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For those who do not know, I was a real estate investor between 2000 and 2006. By 2006, I came to the realization that there were no longer profitable deals to be had on a sound risk/reward basis, and the entire Ponzi scheme looked to be ready to do the Humpty Dumpty thing. So, I took a year off to raise my brand new baby girl, and came back to pursue plans to start a hedge fund that focused on shorting the FIRE sector and European banks - basically any and everybody who ever did business with me and my colleagues in real estate - the writing was evidently on the wall for anyone who bothered to look at walls.

Those who have followed me for a few years know my mantra, and for those that don't, review my early thoughts and calls on Europe and the global FIRE sector. At a fundraiser that MF Global threw in Rockefeller Center's rolling skating rink, I sat down with the then CEO of MF Global and his wife and informed them of my plans. They sincerely wished me luck and told me to let them know when I got started (I would speak to them on and off annually at the skating rink event or over lunch). I said nothing then, but I was highly suspect of the firms prospects going into what I saw was a risky asset firestorm of a correction. As it turned out, it appears I may have had a point. Even more interesting is the fact that I was the only one that I knew of who proclaimed that Fed ZIRP policy was truly poison laced in Myrrh. Contrary to that espoused by ink stained ivory towers of academia and those who so often correct in the Sell Side, ZIRP is killing the banks while regulatory capture is hiding the metastizing tumors. I also now a few who used to work in the risk departments of MF (yes, they did have one) and they said that Goldman/governer guy was the one that ran MF into the ground. Accordingly, MF was a good brokerage, but he came in and tried to make them bankers and traders, which they were not (at least they weren't good ones, anyway). By forcing the firm to carry inexperienced proprietary risk, he doomed the firm (according to this insider).

Hmmmm... Up is down, and down is up, I bendeth you over if you spilleth my cup! Again, as excerpted from There’s Something Fishy at the House of Morgan":

Again, I have warned of this occurrence as well. See my interview with Max Keiser below where I explained how the Fed's ZIRP policy is literally starving the banks it was designed to save. Listen to what was a highly contrarian perspective last year, but proven fact this year!

 

 

Provisions and charge-offs: I have been warning about the over-exuberant release of provisions to pad accounting earnings since late 2009!

Declines in provision was one of the major contributors to bottom line. JPMorgan reduced its provision for loan losses to $1.2bn (0.7% of loans) in Q1 2011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% of loans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans) in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9% of loans) in Q4 2010. Although banks delinquency and charge-off rate has declined, the extent of decline in provisions is unwarranted compared to decline in charge-off rates. As a result of higher decline in provisions compared to charge-offs, total reserve for loan losses have decreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At the end of Q1 the banks allowances to loan losses is lowest since 2009.

Although the reduction in provisions has helped the banks to improve its profitability it has seriously undermined the banks’ ability to absorb losses, if economic conditions worsen. As a result of under provisioning for the past five quarters, the banks Eyles test, a measure of banks’ ability to absorb losses, has turned to a negative 7.7% in Q1 2011 compared with +6.4% in Q1 2010. A negative Eyles test has serious implications to shareholders – the losses from banks could not only drain entire allowances for loan losses which are inadequate but can also wipe off c7.7% of shareholder’s equity capital. The negative value of 7.7% for JPM’s Eyles is the lowest in this downturn.

MF Global Files for Bankruptcy; Shares Remain Halted

MF Global Holdings filed for Chapter 11 bankruptcy protection in New York on Monday morning, after an effort to sell itself to Interactive Brokers Group failed.

MF Global [MF 1.20 --- UNCH ] had a tentative deal to sell assets to Interactive Brokers [IBKR 15.55 0.33 (+2.17%) ] as of late Sunday, but the agreement fell apart as talks continued overnight, said people familiar with the matter. Discussions ended around 5 a.m. ET, one of these people said.

MF Global had been considering filing just its holding company for bankruptcy protection and then executing the sale. That plan is now off the table, one of the people said.

