Friday, 28 August 2009 01:00

The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets

The following is the joke that is not funny, currently playing out in a country very near you. Please read "The Doo Doo 32, revisited" and "The FDIC as a catalyst, or the new Doo Doo 32!" to bring you up to speed on my opinion of the banks. "Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets" offers some empirical data to back up these articles, then move on the banking comedy currently

There is significant risk in smaller, lesser known banks as well. We have screened almost 1,000 publicly traded banks to cull the weak ones into a new Doo Doo list. Trust me, there is more to choose from than one may think. In
an attempt to recreate a new list of banks that are at extreme risk of failure,
and have publicly traded shares available for shorting, we have screened nearly
1,000 publicly traded prospects for strength, asset quality and solvency. We
then shortlisted 25 banks, and of the 25 banks shortlisted we further analyzed
the banks in each bucket of risk used to create the list (loan performance and
quality, securities inventory depreciation, income and operations). Of the 16
banks in the 1st category we had selected 8 banks with the largest
negative cushion to loan losses and had compared them by culling out data from
their latest FDIC call report and have performed a trend analysis (for the last
four quarters). In aggregate we had short-listed 4 banks in the 1st
category, just the first pass! We have dozens more banks to go (subscribers may download this shortlist here:
spreadsheet Doo Doo shortlist - August 27, 2009 2009-08-28 01:07:22 191.05 Kb ).

being played out in the courts. Let me warn you upfront, this post is packed with both poignant opinion (not eveybody is going to like it) and well researched, empirical fact about failed and failing banks.

Aug. 27 (Bloomberg ) -- The Federal Reserve argued yesterday that identifying the financial institutions thatbenefited from its emergency loans would harm the companies and render the central bank’s planned appeal of a court ruling moot. This is abject nonsense. What hurts banks is what ultimately hurts banking product consumers, and that is the secrecy, fraud, and mispresentation that has been the recent changes in accounting rules that allow banks to outright lie about the trouble their assets are in. What hurts the banks are the myriad secrets kept from the public, primarily the ones concerning the heatlh of the banks in the first place. I will start (by the end of this blog post) revealing those banks that are either about to be shut down by the FDIC or very well should be (thus I strongly suggest you read this lengthy, yet informative missive). Why should the people have to rely on a blogger for the true state of their financial institutions and at the same time have to actually sue those who are supposed to be safeguarding us against financial failure. If the banks are insolvent, they should be wound down, not protected in a multi-trillion dollar shroud of secrecy and taxpayer monies. If they are solvent, then there is noting to hide. Bernanke et. al. and the other members of the Central Banking establishment are not the only ones in this country that can count! The bad part about it is, many of these banks who are swimming in trashy assets will probably end up failing anyway, despite the many hundreds of billions of dollars thrown at them and the illegal (as the judge below made clear) shrouds of secrecy surrounding their repetitive bailouts. Read this article and the rest of the doo doo series, I will start informing you of who is already insolvent, putting creditors at risk, and who probably received the Fed assistance. That is, until I am silenced by the government. To make matters worse, the share prices of these companies have skyrocketed, nearly all of them - despite the fact that their is little to negative equity in them.

The Fed’s board of governors asked Manhattan Chief U.S. District Judge Loretta Preska
to delay enforcement of her Aug. 24 decision that the identities of
borrowers in 11 lending programs must be made public by Aug. 31. The
central bank wants Preska to stay her order until the U.S. Court of
Appeals in New York can hear the case.

“The immediate release of these documents will destroy the board’s
claims of exemption and right of appellate review,” the motion said.
“The institutions whose names and information would be disclosed will
also suffer irreparable harm.”
Just so we are clear here. The truth sill cause irreparable harm, but concealment and lies will benefit the public????!!!!

The Fed’s “ability to effectively manage the current, and any future,
financial crisis” would be impaired, according to the motion. It said
“significant harms” could befall the U.S. economy as well.

The central bank didn’t say when it would file its appeal.

Fed lawyer Kit Wheatley
told Preska in a conference call today that she did not know how long
it would take for the Fed board to search the New York Fed for records.

“We really don’t know what’s in New York,” Wheatley said. “We don’t control the system of record-keeping in New York.”
a minute, If they don't know what's in NY, then how do they know what
they don't know will cause "irreparable harm" to you know who since
they are refusing to tell anybody who that is? Oh, okay. It is all
becoming clearer now!

The Standard

The Fed’s lawyer went on to say that she did not know what records
would fall under a “delegated function,” which would be a task assigned
to the New York Fed.

Preska interrupted Wheatley, saying that “Ms. Wheatley, I held that’s
not the standard. You didn’t search under the regulation. You’re
supposed to search under the regulation.”

