Displaying items by tag: Banking

I was perusing ZeroHedge the other day (a fine, rabble rousing rag after my own heart), when I came across a guest post accusing JP Morgan of some funny stuff. Those that follow me know that I really believe JPM to be highly overrated. In reviewing the authors allegations, he may actually be on to something in regards to portions of the AML stuff. In order to truly ascertain the extent, if any, I would have to dig a little further, which I don't have the time to do right now.

I feel he is jumping the gun on the general liquidity argument though. No disrespect intended to the man, for anyone willing to break out a calculator and dispel the "this is the best thing since sliced bread" propaganda and disinformation is cool in my book.

I, Reggie Middleton, challenge the mainstream media to think independently. I challenge them to dig down, past the sterilized, politically correct soundbites proffered by popular corporate management, you know - the "in crowd". I challenge the MSM to pull out a calculator, run through the reported numbers, and actually ascertain if what is being proferred by managment actually correlates with the numbers offered to the regulatory agencies. I know some of the finance stuff can get arcane, but their are many objective parties to turn to for assistance. Unfortunately, they are very rarely consulted. I see the favored names in the media, but rarely do I see objective opinion.

Below is a snippet of headlines that I pulled from a Google news search for the phrase JP Morgan.

• msnbc.com - ‎The market's expectations for bank earnings increased after JPMorgan set a high bar Wednesday with a surprisingly strong profit that helped propel the Dow ...
• JPMorgan scores big in latest quarter
  CNNMoney.com
• JPMorgan Chase Reports Strong Profit of $3.6 Billion New York Times - ‎Oct 14, 2009‎: A year after the financial system was brought to its knees, a resurgent JPMorgan Chase reported a second consecutive quarter of surprisingly ...
• JPMorgan profits lift Dow past 10000
  Financial Times
  Two Reasons the Dow's Rally to 10000 Will Keep Moving Ahead‎ - A blowout third quarter for jpmorgan Chase & Co. (NYSE: JPM) sent its shares and more than 600 other stocks 52-week highs. jpmorgan delivered its strongest ...

Keep these newsbites in mind as I go over what I gathered from JP Morgan's latest results.

JP Morgan - 3Q09 Results and Outlook

Our
modelled results were pretty much on point with JP Morgan's actual Q309
reported results - see

• JPM Public Excerpt of Forensic Analysis Subscription (free)
• JPM Report (092209) Final - Professional (subscription)
  
• JPM Forensic Report (092209) Final- Retail (subscription).
  

The tough economic environment is still gripping the
traditional banking operations of US banks and JP Morgan's 3Q09 fail to provide
light at the end of the tunnel. As a matter of fact, if is arguable that for
those that do perceive a light, it is that of a freight train coming to run
over the observer. The credit deterioration impact on JP Morgan, however, has
been moderated by the gains from trading revenues which provided more than
adequate cushion to absorb the high credit losses from the traditional banking
operations.

The
major support for JP Morgan came from increase in revenues from principal
transactions (including trading revenues of investment banking and
corporate/private equity division) which led non-interest revenue to increase to
$13.8 billion in 3Q09 from $12.9 billion in 2Q09 and $5.7 billion in 3Q08. In
3Q09, non interest revenues accounted for 52.2% of the total net revenues
against 50.6% in 2Q09 and 39.0% in 3Q08.

In a contributory post that I made for another site, one of the commenters alleged that it was misleading to say that the failed bulge bracket banks had backing from the Federal Reserve, or else they wouldn't have failed. This is simply not true. The blessing of the government does not necessarily cure all of your ills. The Federal Reserve opened its discount window to the remaining bulge bracket banks after Bear Stearns (Is this the Breaking of the Bear?) filed for bankruptcy. It even decided to allow much lower grade collateral, degrading its standards to the point where it took stock and MBS, if I am not mistaken. This liquidity backstop (among other programs) did not prevent the collapse of Lehman Brothers, nor the very near collapse of Merrill Lynch. The remaining two bulge bracket banks were literally forced to become commercial banks to stave off their downfall. This history is barely a year old and is already lost on some.