This person said MF Global's parent company would be included in the bankruptcy filing. Voluntary bankruptcy petitions for MF Global Holdings and MF Global Finance USA hit the docket in a U.S. bankruptcy court in Manhattan mid-morning on Monday.

The Chicago Mercantile Exchange said on Monday that customers of broker-dealer MF Global were limited to liquidating their positions. The exchange, which owns the Chicago Board of Trade, said it would no longer recognize MF Global, which has filed for Chapter 11 bankruptcy protection, as a guarantor for floor trading.

... "It was quite difficult to get our money out on Friday, because they had a lot of redemption calls," a trader, whose firm used MF Global as a brokerage said. "The company is not initiating any new position. They are trying to close down positions that they already have with clients that are open."

At MF Global's London office, in Canary Wharf, staff were coming and going from the office as normal at Monday lunchtime.

There was a tense atmosphere and most declined to speak to CNBC.com.

"We're not allowed to speak to you; so you can probably read into that what you will," one MF Global worker told CNBC.com.

The last set of statements are teiling, indeed. MF Global is a mini-Lehman, and while many may not be taking MF Global's demise as seriously, it definitely is. They died from the same disease that afflicts much of Wall Street, and most of European banking. They are smaller, that's the only real difference - and the asset management company that they were spun off is doing just as bad. I said it before, and I'll say it again, Europe is housing Lehman Brothers x 4!


From ZeroHedge: Presenting The Bond That Blew Up MF Global

Reaching for yield (and prospectively capital appreciation) while shortening duration had become the new 'smart money' trade as we saw HY credit curves steepen earlier in the year (only to become the pain trade very quickly). The attraction of those incredible yields on short-dated sovereigns was an obvious place for momentum monkeys to chase and it seems that was the undoing of MF Global. The Dec 2012 Italian bonds (in which MF held 91% of its ITA exposure), as highlighted in today's Bloomberg Chart-of-the-day, appears to be the capital-sucking instrument of doom for the now-stricken MF. As if we need to remind readers, there is a reason why yields are high - there is no free lunch - and while some have already leaped to the defense of the bet-on-black Corzine risk management process with comments such as 'He was simply early and will be proved correct' should remember that only the central banks have bottomless non-mark-to-market pockets to withstand the vol. It also sets up a rather useful lesson for those pushing for EFSF leverage to buy risky sovereign debt - but given today's issue demand, perhaps that is moot.

Hmmmm! I remember over the summer, when MF probably put these trades on, I warned about Italy sparking France while NEARLY EVERYONE ELSE was still focusing on Greece! Reference the following excerpt from Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

So, how accurate was I? Well, we'll see in a few... In this morning's headlines:

So, What's the Next Shoe To Drop? Read on...

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

Now, let's refresh the output from And The European Bank Run Continues...and more importantly BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional, I strongly urge those who haven't to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP.  Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price...

image014image014

Using more recent market inputs (you know, assuming this stuff was Level 1), we get the following...

bnp_haircut_exposure

Notice here the base case TEC impairment is now approaching the adverse case from just a few weeks ago - and this is using market pricing, not some pie in the sky model!

I have not recalculated the adverse scenario in this example, but you can simply use your imagination, or download the model and run it for yourself.

A Greek default with haircuts somewhat inline with market prices will wipe out 13% of BNP TEC, with a more severe cut (quite likely) taking out nearly 20%. This is not even glancing upon the many problems we discussed in our forensice reports (File Icon French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers,File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers).

Now, if the ZH referenced report above is accurate (and I believe it is) the banks are going to try to delever by selling assets in the open markets (all at the same time, selling the same assets to the same pool of potential buyers at the same bad times). This means that the prices used to populate this model are probably still too optmistic. Even if they weren't, look at the capital short fall the Greek default will leave BNP with assuming our institutional bank run thesis holds true and they see a slight withdrawal of liquidity of 10% this year and 15% next (knowing full well the numbers for Lehmand and Bear were much, much higher than that before they collapsed). First, a refesher on our European bank run theory expoused 5 months ago...