Preska scheduled another conference call for 2:30 p.m. today to discuss the schedule for a search of the New York Fed.

“Nobody is going to deny you your right to an appeal,” Preska said on
the call, “We’re going to do it expeditiously, not in a piecemeal
fashion and hand it all off to the Second Circuit.”

The Fed has refused to name the financial firms it lent to or disclose
the amounts or the assets put up as collateral under the emergency
programs, saying disclosure might set off a run by depositors and
unsettle shareholders.

Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 under the Freedom of Information Act on behalf of its Bloomberg News unit.

Public Interest

“Our argument is that the public interest in disclosure outweighs the banks’ interest in secrecy,” said Thomas Golden, a lawyer with New York-based Willkie Farr & Gallagher LLP who represents Bloomberg.

Preska’s Aug. 24 ruling rejected the Fed’s argument that the records
should remain private because they are trade secrets and would scare
customers into pulling their deposits.
Being insolvent is now a trade secret! I need to run that one the next time I get in financial trouble.

.... The Clearing House Association LLC, an industry-owned group in New
York that processes payments between banks, filed a declaration that
accompanied the request for a stay... “Experience in the banking
industry has shown that when customers and market participants hear
negative rumors about a bank, negative consequences inevitably flow,” Norman Nelson,
vice president and general counsel for the group, said in the document.
“Our members have accessed the discount window with the understanding
that the Fed will not disclose information about their borrowing,
especially their identity.”

Members of the Clearing House are ABN Amro Holding NV, Bank of America
Corp., Bank of New York Mellon Corp., Citigroup Inc.Deutsche Bank AG,
HSBC Holdings Plc, JPMorgan Chase Inc., UBS AG, U.S. Bancorp and Wells
Fargo & Co.
I have rich research on quite a few of these guys. See Wells Fargo & Co focused post "Fact, Fiction, Farce and Lies! What happened to the Bank Bears?"and
the very real potential for a $100 billion dollars of economic losses
coming out of Wells Fargo, all conveniently hidden by entities such as
the "clearinghouse" and the Fed. The actual declaration can be downloaded here:
pdf Clearinghouse_declaration 27/08/2009,23:05 183.30 Kb, and features some comedic content of its own. Let's take a look see.

Clearing House submits this declaration because the Court's Order
threatens to impair the ability of our members to access emergency
funds through the New York Fed's Discount Window without suffering the severe competitive harm that public disclosure of their identity will cause.

members have accessed the New York Fed's Discount Window with the
understanding that the Fed will not publicly disclose information about
their borrowing, especially their identity. Industry
experience, including very recent and searing experience, has shown
that negative rumors about a bank's financial condition - even
completely unfounded rumors - have caused competitive harm, including
bank runs and failures. Okay, let's parse this message accurately, shall we? Truth and transparency runs the risk of "negative rumors" that threaten "bank runs and failures" while secrecy, concealment and innuendo (thre preferred method of handling banking insolvency, it appears) is what the Fed and the "Clearing House" recommends to perpetuate the strength of, and confidence in, the banking system?????!!!!!

Furthermore, how in the hell can anybody consider a rumor to be unfounded if it is based on a fact or truth. Now, by not revealing who needed help, rumors will be unfounded, but I suspect that these entities are much less concerned with how founded a rumors is than how damaging the truth and facts are. What say you, my loyal reader?

The case is Bloomberg LP v. Board of Governors of the Federal
Reserve System, 08-CV-9595, U.S. District Court, Southern District of
New York (Manhattan).

And while Bernanke et. al. and the "Clearing House" attempt to use secrecy to prevent rumors about who needed
trillions of dollars of bailout funds for allegedely healthy banks, another arm of our government looks like it may need a bailout of its own, due of course, to those healthy banks that are suspect to bank runs if the truth were to be known...

FDIC List of Problem U.S. Banks Rises to 416, Putting Reserve Fund at Risk

The U.S. added 111 lenders to its
list of “problem banks,” a jump that suggests rising bank failures may
force the Federal Deposit Insurance Corp. to deplete a reserve fund
that shrank 40 percent this year.

A total of 416 banks with combined assets of $299.8
billion failed the FDIC’s grading system for asset quality, liquidity
and earnings in the second quarter, the most since June 1994, the
Washington-based FDIC said in a report today. Regulators didn’t
identify companies deemed “problem” banks.