I have posted this warning of Bank of America's naked swap writing to my subscribers a few weeks ago. Since BAC is reporting this week, I have decided to make my suspicions public. I have found evidence that this bank has $32 billion of naked (as in apparently unhedged) swaps on its books - just like AIG. The difference is this bank is bigger, probably has more exposure, and has already been bailed out - several times. Oh, did I mention the insured collateral is nearly half BBB rated or lower??? How about extreme management issues at the top, and I mean all the way to the top (the CEO may actually bring down the ex-treasury secretary and maybe even the Fed Chairman. A trunk full of junk, surrounded by drama! It should be an interesting conference call tomorrow when they report, that is if anybody decides to ask the right questions...

As many of my subscribers and readers know, I have caught many companies on the short side as they imploded. One company that I did not get was American International Group. The reason it escaped me? I was too close to it. I have met Frank Tizzio (then president), Maurice Greenburg (then CEO and Chairman), and a several of their upper management to collaborate on deals, and was impressed with the way they ran their shop. Because of this, I didn't apply the same critical, skeptical eye that I used with the other prospects. Alas, because of such, I overlooked the inevitable, and in retrospect, the blatantly obvious. Well, I have learned my lesson. The lesson learned from AIG was not wasted on me, but does seem to have been wasted on many others. With this thought in mind, let's review the net, unhedged swap exposure of a few of our analysis subjects. I think a few of my readers may have their eyebrows raised. Some things are actually hiding in plain sight. I have made this short description of what I see as Bank of America, the naked swap dealer, available for free download, but you must register (I made the process very quick) to get it. I know it is a pain in the ass, but I want to be sure that the disclaimer is acknowledged by all who access the document. Thank our litigious society. See BAC Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb. I need for all to know that, in my opinion, bank reporting is quite opaque, so it is not very easy to get granular information out of it. The conclusions drawn from this post and the accompanying downloads are derived from BAC's publicly available documents and are the result of my best efforts to piece the information together. For those who do not know of me, you can reference the "who am I"section below to see how well this process has worked in the past.

For the sake of nostalgia, here is an old post of Bank of America's estimated ABS inventory: ABS Inventory 2008-02-25 06:48:09 0 bytes. I will be releasing similar analysis of other banks and insurers to subscribers over the next day or two, and then to the public a day or two before their respective earnings announcement.

The following is the bailout AIG story as excerpted from Wikipedia and annotated the BAC way by your friendly neighborhood blogger, Reggie Middleton, in bold, italic font:

This is part 3 in my quest for the truth in what lies off balance sheet of the big banks in America. Please reference If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? and If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan for the prequels. As was noted before, I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is. Now, on to the bank to be owned by America - I'm sorry, that's Bank of America...

Bank of America Securitization Activities

Bank of America securitizes residential mortgages, commercial mortgages, credit card receivables, and home equity loans and automobile loans that it originates or purchases from third parties. As of June 30, 2009, the total principal balance outstanding of securitized portfolio was nearly 1.7 trillion (including 1.1 trillion of mortgage backed securities, securitized by Government sponsored entities). The total senior securities and subordinated securities held by BAC on its balance sheet amounted to about $27 billion (28% of tangible equity) and $10 billion (10% of tangible equity), respectively.

Note to readers: a formatting issue caused the 2nd half of this article to get cut off. I urge interested parties to reread the article to get the full message.

Since I write for a diverse audience, I will start this off with an overview of securitization. If you are in the industry or are just a smart ass dude, feel free to skip down to the JP Morgan specific section below. I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is.

Overview

Securitization is still a very significant source of leverage and opacity in the US and European economies, in spite of its predominant role in the most recent global financial turbulence. It is a practice where loans and other debt instruments are aggregated in a pool and thereby used to issue new securities. Banks and financial institutions started establishing Special Purpose Vehicles (SPV) and Qualifying Special Purpose Entity (QSPE) under the FASB rules to securitized loans and thereby reducing, from an accounting perspective (but more accurately put), or transferring from an economic perspective, financial risks on their balance sheets. Although these new founded QSPE's were rated by rating agencies (Moody's, Fitch, S&P among the few) prior to the issuance of securities, the underlying ratings failed to capture the actual economic value of the underlying collateral. Furthermore, the ratings established by the rating agencies are an assurance of performance.

Note to readers: a formatting issue caused the 2nd half of this article to get cut off. I urge interested parties to reread the article to get the full message.