    1. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
    2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  1. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
    1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

And the BNP results????

bnp_haircut_exposure_bank_runbnp_haircut_exposure_bank_run

Half trillion euros here, half trillion euros there... Sooner or later, we'll be talking about some real money! Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional).

On Derivatives Implosions and Debt Destruction...

Just like the US banks and EU leaders have somehow gamed (or at least tried to game) the CDS market into a sham, they look to do the same in the discorporation of those entities who have been destroyed by the highly deflationary forces taking hold. To wit: MF Global Creditors Led By JPMorgan

The following are MF Global Holdings’ largest unsecured creditors and shareholders, according to the company’s bankruptcy filing and related court papers submitted today in U.S. Bankruptcy Court in Manhattan.

Unsecured creditors rank behind secured lenders in getting repaid in a bankruptcy, and are ahead of preferred and common shareholders.

Unsecured Creditors:

JPMorgan Chase & Co. (JPM)’s JPMorgan Chase Bank, bondholder trustee, $1.2 billion.

Deutsche Bank AG, trustee for $1.02 billion in bonds:

Deutsche Bank Trust Co., bondholder trustee for 6.25% notes, $325 million bondholder trustee for 3.375% notes, $325 million bondholder trustee for 1.875% notes, $287.5 million bondholder trustee for 9% notes, $78.6 million.

From ZeroHedge, we are sourced the ISDA "determinations committee":

Americas Voting Dealers
Bank of America / Merrill Lynch
Barclays
Citibank
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale
UBS

EMEA

Voting Dealers
Bank of America / Merrill Lynch
Barclays
BNP Paribas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale
UBS

 

More from Reggie Middleton...

The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!

This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

Published in BoomBustBlog

lauren_icon_twitter__2__reasonably_smallLauren Lyster, the enticing Russian TV/Capital Accounts host gave me the rare opportunity yesterday to sit down and run my mouth for 15 minutes straight. This is a format which is most conducive to true conveyance of knowledge and information, at least in my not very humble opinion. I'm just not the 8 second soundbite type.

In viewing the interviews below, compare and contrast to the other two similar but large channels at large, Fox Business News and CNBC, I am quite curious to get your opinions and feedback.

I also query, why is the bond market so much more fundamentally astute than the equity markets? Is it becuase it is truly too deep and wide to manipulate? In today's headlines (and right after this world saving 5th European bailout):

Let's view the interview before we go any farther...

Interview w/Reggie Middleton: Is Bank of America going Bust? (Part 1)

Interview w/Reggie Middleton: Is Bank of America going Bust? (Part 2)

I addressed the CDS issue in detail in yesterday's blog post, which should be read by any who have not already: The Banks Have Volunteered (at Gunpoint) To Get 50% of Their Money Taken - No Credit Event???. Why is this credit event issue pertinent? Well, if the Europeans succeed in shamming the CDS market, rates skyrocket (duhh, didn't think of that???) and all banks that state they are hedged via CDS truly aren't? I delved into this in detail in 2009, with the blog post And the next AIG is... (Public Edition)... Think about it! If there is a credit event then the fireworks start. If there is no credit event, then what does that say about Goldman, who swears to high hell they are adequately hedged? Hedged with CDS that won't get triggered upon a 50% loss? Let's take a closer look with excerpts from recent BoomBustBlog posts and subscriber research...

Of course, you know I'm going to say "I told you so!" Reference So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? and then Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? You see, in said piece, ZeroHedge dutifully reported that Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure- a very interesting refresh of what I called out two years ago through "The Next Step in the Bank Implosion Cycle???":

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!

 bank_ficc_derivative_trading.png

This concept was further illustrated in An Independent Look into JP Morgan...

Click graph to enlarge (there is a typo in the graphic - billion should trillion)

image001.png

Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide.

I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.

