From Bloomberg:

Treasury Secretary Henry Paulson and New York Federal Reserve Bank President Timothy Geithner met this evening with Wall Street executives to discuss this week's slump in the financial markets.

Securities and Exchange Commission Chairman Christopher Cox also took part in the discussions, New York Fed spokesman Andrew Williams
said in a statement. The talks with ``senior representatives of major
financial institutions'' were held at the Fed's New York district bank,
he added, declining to identify the executives.

The Wall Street Journal reported earlier that Morgan Stanley Chief Executive John Mack (HMMMM!!!!) and Merrill Lynch Chief Executive John Thain participated in the discussions with Paulson, Geithner and Cox.

The
New York Fed meeting came as Lehman Brothers Holdings Inc. continues to
seek a buyer or buyers for the investment bank that lost 77 percent of
its value this week.

We all know what is happening to Lehman, and if you followed this blog you knew it about 7 months ago. We also know why Thain from Merrill was at that meeting. But why was John Mack there??? Well, registered users and subscribers know from the readings in the sidebar.

Banks, Brokers, & Bullsh1+ part 1

Wednesday, 19 December 2007 | Reggie Middleton

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 of...

The Riskiest Bank on the Street
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

Key highlights of my research on the "Riskiest Investment Bank on the
Street": The Riskiest Bank on Wall Street – Morgan Stanley has US$74
billion of Level 3 assets, over 200% of its eq
Monday, 11 February 2008

A closer look at the exposure of the other brokers
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

...- Who has the most of their assets tied up in illiquid Level 3 as a proportion to tangible equity? You guessed it, The Riskiest Bank on the Street. Now, they do have a decent amount of liquidity the ...
Sunday, 16 March 2008

19. On the insolvencies of non-bank financial institutions
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...Bullsh1+ part 1 Banks, Brokers, & Bullsh1+ part 2 Money Panic
Bear Fight The Breaking of the Bear The Riskiest Bank on the Street Here comes the CRE Bust (Quip on Lehman Brothers)...
Tuesday, 18 March 2008

20. Quick Morgan Stanley update from my lab
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
This is a refresher to the The Riskiest Bank on the
Street piece that I posted a few months ago on Morgan Stanley. Let me
get straight to the salient points. High exposure to lev
Thursday, 20 March 2008

21. Early morning scan of events
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
For those that haven't noticed, I've begun sharing my early morning
news and data routine with the blog. Here goes Monday moring EST. Is
the Fed running out of ammo? Reserve
Monday, 31 March 2008

22. Reggie Middleton on the Street's Riskiest Bank - Update
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
This is the update to my forensic deep dive analysis of Morgan Stanley. It is still, in my opinion, the "riskiest bank on the street". A few things to make note of as you browse through my opinion a
Sunday, 06 April 2008

23. Banks, Brokers & Bullsh1t 3.0: Shenanigans at Morgan and Lehman
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
I've been promising to give an illustration of the shenanigans being
played by the commercial and investment bank's for some time now, but
I've been quite busy working on my entrepeneurial pursuits
Wednesday, 16 April 2008

24. I warned you about the risk of those I Banks
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...ive counterparty and credit risk to imperfect hedges to dead and depreciating assets held off balance sheet: The Riskiest Bank on the Street Is this the Breaking of the Bear? Banks, Broke...
Wednesday, 21 May 2008

For those who are not part of the inner caucus:


Morgan Stanley has US$74 billion of Level 3 assets, over 200% of its
equity, which is the highest amongst its peers. Although the Level 3
assets have declined from the previous quarters owing to huge
writedowns, the reclassification of assets from from Level 2 to level 3
category continues as the liquidity for the troubled mortgage paper
drys up.

Increasing level 3 assets likely to cause further losses:
Morgan Stanley’s hard-to-value assets, represented by level 3 assets
have grown persistently, rising from 4.3% of the total assets in 1Q2007
to 7.0% in 1Q2008 partly off the transfer of assets from level 2 to
level 3 due to unobservable market inputs. As liquidity crisis and
credit spread widening continues to hamper the global financial
markets, we expect the increasing proportion of level 3 assets in
Morgan Stanley’s balance sheet to translate into higher losses and
asset write-downs for the company. Also noteworthy is the fact that
Morgan Stanley’s level 3 assets as a proportion of its shareholders’
equity are the highest in its peer group which makes it one of the most
vulnerable companies to be hit by continuing credit market turmoil.

