Displaying items by tag: Asset Securitization Crisis

The mainstream media has gone Ga Ga over Morgan Stanley's latest results. Just take a look...

The Wall Street Journal Blog: Morgan Stanley Earnings: Sticking It to Goldman Sachs

Morgan Stanley, which beat earnings analyst expectations by posting better trading revenue than its rivals. While Goldman Sachs Group and J.P. Morgan Chase took hits to their trading books, Morgan Stanley’s trading revenue doubled to $3.1 billion from a year ago. What was the secret?

Well, apparently the secret was to get your ass handed to you in the previous comparable period while simultaneously under performing your peers, then turn in a simply below mediocre performance the next reporting period and you will receive accolades from the mainstream media. After all, who cares about those [BoomBust]Blogs who actually bother to read into the results.

The International Business Journal: Morgan Stanley earnings surge, credits trading revenues to DVA ...

On the revenues side, results in its three divisions were much improved from last year but slightly worse than last quarter. Net revenues in Global Wealth Management were impressive, coming in at $3.07 billion, compared to $1.92 billion last year and $3.1 billion last quarter.

Like rival Goldman Sachs (NYSE:GS), Morgan Stanley saw lower underwriting revenues from last quarter and last year, reflecting the difficult environment for investment banking. However, unlike Goldman, Morgan Stanley's trading revenues were strong, coming in at $3.3 billion, up 93 percent from last year and down 11 percent from last quarter.

I don't even think these guys bothered to read the results at all. They are comparing revenues pre-multi billion dollar acquisition with the post acquisition entity. Hey, I can double my revenues if I purchased a company that had 3x my revenues too! This is just sloppy! Yet, these euphoric headlines were all over the place as MS stock climbs nearly 10%. Yes, MS did relatively better than GS, but GS is a federally insured hedge fund (that's right, I said it), and we all know how most hedge funds do in times of volatility and declining prices. Well, I hate to rain on the positive earnings parade, but a couple of my subscribers have requested the truth be told!

Reggie's Take:

Published in BoomBustBlog
Tuesday, 20 July 2010 14:02

On Goldman's Latest Earnings Results...

CNBC (the world's biggest Goldman cheerleader) reports "Goldman Sachs' Revenue Falls, but Profit Beats Views" even as Bloomberg reports "Goldman Sachs Profit Falls 82%, Misses Estimates on Trading-Revenue Drop". Whoah... It's hard to get a straight answer out of these news guys, ain't it? Well, one thing they both have in common is that Goldman's trading revenue fell over 40%! Hey, I told you so. Reference my overview of GS's last previous quarterly performance, A Realistic View of Goldman Sachs and Their Latest Quarterly Results

For those who have forgotten the implications of the highly leveraged and opaque financial holdings (the true value of which rests at the mercy of market sentiment) and can turn blind eye to the highly volatile nature of the trading revenues combined with a literal tsunami of regulatory pressure and potential litigious onslaught (all issues which we have repetitively brought up in the past as what appears to be the sole voice of contrarian reason), Goldman Sachs holds  a strong investment proposition. However, if fundamental considerations such  as the company’s solvency, true economic profit (not the accounting earnings you hear preached from your brokerage’s sell side marketing propaganda research reports) and the sustainability of income are to be considered, GS should NOT appear among the preferred lot.

GS swims and sinks with the financial markets and the performance at the trading desks determines not only the profitability, but the survival of the Company. The market’s unfounded exuberance (largely driven by liquidity rather than fundamentals), combined with the collapse or near collapse of 3 of its 4 largest competitors  is enabling GS to generate extraordinarily strong trading results. Trading revenues which account for more than 60% of the revenues not only dictate GS’s profitability but also serves as a cushion to absorb the write-downs on the investments. Thus, Goldman Sachs is amongst the most vulnerable to a major market disruption which can severely dent its earnings stream and expose it substantial equity erosion from investment write-downs. Apart from that,  the recent fraud charges filed against GS not only adds to the risk of incurring huge litigation costs but also add to the risk of tighter regulation and oversight of the sector which can hinder the business activity in the coming years.

