Displaying items by tag: Banking

I'll admit it to everyone, I am absolutely disgusted with my investment performance over the past two quarters. I came into the second quarter up nearly 500% for the two years running thanks to top notch research across myriad sectors (see zipResearch_Samples 11/17/2008 for examples) and loss about half of that profit fighting the bull rally that I easily saw coming but severely underestimated the length, depth and breadth of. Having switched over to market neutral in the third quarter (see Recent strategy analysis sample available to the public) caused me to simply hover with a few percentage point gains here and there, since by then most of the drastic moves were over, but I was biding my time in mostly cash waiting for the fundamentals to kick back in. You see I am a fundamental investor, and I kill it when 2+2=4, and I do even better when it equals something else. The caveat is when it does equal something else, I have to wait until it starts moving back towards that number 4 for me to realize my meal. This severe boom/bust market is basically custom tailored to my investment style (see "The Great Global Macro Experiment, Revisited", and realize why I call it BoomBustBlog!) just to an aggravated extreme!

Hey, y'all! It appears as if we may be approaching that time where 2+2 may again equal 4.

By now I'm sure we have soaked in the head-fake that was the "better than expected" GDP number. Well, the gross number was only marginally better than expected, and if one bothers to taken even the most cursory glance beneath the surface.... Whoa! Stimulus was quoted as the reason the economy expanded, but this is just not true. Stimulus is something that stimulates. That just didn't happen in this case. The main drivers reported for the GDP pop came from automobiles (the cash for clunkers so-called stimulus plan) and residential investment (the government tax break, more so-called stimulus). This is how I see it. Automobile sales are already down since the clunker plan ended, so there is no speculation as to whether or not this government effort stimulated anything, It didn't. All the government did was to literally "purchase" a few GDP basis points. There was no multiplier effect. There wasn't even a material economic impact that lasted a month after teh plan ended. Basically, the government put $XX billion into car sales to get a $XX billion less slippage and administrative costs purchase of a few GDP points for the months in question. Basically, a waste of money that should have went into guaranteeing ABS for small business loans to take over the hole that CIT is making in entrepreneurial lending - with more realistic underwriting, of course.

How about the housing boost? Well, home sales and home prices have trended downward from what I can see, as soon as the deadline for the first time homebuyer credit approached. Damn near in real time. Again, now real multiplier and no lasting effect. I mean it didn't even last a month into expiration. Again, a waste of money in an attempt to reflate a bursting bubble.

So, what is it that I do see for the economy. Well, from my perch in NYC...

Published in BoomBustBlog
Wednesday, 28 October 2009 05:00

Deposit Insurance Arbitrage

I'll coin this term in order to explain the travesty that is being allowed in the banking industry. Institutions are literally paying little old ladies' less than a half a percent on their life savings and using said funds to gamble in the risk fraught derivatives market, with the risk being totally underwritten by the government through the:

  1. FDIC (deposit insurance and bond insurance - although to date this expense has been born by the industry, the FDIC is insolvent and may very well have to tap the Treasury, ie. the taxpayer: see I'm going to try not to say I told you so...),
  2. Treasury (via TARP and associate measures, see America, You have been outright lied to! Bamboozled! Swindled! Hoodwinked! The Worst Case Scenario) and
  3. Federal Reserve (ZIRP, QE, and a whole slew of programs I only wish I knew about - see The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets).

A perfect example of how the big banks are carrying this arbitrage out is outlined in "The Next Step in the Bank Implosion Cycle???", but the global economy risking behemoths are not the only one's that arbitrage bank deposit funds via FDIC guarantees. Earlier this year, I featured research on a smaller bank, Bank of Oklahoma, which I found participated in some pretty suspect accounting moves. Despite these "gimmicks" the stock floated higher with the general market and particularly the banking sector. OF course, this does nothing to cure the ills that they have been papering over. Subscribers should reference:

BOK 1Q09 BOK 1Q09 2009-05-07 06:34:52 460.74 Kb

BOK 2Q09 review BOK 2Q09 review 2009-08-01 05:04:06 1.05 Mb

March Actionable Note - Banking Sector BK March Actionable Note - Banking Sector BK 2009-03-03 11:58:22 184.25 Kb

March 2nd Actionable Note Preview - banking March 2nd Actionable Note Preview - banking 2009-03-02 09:44:20 61.88 Kb

Well, one of my subscribers have pointed out another "gimmick" that they are into, and that is the FDIC arbitrage thing. That's right, not the giga-billion dollar Wall Street TARP babies, but the Bank of Oklahoma. Here's how it works:

  1. As a deposit taking institution, CDs and savings accounts are insured by the FDIC. The banks use the funds from these CDs and savings accounts to fund their operations, which use to be primarily loans and checking/cash management services.
  2. The Fed has enabled expanded margins for many of these institutions through ZIRP (zero interest rate policy), but that is not enough to help the truly sick banks. See "The Anatomy of a Sick Bank!".
  3. Thus, many banks have ventured off into the arcane world of derivatives to boost earnings, and avoid having to polish all of those toasters to offer to Grannie! These banks include JP Morgan, Citibank, and Bank of America (see The Next Step in the Bank Implosion Cycle???"), but also much smaller regional and even some local institutions. The Bank of Oklahoma is offering what appears to be option-embedded CDs that sport the FDIC insured moniker on them. These instruments allow the owner to participate in the equity markets while having the federal guarantee on the principal. So, you ask, what's so bad about that? Well, let's walk through what their marketing material has to say, "For discussion purposes only", of course...

Published in BoomBustBlog

PNC has reported strong accounting earnings for Q3-09 and lower charge-offs as well as lower 90 day lates. The press and the blogs were all over it as a news search in Google reveals:

PNC Financial Services profit jumps 88% - MarketWatch PNC Financial Services Group (NYSE:PNC) said that its third-quarter net profit jumped to $467 million, or $1.00 a share, ...

The sell side jumps on the bandwagon as well... Wells Fargo Upgrades PNC Financial Services Group (PNC) to Outperform; Raises ... StreetInsider.com (subscription)

As a result their share jumped more than 10%.

But, and there is always a but, if we look at the bigger picture things really don't look so rosy...

As a matter of fact, if anyone really bothered to look at the numbers offered (not even the real 10Q numbers, but the numbers offered in the conference call), one would realize that there was no real improvement in asset quality, despite lower charge-offs. As a matter of fact, asset quality AND loan quality got worse, not better - both quarter over quarter and year over year!!! This was the crux of the share price collapse in PNC to begin with. What the hell is wrong with those charged with analyzing these companies???

Published in BoomBustBlog

You know, I happen to really, really appreciate the blogoshpere. There are a select handful of blogs that offer unique, insightful and very difficult to come by expertise, opinion and commentary. Much more so than the mainstream media and even more so than the more specialized media. Despite this, there are certain components of the MSM and corporate America that still do not respect the blogs. Now, why is that? Well, I dare you - no, I double dare you - to find an MSM outlet that performs investigative analysis at the level of the top blogs. I'm not even going to bother to mention who those blogs are (hint, hint), but just want to throw the challenge out there as I show how PNC may have possibly pulled the wool over the collective media, sell side and market's eyes.

Just a few hours ago, I posted my review of PNC's 3rd quarter earnings for 2009 (please look here to see the media, sell side brokerage and equity market's accolades for said results as well as my opinion -For those that didn't notice - Reggie Middleton on PNCl Q3-09 Results). In that review, I actually gave management kudos what appeared to be operational excellence. While typing the review and pondering the data trends, that annoying thing called common sense kept nagging me. I thought to myself, how can their 90 day late loans and charge offs trend downwards after just buying one of the largest junk loan manufacturers in the country amid near record (and rising) unemployment? Even more to the point, why the hell didn't anyone else press this point? Well, I asked my analytical team to dig in a little deeper, and it didn't take long to come up with an answer...

Published in BoomBustBlog
Tuesday, 27 October 2009 05:00

The Next Step in the Bank Implosion Cycle???

Of the many issues that I have been warning about concerning banks, their balance sheets and the risks that they take, one of the (and there are a few) most underappreciated is the currency risk of the "mother of all carry trades". See Roubini Not Alone in Fearing Dollar Carry Trade and Roubini Sees `Huge' Asset Bubbles Growing in `Mother of All Carry Trades'.

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

“The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”

As has been the case at least twice in the past, I am in agreement with the man. The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!


See the following for a backgrounder on my opinion before we move on to the risks of currency volatility and interest rate swaps in the "Too Big To Fail, but Too Big to Let Survive Intact" club:

Published in BoomBustBlog

I run a rather interesting site. I believe I provide uncommon analysis, and due to that fact it is not necessarily appreciated by the masses. Point in case: I say X company is fundamentally weak and the share price subsequently goes up and/or they report "record" earnings. There are some that then regard my analysis as wrong or irrelevant, or worse yet not applicable because it uses the fundamentals. It is unfortunate that such a large cross section of investors now truly believe that fundamentals no longer apply - or worse yet believe short term price movement is the grand arbiter of value! Fundamental analysis is basically the measurement of value against risk. When one believes these principals no longer apply, then one no longer has confidence in the capitalist system and/or one has been hoodwinked by the most recent bubble/burst. This is where I believe we are now, and so shortly after just three bubbles were blown and popped in the last decade. - with one just popping last year! That's right three, literally one every three years or so - dot.com/telecomm, real estate/credit, and now the government induced equity bubble. We can arguably throw 2007 oil in there as well. Those that follow me know that this is what I do for a living - see "The Great Global Macro Experiment, Revisited".