Since I write for a diverse audience, I will start this off with an overview of securitization. If you are in the industry or are just a smart ass dude, feel free to skip down to the JP Morgan specific section below. I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is.

Overview

Securitization is still a very significant source of leverage and opacity in the US and European economies, in spite of its predominant role in the most recent global financial turbulence. It is a practice where loans and other debt instruments are aggregated in a pool and thereby used to issue new securities. Banks and financial institutions started establishing Special Purpose Vehicles (SPV) and Qualifying Special Purpose Entity (QSPE) under the FASB rules to securitized loans and thereby reducing, from an accounting perspective (but more accurately put), or transferring from an economic perspective, financial risks on their balance sheets. Although these new founded QSPE's were rated by rating agencies (Moody's, Fitch, S&P among the few) prior to the issuance of securities, the underlying ratings failed to capture the actual economic value of the underlying collateral. Furthermore, the ratings established by the rating agencies are an assurance of performance.

Note to readers: a formatting issue caused the 2nd half of this article to get cut off. I urge interested parties to reread the article to get the full message.

Since I write for a diverse audience, I will start this off with an overview of securitization. If you are in the industry or are just a smart ass dude, feel free to skip down to the JP Morgan specific section below. I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is.

Overview

Securitization is still a very significant source of leverage and opacity in the US and European economies, in spite of its predominant role in the most recent global financial turbulence. It is a practice where loans and other debt instruments are aggregated in a pool and thereby used to issue new securities. Banks and financial institutions started establishing Special Purpose Vehicles (SPV) and Qualifying Special Purpose Entity (QSPE) under the FASB rules to securitized loans and thereby reducing, from an accounting perspective (but more accurately put), or transferring from an economic perspective, financial risks on their balance sheets. Although these new founded QSPE's were rated by rating agencies (Moody's, Fitch, S&P among the few) prior to the issuance of securities, the underlying ratings failed to capture the actual economic value of the underlying collateral. Furthermore, the ratings established by the rating agencies are an assurance of performance.

One of the quandaries of running a subscription service is that when you have some really juicy stuff, you inherently limit the audience that you are able to reach. Normally, this isn't that big a deal. When you believe that there is a mass cover up aiming to prop up the largest cadre of zombie, insolvent companies in modern history it becomes a much bigger deal. This leads me to distribute a significant amount of research for free. On that note, I have been following the breadcrumb trail of hidden (or more aptly put, concealed) corporate liabilities, and it has led me to (of all places) off the balance sheet of the big banks. I have spent a lot of time concentrating on exactly where the losses, if any, will come from in these banks. We have already established that the smaller banks had, have and will totally drain the FDIC's insurance fund over a year and a half ago (see As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades Friday, 23 May 2008, notice how many of the banks have went under since then) in the post "I'm going to try not to say I told you so...

I would also like to add that I have raised the flag on this regional bank/commercial real estate issue many months before the sell side and the main stream media said a peep. This is not to brag or boast, for I am a fundamental investor and the market has definitively ignored the fundamentals for 7 months running. The point that I am trying to convey is that analysts in the big sell side banks work for their trading desks, underwriting and sales departments, and not for the investor (be it retail or institutional). Thus, proclamations of "Buy! Buy! Buy!" do not necessarily mean we have entered into a fundamentally firm area in which to buy stocks, bonds or any other risky assets covered by these guys. For a sterling example, see "The sell side is pushing with all of their might to inflate the market...".

As a matter of fact, I have also focused on those very same brokerages, banks, insurers and REITs that went bust, starting as far back as 2007, again before it was fashionable to do so (see Is this the Breaking of the Bear? January 2008, GGP and the type of investigative analysis you will not get from your brokerage house November 2007 to December 2008, A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007, etc.)

Now, that everyone feels the coast is clear and we will be entering a new bull market amid a broad economic recovery sprouting green shoots all over the place, I am intent on quantifying what remaining risks there are - if there are any remaining risks I am also in the process of fine tuning the market neutral strategy that can produce profits up until and through the period that these banks bring the market and economy back down (see Option Strategy Analysis Update for the strategy analysis and their performance thus far).

I have commented on the interconnected counterparty risks in the banking and shadow banking system. A tidbits are now coming out in the news. Anytime a big lender defaults, another big lender (or three will be on the hook for it).