  1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
  2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
  3. As the markets climb on top of one big, incestuous pool of concentrated risk...
  4. Any objective review shows that the big banks are simply too big for the safety of this country
  5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish.

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

 Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010, discusses JP Morgan and concentrated derivative bank risk.

If you think that's scary (and you really should) check out Is Goldmans Sachs Derivative Exposure the Squid in the Coal Mine?

The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question “Has the value or the economic quantity of the underlying increased at a similar pace, and if not does this indicate that everyone on the street has doubled and tripled up their ‘bets’ on the SAME HORSE?”

Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?

Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history.  In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago. The notional amount of a derivative contract is a reference amount from which contractual payments will be derived, but it is generally not an amount at risk. However, the changes in notional volumes can provide insight into potential revenue, and operational issues and potentially the contagion risk that banks and financial institutions poses to the wider economy – particularly in the form of counterparty risk delta. The top four banks with the most derivatives activity hold 94% of all derivatives, while the largest 25 banks account for nearly 100% of all contracts.  Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.

In absolute terms, JPM leads this list with total notional value of derivative contracts at $78 trillion, or 1.3x times the Wolds GDP. However, in relative terms, Goldman Sachs leads the list with total value of notional derivatives at 537 times is total assets compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).

So, what does this mean? Well, it should be assumed that Goldman is well hedged for its exposure, at least on academic basis. The problem is its academic. AIG has taught as that bilateral netting is tantamount to bullshit at this level without government bailout intervention. If there is any entity at risk of counterparty default or who is at the behest of a government bailout if the proverbial feces hits the fan blades… Ladies and gentlemen, that entity would be known as Goldman Sachs.

As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...

GS__Banks_Derivatives_exposure_temp_work_Page_2

Goldman is much more highly leveraged into the derivatives trade than ANY and ALL of its peers as to actually be difficult to chart. That stalk representing Goldman's risk relative to EVERY OTHER banks is damn near phallic in stature!

GS__Banks_Derivatives_exposure_temp_work_Page_3

 As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... , this is not a new phenomenon. Quite to the contrary, it has been a constant trend through the bubble, and amazingly enough even through the crash as banks have actually ratcheted up risk and assets in a blind race to become TBTF (to big to fail), under the auspices of the regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture). So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just giving y'all a heads up ahead of time...

image009

And back to Bank of America Lynch(ing this) CountryWide....

The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!: Yes, BAC is insolvent, and yes CountryWide is (and was) now a real estate company first and foremost - reference "Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?"

I know I wouldn't. I believe there are better investments out there from a risk/reward perspective. Countrywide is in a bit of a jam, and it is not just from bad loans on the books. Looking at the Countrywide Foreclosures Blog (yes, there actually is one), I found this article:14,196 Homes Offered For Sale on Countrywide Financial's Website. I browsed through some of the site, and the small sample of numbers that I looked at seemed accurately reported. It also seems to mesh with Housingtracker.net. Browsing through the comments, someone noticed that the bank and trust offerings were not included. I looked, and at first glance, it seemed like he had a point. Now,it is a lot of work to verify all of this, but if it does pay out (and it looks like it does), Countrywide has nearly 100% of it market capitalization outstanding as REOs - in a market where houses just aren't selling and property values are falling fast. This is totally discounting each and every under performing and underwater mortgage asset they have on their books.

Held by Countrywide Mortgage Co. $ 2,910,876,468
Held by Countrywide Trust and Bank $ 2,969,067,322
Total $ 5,879,943,790
   
CFC Market Capitalization $ 6,180,000,000
% market cap held as REO 95%
 

Subscribers, if the Europeans mess this up (and a gambling man would probably be best served casting his bets in that direction) expect the subject bank of this article, and the most recent forensic download (File Icon Haircuts, Derivative Risks and Valuation) to go "BOOM!" See the blog post This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

Lauren asked a very good question regarding why I'm the only pundit making such dire observations...

