Displaying items by tag: Banking

A little more than a year and a half ago, I penned "A little more on HELOCs, 2nd lien loans and rose colored glasses",:

I syndicate my work across various sites on the web and occasionally go through the comments to see what people think. I get viewers of all types, from first time investors and the curious to multi-billion dollar portfolio managers and directors of analytical departments of the bulge brackets. It is the guy in the middle, the arm chair investor that seems to throw some of the wierdest comments, though. One of which was, "banks are more complicated than HELOC exposure and LTVs and it will take more than that to determine a bank short". Well, that comment is partially true. Today's banks are much more complex than LTVs and 2nd liens, but when these risky products on the downturn are multiples of your tangible capital, it really doesn't take more than that to start causing some severe solvency issues. You can have a trillion dollars in assets, but if you have $20 billion in equity with $100 billion in investments that will take a 50% loss, you are underwater by $30 billion. You can talk about these banks using terms such as "complicated", "complex", "fancy" and all of the other high falutin' adjectives that you can think of, but at the end of the day, if you lose more than you own you are insolvent. Now, that's a simple concept and it works quite well for my investment pursuits. This is coming from a guy who use to design offshore, option embedded structured products to fund illiquid private sector liabilities for things such retiree health care risks. Having some experience in the structured product arena, being an entrepreneur, and simply having to balance the family budget, I have come to learn - without a doubt - that complicated usually means less valuable. Either that, or it means an opportunity to charge the client more through lack of transparency in the pricing and profit structure.

Following the geographic default graph for HELOCs reproduced from the last posting, you see the two states that have been in the news the most lately have big spikes in my pretty little graph.

From Bloomberg: Mortgage-Bond Leverage Reaches 10-to-1, Markets Heal

Jan. 19 (Bloomberg) -- Wall Street firms are loosening terms of their lending to mortgage-bond investors as markets heal, an RBS Securities Inc. executive said.

Repurchase agreement, or repo, lending against the debt has expanded so much since freezing in late 2008 that some banks now offer as much as 10-to-1 leverage and terms as long as one year on certain securities backed by prime jumbo-home loans, said Scott Eichel, the Royal Bank of Scotland unit’s global co-head of asset- and mortgage-backed securities.

I was not going to bother to comment further, but after hearing pundit after pundit attack Obama for the bank levy and Glass Steagal 'lite', after banks allegedly paid their dues... I just couldn't take it anymore.

Yes! Obama has made a lot of policy errors in dealing with the banks. Yes! I believe he has not solved the problems, but has chased the symptoms. The separation of prop trading from deposit banking IS the RIGHT thing to do. In addition, the banks have not come anywhere NEAR repaying their debt to the government. Not even close.

Yes, some of the banks repaid TARP, with interest and warrants. Okay. The investment big banks (that were still in existence) were offered expedited financial holding company (bank) charters. That is why they didn't fail, at least in part.

So, running down the list, the banks paid back TARP. That's a +, but....

A commenter on a prominent internet financial site posed this hypothetical (I actually doubt it was that hypothetical, actually):

As a muni trader, my bonus is derived directly from my P/L which is accrued over the quarter and kept in a separate account. It does not go into the firms bottom line and then back out to me. Also, like most traders, I accrue 2% of my gains in a loss provision account in case I have a major write-down in the year. My bonus is 10% of my profit for the year. If I make $50mm for the year my bonus is $5mm

What does my bonus have to do with the MBS trader who's sitting on losses? Did I or did I not show a profit of $40mm to the firm’s bottom line?

In reviewing the banks that were originally included in the Doo Doo 32 (a list of likely doomed banks created in the spring of 2008), I decided to have a team take the devil's advocate perspective (an exercise that we normally pursue) and attempt to build a bullish case for the sectors that I viewed bearishly yet have outperformed the S&P and escaped profitable shorting during the last three quarters. The results are illuminating.

Below is a list of shortlisted banks that have reported higher returns relative to S&P 500 between the period March 9, 2009 and January 5, 2010 - the bear market rally of 2009. The methodology that we followed for this short listing is as follows:

· We took out a list of banks that are domiciled in the US and have market capital of more than $500 million and current share price of more than $10.

· Next we calculated returns for each bank and S&P 500 between period March 9, 2009 and January 5, 2010.

The last standout to the Moral Hazard Brigade has finally joined ranks. The FDIC is considering bailing out the banks!!! From IDD Magazine:

WASHINGTON — As the number of bank failures continues to rise, some industry representatives are making a case that amounts to political heresy: the Federal Deposit Insurance Corp. should prop up dying institutions rather than letting them collapse.

I really wonder what possesses people to believe these sales pitches, hook, line and sinker... Seriously, what the hell was this guy thinking??? From Bloomberg:

Dec. 17 (Bloomberg) -- For California Treasurer Bill Lockyer, the offer from Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. was too good to refuse.

