are millionaires.
    • 18% are multimillionaires
    • 5% have net worths over $10 million.
    • 17% have investable assets over a million dollars
    • 9% have currently investable assets over $2 million

 

Praise from our readers/subscribers

  • wanted to say hello and thank you for all the work thats done here. i know nothing, basically about investments, markets, stratagy etc. i'm a working a playwright-actor-director. thats my line. therein lies my cash supply. ive not traded on your advise as yet, i do indeed think that may change over time. i stuck my 550 in the pot and the langauge of the martkets i'm taking in from you is eyepopping. the curve is breaking down quickly and i thank you and your team.


  • From KC Dallas – “For those ignorant to assume the style of ones writing is an indication of their investment knowledge is, well, ignorant. Those that chose to bash Reggie Middleton should check out his work. It is some of the most in-depth analysis you will find! 
While the pundits were telling everyone the worst was over and to buy, buy, buy (that includes Mr. Bove) Reggie's analysis told you how sick the financial companies were. If the pundits took the time to do their job and actually report the truth, they would have told you exactly what Reggie had been stating since 2007.Pundits have a job and that's to help Wall Street take your money.
I highly recommend those who decided to bash on Reggie to take a look at his site and his data. You WILL NOT be disappointed. You'll get the truth backed up by factual data. Look over some of the data Reggie put out there on MS, LEH, GS, and WFC.
When the pundits started reporting on earnings reports that were stretched truths, you would have already known exactly what amounts of Hide the Level 3 assets these firms had.If you want to see a difference in your accounts, check out his work. Yes, I am biased. Why? Because I've been checking out his site for months and I've been very well educated by his information as well as benefiting financially. Reggie... Thanks for an awesome year!!!! Looking forward to 2009 with you.”

 

  • From Prescient – “For those who don't know Reggie he's the best around, GGP is his crown jewel. He also called HIG and the other insurers and the downfall of the IBs. His analysis is the best. I shouldn't have closed my short on GGP in the $20s, and you shouldn't have closed it in the teens,wow! Congrats on all the success man, you've earned it.
  • From Smarty Pants “Nice summary of the Keynesian viewpoint of the economy. As your chart of US consumer credit shows, the US economy has been running on borrowed money for some time. The past four years of "growth" have been paid for by borrowing nearly $500 Billion to spend…….. That said, Mr. Middleton has presented an extensive and useful body of economic evidence that, for those who fantasize about a return to 2005, there really is more to fear than fear itself.”
  • From Mike – “Hello Reggie:I am a new subscriber. Great research reports from what I am reading this far. Question: is there a summary listing of companies that you have covered or looking at from an investment point of view? There is a lot of content here and want to get caught up and focus on where the opportunities are. I do not want to overlook any potential investment opportunities. Great write up on HIG (The Hartford). I am actually an employee of the company, so it was a very insightful read. Stock rebounded after Friday's "investor day" but I think troubles still loom..particulary is the commercial mortgage market continue to get hit. Thanks Mike
  • From Shaunsnoll -  “you've been KILLING it lately!! is this the longest streak you've ever been on?  because its the longest streak of anyone i personally know for sure.  looking forward to the emerging market stuff Reggie!
  • Reggie has been consistently bearish on the financial stocks for many months. I, for, one, am appreciative of his insights and articles, and have made a lot of money following many of his short recommendations. I would have done even better if I had followed them more aggressively!

   

  See what else my readers have been saying in our Praise section .

Published in Uncategorized
Tuesday, 16 December 2008 23:00

More on Madoff: the financial perspective

Ponzi scheme operated by Bernard Madoff, a former chairman of the NASDAQ, with allegedly $50 bn of assets is by far one of the largest scam in history of financial markets. To put it in perspective, it literally dwarfs that of Enron and Worldcom/MCI in the corporate arena. With investors already battling massive losses on their investment portfolio, a scam of this magnitude could further dampen their confidence. As most of the exposure for leading banks and financial institutions towards Madoff's investment was indirect exposure in the form of clients' assets with minimal direct exposure, the potential capital loss / write-downs in the financial statements could be limited for these financial institutions. However there could be significant indirect impact in terms of future inflows and/or redemptions for their asset management and private banking division.

