- Sun Trust: Recipient of government/taxpayer bailout, share price collapse
- Popular: Literal share price collapse. down 83%
- Countrywide: Total collapse, purchased by Bank of America. Collapse was forewared nearly a year earlier. See Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide
- WaMu: Total corporate collapse, saved by last minute (and contested) rescue by JP Morgan (as was Bear Stearns, which also collapsed under its own weight after I clearly stated it was done for - see Is this the Breaking of the Bear? I also explicitly warned about WaMu's issuess in the Countrywide link above. It's mortgage division took 5 consecutive quarterly losses starting in 2006 before the company started having corporate-wide issued.
- Wells Fargo: Recipient of multi-billion bailout
- KeyCorp: share price collapse
- Synovus Financial Corp: share price near total collapse
- Marshall & Ilsley: share price near total collapse
- Associated Banc: share price near total collapse
- First Charter: near collpase
You should be seeing trend by now. Here are the rest of the banks on the old Doo Doo list. Pick you poison!
M&T Bank Corp - Huntington Bancshares - BB&T Corp - JPM Chase - U.S. Bancorp - Bank of America - Capital One - Nara Bancorp - Sandy Spring Bancorp - PNC - Harleysville National - CVB Financial - Glacier Bancorp - First Horizon - National City Corp - WAMU - Countrywide - Regions Financial Corp - Citigroup - Wachovia Corp - Zions Bancorp - TriCo Bancshares - Fifth Third Bancorp - Sovereign Bancorp
Now, how is it that I saw ALL of this happening and yet the regulators didn't? Well, I posit that, due to regulatory capture, the banking industry convinced the regulators to look the other way, not only until banks started collapsing, but afterwards as well. We all know that the regionals are in trouble now. Much of the trouble is due to 2nd lien loans, and high CRE concentrations. On that note, the Reggie Middleton 2010 Commercial Real Estate Outlook whitepaper has been updated with a few minor changes. Please feel free to download the new version here: CRE 2010 Overview.
So, what is being done to mitigate these problems??? Well, besides weakening the mark to market rules which caused bank valuations to jump in the face of continued credit deterioration in their assets, the regulators have allowed banks like those of the Doo Doo persuasion to gain leverage provided by the new rule FAS 115-2 (on recognition and presentation of other-than-temporary impairments) which came into effect in early June 2009. What does this mean? Well for one Doo Doo bank with a very high CRE concentration, nearly 50% of the losses are hidden from the public. Let's walk through the particulars...
· Zions has been transferring majority of its losses on valuation on stressed debt securities to accumulated other comprehensive income (loss) i.e. recognizing losses as a reduction in shareholders' equity.
· Over the last nine months till September 30, 2009, Zions has charged 58% of its impairment losses on securities as ‘noncredit-related losses' on securities (which are recognized in other comprehensive income (loss)). The remaining 42% is charged through the income statement.
· However, the company is able to do this in view of the leverage provided by the new rule FAS 115-2 (on recognition and presentation of other-than-temporary impairments) which came into effect in early June 2009. The company adopted the new rules (from 1Q2009) prior to the mandatory deadline of adopting it from 2Q2009 to pop up its bottom line. Under this new rule, if the owner does not intend to sell the security, the impairment for these debt securities is separated into the credit loss amount (which is recognized in the income statement) and non-credit loss amount (which is recognized in the other comprehensive income.)
The key is that the company has a lot of discrimination in deciding the share of credit-losses and non-credit losses, which provides a lot of leeway to the company in terms of the amount of impairment losses that can be transferred to "Other comprehensive income (loss)". As before the rule was implemented, if certain debt securities lose market value, the losses can be recognized as a reduction of shareholders' equity. Regulatory capital typically doesn't count such losses. But previously, if the losses persisted into future quarters, they usually had to be charged against income over time, where they would deplete regulatory capital.
With the most recent "regulatory capture" adoption, management has discretion to shuffle losses if the value drop is deemed to be that of an market movements that are not based on the fundamentals. Management also has leeway in determining if the securities will collect the expected underlying future cash flows, and if not then they have to book a credit impairment, which does effect earnings and regulatory capital.
As illustrated in "The Doo Doo 32, revisited" and "New Research Available on the Doo Doo Bank List", many banks are at risk from exposure to preferred securities issued by other banks, whether directly or through derivative structures and CRE. In the case of Zion, a CDO with initial exposure of $2.12 billion; it now has a market value of $1.1 billion, according to WSJ - just about half! The WSJ also reports tht Zions has taken $712 million of market losses on the CDOs through equity. However, the bank's total credit-impairment charges on all of its CDOs—not just those backed by banks—appears to be about $315 million. This management discretion thing is the kicker. When United Commercial Bank was seized, its preferreds were essentially reduced to nill, yet (again according to the WSJ), the Zion CDO model has a failure probability rate of 35%. 100% is a far cry from 35%. Zion's management states that the models are difficult to tweak due to fraud in underwriting. Well, if you know there is fraud, it should be modeled in. It is not that hard. If you need help, contact me and I will help you out. This goes for any bank or investor who has an interest.
Moreover, had the company not transferred the "non-credit losses" to "Other Comprehensive income" it would have reported even higher losses for the last three quarters of 2009. Shown below is the calculation for net earnings (loss) applicable to common shareholders including the non-credit-related losses:
Of course, thestreet.com suggests this as a speculative buy. I don't think so, but what do I know.
· The bank commercial real estate loans to tangible common equity of 4.68x.
· The banks’ Eyles test (a measure of banks loan loss reserve strength) is at 32.7% (i.e).
· The bank has negative cushion of 19.8% as of September 30, 2009.
· The banks NPA’s to equity as of 3Q09 stood at 96.9% while non performing loans plus 90 days past due loans to equity stood at 69.9%.
· The banks NPA’s to loans is at 6.6% while non performing loans plus 90 days past due loans to loans is at 4.8%.
· The bank has high adjusted leverage of 18.3x.
· The bank has market cap of $1.9 bn, share price of $13.76 and recorded a one month return of 5.0% and one year return of -46.2%, however the concern is that the share is already trading at low Price-to-tangible book value of 0.7x, thus I am releasing this information to the public.
There is another Doo Doo bank with a very high level of CRE exposure (see CRE 2010 Overview. for more on this) that is showing cracks and is trading at a premium to book value. Subscribers can download a snapshot and statistics here: Doo Doo 32 Member with high CRE concentration snapshot