Morgan Stanley’s significant level 3 exposure and high leverage remain a cause for extreme concern

Large write-downs likely due to level 3 assets exposure: Morgan
Stanley’s level 3 asset exposure, which stood at 261% of its equity as
of February 29, 2008, is likely to cause a significant drag on its
valuation in the near future. These assets, for which the bank uses
proprietary models to gauge their value, will witness the largest
write-downs of all asset categories amid the current credit market
turmoil. When compared with other leading investment banks, Morgan
Stanley clearly stands out to be the most vulnerable to falling values
in these hard-to-value assets. It is worthwhile to mention that Bear
Stearns, which last month witnessed significant erosion in its market
capitalization, had level 3 assets equal to 239% of its equity, next
only to Morgan Stanley. Although the Fed has mitigated liquidity
concerns of investment banks in significant part, the balance sheet
solvency is a far more difficult problem to address – and one in which
Morgan Stanley leads the pack.

Bank Level 2 Assets Level 3 Assets Shareholder Equity Total Assets Level 2 Assets-to-Equity Level 3 Assets-to-Equity Leverage (X)
Citigroup $934 $133 $114 $2,183 822% 117% 19.21
Merrill Lynch $768 $41 $32 $1,020 2405% 130% 31.94
Lehman Brothers $177 $39 $26 $786 687% 152% 30.59
Goldman Sachs $277 $72 $47 $1,120 586% 153% 23.71
Morgan Stanley $226 $74 $31 $1,045 723% 236% 33.43
Bear Stearns 227 $28 $12 $96 1926% 239% 8.15
Based on latest quarterly filings and transcripts
Let's pay close attention to the chart above. Bear Stearns flamed out in March. I warned you twice that they were going to flame out in January. Stearns is the only company that has (had) a higher L3/equity ratio than Morgan Stanley. The next runner up after Morgan is Lehman Brothers. 'Nuff said. Then after Lehman we have Merrill, the Street's latest whipping boy. Who sports the highest adjusted leverage on the Street (includint what was Bear Stearns)? I'll give you two guesses...
Also,
the growing proportion of level 3 assets in Morgan Stanley’s total
asset exposure is raising investors’ concerns over expected write downs
in the coming quarters. The bank’s level 3 assets have increased partly
due to re-classification of assets from level 2 to level 3 on account
of unobservable inputs for the fair value measurement. During 4Q2007,
Morgan Stanley re-classified $7.0 bn of funded assets and $279 mn of
net derivative contracts from level 2 to level 3. Morgan Stanley’s
level 2 assets-to-total assets ratio declined to 5.2% in 4Q2007 from
8.9% in 1Q2007 while its level 3 assets-to-total assets increased to
7.0% in 4Q2007 from 4.3% in 1Q2007 indicating growing uncertainty
associated with valuation of assets not readily marketable. The trend
can be expected to continue in the coming quarters as uncertainty
associated with realizing values from illiquid assets continues to grow.
The following is excerpted from a post that I made in April - most prescient. Remember, back in April most sell side houses had buy recommendations on Morgan AND Lehman with targets in the 60 dollar range. With friends like those, who needs enemies.

On a different, but related, note we seem to have Lehman playing hide the sausage with losses.

The most recent 10Q has a realized gain of $695 million in the Corporate Equities line for Level II assets, (see Banks, Brokers, & Bullsh1+ part 1 for bullsh1t updates - I just knew I would get to use this link againCool).
Comparing this to prior quarters shows a significant jump, averaging
considerably less that $70 million, with the largest being $135
million. This is even more fishy considering equities on a global basis
were trending downward for the reporting period at hand. I know that
level III is supposed tto represent assets with no observable inputs,
but come on now, where were these equities as the global markets sank,
Mars? Okay, maybe Pluto since Mars may be a little less hospital to
financial entitiy life forms.

We also have gains of approximately $550 million from proprietary investment activity.
I read this as benefits from playing with adding assets to level three
at values they "think" are higher than last reporting period since
there are no observable inputs to tell them otherwise (except for a
global drop in fixed income and equity prices - but why let that rain
on the parade). We now have a new meaning for the term prop desk.