The U.S. has taken over 81 banks this year, including
Guaranty Financial Group Inc. in Texas and Colonial BancGroup Inc. in
Alabama, amid the worst financial crisis since the Great Depression.
The surge
forced regulators to charge banks an emergency fee to raise $5.6
billion for its insurance fund, which fell to $10.4 billion as of June
30 from $13 billion in the previous quarter, the agency said. The total
was the lowest since the savings-and-loan crisis in 1993...

An $11.6 billion increase in loss provisions for bank
failures caused the decline in the reserve fund, the FDIC said. If the
fund is drained, the FDIC has the option of tapping a line of credit at
the Treasury Department that Congress extended in May to $100 billion,
with temporary borrowing authority of $500 billion through 2010...

Bair said the number of
problem banks and failures will remain elevated as banks and thrifts
continue to clean up their balance sheets. “For now, the difficult and necessary process of
recognizing loan losses and cleaning up balance sheets continues to be
reflected in the industry’s bottom line,” she said.
Bair should really share this thinking with Bernanke. Afterall, it is necessary to clean up the balance sheet, not simply loan trillions of dollars against it then change the accounting rules so banks can pretend the losses do not exist. There appears to be a divergent approach to a solution between these two.

FDIC-insured banks reported a net loss of $3.7 billion
in the second quarter, compared with a $5.5 billion gain in the first
quarter. The quarterly loss, the second the industry has reported in 18
years, was driven by increased expenses for bad loans, the FDIC said. Funds set aside by banks to cover loan losses rose to
$66.9 billion in the second quarter from $60.9 billion in the first


More than
150 publicly traded U.S. lenders own nonperforming loans that equal 5
percent or more of their holdings, a level that former regulators say
can wipe out a bank’s equity and threaten its survival, according to
data compiled by Bloomberg.
Most likely due to all of those "Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets".

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp.Flagstar Bancorp.
All said in second- quarter filings they’re “well-capitalized” by
regulatory standards, which means they’re considered financially sound.

and Georgia’s Synovus Financial Corp., according to Bloomberg data.
Among those exceeding 10 percent, the biggest in the 50 U.S. states was
Michigan’s Of course they are. I warned of these banks risk of failure a year and a half ago with my Doo Doo 32 missive. Many of those banks no longer exist, while others are showing up in Bloomberg articles a year or so later as being at risk, yet financially sound by regulatory standards. I am warning again of a new set of bank failures. I suggest you take heed. Do not be lulled into a false sense of complacency merely because stock prices are rising. The guys who trade these stock prices higher are not the ones responsible for making payments on the poorly underwritten loan products that are driving these banks under. As a matter of fact, the secrecy and fraudulent concealment of fact has a direct correlation to share prices. This is why the "Clearing House" does not want the truth to be revealed.


As promised, I will start releasing data on truly insolvent banks, and banks that are close to insolvency. My subscribers (click here to subscribe) get first crack at the list, but I will offer them to the public after a lag. Since it is so aggregious that the government actually feels they should conceal the health of the banking system from the public, I will release some of it up front (the data that can be benefited from an investment perspective is subscriber only). Since I have already shared the loss potential of Wells Fargo, a very large bank, earlier in the blog post - the cat is out of the bag on this one. In case you missed it, here it is again: "Fact, Fiction, Farce and Lies! What happened to the Bank Bears?". PNC Bank is not what I would consider the strongest bank in the world either, see PNC plus CRE = Doo Doo hitting the Fan.There are quite a few other banks trading as high as $45 dollars that just ain't worth it.

These are large banks though. There is significant risk in smaller, lesser known banks as well. I have screened almost 1,000 publicly traded banks to cull the weak ones into a new Doo Doo list. Trust me, there is more to choose from than one may think. In
an attempt to recreate a new list of banks that are at extreme risk of failure,
and have publicly traded shares available for shorting, we have screened nearly
1,000 publicly traded prospects for strength, asset quality and solvency. We
then shortlisted 25 banks, and of the 25 banks shortlisted we further analyzed
the banks in each bucket of risk used to create the list (loan performance and
quality, securities inventory depreciation, income and operations). Of the 16
banks in the 1st category we had selected 8 banks with the largest
negative cushion to loan losses and had compared them by culling out data from
their latest FDIC call report and have performed a trend analysis (for the last
four quarters). In aggregate we had short-listed 4 banks in the 1st
category, just the first pass! We have dozens more banks to go (subscribers may download this shortlist here:
spreadsheet Doo Doo shortlist - August 27, 2009 2009-08-28 01:07:22 191.05 Kb ).