  • The main impact from a systemic point of view is that it undermines the levels of confidence which is already being plagued by economic slowdown and financial woes. This cannot be understated. Take a look at the comparison of some of the biggest, most renowned Wall Street banks' performance as compared to the performance of the research model of this blog, my proprietary performance, and that of the broad and global equity markets. I didn't make this stuff up. The marketing machine of the street will take many years to repair the damage that fraud, combined with relative underperformance has wrought on their business.
  • Since most of the money belonged to institutional investors, international and high net worth clients of private-banking business, the potential losses will probably affect one of the profitable segments for banks - Private and Wealth management business. This is a segment that was aggressively pursued by many medium and large financial institutions, along with the prime brokerage business, whose near to medium term growth prospects have been significantly overestimated. Expect a significant drag on these business segments that have seen a significant ramp up in resources, and significant opportunities to small and nimble entrepreneurial operations such as this hybrid new media/investment/ financial analysis publication from which you are currently reading. There will be an enormous impact for the hedge fund industry in form of higher redemption pressure. Already Hedge fund performance has been dismal due to slumping market situation See "In the Great Global Macro Experiment, the next bubble to burst is.." for more on this topic. In September 2008 alone Hedge Funds faced redemptions of $43 bn. This scam could further aggravate the redemption pressure for hedge funds which could in turn lead to massive global de-leveraging. With increased redemption and de-deleveraging the stock prices could witness further downside.
  • Also the scam could enforce tighter regulation for the hedge fund industry. The financing requirements for hedge funds could get adversely impacted as they would be required to post more collateral with financial institutions that could limit their leverage.

In the table below we have highlighted some of the entities with largest exposure in Madoff investments (both direct and indirect).

Institution Potentila loss / exposure Exposure type where available
US $ mn Euro mn
Fairfield Greenwich Group $7,500
Banco Santander SA $3,298 € 2,347 Indirect exposure - 2.3 bn Euros. Direct exposure - 17 mn Euros
Santander $2,300 Indirect exposure
Bank Medici AG $2,100
Ascot Partners LLC $1,800
Fortis NV $1,405 € 1,000
Union Bancaire Privee $1,250
HSBC Holdings Plc $1,000 Indirect exposure
AXA SA $703 € 500
Natixis $632 € 450 Indirect exposure
Royal Bank of Scotland $623 Through trading, collateralized lending
Carl Shapiro $545
BNP Paribas $506 € 360 Potential loss (however indirect exposure)
Banco Bilbao Vizcaya Argentina SA $422 € 300 Potential loss (however indirect exposure)
Man Group $360 € 450
Reichmuth & Co $327
Nomura $302 Impact on P&L virtually nil
Maxam Capital Management LLC $280
Aozora Bank $137
UniCredit SpA $105 € 75 Indirect exposure
Swiss Life Holding AG $79 Through fund of funds
Nordea Bank AB $67 € 48
Credit Agricole S.A $14 € 10
Bramdean Alternatives 9% of portfolio
Published in BoomBustBlog

From Bloomberg: Former Bear Stearns CEO Greenberg Says Investment Banks ‘Gone’ .

“There’s no more Wall Street,” Greenberg, 81, said today in an interview to be aired on Bloomberg’s “Money & Politics” television program. “That model just doesn’t work because it’s at the mercy of rumors.” Really??!! Would these be the rumors that you bought a bunch of bad assets with a lot of leverage at the top of bursting bubble?

Greenberg elected to stay when JPMorgan Chase & Co. acquired Bear Stearns through a forced sale in March. The acquisition followed a run by clients and lenders that left Bear Stearns on the brink of bankruptcy. Market rumors helped cause customers to pull their money from Bear Stearns and Lehman Brothers Holdings Inc., and pushed down the stock prices, he said. I would think your balance sheet and opaque reporting helped to cause customers to pull their money from Bear Stearns and Lehman Brothers. See Is this the Breaking of the Bear? and Bear Fight - A most bearish view on Bear Stearns in a bear market.

Published in BoomBustBlog

The Wall Street Journal ran an interesting, well researched piece on the run on Morgan Stanley that has been well covered in the blogoshere. From a journalistic perspective, it was excellent, but it was lacking from an actual hard core investor's perspective - the very same hard core perspective that drives my patrons to pay for my blog. So, lest I disappoint my readers, let's throw some analytical and historical facts into this debate. I feel the need to throw my two cents in because nobody is calling a spade a spade, thus partially justifying the nonsense that was the short sale ban that came down from the highly hypocritical industry. Yeah, the same industry whose prop desks short other companies and industries,,, the same industry that profits heavily form enabling their clients (through prime brokerage) to short other companies and industries. With the final fall of the big sell side brokerages, there is even a bigger dearth of services left on Wall Street. Honest, unbiased research. That is, I believe, the draw that the BoomBustBlog has. That is what is lacking throughout nearly all of Wall Street. That is what this blogging medium has allowed me to provide - and I'm just luv'in it.

ms.png

Published in BoomBustBlog