If California were willing to forgo competitive bidding for a $4.5 billion bond offering, the banks promised more orders from individuals and a lower bill to the taxpayers. The firms insisted that by negotiating with them, the state would benefit from its special relationship with the Wall Street troika and wind up with what two underwriters called a salutary “buzz” to boost demand for the debt.

When the October offering failed to sell as planned, California was forced to accept 8 percent less money than it needed and to pay as much as $123 million more in interest than the banks said was sufficient for the market. And the threesome made $12.4 million on the deal, contributing to record bonuses in the securities industry a year after getting a total of $80 billion in a federal bailout.

“Just because someone earns a big wad of money doesn’t mean that they can do what they say they can do,” said Marilyn Cohen, who watched the sale unfold from Los Angeles as president of Envision Capital Management, which oversees $250 million in bonds for individuals. “And shame on the state if they were drinking that Kool-Aid.”

The California sale helped send the municipal-bond market to its worst month in a year. It ended a rally that had pushed borrowing costs for cities and states to a 42-year low, as measured by the Bond Buyer’s index of 20-year general obligation bonds.

Mr. Lockyer, the next time someone promises you something, get it in writing, reviewed by competent counsel and independent financial advisors. Be sure to have the vendors supply a capital reserve to back up their promises. Most banks probably wouldn't do that, which should tell you something in and of itself.

Then there is "Goldman Sachs Driving Trucker YRC Into Bankruptcy, Teamsters' Hoffa Says":

First off, some definitions:

• The Doo Doo, as in the Doo Doo 32: A list of 32 banks that I created on May 22, 2008 which set the stage for my investment thesis of shorting the regional banks. At that time, I was one of the very few, if not one of the only, to warn that the regional banks would hit the fan.
• Regulatory capture (adopted from Wikipedia): A term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is an explicit manifestation of government failure in that it not only encourages, but actively promotes the activities of large firms that produce negative externalities. For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture is when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented. The risk of regulatory capture suggests that regulatory agencies should be protected from outside influence as much as possible, or else not created at all. A captured regulatory agency that serves the interests of its invested patrons with the power of the government behind it is often worse than no regulation whatsoever.

About a year and a half ago, after sounding the alarm on the regionals, I placed strategic bearish positions in the sector which paid off extremely well. The only problem is, it really shouldn't have. Why? Because the problems of these banks were visible a mile away. I started warning friends and family as far back as 2004, I announced it on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be ready to collapse some time soon. Most investors and pundits won't realize it because a) they don't read BoomBustblog, and b) due to regulatory capture, the bank has been given the OK by its regulators to hide the fact that it is getting its insides gutted out by CDOs and losses on loans and loan derivative products. Alas, I am getting ahead of myself. Let's take a quick glance at regulatory capture, graphically encapsulated, then move on to look at the recipients of the Doo Doo Award as they stand now...

A picture is worth a thousand words...

As anticipated in the latest forensic analysis, JPMorgan Chase & Co., the biggest credit-card lender, said defaults climbed to a 2009 high of 8.81 percent from 8.02 percent in October. Delinquencies for the New York-based bank fell to 4.9 percent from 4.95 percent.

pdf JPM Public Excerpt of Forensic Analysis Subscription 2009-09-22 14:33:53 1.51 Mb

pdf JPM Forensic Report (092209) Final- Retail 2009-09-24 03:12:17 130.93 Kb

pdf JPM Report (092209) Final - Professional 2009-09-24 03:13:31 550.72 Kb

Defaults at Bank of America Corp., the No. 2 card lender, fell to 13 percent from 13.22 percent, while late payments increased to 7.69 percent from 7.59 percent, the Charlotte, North Carolina-based bank said in a federal filing.

pdf BAC Swap exposure_011009 2009-10-15 01:02:21 279.76 Kb - Is BAC the next AIG?

Capital One Financial Corp., the third-biggest issuer of Visa Inc. credit cards, posted increases in defaults and delinquencies. Write-offs climbed to 9.6 percent from 9.04 percent, and payments at least 30 days overdue rose to 5.87 percent from 5.72 percent, McLean, Virginia-based Capital One said.

From Bloomberg :

Dec. 15 (Bloomberg) -- The U.S. House is considering reinstituting the Depression-era Glass-Steagall Act, which barred bank holding companies from owning other financial companies, Majority Leader Steny Hoyer said today.

A renewal of the 1933 law “is certainly under discussion” by House members, Hoyer, a Maryland Democrat, told reporters in Washington. The Glass-Steagall law was repealed in 1999.

Hoyer made the comments when asked whether Congress and the Obama administration could do more to persuade banks to make more business loans to get credit flowing into the economy.

“As someone who voted to repeal Glass-Steagall, maybe that was a mistake,” Hoyer told reporters.

The repeal removed a regulatory obstacle to the $46.4 billion merger of Citicorp and Travelers Group Inc. to form Citigroup Inc.

In the current environment, this will literally devastate many of the uber banks, for the trading arms are the only portions of the bank making money - and they wouldn't be making money if they didn't get nearly free access to capital through their insured banks status and access to the various government lending facilities.