These unrealized Level III equity asset gains were millions of dollars
more than what Lehman reported as pretas income for the quarter. That
should scare anybody long in the stock. If it it doesn't make you wet
your pants, just remember that they also booked about $600 million in
FAS 159 gains to arrive at about a $500 million profit for the quarter.
FAS 159 gains are for the most part phantom gains (this was addressed
in detail in the Reggie Middleton on the Street's Riskiest Bank - Update,
and I will excerpt it llater on in this missive as we illustrate MSs
games). Take these two tidbits of data in perspective, and Lehman took
a very deep loss last quarter, and rallied hard on the their results,
on top of it. I believe they were a good short before the price pop,
and they are an even better short with the stock 20% higher. I may
even consider welcoming an SEC investigation against me for shorting
the stock. We can open my trading books, research and blogs, and in
exchange we can also open Lehmans books to see if my research,
observations and assertions had any merit or empirical standing - Uh
Oh! Here comes that Jack Nicholson effect again, after all, all we want
is the truth. "The TRUTH! The TRUTH! YOU CAN'T HANDLE THE TRUTH!!!" I love that scene...

Lehman and it's MSRs: Multiple Statutory wRightups!

With Bear Stearns gone (Is this the Breaking of the Bear?),
Lehman is the undispute king of MBS on the street. They are, as a
result of being so involved in the industry, rich in MSRs (it really
stands for mortgage servicing rights, I was just being an asshole in
the subtitleFoot in mouth,
or was I?). Lehman wrote UP the value of these assets. Granted, with
the current financing home sales market slowing to a crawl, prepayments
have dropped considerably, giving a plausible gain to these rights
since they will not be eliminated through loans being retired, but their amortization rates fell below the reduced (by one third) long term assumptions. Thus, they are not only kitchen sinking for this quarter, but this is a) a non-cash gain
(yeah, like the level III hide the sausage game and the FAS 159 benefit
- so "Where's the cash?"), and b) supposedely a hedge (albeit an
imperfect one) against Alt-A impairments - we may see some horrow
related to this in the future.

Morgan Stanley guys teasing the Lehman guys - "My sausage is bigger than yours..."

The Reggie Middleton on the Street's Riskiest Bank - Update
piece was posted right before Morgan reported. No need to fret though,
there were no surprises and they are still the riskiest bank on the
street. I would like to not that many sell side instutions have buys on
Lehman and Morgan - some with price targets of $65! Whaaaatttt???!!
Methinks someone may be sniffing the ink off of the analyst reports
before it dries... Since I am just a neophyte individual investor and
blogger, I will try not to be intimidated by the big boys, but I must
disagree. Consider me the diminuitive captain contrarian.

In the recent 10Q, Morgan's gains from level III assets were exactly 100% more than the level III asset gains for ALL OF LAST YEAR!
This was during the roughest and most illiquid structured product,
fixed income, and most volatile equity quarter in recent history, if
not ever. Hmmmm! I wonder... Oh yeah, they get to determine the values
of level III assets, not the market (Banks, Brokers, & Bullsh1+ part 1)
- and did they need to do some constructive determining this quarter.
Instead of going into MS assets indepth, I will defer to the full
report: Reggie Middleton on the Street's Riskiest Bank - Update,
but will point out a few interesting tidbits. The report shows a
constant trend of shifting assets from Level II to Level III,
presumably as they become impossible to value due to illiquidity, in
other words - are worth less - this increase is despite impairments
incurred in extant level III assets. It appears that as these assets
are shifted from level II to III, they may also be revalued to the
upside.

Published in BoomBustBlog

This is the Fannie/Freddie recap, and their addition to the Asset Securitization Crisis. They were taken over just before they had to roll over a $223 billion of debt. Nick of time financing measures...

The Asset Securitization Crisis Analysis road-map to date:

  1. Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
  2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
  3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  5. Municipal bond market and the securitization crisis - part I
  6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
  7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  9. More on the banking backdrop, we've never had so many loans!
  10. As I see it, these 32 banks and thrifts are in deep doo-doo!
  11. A little more on HELOCs, 2nd lien loans and rose colored glasses
  12. Will Countywide cause the next shoe to drop?
  13. Capital, Leverage and Loss in the Banking System
  14. Doo-Doo bank drill down, part 1 - Wells Fargo
  15. Doo-Doo Bank 32 drill down: Part 2 - Popular
  16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
  17. The Anatomy of a Sick Bank!
  18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
  19. GE: The Uber Bank???
  20. Sun Trust Forensic Analysis
  21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
  22. Goldman Sachs Forensic Analysis
  23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
  24. Pt one of three of my opinion of HSBC and the macro factors affecting it
  25. The Big Bank Bust

st1:*{behavior:url(#ieooui) }

  • Fannie Mae & Freddie Mac - Who will finance their future?