Understanding my proprietary investment style

As you can see, there is a reason why they call this BoomBustBlog! Many people believe we have hit that trough in March of this year. I don't. Even if we did, we have literally approached bubblicious territory again which sets us up for another spin at the asset cycle.

Alas, I digress... Back to the point. I am a capitalist and believe in the principals of capitalism. Thus, I do tend to adhere to the fundamentals. Sooner or later, the market always returns to the fundamentals. The ensuing ride may be rough, but it is also nearly always guaranteed. This brings us to Wells Fargo 3rd quarter earnings report and their "record" earnings. As a quick recap of where I am coming from re: Wells then on to a review of their Q3-09 results...

  1. Doo-Doo bank drill down, part 1 - Wells Fargo - I introduce Wells as a founding member of the Doo Doo 32 list of banks to encounter distress in the Spring of 2008. Here I was the first to introduce the blogoshpere to Wells extremely aggressive accounting games, namely extending the definition of the term delinquent in order to hide HELOC losses!
  2. The open source mortgage default model I released an open source spreadsheet that detailed defualts in almost all states sourced from independent government sources. Apply these loss rates to Wells portfolio and the truth is evident.
  3. Fact, Fiction, Farce and Lies! What happened to the Bank Bears? I attempted to stress the difference between economic and accounting losses. Yes, Wells has "record" accounting profits, but also has record economic losses as well.
  4. Beware of Bank Earnings Propaganda - They are still in BIG trouble!- self explanatory
  5. Wells Fargo reports in a few hours and I wonder how forthcoming they will be with their credit losses
  6. Wells Fargo Q2 2008 Highlights <!-- -->
  7. Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets

Subscriber links with the real heavy analysis can be found at the end of this article.

Reggie Middleton on Wells Fargo's 3Q09 Reported Performance

Results Review - 3Q09

Wells Fargo & Co. (WFC) reported higher-than-expected earnings for 3Q-09, beating consensus estimates for the second time in a row, primarily on back of increased revenues from mortgage banking. Although WFC's reported EPS at $0.56 was up 14.0% y-o-y, it declined 2.0% q-o-q in 3Q09. A y-o-y growth in earnings reflected strong growth in non-interest income (up 169.8% y-o-y) and net interest income (up 83.1% y-o-y) led by higher customer base and increase in product offerings to its existing customers, partially offset by increased provisions for credit losses (up 144.9% y-o-y and 20.2% q-o-q) during the same period. Excluding the impact of gains from mortgage servicing rights (MSR) and hedging gains (included in mortgage revenues and overall constituting a part of non-interest income), the Company's earnings declined in 3Q2009 on q-o-q basis. The contracting base of interest earning assets (q-on-q) along with higher loan losses provides a significant headwind to the company's valuation in the near-term.

In 3Q-09 WFCs' net charge-offs increased to $5.1 billion, or 2.5% of average loans (up 156.2% y-o-y and 16.5% q-o-q) primarily due to higher charge-offs from Wachovia's loan portfolio which contributed 33.8% to total net charge-offs. Wachovia's net charge-off rate deteriorated sharply to reach 1.66% in 3Q09 from 0.92% in 2Q09 while WFC's legacy loan portfolio charge-off rate rose 2 basis points to 3.37% in 3Q09 from 3.35% in 2Q09. Further, non-performing assets also rose 27.9% q-o-q to $23.5 billion as of September 30, 2009, or 2.9% of total loans, reflecting deterioration in the Company's consumer loans and Wachovia's commercial and commercial real estate nonaccrual loans.

Published in BoomBustBlog
Friday, 23 October 2009 05:00

Reggie Middleton on Suntrust's Q3-09 Earnings

For all of you momentum chasing, non-calculating, never touched a
spreadsheet, CNBC luvin', James Cramer watchin' bulls out there, I have
a feeling you will be hearing a lot of I told'ja so's over the next 12
months. I express this in jest (yes, I'm a part time comedian), but there is a serious streak here as well. I believe the equity prices are soaring on top of near, or actually, insolvent companies.