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JPM is leaving no stone unturned to prop up the operational performance and give out green signals, even if it involves the most unsustainable measures. While in 1Q10, trading income came to the rescue of the sagging core operations, in 2Q10, it was management’s over-exuberance (defying logic and rationality, to some extent) resulting in drastic reduction in loan loss provisioning and beefing up the bottom line. Although the credit quality has shown slight improvement (thanks to the enormous fiscal and monetary stimulus), it does not completely warrant for JPM’ unhealthy and hasty decision to substantially pare its loss provisions. I know many financial pundits second guess management as arm chair coaches, but when management error is egregious, well let’s let the numbers speak through graphics….

As Excerpted from As I Made Very Clear In March, US Housing Has a Way to Fall:

Trust me, the collateral behind many more mortgages will continue to depreciate materially as government giveaways and bubble blowing for housing fade!

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In a nutshell, a cursory glance of JP Morgan's recent earnings announcement is middling, and that's putting it optimistically. Revenue and profits have fallen nearly across the board, and the earnings beat is a result of moving capital from reserves to the earnings column. Even this may be suspect, for while credit metric trends appear to be improving (largely a result of massive government stimulus), the core, underlying cause of this malaise looks to be on the move downward again. See As I Made Very Clear In March, US Housing Has a Way to Fall.

I will be coming out with a detailed review of JPM's results shortly. In the meantime and in between time, refresh your collective memories with past analysis and opinion:

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!)

The JP Morgan Professional Level Forensic Report (subscription only)

The JP Morgan Retail Level Forensic Report (subscription only)

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

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Just after the HSBC Emerging Markets Index was released showing a marked slowdown in growth, HSBC Chief Economist Stephen King told CNBC news that Emerging Markets Hit a Bump in the Road. The is to be expected, with monetary tightening occurring in China (see and ), austerity measures being applied en masse in developed Europe (see The Pan-European Sovereign Debt Crisis) and the potential for a double dip in the US and UK. He also says that there is promise for the future, and I might even be inclined to agree with him, it's just that we need to get past the present first.

HSBC has a proprietary interest in the success of the emerging markets for they are highly geared into their growth and well being. With the developed nations of the west and Europe choking on debt overhang, the emerging markets are HSBC's key to growth, so it is very much the case that Mr. King is talking his book - which is not necessarily a bad thing, we just need to know all of the facts as they are laid before us.

I have just released our HSBC forensic analysis for the second quarter, and it is easily one of the most meaty reports that we have accomplished this year with 26 pages (Pro/Institutional versions) of fundamental, economic and macro analysis that truly picks apart both the inner workings and the future prospects of this bank. Below are some excerpts as applies to the topic of the emerging markets...

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I wanted to share a series of negative news flow relating to the weakness in the core businesses of the investment banks owing to increased volatility in the capital markets over the last few months. This ebb from the sell side trails the opinion of BoomBustBlog research which forwarned of the same very early in the first quarter as well as last quarter of 2009l The news flow points out that the upcoming results of GS, MS and JPM might be disappointing or below expectations - as if we already didn't know this.

  • According to some of the recent MSM articles, the recent surge in volatility has led to record low activity in the underwriting and M&A activity.

Global M&A value for the first half of 2010 grew 3% to $1.18 trillion, compared with $1.15 trillion a year earlier, according to Dealogic's figures. But while values were up against the year-earlier period, the $552.7 billion in value generated in the second quarter was down almost 7% compared with the first quarter of the year - WSJ.com.

Wall Street investment banks sold $1.36 trillion of stocks and bonds in the second quarter, down 33% from the second quarter of 2009 and the lowest quarterly total since the fourth quarter of 2008, according to Dealogic.

  • Also, the capital markets volatility will have severe implications for the trading revenues of investment banks like GS and MS which derive substantial portions of their revenues from trading activities. Analysts have been downgrading earnings estimates for these banks and GS’s earnings have been particularly slashed since it generates nearly 60-70% of total revenues from trading.

Barclays Capital analyst, Roger Freeman, cut earnings estimates for Goldman Sachs Group (GS) and Morgan Stanley (MS) on June 23, 2010. Freeman slashed his second-quarter profit forecast for Goldman by nearly 64% to $1.95 a share from $5.35 a share. Freeman is expecting 40% lower trading revenues in FICC and equity segments in 2Q10 against 1Q10. His estimate for Morgan Stanley dropped 29% to 55 cents a share from 77 cents a share - WSJ.com.