Fannie Mae and Freddie Mac were formed as government agencies to expand home ownership and provide stability and liquidity to the secondary mortgage market. The continued decline in housing prices in the US has resulted in huge write downs in the residential mortgage backed securities market. The S&P Case Shiller home price index has been declining consecutively for the last 23 months; it fell 0.5% in July 2008. The imminent threat to Fannie Mae's and Freddie Mac's combined debt of US$1.59 trillion, and lack of financing options have raised doubts about the viability of mortgage companies.

Published in BoomBustBlog

For those who haven't read my verbose missive: The Asset Securitization Crisis Series to date, please do. The macro stuff is free, and the micro stuff is more than worth it. I made very clear the following would happen and laid out the case from a logical perspctive as well as a historical one - while the Street and media were declaring ths a "Supbrime" crisis that would be contained. 100% of my research resources have been following this path for the last couple of months and it is starting to bear fruit. If you thought the homebuilders/insurers/CRE/investment banks and regional bank research seemed prescient, you ain't seen nothing yet!

From Bloomberg:

Bank of America Says Losses Shift to Commercial Loans

By David Mildenberg

Sept. 10 (Bloomberg) -- Bank of America Corp., the biggest U.S. consumer bank, said credit weakness is spreading to commercial borrowers from residential customers and loan losses probably will deepen in the third quarter.

Home builders unable to repay their loans are contributing to deterioration among commercial borrowers, said Brian Moynihan, head of the global corporate and investment banking unit, at a New York conference today. More than half the Charlotte, North Carolina-based bank's $13.4 billion in loans to builders are considered troubled, 19 percent are not paying interest and losses are likely to mount, Moynihan said.

Bank of America's commercial loans were $335 billion as of June 30, and a home-builder portfolio that accounts for less than 4 percent ``won't create major pain for us, but it's going up,'' he said. ``It's not pretty.''

Published in BoomBustBlog
Wednesday, 10 September 2008 01:00

The Big Bank Bust

I have commissioned additional work on the banking crisis, for I feel we are at the nadir of another BIG downturn. More than one of the big institutions are at the brink of a bust, and I think the markets are generally too optimistic. Let's add to where we have come thus far:

The Asset Securitization Crisis Analysis road-map to date:

  1. Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
  2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
  3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  5. Municipal bond market and the securitization crisis - part I
  6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
  7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  9. More on the banking backdrop, we've never had so many loans!
  10. As I see it, these 32 banks and thrifts are in deep doo-doo!
  11. A little more on HELOCs, 2nd lien loans and rose colored glasses
  12. Will Countywide cause the next shoe to drop?
  13. Capital, Leverage and Loss in the Banking System
  14. Doo-Doo bank drill down, part 1 - Wells Fargo
  15. Doo-Doo Bank 32 drill down: Part 2 - Popular
  16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
  17. The Anatomy of a Sick Bank!
  18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
  19. GE: The Uber Bank???
  20. Sun Trust Forensic Analysis
  21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
  22. Goldman Sachs Forensic Analysis
  23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
  24. Pt one of three of my opinion of HSBC and the macro factors affecting it

Now, on to the Big Bank Bust and its Impact on the Real Economy - the next major installment of the Reggie Middleton on the Asset Securitization Crisis (this, combined with my trades and blog/media experience should be a book one day).

Before we go one though, the let's take the tab of the effect of the bust on the big banks...

A) The story so far...

Commercial and Investment Banking no more in vogue

  • Asset writedowns surpass US$500 billion

Since the beginning of the crisis, the global banking community had asset writedowns worth more than US$550 billion. This asset securitization crisis, which initially manifested itself as a subprime mortgage problem, has spread to other asset categories and has become a full fledged credit crunch. The problem is not restricted to the US alone, with banks across Europe and Asia recording significant asset writedowns. The US subprime mortgage market's collapse in 2007 has led to banks worldwide reporting US$508 billion in losses due to declining value of papers/securities tied to home mortgages, commercial mortgages and leveraged loans.