As for the touchy question as to why I am stating things that no one else does, I tried to be politically correct in espousing my thoughts on the "long only wold of the MSM". I believe I was fair, and I wear my own track record on my sleeve, see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

I can be reached via the following channels, or directly via email:

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I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support.There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans. For those that are new to the blog, these are pics of previous meet and greets...
BoomBustBlog on the MotherLand in the Hudson, NYC

BoomBustBlog on the MotherLand in the Hudson, NYC

  

BoomBustBlog in the 79th Street Boat Basin, NYC

47b8d631b3127cce98548a67f7f900000047100Abs2TFi2ZsWWg.jpg

BoomBustBlog in the 79th Street Boat Basin, NYC

DSC06310.jpg

 BoomBustBlog at BuddhaKahn, Meatpacking District, NYC

buddhakahn2.jpg

Published in BoomBustBlog

Last week I wrote a scathing expose on Bank of America and its [fraudulent?] transfer of over $50 trillion worth of suspect derivatives into its FDIC insured depository arm - Bank of America Lynch[ing this] CountryWide's Equity Is Likely Worthless and It Will Rape FDIC Insured Accounts Going Bust. It drew quite a bit of attention, but the story doesn't end there. Actually, that was just the beginning. It gets worse, much worse. The next question Du Jour is, "What exactly did Bank of America Lynch[ing this] CountryWide put in Aunt Mabel's retirement savings account? Well, I have already answered that question for subscribers two years ago, but I will explore it further in public now because it leads me to the most recently released BoomBustBlog subscriber research (click here to subscribe) in which we have identified entities that are ripe for a fuse to be lit under their contagion infused ass, and Bank of America Lynch[ing this] CountryWide just so happened to of dumped 5 trailer loads of matches into YOUR bank accounts. Oh, it's so good to be [Bank of] American. Those who don't subscribe, and particularly those who haven't seen the RT/Capital Accounts interview, should spend take the time to view the most "Intellectually Aggressive Analysis on Wall Street" video below, wherein through Reggie Middleton vs Bruce Lee vs BAC, the type and composition of said swap derivatives purportedly dumped into your bank accounts are detailed and explained and illustrated. Be warned, this is not your Daddy's investment analysis, and is not for the feint of heart.

The swaps illustrated and explained in this video are nearly guaranteed to be written with the subject bank of our most recent analysis, compounding the on-balance sheet derivative exposure, which is already the highest in the world once proper TEC adjustements are taken into consideration. This is the same bank, apparently unrecognized by the markets, media and sell side, that will literally go boom when the match is put to the dry gunpowder (subscribers only, click here to subscribe): Haircuts, Derivative Risks and Valuation.

To fully appreciate the risks at stake here, just remember that Bank of America Lynch[ing this] CountryWide bought both CountryWide and Merrill Lynch, the most aggregious mortgage operators in thier respective categories. It's quite possible that CountryWide's litigation liabilities alone could sink the whole bank, while Merrill Lynch was collapsing under its own weight as BAC purchased them at a PREMIUM! Let me attempt to hit this point HARDER! In 2007, I posed the question,"Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?"

I know I wouldn't. I believe there are better investments out there from a risk/reward perspective. Countrywide is in a bit of a jam, and it is not just from bad loans on the books. Looking at the Countrywide Foreclosures Blog (yes, there actually is one), I found this article:14,196 Homes Offered For Sale on Countrywide Financial's Website. I browsed through some of the site, and the small sample of numbers that I looked at seemed accurately reported. It also seems to mesh with Housingtracker.net. Browsing through the comments, someone noticed that the bank and trust offerings were not included. I looked, and at first glance, it seemed like he had a point. Now,it is a lot of work to verify all of this, but if it does pay out (and it looks like it does), Countrywide has nearly 100% of it market capitalization outstanding as REOs - in a market where houses just aren't selling and property values are falling fast. This is totally discounting each and every under performing and underwater mortgage asset they have on their books.

