Displaying items by tag: Asset Securitization Crisis

I realize that many on the Street probably detest Matt Taibbi, but love him or hate him his expose on Goldman Sachs (Taibbi's Takedown of 'Vampire Squid' Goldman Sachs) was not only a phenomenally interesting read, it brought immense amounts of attention to Goldman Sachs - albeit, practically all extremely negative! Long story, short Taibbi has become a contemporary, literary force to reckon with by creating annals of the arcane, yet mundane annals of financial engineering and making it a damn interesting read. His latest piece on Fraudclosure, albeit quite one-sided, is also quite good. You see, he can get away with being one-sided on this topic, for the banks actually have much, much to apologize for. So, round 1 was Goldman Sachs, and round 2 appears to be Citi, Deustche Bank, Wells Fargo and JP Morgan. Here are a few interesting quips from Matt Taibbi: Courts Helping Banks Screw Over Homeowners -

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I feel this month has thrown enough events at the market to force it to start taking the real fundamentals into consideration. Of course, battling this ideal is the US Federal Reserve and their QE 2.1 policy. This should be a time to reflect upon exactly where we stand thus, I will review my thoughts and observations over the last 30 to 45 days and then summarize a truly unbiased and independently calculated view of the downright nasty side effects of the US shadow inventory of distressed housing. All paying subscribers can download the full shadow inventory report here: File Icon Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel - Shadow Inventory.

Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves and provisions to pad lagging accounting earnings under the auspices of increasing credit metrics are simply setting their investors up for a major reversal which will bang those very same accounting earnings: JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! and ).

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Summary: Banks, Insurers and ratings agencies conspired to move junk assets that were guaranteed to implode. They were (Wall)Street hustling, 3 Card Monte style.

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From an astute BoomBustBlogger that reads the fine print buried in the middle of a 250 page servicer agreement...



3.12 Realization on defaulted mortgage loans CitiMortgage will use its best efforts, consistent with its customary servicing procedures, to foreclose upon or otherwise comparably convert the ownership of properties securing any mortgage loans that continue in default and as to which no satisfactory arrangements can be made for collection of delinquent payments pursuant to section 3.2. Consistent with the foregoing, CitiMortgage will use reasonable efforts to realize upon defaulted mortgage loans in a manner that will maximize the receipt of principal and interest by the certificate holders, taking into account, among other things, the timing of foreclosure proceedings.

If a deficiency action is available against the mortgagor or any other person, CitiMortgage may proceed for the deficiency. CitiMortgage may retain 25% of the net proceeds received from a mortgagor pursuant to a deficiency action as compensation for proceeding with the deficiency action.

The reader's interpretation was slightly off. The servicer get's to go after the mortgagor in a delinquency action. Please let it be known that this in know way alters the conflicting dynamic that allows for the servicer to push certain mortgagors into foreclosure vs a mod work out. If you are self-employed and judgment proof, you are more likely to get a mod than if you are high income with a steady job with garnishable wages. The profits could very well keep rolling in. Let's engage in some chart porn...

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Summary: Morgan Stanley is also extending its abysmal track record in CRE with the 97% in Revel. The bank took an effective loss for the common shareholders, even when backing out the DVA effect (which is a non-cash charge) as long as you normalize one time items. There is plenty more pain in RE to come, and Morgan's track record is horrendous at the same time expenses are rising with talent fleeing.

The Morgan Stanley Q3 2010 forensic report and updated valuation is now available for download to all subscribers - File Icon Morgan Stanley Q3 2010 Analysis and Updated Valuation. I will be exporting strategic portions of the model for pro and institutional subscribers over the next few days which will allow a forensic view of the balance sheet holdings. Below is an excerpt of the report, as well as some links to the mainstream media's reporting of Morgan Stanley's quarterly results to allow subscribers to discern the difference in both our approaches and results.

Mainstream Media's Reporting of Morgan Stanley's Q3

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I have taken the liberty to excerpt a few paragraphs for those that don't subscribe in order for you to ascertain the difference between reported news and analysis. Feel free to click on any page to enlarge to print quality size.

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It is interesting to see what the analysts on the Street have to say about the companies that I have have commented on in the recent past. Let's traipse through a summary of opinion...

Research Analyst
Company Opinion (10/22/10 – 10/25/10)
Thomson Reuters hold Buy buy hold
Ativo Research sell Strong sell Strong sell Strong Sell
Columbine capital Services Inc. Neutral Sell sell sell
Value Line 4(below Average) 3(AVG. Performer) 3(AVG. Performer) 4(Below Average)
Ford Equity Research Neutral Stong Buy Neutral Strong buy
S&P 3 Star 5 star 3 Star 4 Star
Meredith Whitney advisers hold hold hold
Barclays Capital overweight Equal Weight overweight overweight
Wells Fargo outperform outperform Market Perform
J.P.Morgan overweight overweight overweight
Deutsche Bank buy Buy
Jefferies & company buy
PiperJaffray overweight
Stifel Nicolaus Buy

Here are a few excerpts from the various reports...

Comments from various analyst for JPM

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Zerohedge had posted an article this morning that brought back memories of how lonely it can be to have a contrarian, dissenting opinion - Ambac Does Not Make November 1 Coupon Payment, To File Bankruptcy Within A Month If Unable To Raise Additional Capital . You see, I have alleged Ambac to be insolvent for 3 years now - seriously, Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion in Equity! This post was written in November of 2007. On November 1st, 2010 the chickens are now coming home to roost (again). Of course, the sell side never really agreed with me. After all, there are two sides to every trade (excerpted from the afore-linked article)...