Published in BoomBustBlog
Wednesday, 10 September 2008 01:00

Speaking of S&P valuations...

Speaking of valuation, the volatility of the financial components in the S&P (and the S&P in general) is easily double the historical average. This drives up the cost of capital, a major component in DCF. If there is even the slightest whiff of an uptick in interest rates - Look out below! Book values are also being misinterpreted. LEH is allegedly trading at 25% book value according to those on the Street. If that is the case, then why can't they find a suitor? We all know why! LEH is probably currently trading at a slight premium to real book value, if not par!

People who should know better think that stocks are cheap now because their prices went down. They are going to get burned, again.

Published in BoomBustBlog
Tuesday, 09 September 2008 01:00

GSE's make the Doo Doo smell worse

From the FT.com :

Fannie and Freddie’s combined $36bn of preferred stock is widely held by US regional banks. These banks will be forced to take significant write-downs of their holdings.

Few banks have provided detailed disclosures on the extent of their holdings in Fannie Mae and Freddie Mac, but among those that could be most affected are Gateway Financial Holdings and Midwest Banc Holdings. According to recent research by analysts at Keefe, Bruyette & Woods, both banks have exposure that amounts to more than 30 per cent of their tangible capital.

Now, I understand and agree with the argument that the bailout was necessary to prevent a run on US government backed debt, but this is far from a reason to rally or celebrate. Let's take a look at what Paulson has done to the Doo-Doo 32.

We looked at the filings of most of the 32 banks of the doo doo list. It is to be noted that GSE exposure includes the banks’ holdings in senior debt or mortgage-backed securities, which could virtually be certain to be protected under any bailout scenario of Fredic Mac and Fannie Mae. Banks’ holdings in common, preferred or subordinated debt face higher risk of being wiped out (although it appears that the sub debt may be protected as well, eventhough it may be considered a form of additional moral hazard).

Only
a very few banks have disclosed how much of their exposure to GSE is in
preferred stock, common shares or subordinated debt on a granular
basis.

Key observations:

  1. Wells
    Fargo, M&T Bank and Sovereign Bancorp have exposure of 5.2%, 5.4%
    and 8.7%, respectively, of their total equity into preferred shares of
    GSEs.
  2. Banks have very nominal exposure to common equity shares (currently near worthless) of GSEs as % of banks’ total equity.
  3. Banks’
    total exposure to GSEs securities (including senior debt) is 129.1% (as
    % of total equity) for Popular, 62.3% for Sovereign Bancorp and 53.4%
    for Glacier Bancorp

M&T does not have capital to spare. There ratios are thin enough as it is, and the preferred investments should be just about wiped clean. As for Wells Fargo...

Published in BoomBustBlog

In reading an article in the NY Times just now, I came across this poignant statement:

The Treasury secretary, Henry M. Paulson Jr.,
who won authority from Congress last month to use taxpayer money to
bolster the companies, always maintained that he hoped never to use
that power. But, as the companies’ stocks continued to languish and
their borrowing costs rose, some within the Treasury Department began
urging Mr. Paulson to intervene quickly.

Then, last week, advisers from Morgan Stanley
hired by the Treasury Department to scrutinize the companies came to a
troubling conclusion: Freddie Mac’s capital position was worse than
initially imagined, according to people briefed on those findings. The
company had made decisions that, while not necessarily in violation of
accounting rules, had the effect of overstating the companies’ capital
resources and financial stability.

Indeed, one person briefed on
the company’s finances said Freddie Mac had made accounting decisions
that pushed losses into the future and postponed a capital shortfall
until the fourth quarter of this year, which would not need to be
disclosed until early 2009. Fannie Mae has used similar methods, but to
a lesser degree, according to other people who have been briefed.

Is
anybody truly surprised? These companies used massive leverage to write
and/or insure trillions of dollars of loans, many of which were written
on top of the largest real asset and credit bubble in modern history.
It was bound to happen. I have went through this in excruciating detail
(see The Asset Securitization Crisis).