Well, hopefully by now you have heard of the Doo Doo 32 (As I see it, these 32 banks and thrifts are in deep doo-doo!), of which Suntrust was a founding member. Well, they are even on the board of the The Doo Doo 32, revisited. Click the links, they're worth the read. Since Suntrust reported today, I though I would go over some of the numbers but before I do let's get the flavor from the main stream media...

SunTrust posts 3Q loss but sees some signs improve 22 Oct 2009 - The Associated Press: ATLANTA - SunTrust Banks Inc. on Thursday posted a big third-quarter loss as it set aside more money to cover bad loans, but said the rate at which mortgages were slipping into delinquency slowed for the first time in a year.

The bank reported a loss of $377.1 million, or 76 cents per share, compared with a year-ago profit of $304.4 million, or 87 cents per share.

The latest quarter included charges of 16 cents per share related to the valuation of certain debt.

Analysts polled by Thomson Reuters, on average, forecast a loss of 65 cents per share. Analysts typically do not include one-time gains or charges in their estimates. Why don't these analysts have thier banks part with a fraction of that record trading revenue (I'll be getting to that in my next post) and subscribe to BoomBustBlog!?

Net interest income, or money earned from traditional banking operations like deposits, slipped slightly to $1.17 billion from $1.18 billion. Total deposits reached $114.5 billion, up 14 percent from last year.

The bank more than doubled its provision for loan losses — money set aside to cover souring loans — to $1.13 billion, from $503.7 million in the 2008 quarter.

Loans considered past due, or non-performing loans, were $5.44 billion. That's up from $3.29 billion in the 2008 quarter, but down marginally from the prior quarter. SunTrust said the dip from the June period was the first decline since the credit crisis began in 2007, and the increase in residential mortgage loans slowed substantially from the rate seen in the past four quarters.

Restructured loans that were in good standing rose 31 percent to $1.34 billion. Early stage delinquencies, or loans that are 30 days past due, declined on both a sequential and year-over-year basis.

The bank wrote off more than $1 billion in loans as going unpaid, compared with $392 million last year. The total largely reflected reworked loans for residential construction and mortgages, along with additional charge-offs for corporate borrowers in cyclical industries, the banks said.

Noninterest income, or money earned from fees and charges, dropped nearly 40 percent to $775.1 million from $1.29 billion a year ago. The company said the decline was due to gains generated in last year's quarter when it contributed company-owned stock to the SunTrust charitable foundation, sold a subsidiary and recorded gains on certain debt and hedges, which swing to a loss this year. Trading accounts profit and commissions also fell.

Chairman and CEO James M. Wells III said the quarter's results "reflected the difficult operating environment for more traditional banks." The recession was reflected in lower fee income and weak loan demand as consumers and businesses work to pay off debt, he said. Some trends indicate that the economy is improving, but he said it will take time before that is reflected in the bank's results.

SunTrust shares slid 25 cents to $20.51 in morning trading. They ended Wednesday's session down 30 percent since the start of the year.

Published in BoomBustBlog

I received this email a couple of days ago. I looked into him and he is a relatively large concern. It is not just the little guy getting shafted...

Reggie - I am a large hotel company and have been treated like a thief by the doo doos [he is referring to Reggie Middleton's notorious Doo Doo 32 (As I see it, these 32 banks and thrifts are in deep doo-doo!)]. It infuriates me everyday. This statement is obviously false and banks are using every coverage or ltv test they can to make borrowers pay loans down. Please do not use my name in anything...


Additionally, commercial loans have declined due to weak loan demand as a result of the recessionary environment and borrowers' desire to restrict capital spending and pay down existing debt facilities.

The Company has substantial available liquidity as the inflows of high quality deposits and longer term financing sources have largely been retained in cash and invested in high quality government-backed securities.

Anyone interested in my latest take on the Suntrust numbers (remember, I warned you about them a long time ago) should look here: Reggie Middleton on Suntrusts Q3-09 Earnings

Published in BoomBustBlog

This is the fifth in my series on what lies off balance sheet of your local big bank. Since the media doesn't seem to focus on these risks, and I have yet to see anything substantial from the sell side, I guess its left up to me to spread the word. The precursors to this are:

  1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
  3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
  4. And the next AIG is... (Public Edition)
  5. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo

Enter PNC Financial, the "off the books" edition!!!

