Monday, 28 February 2011 17:16

You've Been Had! You've Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do!

Many people ask me for investing advice, something that I am quite reticent to give over casual conversation. There is one aspect that I do offer freely though, and that is the push for the return of common sense. When people ask me what sectors to invest in, and whether banks are a potentially good buy or not, I remind them that buying stocks for the longer term is no different than buying a chunk of any business. The question is, "Is this a good business prospect?".

Just imagine if I came up to you and pitched my business for an investment along the lines of the following...

"Listen, Dude! I have this big banking business that does several billion dollar per year. It is very sensitive to the business cycle and as you know, Tim Geithner and Ben Bernanke - two of the smartest and most honest people this universe has ever experienced - says that the worst is behind us and the economy is growing. Hey, even the NAR says that we should buy a  house now, and they have those high falutin' fancy economists to crunch numbers for them. So, with that being said, all you have to do is look past the fact that I had to get bailed out by the government several times to the tune of many billions of dollars. My lawyers may also want me to disclose that some smart ass investor/blogger types say that we are coming off a high in the business cycle, but we have Optimism Driven Reduction of Risk Reserve due to our very rosy outlook. Due not be deterred by the fact that the collateral behind our loans has depreciated by as much as 42% and is still on the downfall. I know that blogger/investor guy that is starting to get a few seconds of airplay says we are in a Real Estate Depression That Is About To Get Much Worse, but truth be told, it's really a matter of semantics. A depression is generally a 20% drop in values surround by severely depressed economic activity. We are experiencing 40%+... See! The numbers don't match. It ain't a depression! What that blogger dude fails to realize is that my whole industry is under the protection of the US gubment - that's right, we are directly indemnified by .GOV. In case you didn't get the memo, FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!

We have put out record profits, as the government supports our paying out that vast majority of what should be retained earnings as salary, bonus and other unearned compensation. As a matter of fact, the government has actually funded this exercise with tax payer dollars! I'm telling you man, this is the best gimmick since that PT Barnum guy and his snake oil. There's an ass for every seat." [continue reading up on this topic, for it is highly illuminating. Of course, it doesn’t end there. After all, Buried Deep Within The Files That The Federal Reserve Released On Their MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks]

Does this sound like a sound investment to you?

Yes, I know the government has bankrupted the country to save the banks, and I know that the government has allowed the banks to trade "funny money" so they don't have to produce the real stuff. Most people think that, with the mark to market rules totally obliterated, the banks are home free. The problem is that it was never the mark to market rules that were the problem in the first place. It was overt leverage and depreciating (trash) assets, resulting in negative equity (insolvency). Nothing has changed. Remember, I called both before their respective crashes and called the reasons for such in ample detail:

  1. 2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings from the sell side and investment grade AA or better from the ratings agencies - see Is this the Breaking of the Bear?
  2. One of several warnings about Lehman Brothers (May 2008):

Why didn’t Wall Street read my post on Lehman being a yellow lying lemon? See “Is Lehman really a lemming in disguise?” and realize that this post was made on February 20th, when Goldman Sachs had a recommended price of about $55 while this blog warned that Lehman may be done for. This very similar to when I warned about the potential demise of Bear Stearns in January, when the rest of the Street had a “buy” at about $130 per share. See Is this the Breaking of the Bear?. 7 We all know how both of these stories ended. Please click the graph to enlarge to print quality size.


So, what made Lehman Brothers and Bear Stearns go bust? Real counterparties and real investors wanting REAL money back, not accounting profits or the government's newly issued and sanctioned proxy for capital. Wjem JP Morgan and the other clearing houses and counterparties wanted to be made whole or have their deals properly collateralized, they failed to accept hopium, and didn't even want discounted pipes. They wanted real assets or cash, neither of which these banks had in abundance! Well, the same thing is happening again. Remember, about this time last month I issued the memo regarding Bank of America: Re: B of A – With Banks Being Forced To Admit The Inevitable Truth, How Long Will It Be Before Fundamentals Rule The Day Again? [be sure to follow all of the links below, they are worth the effort!]

As far back as 2009  (yes, over a year ago) I have been warning readers and subscribers of the (not so) hidden risks of putbacks, warranty and rep reserves, and the overly optimistic under reserving of the big commercial banks. I used JP Morgan as an example (see link list below), but made it clear this warning stood for several big banks(several of the big banks – As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves, As a matter of fact I said that the banks ‘ due to legal risk. This risk was significantly exacerbated the day after making that post, Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! wherein the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifying and vindicating my post from the day before and clearly demonstrates that 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!

I know many find this to be sensationalist, but they also found the bombastic posts of 2007 to be sensationalist as well, that is at least until 2008! We have mortgage situations where the actual BANKS are walking away from home, see Now, tell me how much the mortgages are worth behind abandoned houses – houses that were abandoned by both the homeowner and the bank? Although these are minority occurrences, I see them spreading away from the fringes and closer to the core as the economics of foreclosing on certain properties makes less and less sense in an increasing number of situations. All of this ranting and raving is simply to provide a background for the not so surprising development in the latest Bank of America quarterly earnings announcement. From Bloomberg: BofA Reports Loss on Costs Tied to Bad Loans, Mortgage Unit...

Well, guest who has popped up in the news again, and better yet - guess why...

Bank of America Sued by Investors Seeking to Unload Loans - Bloomberg

Bank of America, Wells Fargo May Face Fines on Foreclosures: 2 days ago - Bank of America Corp. and Wells Fargo & Co., the largest U.S. mortgage firms, said they may face fines or enforcement actions from regulators amid ...

Bank of America Says Putback Dispute Doubles With Pimco Group ...2 days ago - Bank of America Corp. said a bondholder group pressuring the lender to repurchase soured mortgages has almost doubled the number of securitizations on which ...

Bank of America Sued by Investors Seeking to Unload Loans - Bloomberg 4 days ago - Bank of America Corp. , the biggest U.S. bank by assets, was sued by investors in mortgage-backed bonds who are seeking to force the bank to buy back loans ...

Bank of America, KPMG Settlement With Countrywide Shareholders Is ...

Countrywide Financial Corp., the mortgage lender acquired by Bank of America Corp., and KPMG LLP, its former auditor, won final approval for a $601.5 million minimum settlement with Countrywide investors suing for securities fraud. U.S. District Judge Mariana Pfaelzer in Los Angeles today approved the settlement of the class action, which was revised in December to set aside $22.5 million for possible separate settlements after about two dozen institutional investors, including the California Public Employees’ Retirement System, opted out of the original $624 million agreement.

You see, you can kick the can down the road, lie about (and conceal) true market values, mislead the sheeple, but at the end of the day many seem to forget that there were investors and counterparties that funded many of these deals to begin with. When they come knocking on the door, they are not going to accept mark to mythology as payment in full. Hey, but it's different this time, right?! Bear could never happen again. It was a once in a lifetime occurrence, except for (of course) Lehman! Hey we finagled our way out of Merrill, who was sold to... Guest who?

You just have to be asking yourself by now, "Is Another Banking Crisis Inevitable?".

The chickens are coming home to roost, dude. When you send your chickens out in the morning, they return to your barnyard. Not your neighbor's barnyard, not the guy across the street, but your barnyard. Oh, I say it and say it again... You've had! Been took! Hoodwinked! Bamboozled! Led astray, run amok! This is what they do!

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Another stint on Max Keiser discussing what happens when its the banks that walk away from a home, phantom banking profits that never were, and more shenanigans that are the tour de force that is today's banking system and economy. To skip directly to the Reggie Middleton interview, move to 11:55 in the video.

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Last modified on Monday, 28 February 2011 18:16