Does
anybody truly think that "real" privately owned and publicly traded
banks operated any differently. Reread the NY Times quip above, then
visit my findings (yes, I was the first) on Wells Fargo accounting
proclivities below. An excerpt:

Increasing provisions and chare-offs

· In
1Q2008, WFC’s NPAs increased to over 1.16% of total loans from 1.01% in
4Q2007. Overall NPAs increased to $4.5 bn from $3.9 bn in 4Q2007. NPAs
in real estate construction loans witnessed highest increase of 49% to
$438 mn in 1Q2008. NPAs of C&D loans stood at 2.32% of total
C&D loans, followed by real estate 1-4 family mortgage (1.91%)
and lease financing (0.83%)

· Wells Fargo’s gross charge offs increased to 0.46% of total loans compared to 0.37% of total loans in 4Q2007. C&D
loans witnessed the highest increase in charge-offs with an increase of
nearly three-fold to $29 mn in 1Q2008, showing signs of increased
stress in these loans.
Real estate 1-4 family junior
lien mortgage, credit card loans and Other revolving credit and
installment had charge-offs of 0.61%, 1.68% and 0.98% to total loans,
respectively.

· However
despite increase in NPAs and increase in charge offs, Wells Fargo
provision for credit loss sequentially declined to $2.0 bn in 1Q2008
from $2.6 bn in 4Q2007. (0.52% of total loans in 1Q2008 from 0.68% of
total loans in 4Q2007) raising concerns over possible inadequacy of
provision amount.

· From
April 1, 2008 onwards, Wells Fargo has changed its home equity
charge-off policy to 180 days from 120 days previously. Amid current
deteriorating credit markets with residential sector showing no signs
of recovery, it is quite understandable that the bank has changed the
policy in a bid to defer recognition of provision and charge-offs.


Published in BoomBustBlog
Sunday, 07 September 2008 01:00

More thougts on Fannie and Freddie

In the media, it appears as if some are speculating that the government takeover will somehow improve the US housing market. Let's get this straight. The reason why Freddie and Fannie are in this mess now is because they took on more business than they could afford to handle. Lots of leverage, overly cheap (as in below market rate) capital, and imprudent management decisions hath wrought this wrath of the economic gods. If the government were to fix this problem, it would only be by the exercise of prudence. That means no supporting trillions of dollars of lending and insurance with billions of dollars of capital. That means real and selective underwriting. That ultimately means much smaller companies that will lead to much less mortgage market liquidity. Its the only way. No more monopol money, no more somethings for nothings.

I am glad that the Morgan Stanlely suditors were able to see through risk hiding and accounting shenanigans. Now, that they are finished, they should return to the MS headquarters in Time Square and dig into their own books. Morgan Stanley is still, after all, the Street's Riskiest Bank!

Hey, not to pick on just Morgan Stanley, Wells Fargo , the entire Doo Doo 32, Fannie and Freddie, there are also the investment banks. We already went through Bear Stearns (where I warned you months before the collapse), the monolines (too many warnings to go through here, see the archives), but the other investment banks are using the venerable fuill of sh1t accounting methodology to account for assets, liabilites and losses. Do you remember my admonition regarding Goldman Sachs and the Golden Boys (see Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street and Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis), well not only has that trade yielded handsome profits but it has not even come close to coming to its full potential. These financial sector guys are time bombs! The worst is ahead of us. Consider yourselves duly warned. The revolution will not be televised.

When, not if, the next big blow up occurs, it will push the next leg of my investment thesis into overdrive. As it is, the RE and investment portion of the thesis as yielded risk adjusted returns that have more than proven my point.

Published in BoomBustBlog
Friday, 05 September 2008 01:00

NY Times on China's bind

Main Bank of China Is in Need of Capital


HONG KONG — China’s central bank is in a bind.


It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.


Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.


Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.


This is actually an interesting article and I urge you to read the rest . As you know, I have been bearish on the Asian nations and the chickens are finally coming home to roost. See my China macro update .

Published in BoomBustBlog

From CNBC , that bastion of financial news stuffs:

Pimco’s legendary bond investor Bill Gross said during “Street Signs” Thursday that his firm would be staying out of any and all bank offerings for the foreseeable future.

Banks the world over have raised $400 billion in capital, Gross said, and may need to raise much more. The problem, though, as yesterday’s $1.5 billion preferred offering at Wells Fargo showed, is that the institutional buyers are full, leaving only small investors to pick up the slack.

As Gross said, “There’s only so many billion and a half small investor bank capital deals that can be done from this point forward.”

Don't say I didn't warn you about Wells Fargo (no wonder why they're raising capital) - see my Wells Fargo work: drill down, the forensic analysis and the Q2 highlights.

Published in BoomBustBlog