Published in BoomBustBlog

Before I delve into specifically what makes Wells Fargo an ongoing Doo Doo list member, I urge those who do no normally follow me to read the precursors to this article:

  1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
  3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
  4. And the next AIG is... (Public Edition)

After reading through Wells Fargo's numbers below, I want some of you guys (and gals) with calculators and spreadsheets to review "I'm going to try not to say I told you so..." and let me know the chances of the FDIC's absorbing a behemoth such as the CDO trading, CDS writing, off balance sheet VIE having, QSPE bulging, California and Florida Zero recovery 2nd lien sporting Wells Fargo in the case some of its arcane and non-performing assets really hit the fan. I am getting ahead of myself though. Let's take this from the beginning.

Subscription Analysis - The Heavy Stuff The Free Stuff

WFC Off Balance Sheet Exposure WFC Off Balance Sheet Exposure 2009-10-19 04:11:50 259.25 Kb - The complete off balance sheet review

WFC Research Note Sep 2009 WFC Research Note Sep 2009 2009-09-30 13:01:30 281.29 Kb - The Skinny on that CDS exposure. Are they doing the AIG thing too???

WFC Investment Note 22 May 09 - Retail WFC Full Forensic Analysis & Research Note 22 May 09 - Retail 2009-05-27 01:55:50 554.15 Kb

WFC Investment Note 22 May 09 - Pro WFC Full Forensic Analysis & Research Note with Anticipated Capital Requirements under revised SCAP/Stress testing 22 May 09 - Professional 2009-05-27 01:56:54 853.53 Kb This is the document that ties all of the ancillary research togther and includes our best estimate as to the amount of capital Wells Fargo will need to raise!

Wells Fargo ABS Inventory Wells Fargo ABS Inventory 2008-08-30 06:40:27 798.22 Kb

The open source mortgage default model

Fact, Fiction, Farce and Lies! What happened to the Bank Bears?

Beware of Bank Earnings Propaganda - They are still in BIG trouble!

Wells Fargo reports in a few hours and I wonder how forthcoming they will be with their credit losses

Wells Fargo Q2 2008 Highlights <!-- -->

Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets

Doo-Doo bank drill down, part 1 - Wells Fargo

When the ticker WFC came up as a short list finalist in one of our scans last year, I was able to hear the cackling of those name brand groupies and CNBC junkies literally leaping from my keyboard. This is an excerpt from a free piece that I released on them exactly a year and a half ago, before the days of TARP:

"Well, the first bank on the drill down list will also be 2nd of the banks that I will deliver a forensic analysis on (the first was PNC Bank). That bank is,,, (drum roll in the background, crescendo.... I know some of you hate it when I do this........) Wells Fargo! I can hear a few of you naysayers cackling behind your computer screens as I type this. Wells Fargo is a big name brand bank (cackle, cackle)! Wells Fargo has Warren Buffet as its largest investor (cackle, cackle)! Wells Fargo this and that and blah, blah and (cackle, cackle).... All I can say is, beware of name brands (I actually felt compelled to address this in earlier posts). I have made more than a couple of dollars benefiting from name brand hubris and smaller investors who would rather be told what to do than read a balance sheet! Time will tell if I am right or not on Wells Fargo, just be forewarned - several of the banks on the Doo-Doo 32 (32 banks in deep doo-doo) list have already taken a trip to the confessional!"

Well, fast forward a year and a half and we see who was right. I urge those who do not subscribe to my blog to reference "Doo-Doo bank drill down, part 1 - Wells Fargo". Wells Fargo was actually one of the original Doo Doo 32 banks (32 banks in deep doo-doo), a list of institutions quite likely to hit the fan from an investor's perspective. I welcome all to track the well being of the banks on that list from that period to date. As for Wells Fargo, even despite extreme efforts by the government to prop it up, it appears as if I was on to something back then. Although many pundits STILL believe that I am wrong, the more I dig into the innards of this bank, the more cracks I see in its armor.

The risks posed by the housing crisis and arcane financing vehicles are drastically under-appreciated by the sell side...

Wells Fargo's high risk from its exposure to some of the hardest hit regions like California and Florida was further enlarged through the acquisition of Wachovia's ailing portfolio. The surge in NPAs pushed up the Texas ratio of the Bank to 29.9% as of June 2009 from 19.1% in December, 2008. Wells Fargo Eyles Test exceeded the allowance for loan losses by $3.7 billion or 6.3% of the tangible equity as of June 30, 2009 as against the excess allowance for loan losses over ET of $3.4 billion or 7.5% of the tangible equity in Dec 2008. As the rise in NPAs is far from subsiding, the Bank is expected to feel additional the pressure from high charge offs and provisions (see the latest news on the housing front and proposed FDIC charges whose charges have already [within a month] seen the need to be modified, see "I'm going to try not to say I told you so...").

Published in BoomBustBlog
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