Displaying items by tag: Banking

Yes, Goldman Sachs, the big, powerful, influential Wall Street bank put out a big buy reco on the very same banks that I have called insolvent. You can guess what happened, in damn near real time... First, Wells Fargo, JPMorgan `Attractive' on Earnings Outlook, Goldman Sachs Says - then... Stocks in U.S. Climb as Goldman Upgrades Banks, ISM Index Beats Estimates. I know I don't carry that Goldman pedigree, you know being a brother from Brooklyn and all. Yet, Goldman and I have disagreed on this very same issue before. Let me refresh your collective memories...

Published in BoomBustBlog
Thursday, 01 October 2009 05:00

And the next AIG is....

As many of my subscribers 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. 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 subscribers may have their eyebrows raised. Some things are actually hiding in plain sight. See BAC Swap exposure_011009 Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb.

For the sake of nostalgia, here is an old post of the same company's ABS inventory: BAC ABS Inventory ABS Inventory 2008-02-25 06:48:09 0 bytes

I will be releasing similar analysis of other banks and insurers over the next day or two.

Published in BoomBustBlog
Thursday, 01 October 2009 05:00

I'm going to try not to say I told you so...

For those that believe mark to market rules are useless (I know they make it hard to goose your share price in a deflationary market, see "Charting the Truth"), I bring you the collapse of a bank last week that wasn't even on the FDIC's troubled bank list. To add misty eyes to

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misery, the mis-marking of the banks assets will cost the FDIC nearly a billion dollars. That's a lot for a bank that wasn't even on the watch list. If the banks were forced to carry assets at market value, REAL market value, these little surprises will not be allowed to sneak up. Investors, regulators, bloggers, etc. will be able to see them coming a mile away - or at least they should. Alas, I am able to see them anyway. Is it because I am hyper-intelligent, possessive of meta-human powers, or employ an army of elfin dwarves to hide in the boardroom duct vents to eavesdrop on the board meetings? No, its none of those. Its because I PAY ATTENTION, and odn't have any conflicts of interests and axes to grind that color my observations and analysis.

Subscribers should keep this in mind when reading about this big bank that has written a bunch (more than a quarter of its tangible equity) in naked, unhedged credit default and total return swaps - see "And the next AIG is....". Knowing what they have acquired as of late, and what their subsidiaires have been trying to unload, there is no telling what the hell the quality of the underlying is. One thing is for sure, it is probably not very pristine!

Before we move on to the Blooberg article that sparked this blog post, let's excerpt some key snippets from the latest FDIC memorandum to its Board of Directors. It is written in the coded language of regulator-ese, but I will translate for you in red font:

1. The FDIC not impose additional special assessments in 2009. Because we have hit them pretty hard already and they are already broker than we are!
2. The FDIC maintain assessment rates at their current levels through the end of 2010 and immediately adopt a uniform 3 basis point increase in assessment rates effective January 1, 2011.
3. In October 2008, the Board adopted a Restoration Plan to return the Deposit Insurance Fund (DIF or the Fund) to its statutorily mandated minimum reserve ratio of 1.15 percent within five years. In February 2009, given the extraordinary circumstances facing the banking industry, the Board amended its Restoration Plan to allow the Fund seven years to return to 1.15% percent. We're in trouble and need more time. We will crush an already insolvent banking system (despite the proclamations to the contrary by the government and bank management) if we attempt to return the fund to a prudent level in less than 7 years. Its getting worse quickly even as the bank stocks skyrocket over 100% - just a few months ago we throught we could do it in 5 years.
Pursuant to these requirements, staff estimates that both the Fund balance and the reserve ratio as of September 30, 2009, will be negative. This is techincially and effectively insolvent! This reflects, in part, an increase in provisioning for anticipated failures. In contrast, cash and marketable securities available to resolve failed institutions remain positive.