Bank of America analyst, Guy Moszkowski, also slashed earnings estimates for GS and MS. He revised GS’ 2Q10 earnings estimates to $1.76 per share, 51% lower than the previous estimate of $3.57. The new estimates reflect a 45% decline in equity trading revenue and 40% drop in fixed-income trading revenue compared with the first quarter. MS’s 2Q10 EPS estimate was cut 35%, to 58 cents a share from 89 cents. The estimate on JPMorgan Chase & Co. was trimmed to 70 cents a share from 77 cents, and Citigroup Inc. was lowered to 2 cents a share from 4 cents - Businessweek.

I would also like to add that the recent volatility and market decline has also impacted the AUM of asset managers and there has been downward price revision by analysts. The assets under management of BEN declined 5% (m-o-m) in May, 2010 and the June figures are not yet out. Consequently, the target price estimates have been lowered by many analysts. In June, FBR Capital lowered its target for BEN to $105 from $118 and Barclays capital lowered its target for BEN to $125 from $133. Analyst at Goldman Sachs have also made significant downward revisions in this sector.

Now, the news flow in light of applied BoomBustBlog research:

The Asset Manager Trade is Printing Money Almost as Fast as Ben Bernanke 

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Many people have asked me how SRS and REITs share prices can defy gravity the way they have given the abysmal state of  commercial real estate (CRE). Well my opinion is that the equity and the debt markets have allowed agent and principal manipulation to the extent that it materially distorts and interferes with the market pricing mechanism. Put more simply, its the result of widespread fraud and shenanigans - subprime 2.0, just with bigger numbers! If you have a trust or a company that owns a basket of X assets on a 50% leveraged basis, and those assets have decreased 40% in value, one should expect a requisite 80% drop in the equity value of said trust or company. Granted, this is an oversimplification, but the premise is solid. Instead, we have companies whose portfolios have fallen over 40% and whose share prices have increased over 100% from the market lows - heading into what is unmistakeably a worse macro environment and outlook in terms of interest rates, employment and economic activity.

This is a relatively long post, and purposely so, for its goal is to illustrate why REIT prices are defying gravity and what it will take to bring them back down to earth (a significant fall), as well as when. If you are the impatient type, or feel you have read this material already, you can jump straight to the bottom to access our freshly released REIT short list scan finalists for paid subscribers.

Make no mistake about the state of CRE, it is in bad shape. For those of you who react to graphs and spreadsheets, reference Reggie Middleton’s CRE 2010 Overview CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. Tuesday, December 15th, 2009. Those of you who like pretty pictures, unmistakeably grounded in reality, reference my visual tour of downtown Manhattan to Downtown Brooklyn from last year - “Who are ya gonna believe, the pundits or your lying eyes?” (for pictures) and “Who are you going to believe, the pundits or your lying eyes, part 2″ (for numbers and a very shaky video. It is not just the big city urban areas either. Here is an anecdotal snapshot of CRE business parks in Washington state, contributed by a BoomBustBlog reader:

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CNBC runs as a headline the usual contradictory nonsense that we come to expect from certain heads of state. It would be funny if it didn't portend such dire consequences. The Spanish banks, just last week, were declared to be some of the healthiest in Europe (spoken with my fingers crossed behind my back, wry smile and spittle dripping from the side of my mouth). Of course, Banco Santadar and BBVA shares rocketed on the news that they are no longer insolvent and that the Spanish housing market pauses no threat.

CNBC Trader Talk Blog — Pisani: Spain Bank Aces Stress Test — CNBC ...

Europe mostly flat (Greece up 2.3 percent), euro behaving, U.S. futures were calm ahead of the quadruple witching expiration. Spanish bank Banco Santander is up 1 percent on several pieces of news:

1) a spokesman for Spain's Prime Minister remarked that the Spanish bank performed strongly during the recent stress tests, saying the bank had "one of the best" results. The Committee of European Banking Supervisors is expected to provide details of the results in the coming weeks.they have the best ranking so far in a European bank stress tests, according to a Spanish government source; not clear when the full results of those tests will be published.

2) the bank also confirmed they have made an offer for 318 British branches of Royal Bank of Scotland.

They already have a strong presence in the UK. Santander's vice-chairman caused a small stir yesterday when he said they were talking with M&T Bank, based in Buffalo, NY, about possibly merging its U.S. operations with them.