Bank of America Top Picks (June 2007)

Ticker Rating Price Target Price as of 11/29/07 Profit on the BofA Call % Profit
SCA B $23.60 $37.00 $6.69 ($16.91) -71.65%
MBI B $60.33 $85.00 $30.04 ($30.29) -50.21%
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You really can't get rich listening to these guys. Hopefully, you can see where the use of their default data is a conservative approach (even a bit rosy), albeit tweaked ever so slightly for the sake of reality. As you may have ascertained, I do not put a lot of faith in sell side research. I have even less faith in the big three rating agencies research (although Fitch is trying to be taken seriously). Thus, even if they deem ABK and MBIA not in need of more capital, that is near meaningless in my book. These are the same companies that rated the insured portfolios AAA a year or two ago that are now taking up to 20%+ losses.

Of course, this may not be surprising to some, since the best performing sell side analyst during this time period (save yours truly, of course) only racked up 38% in accurate calls: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

We also have to contend with the moral hazard/bailout issue. If you read my earlier missive on MBIA, I detailed the rating agencies' dilemma.

Six Degrees of Separation: Guess who Ambac insures!

Bank of America issued a report on the monoline insurers on July 30th, 2007 that states that ABK’s RMBS exposure to troubled companies is limited to only 4 cos. with vintages primarily in the early years excluding two relatively well performing underwritings. Despite this, they failed to include in this caveat the consumer finance insureds:

    • Countrywide, which probably has one of the worst performing portfolios in the industry;
    • GMAC, who has also suffered significant losses that GM has been forced to cover, hence hampering a clean sale of the company;
    • Indymac, another company that is saddled with mortgage related losses that is on the insured’s list (Indymac and Countrywide have had their shares more than halved in the last few months. I was short these companies. CFC may go bankrupt);
    • Lehman brothers has some losses to contend with as well, but I don’t know to what extent since I don’t follow it – I do know that they are the 2nd largest MBS house on the street, next to Bear Stearns;
    • Greenpoint Mortgage Funding is defunct, wound down due to losses;
    • Then we also have Citimortgage (SIV king whose own mortgage portfolio is a mess);
    • Accredited Mortgage Loan (bankrupt or close to it);
    • Wachovia (just reported a billion plus writedown on mortgage assets);
    • Countrywide Revolving Equity Trust/Alt-A trust (need I say more about undocumented 2nd lien loans from this lender);
    • Option One Mortgage Trust (nearly defunct due to mortgage losse);
    • BofA, mulit-billion dollar mortgage asset writedown;
    • and Newcastle – who I believe is either out of business or close to it. I stopped following it some time ago.
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Here is a presentation using readily available data from the Federal Reserve and BoomBustBlog illustrating what clearly shows we have not come anywhere near the peak of the economic downturn IF you believe that real asset prices, economic housing activity and bank lending and available credit are gauges of, and effect, economic health.

Since the loan peak of 7.3227 trillion for week ending 10-22-08, total loans and leases at banks have dropped over 500 billion dollars.  That big spike on April 1st was due to an FASB rule change that forced some 452 or so billion in off-balance sheet stuff back on their books.  Basically, this was not new lending, it was lending that was held off balance sheet. Despite the stimulus that was supposed to increase lending, the current total loans and leases is now at 6.7889 trillion.  This is a drop of $533.8 billion.  Not counting the +452 to 515 billion resulting from that rule change, the drop is ~1,000 billion.  In other words, we've had total loan retraction in the amount of nearly a trillion dollars since the bailout - green shoots, end of the recession, no chance of a double dip (because we never left the first one) and all. Unbelievable.

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It has come to my attention that several banks have actually blocked rank and file level access to my blog through their intranet. That, my dear friends, is asinine, and does nothing but engender distrust. While I admit I can be rather flamboyant in my writings, I am nonetheless quite fair. In addition, my opinions are analytically driven, by design. Thus, if you have a differing opinion all you really need to do is challenge me with the facts. One of us will be proven to be right, or at the very least it will be shown to all how we came to our conclusions. I have absolutely no problem admitting when I am wrong or have made a mistake. I have been right long enough and often enough that I have plenty of emotional and even egotistical room for error. I know fully that no one is perfect, and while I would much rather catch any error first, before a third party does it (particularly a dissenting third party) I know that things don't always happen that way.

A commenter had a very intelligent dissent against my Goldman Sachs post on Zero Hedge the other day. While cogent, eloquent and very lengthy, it was still wrong but it definitely exemplified what a bank (or any other entity) should do when they feel that I am not in the right. Of course, if you put yourself out there, there is always the risk that you can be proven wrong as well. Believe it or not, and contrary to what you marketing and PR advisers may tell you - it is alright. As a matter of fact, it is actually good sometimes. You see, to many of the people that matter, it is not only acceptable, it is expected that you will not be right all of the time. Anybody who is right all of the time should be held up to a much higher level of scrutiny. Just ask Bernie Madoff. The true test of character and fortitude is to be able to publicly admit when you have made a boo-boo, and be willing to do something about it. That goes a lot farther in my eyes, than abject perfection. This is a lesson that the global and national banking industry in the US has yet to learn.

On that note, let's go over a few emails that I have received recently...

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