Staff has also projected the Fund balance and reserve ratio for each quarter over the next several years using the most recently available information on expected failures and loss rates and statistical analyses of trends in CAMELS downgrades, failure rates and loss rates. Staff projects that, over the period 2009 through 2013, the Fund could incur approximately $100 billion in failure costs. Staff projects that most of these costs will occur in 2009 and 2010. Approximately $25 billion of the $100 billion amount has already been incurred in failure costs so far in 2009. Staff projects that most of these costs will occur in 2009 and 2010. So, only 25% into this mess by the FDIC's own calculations, and they are already negative and insolvent. They believe the worst is yet to come (versus Bernanke, Paulson and Geithner saying the worst is behind us), and that worse will come rather quickly. To make things worse, as you read the article excerpted below, the FDIC doesn't even seem to have a firm graps on the risks, as they were blindsided by a nearly billion dollar failure that wasn't even on thier problem bank list, and this was last Friday! You all know who has been the most bearish on the financial sector through all of this.

If the Board imposes no further special assessments and leaves existing risk-based assessment rates in place, staff projects that the Fund balance would become significantly negative in 2010 and may remain negative until 2013. According to these projections the reserve ratio would not return to the statutorily mandated minimum reserve ratio of 1.15 percent until late 2018. 'Nuff said!

The projections in the preceding paragraphs address the effect of projected failures on the Fund balance (its net worth, which is assets minus liabilities), not the cash balance of the Fund, which provides needed liquidity. Staff has also estimated the FDIC’s need for cash to pay for projected failures. At the beginning of this crisis, in June 2008, total assets held by the DIF were approximately $55 billion, and consisted almost entirely of cash and marketable securities (i.e., liquid assets). As the crisis has unfolded, the liquid assets of the DIF have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets in failed institutions. As of June 30, 2009, while total assets of the DIF had increased to almost $65 billion, cash and marketable securities had fallen to about $22 billion. The pace of resolutions continues to put downward pressure on cash balances. While the less liquid assets in the DIF have value that will eventually be converted to cash when sold, the FDIC’s immediate need is for more liquid assets to fund near-term failures. Translation: We were forced to accept the trash assets from the fail banks that we could not convince the private sector to accept, as we mean (by using the term "less liquid claims") that these assets are effectively unmarketable, and must be traded at an extreme discount which renders them for all intents and purposes of the fund, effectively worthless in comparison.

Staff ‘s projections take into account recent trends in resolution methodologies, such as the increasing use of loss sharing—especially for larger institutions—which reduce the FDIC’s immediate cash outlays, and the anticipated pace at which assets obtained from failed institutions can be sold. If the FDIC took no action under its existing authority to increase its liquidity, the FDIC’s projected liquidity needs would exceed its liquid assets on hand beginning in the first quarter of 2010. Through 2010 and 2011, liquidity needs could significantly exceed liquid assets on hand. So, not only are we balance sheet insolvent, we will be cash flow insolvent within one quarter.

Imposing an additional special assessment as provided for in the May 2009 final rule would bring in approximately $5.5 billion in revenue to the Fund; imposing two (one at the end of September, one at the end of December) would bring in approximately $11 billion in revenue. Given staff’s projections, neither amount would prevent the Fund from becoming significantly negative or prevent the Fund’s liquidity needs from exceeding its liquid assets on hand in 2010. Even combining these special assessments with higher risk-based assessment rates would not solve these problems, unless rates were set very high or more was collected in special assessments. Furthermore, any additional special assessment or immediate, large increase in assessment rates would impose a burden on an industry that is struggling to maintain positive earnings overall. Translation: Damn, even if we hit the banks at the continuing rate that we have already elevated the special charges to, we are still insolvent. No matter if hit them much harder, insolvent we will still be. The only way out of this is the same accounting game that the banks pulled. Hopefully, we will be able to fool somebody. See below.