Take United
Security Bancshares (UBFO US Equity)
as an example. This bank has
weak fundamentals but it is trading at $5.1 making it extremely risky to short. Despite that, it has negative equity from my perspective, hence is not even worth the $5 that it is trading at. I have another bank whose summary is available in the subscriber's download section whose negative equity situation is twice as bad - nearly 200% negative - that I feel is even more worthless. My assumption is that the FDIC will be taking that one, and quite likely this one as well, down soon. Hey, it is now FDIC Friday, the day might even be today. Who knows. Well, back to
Security Bancshares:

  • About 64% of the loan portfolio is real estate related, with an extreme
    concentration in commercial real estate. Non accrual loans and 90 days past due
    loans amounts to 87.6% of the tangible equity. High NPAs result in negative
    cushion (excess of NPL+90 days due over reserve) of 62.9% of equity. Texas ratio
    is the highest among the analyzed set at 103.9% and shortfall from Eyles Test
    (liquidity available to fund loan losses) is 69.8% of the tangible equity.
  • NPAs as % of loan are 15.2% and as % of tangible equity are 129.6% (this screams insolvency to me!)

  • Adjusted leverage is 11.4x.
  • The bank is trading at Price
    to tangible book value of 1.0x

I will probably post more on this bank soon, that is if it is not taken under by the FDIC this weekend. Speaking of whom, I expect the FDIC to step to all of the banks, or at least most of them, that I have on my new Doo Doo list.

Other links around the web from the MSM and Blogs:

Last modified on Friday, 28 August 2009 01:00


  • Comment Link John Thursday, 12 August 2010 05:51 posted by John

    Many thanks for another enjoyable write-up it has been a delight to look at.

    Sarah Penson
    breadman tr875

  • Comment Link Reggie Middleton Tuesday, 01 September 2009 03:57 posted by Reggie Middleton

    you can discuss this openly in the subscriber discussion forums. The links can be found at the bottom of the user menu in the left hand column. If you post there, just alert me and other subscribers that you have started a discussion in the subscriber forums and I will attend. Any subscriber only content must be discussed there or you will be letting the proberbial cat out of the bag.

    Although we had sourced all the data for the purpose of our analysis from call reports, since NPA’s are not reported explicitly in the call report we had relied on Bloomberg. However, on cross checking the figure of NPA from Bloomberg for UBFO with the filings, it is found that the NPA data for UBFO from Bloomberg was as of March 31, 2008 and has not been updated for the latest reported figure as of June 30, 2009.

    The NPA from Bloomberg was $83 million which matches with the reported figure as of March 31, 2009 while the figure as of June 30, 2009 is $104 mn. Consequently the Texas ratio was underestimated at 104% against the actual 130%.
    Good catch!

  • Comment Link mishaba Monday, 31 August 2009 12:56 posted by mishaba

    That smiley should be an 8. Table 8 has the NPA info.

    And there's a minor discrepancy between the FDIC tables and the 10Q. I'm using the 10Q.

  • Comment Link mishaba Monday, 31 August 2009 12:53 posted by mishaba

    Thank you for the polite and detailed response.

    You're right, let's settle on the standard Texas Ratio (NPA/(TCE+ALL)).

    There is still some arithmetic error, hopefully on my part.

    I download the data from FDIC, but let's use the 10Q.

    From the 10Q (table 8)

    OREO: 37,065
    NPL: 56,170
    NPA: $93M

    (not $83 as the analyst wrote; must be a 1-letter typo).

    PS. The bank is slightly more conservative, counting another $10M restructured loans as its reported NPA, but let's stick to the standard definition.

    TCE: 74M equity - 10M intangibles = $64M
    ALL: $16M

    Total "common capital" (my terminology for TCE+ALL): $80M

    Texas Ratio: 93/80 = 117%

    Could the analyst please double check my numbers? If we're all using the same metrics, then we can have a meaningful discussion.

    Because my numbers for the subscriber-only "Bank T" differ as well, and I'd like to run those past the analyst. Maybe a private message?

    Part 2: Pessimistic analysis

    2a) NPAs get higher. If we add in the $10M of restructured loans that the bank itself calls non-performing, NPA jumps to $104M

    2b) Equity gets lower. Removing $10M of tax deferral assets (can't pay your depositors with those!), TCE drops to $54M (and CC follows to $70M.

    Result: Conservative Texas Ratio is 104/70 = 150%.

    That's pretty nasty. Any objections to me posting the same analysis for Bank-T?

  • Comment Link shaunsnoll Monday, 31 August 2009 12:38 posted by shaunsnoll

    great point Mishaba, thanks

  • Comment Link Reggie Middleton Monday, 31 August 2009 08:58 posted by Reggie Middleton

    @ mishabe
    Note from the analyst working on the new Doo Doo project:

    We have checked the numbers and there is no discrepancy between our figures and commenter’s numbers (both of which match with FDIC Call report and 10-Q as well).

