Listen, even US Economic Cheerleader and Propaganda-in-Chief Ben Bernanke said it will be several years before growth and employment resumes. Sooooo…. What the hell are the boys (and girls) at JP Morgan doing????
Well fast forward three or four months and we get to see whether or not I had a point. You see, JP Morgan swallowed WaMu (who I warned would face peril in 2007) at a discount that is all but eaten up already as asset values continue to fall, and they swallowed Bear Stearns (whom I warned would fail in January of 2008) with government guarantees. Combine these with their own lending and you have a lot of potentially rotten assets smelling even more rotten. Now that the fraud which was mortgage paper keeping, transfer and assignment has come to light, it is just a matter of time before the even more material overstatement of values discussion becomes both commonplace and the subject of enough litigation to last several presidencies. Reference "The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!"
You see, JPM (and not to pick on them, so let's include their big bank brethren as well) so early stage delinquencies ameliorate, and as a result padded the lack of oomph in trading, asset management, core banking and I-banking with the release of accounting reserves. Either they purposely were looking to deceive or the honestly didn't look at the amelioration in the larger context (or of course, I could just be wrong - but I seriously doubt so). If you remember, I issued an explicit warning regarding watching price without regard to economic activity in The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression as well as paying heed to those who have vested interests in Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!.
Below is a chart which illustrates the folly of excluding economic sales activity from your real estate based decision making.
Well, the big banks which include JPM that released reserves and provisions just did the same thing. They saw this...
... and apparently believed that a) this positive trend would continue (unrealistically optimistic, but possible), b) collateral values will not collapse, c) this improvement was caused by organic means/economic growth and not government bubble blowing (and I am sure they knew better than that) and d) nothing else would or could go wrong. Well, all they had to do was to take a holistic view of the market before reducing provisions and they could have seen that although the credit metrics had improved slightly right after the government induced buyers to jump headfirst into a plunging housing market with suppressed mortgage rates and tax incentives, that the real world credit metrics were actually worse than they have been throughout this entire crisis due to the fact that economic housing sales have plummeted in relation to the deteriorating metrics, causing an increasingly large pipeline of bad assets to pile up on banks books. Just as an increasing price is misleading if you look at it in a vacuum, so are improving credit metrics. The NPA pipeline for the banks is not only getting longer, its the longest it has been since I can recall the data. This is a very bad thing.
Let's break this down...
The end result... Banks are becoming the country's largest REITs, sans the tax exempt trust part, and sans the expertise in managing properties.
As I anticipated way back in 2007, banks are becoming the largest homeowners in the country. Reference "Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?" from December of 2007:
I know I wouldn't. I believe there are better investments out there from a risk/reward perspective. Countrywide is in a bit of a jam, and it is not just from bad loans on the books. Looking at the Countrywide Foreclosures Blog (yes, there actually is one), I found this article:14,196 Homes Offered For Sale on Countrywide Financial's Website. I browsed through some of the site, and the small sample of numbers that I looked at seemed accurately reported. It also seems to mesh with Housingtracker.net. Browsing through the comments, someone noticed that the bank and trust offerings were not included. I looked, and at first glance, it seemed like he had a point. Now,it is a lot of work to verify all of this, but if it does pay out (and it looks like it does), Countrywide has nearly 100% of it market capitalization outstanding as REOs – in a market where houses just aren't selling and property values are falling fast. This is totally discounting each and every under performing and underwater mortgage asset they have on their books.
|Held by Countrywide Mortgage Co.||$ 2,910,876,468|
|Held by Countrywide Trust and Bank||$ 2,969,067,322|
|CFC Market Capitalization||$ 6,180,000,000|
|% market cap held as REO||95%|
Just some food for thought.
Now, fast forward roughly 3 years, and after Countrywide and WaMu collapse (as we at BoomBust anticipated back in 2007), and you find the biggest and most respected banks in the country are suffering from THE EXACT SAME PROBLEM!!!
Banks balance sheets are getting stuffed faster than ever with bad loans and foreclosures because the bad loans and foreclosures are occurring faster than the market is absorbing them. This means that the REOs are building up on the banks balance sheets (whether they properly disclose this or not) and it also means that the Fraudclosure issue will significantly exacerbate the problem, and it also means this problem will get much worse as housing activity AND prices are on the downturn again.
These factors should have been taken into consideration before even thinking of reducing risk provision measures. Of course, then you have FraudclosureGate, which delays the foreclosure process, further stuffing the pipeline. The result of FraudclosureGate will be the mad dash to put fraudulent loans back the originator. None of these occurrences will be good for the banks, particularly those banks that swallowed the NINJA loan mills.
Look here for some more sobering views...
As of last quarter (when the effects of .GOV bubble blowing just started to wear off) housing related NPAs (or what will become housing related NPAs with honest accounting) have SIGNIFICANTLY outstripped housing sales in both growth rate and amount.
If you have read this far, then you undoubtedly have an interest in the mortgage and commercial banking space. I will be releasing to paying subscribers updated bank valuations and quarterly earnings opinions that FULLY reflect the data above, plus much more that I didn't have time to delve into today. Stay tuned for analysis of JP Morgan, Morgan Stanley, Goldman Sachs, PNC Bank, Well Fargo, and Sun Trust Bank. Others may follow. Subscribers can scan the subscription archives for previous quarterly opinions, stress tests and full forensic reports of all of the aforementioned bank (click here to subscribe). As a subscriber, you also have access to all of the data and analysis used to create these charts, in addition to a more granular application, by state in the SCAP template and by region in housing price and charge off templates – see
- House price data, 2nd Quarter 2010
- Bank Charge-offs and Recoveries 2Q10
- The very extensive SCAP Assumptions, showing the credit metrics banks needed to submit for the stress tests of 2009, Updated for last quarter on a state by state basis_09082010 Web
See the following posts for an extensive background on the topics discussed in the video:
Subscribers should also review our forensic valuation reports, which have (thus far) proven to be right on the money in terms of JP Morgan:
The JP Morgan Professional Level Forensic Report (subscription only)
The JP Morgan Retail Level Forensic Report (subscription only)
Those that don’t subscribe still have a lot of BoomBustBlog JPM opinion and analysis to chew on, including a free, condensed (but still about 15 pages) version of the forensic analysis above. You can find it below this pretty graphic from “An Unbiased Review of JP Morgan’s Q1 2010 Results Yields Less Roses Than the Maintream Media Presents“…
- An Independent Look into JP Morgan (subscription content free preview!)
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 – JP Morgan
- Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!
- Anecdotal observations from the JP Morgan Q2-09 conference call
- Reggie Middleton on JP Morgan’s Q309 results
- Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results
- Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!
- Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
- Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
- Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
- Because 105% LTV On Depreciating Property Wasn’t Good Enough for the US Taxpayer…
- I Told You Housing Was Going to Take a Downturn for the Worse. I’ll Tell You Something Else, We Are in a Housing Depression! It’ll Get Worse Until Market Forces Rule Over Government Bubble Blowing!
- As I Made Very Clear In March, US Housing Has a Way to Fall
- It’s Official: The US Housing Downturn Has Resumed in Earnest
- The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream Media