An alternative—borrowing from the Treasury or the Federal Financing Bank (FFB)— would also increase the liquid assets available to fund future resolutions but would not increase the Fund balance as there would be a corresponding liability recorded. Hey, wait a minute here. How is this any different from asking the banks to prepay thier insurace premiums. In the prepay scenario, there will be an increase in cash (an asset) as well as an associated liability (unearned insurance premiums). Do the FDIC folk believe me to be as dense as some of those bank investors that really believe that banking industry is solvent. I posit this query to all interested pundits: how can the banking industry be solvent if the banking industry insurance fund is insolvent, and by thier very own admission, very insolvent!??!!?!?!?!?!?!?!?

Staff projects that failures will peak in 2009 and 2010 and that industry earnings will have recovered sufficiently by 2011 to absorb a 3 basis point increase in deposit insurance assessments. Adopting a uniform increase in assessment rates of 3 basis points now, effective January 1, 2011, should ensure that the prepaid assessments would address current liquidity needs without materially impairing the capital or earnings of insured institutions. Advance adoption of the rate increase also should help institutions plan for future assessment expenses. So, whatcha sayin' is that we all know the banks are playing accounting games, we will just go along and play the games with them. Fu$% the economic earnings and cash, as long as we don't harm the accounting earnings, all will be fine. The problem with this is economic earnings actually mean cash and real capital. Accounting game or not, if you hit an insolvent bank hard for cash, it will give it to you and maybe even be able to gloss it over with pretty accounting tricks to make it look like its making some money, but in the end all you will be doing is using that money that you took from the bank to eventually take IT over. Garbage in, garbage out - old school programming! There is more, but I am sure you've got the message by now. Now, on to the article of the day...

From Bloomberg:

Oct. 1 (Bloomberg) -- There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.

It failed last week.

Published in BoomBustBlog

The other shoe is dropping on the banking industry, and market reaction seems muted. This is interesting, for the demands of cash, deviations from expected returns (the technical definition or risk) and murkiness in realistic valuation of assets and liabilities are all converging to a point that bank insiders fear to tread.

First we will go through yesterdays news, then prance through some BoomBustBlog.com exclusives in a separate post...

Published in BoomBustBlog
Wednesday, 30 September 2009 05:00

Wells Fargo 3rd quarter research note

Here is an updated research note on Wells Fargo for subscribers:WFC Research Note Sep 2009 WFC Research Note Sep 2009 2009-09-30 13:01:30 281.29 Kb.

For those that don't subscribe and wonder what is behind the firewall, we have analyzed the CDS exposure that Wells has, or at least that Wells has reported. If you recall, there was a blog story that broke a few weeks ago detailing the CDS exposure that WaMu had to CMBS from writing protection on the risky tranches in a bid to get investors to buy the securities. Wells inherited this alleged problem in their purchase and it seems as if they may not have even been aware of it. Well, we performed a deep dive and came up with the likely capital calls, as well as some other very interesting tidbits...

Published in BoomBustBlog

OCC Reports Second Quarter Bank Trading Revenue of $5.2 Billion

WASHINGTON — U.S. commercial banks reported trading revenues of $5.2 billion in the second quarter of 2009, compared to record revenues of $9.8 billion in the first quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

“After such a strong first quarter, we expected to see a seasonal decline in trading revenues, and indeed that occurred,” Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. “Still, second quarter trading revenues were the sixth strongest since we’ve been keeping records.” With the advent of the relaxation of the mark to market rules, I am suspect of some of this trading revenue gain. I know the reduced competitive landscape led to higher spreads which leads to higher profits, but the ability to print your own profits with the adjustment of assumptions is scary, to say the least.

Published in BoomBustBlog

From Reuters via CNBC: Banks' Large-Loan Losses Triple: US Regulators

U.S. regulators say that the level of losses from syndicated loans facing banks and other financial institutions tripled to $53 billion in 2009, due to poor underwriting standards and the continuing weakness in economic conditions.

Published in BoomBustBlog
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