    With regards to readers’ comment regarding adding back loan reserves ($16 mn) to TCE ($74 mn) to measure banks ability to absorb loan losses, we completely agree with the reader that banks reserves for loan losses should be taken into consideration to measure banks solvency since these loan loss reserves represent excess provision created by the bank over its life.

    In the ratio NPL / TCE (88%) we have not added back loan loss reserves since it would have created confusion to those who would like to measure NPL in relation to TCE only. The readers argument that we should add back reserves to TCE and use NPL / (TCE + Loan loss reserve) to measure banks ability to absorb loan losses is completely justified. The Texas ratio in the sheet exactly measures this - banks strength to absorb loan losses with the following formula (NPL / TCE + Loan loss reserve). Texas ratio for UBFO’s 69.9% (using NPL’s) matches with readers’ adjusted NPL / Common Capital of 70.0%.

    However, the Texas ratio in the sheet is not computed using NPL’s alone but NPA’s + past due loans. The bank has NPL’s of $56 mn while it has NPA’s of $83 mn (NPL + Other real estate owned loans + loans past due 90 days). Since NPA’s plus past due loans better represent banks potential loan losses than NPL’s we have used NPA plus loans past due 90+days in the numerator. Texas ratio using NPA’s is 104% while using NPL alone is 70%.

  • Comment Link Reggie Middleton Saturday, 29 August 2009 09:24 posted by Reggie Middleton

    @ mishaba
    IT's the weekend so the guys that ran the numbers are off, but I think we may be using different input numbers. It is always best to the the latest input numbers from the latest call sheets, and if those are not available, then the bank's 10Q. Third party sources tend to be off at times. Bloomberg and the 10Q have slightly different numbers than the FDIC. The FDIC trumps them all since they are the one's that close down the banks.

    Nevertheless, I'll have the guys check the numbers Monday to ensure that there are no errors.

    You may also be forgetting to subtract unrealized losses on securities as well. That is actually what brought down two of the banks that failed last week.

  • Comment Link Adrian Burridge Friday, 28 August 2009 21:29 posted by Adrian Burridge

    Keep up the good work.

    Same problems in Canada but the press won't own up to the $1.1 trillion in US assets that the Canadian banks have in the US - many of which are in real trouble.

    Yours Sincerely,

    Adrian Burridge

  • Comment Link shaunsnoll Friday, 28 August 2009 18:04 posted by shaunsnoll

    its funny how even a company with -200% adjusted tangible equity is not shocking anymore, even when that same company doubles in share price.

  • Comment Link mishaba Friday, 28 August 2009 15:15 posted by mishaba

    I'm new at bank balance sheet analysis, so forgive the newbie errors.

    Shouldn't the loss reserves be added back to the TCE for valuation of the common?

    UBFO has $74M of equity (no preferred). Subtracting out goodwill and intangibles leaves $64M for the common shareholder. Yeah, NPAs are $56M, for an 88% NPL/TCE, which matches Reggie's math.

    BUT, they also have $16M set aside for loan losses that's not being counted in their assets, so it's more like $80M of common capital, for a ratio of 70% NPL/common capital.

    BTW, I'm a pessimist, so I don't actually count idiotic "deferred tax assets" as assets. They have 10.5M of those, which aren't helpful in a liquidation. That drops their actual capital to $70M, for an 81% ratio.

    And yes, I'm short UBFO, and have been for a couple of weeks.

    But one of the banks profiled in the subscriber-only section has enormous loss reserves set aside. So focussing only on tangible common equity isn't really the entire story: loan reserves have to be added back to the TCE to understand how much each share is worth in liquidation. No?

    Subscribers: I'm referring to the bank with $133M of loan loss reserves, yet TCE of only $113M. Those reserves make a huge difference in valuation.

    BTW, you can search for a specific bank's information here:

  • Comment Link nhsadika Friday, 28 August 2009 13:21 posted by nhsadika

    I did some insider selling/buying ratios for 1 year
    C 36.69
    BAC ratio 34.6
    WFC 19
    JPM 4.56
    UBFO 0.536 (of course the numbers here are much smaller, however the CEO still has 800K+ shares)

  • Comment Link Reggie Middleton Friday, 28 August 2009 09:50 posted by Reggie Middleton

    I must admit, I am absolutely shocked that no one has bothered to comment on a bank that is currently doing business and trading on the public equity markets that actually has non-performing assets that are 130% of its tangible equity. Do any of the readers actually have assets with this bank? Think about the likely consequences of piercing the FDIC insured limits in deposits with this bank.

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