But all of a sudden the banks in Spain get pissed off when the ECB declares it no longer wants to play the Pan-European subprime lender role: Spanish Banks Rage at End of ECB Offer

Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a 442 billion euros ($542 billion) funding program this week, accusing the central bank of “absurd” behavior in not renewing the scheme. On Thursday, the clock runs out on the ECB financing program – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer. One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”

Another top director said: “The ECB’s policy is that they don’t want to provide maturity of more than three months. But they have to adapt.” Banks across the euro zone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent. The 442 billion euro ECB facility, which charges interest at a rate of 1 percent, is not set to be renewed, something that banks in Spain and elsewhere in Europe say ignores current commercial realities. A special offer of six-day liquidity will tide banks over until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year. “The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.”

BarCap estimates that at least 150 billion euros of the ECB funding that is maturing will not be rolled over into shorter-term three-month schemes, forcing banks to shrink their own lending. Spain’s banks have been among the hardest hit by the faltering confidence in the euro zone economies in recent months following problems with the country’s smaller savings banks, or cajas. The bigger commercial banks, led by Santander and BBVA, feel unfairly tarred.

Yeah, right. "Unfairly Tarred"!!! I've been warning about the Spanish Banks since January or 2009. Now that the chickens have come home to roost, they are screaming "unfairly tarred"??? How about (chicken roosting) feathered and tarred!

As We Have Warned, the Fissures Are Widening in the Spanish Banking System Monday, May 24th, 2010

I have made our position on Spain clear through a complete forensic review of the state’s finances for subscribers: Spain public finances projections_033010. An excerpt from this subscription document (subscribers, reference page 2) shows the euphoric, yet highly unrealistic optimism upon which Spain has built its fiscal austerity projections.

Published in BoomBustBlog

From CNBC.com: Europe Double-Dip May Bring Correction: Roubini

Economic woes in Europe could spread to the U.S. and lead to a further correction in stock prices, Nouriel Roubini, chairman of Roubini Global Economics, told CNBC on Monday.

Hey, but wasn't I saying that since January of this year??!! Remember back February when the media and the sell side analysts said the Greek problems were soon to be solved and this definitely was not a "European" problem but rather a localized one?

BoomBustBlog, February 7, 2010: The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a in localized one.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns


This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they’re domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.


Bloomberg has as a headline today: Stress Tests on European Banks Must Assess Sovereign Risks, EU Draft Shows. Duhhh! As if we should really ignore the biggest threat to the solvency of the the European banking system in a so-called "stress test". What is this, Geithner "lite"? Reference  How Greece Killed Its Banks! to see exactly how much damage those who wish to ignore sovereign risks are trying to hide...

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From Bloomberg, early in the morning you get the usual, inaccurate analyst chatter: Sales of Existing Homes in U.S. Probably Climbed on Tax Credit

Sales of U.S. previously owned homes rose in May to the highest level in six months as buyers rushed to beat a June tax-credit deadline, economists said before a report today.

Purchases of existing houses, which are tabulated when a contract closes, increased 6 percent to a 6.12 million annual rate, according to the median of 73 forecasts in a Bloomberg News survey. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

Credit-induced gyrations will make the underlying health of the market difficult to determine over the next couple of months. A slump in builder shares since early May signals investors are concerned the damage caused by the end of government stimulus, mounting foreclosures and unemployment will exceed the benefits of lower mortgage rates.

Then the actual report comes out: Existing Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May

June 22 (Bloomberg) -- Sales of U.S. previously owned homes unexpectedly fell in May, a sign demand was probably pulled into prior months before a June tax-credit deadline.

Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

The decline raises the risk the retrenchment following the expiration of the tax credit will be deeper than anticipated. A slump in builder shares since late April has exceeded the retreat in the broader market on concern the damage from the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.

Now, this is the BoomBustBlog version from March of this year where I made it crystal clear that housing will fall further and significantly. The governmetn incentives are just market interference and pricing distortions, prolonging the pain: It’s Official: The US Housing Downturn Has Resumed in Earnest

Let’s take a look at some charts sourced from the upcoming BoomBustBlog subscriber “A Fundamental Investor’s Peek into the Alt-A and Subprime Market”should be released withing 24 hours or so. This release will include all of the raw data necessary for users to run their own calculation and draw their own conclusions. update, which

Click to enlarge


In the chart above, you can see where CA has made some progress interms of appreciation. CA, FL, and NV account for nearly 50% of nationwide price damage. Let’s take a closer look…

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