Held by Countrywide Mortgage Co. $ 2,910,876,468
Held by Countrywide Trust and Bank $ 2,969,067,322
Total $ 5,879,943,790
   
CFC Market Capitalization $ 6,180,000,000
% market cap held as REO 95%

You see, CountryWide was insolvent way back in 2007, even if you were able to ignore the biggest problems that they have (had). Throw in the soured, souring, and soon to be soured PrimeX style mortages then add in the massive litigation liabiities and CountryWide is so insolvent that they would have brought down anything that would have dared stand next to them, not to mention acquire them. Which begs the question, "Why in the hell did Bank of America do it?". I posed this in the following month in January of 2008, Quick Opinion on Bank of America Buying Countrywide...

It is a mistake, plain and simple. I normally don't like to tell people who specialize in a business how to run it, since they probably know more about their business than I do - but sometimes the mistakes are just so glaring. I don't care how many analysts are poring over how many books at Countrywide. BAC's error is not misjudging the value of Countrywide now, but misjudging the macro environment in which Countrywide operates.

My experience has been primarily understanding and evaluating companies from the equity perspective, but that definitely doesn't mean that I ignore the fxed income side. I am just not better at it than the other guys. What I have been noticing of late is that credit markets have been screaming murder for some time now, and the equity markets have been humming along new bullish highs and trading runs as if nothing is truly wrong. This is a strong indicator that momentum trading has again taken control of the markets. It is an environment where price trumps value. The last time this came to a head was the dot com bust. It took many institutional and individual investors 5 to 6 years to break even. Some never recouped their losses. Well, my gut has been telling me for about a year and change now that we are back there again. 2008 thus far has done nothing but confirm that we have come to a head. The pic above was an actual shot (one of very many at various locations) of the run on Northern Rock Bank in the U.K. This was real, and it was indicative of a real problem.

Well, we had a very recent run on the bank here in the states as well. There were pictures all over the web when it occurred, and now mysteriously, they are all gone. All I was able to retrieve was this screen capture of a thumbnail from Blownmortgage.com. Just as the pictorial remnants of the run have somehow disappeared, so has the equity markets prudence in the face of such a run. You can guess which bank got ran on.

cwide_bankrun.png

There were companies in the dot com era that made purchases that they thought were risky but potentially profitable, and in more severe cases such as the internet media companies, many have dwindled down to mere pennies per share, ex. Razorfish, et. al. So, historically, companies have had the hubris of BAC to go on and lose most or all of thier investment.

I have been using this chart a lot lately, and it looks like I will be using it a lot more.

If the housing market goes anywhere NEAR its historical trends, we are going to see 30% to 40% drops in real prices. Many people poo-poo this notion, calling it apocalyptic. This is silly to me. Why didn't they poo-poo the notion of 40% to 200% price increases in the same time frame? Isn't that even more dramatic? For some reason, investors - individual and professional alike - have a hard time avoiding following the crowd. They try to catch bottoms (a risky and foolhardy endeavor in my opinion), time tops, and always seem to believe something will bounce back or XYZ asset will never go down in price over the long term (ala Fitch Ratings HPA models or the Japanese real estate market).

But BAC is Value Investing Like Buffet

No they are not. They are gambling like cowboys. The caveat to the Buffet argument is that BAC didn't buy the assets of Countrywide, they bought the whole company, kit and kaboodle - including the liabilities. I can understand if they bought just the servicing arm, but they didn't. Believe me, it is possible to pay less than zero for a company. The last time Buffet bought a financial company steeped in liabilities and risks on the cheap, he regretted it and realized that no matter how cheap he got the assets, he still overpaid. Risk vs. Reward: don't just stare at the reward side of the equation. If you must, simlpy reminisce on Solomon Brothers. In other words, the cost for buying Countrywide could easily be more than what is paid for it.

CFC is dangerous, plain and simple. The residential housing chart clearly shows how far out of whack housing values are in historic real terms. Come on, this makes the remnants of the Gold Rush look mild. If values come anywhere near the mean values of growth, BAC will be paying the CFC bill for a long time, and they will be paying a lot more than $6 billion, the cost of acquisition. Now, I hear there are performance covenants and guarantees in the purchase which may smooth out the pain, but CFC is in a world of hurt, and doesn't have much wiggle room to offer incentives. As I have stried my best to insinuate, it is possible to get CFC for free and still lose money. I know BAC has been in the business longer than I have been short CFC, but I made more money on that short than they did on their $2 billion investment. Sometimes, you are just wrong.

As of last month, CFC had more nominal dollars in REOs than they did market cap. Now, just add all of those garbage loans, the plethora of law suits, a few SEC and state banking authority investigations in a pot with a market where housing value corrects 30% in real terms with inventory building higher and higher, and we have a bitter tasting brew indeed... I hope those BAC shareholders have strong stomachs.

So, was I Right?

Let's let the BoomBustBlog archives tell the tale...

Reggie Middleton's Real Estate Recap: As I Have Clearly Illustrated, It's a Real Estate Depression!!!

Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn

Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:

I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.

Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I

(1) Land and Debt are four letter words.  One of the golden rules to being a homebuilder is to finance land with equity and use debt for financing your homebuilding operations.  Why?  Because when you are highly levered and the market turns on you, then you will not be able to last during the downturn.  It is a rule that has proved out in every housing recession period.  Why then do builders double up their positions and try to grow faster than the market average?  Greed.  The bigger your company the bigger your compensation package.  If not greed, then stupidity.  This is such a basic concept and it holds true in every downturn.

(2)  There is a dis-connect between the land and housing markets.  When a housing market takes off, the first to know are the builders because they are looking at the sales data.  Eventually, the land market catches on and begins raising prices.  However, when a market is in decline, the builders are the first to know and the land owners hold their pricing until it is too late and they realize the downturn is for real.  Did you hear that banks?

(3) Types of Land Owners.  The most ignorant is the farmer or long time owner.  This person has a basis of practically zero because it has been in the family forever or 30 plus years.  They are not sophisticated and don't really understand the full value of their land.  Next up are the speculators.  These guys bought land 5-20 years ago hoping growth would come there way.  Their basis is higher, but they have no debt and don't have to do a deal if they don't want to.  The next group of land owners is the Investor who put together an LLC...

Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt II

Land is illiquid and for the most part does not generate income but does generate expenses. The exception being leasing land for someone to use for agricultural purposes. If the very nature of land is illiquidity, then what is its liquidity in the biggest real estate crisis since the depression? What is liquidity? Isn't liquidity the ability for a buyer and seller to meet at current market rates? Stocks for the most part are liquid because when I hit sell on my fidelity account someone else is on the buy side. With land, it is difficult to find a buyer at your price in a timely manner. How about now? How much is land really worth if you had to liquidate it today for cash. I believe as do many of the people in private equity, that land is down 50%, thus the land on builders books are down 50%. Bye bye equity.

Why Keep Telling A Joke That's Just Not Funny? Enter The NAR

For those who didn't catch it, I espoused my opinions of JP Morgan's overt optimism on CNBC a couple of months ago, and things are turning out exactly as  have stated with bank reserves being shoved into the accounting profit bucket just as the foreclosure pipeline is being backed up by robo-signing scandals which exacerbates the largely under appreciated shadow inventory problem (The 3rd Quarter in Review, and More Importantly How the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies!), MBS investors are demanding significantly increased put backs (see ) and "Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…"

Add all of this up and consider the junk portfolio of the subject bank in question as well as the tight knit incestuous circle of swap writers, and you have a recipe for disaster. Oh yeah, this is just the fallout from the mortgage operations of the Countrywide acquisistion. Keep in mind that although there a lot of CDS on BAC's books, the other swap category (TRS) illustrated in the video above is much more dangerous, particularly as it relates to this housing market.

Subscribers, reference pages 4,5 and 6 of Haircuts, Derivative Risks and Valuation to see how not only the housing and CRE market losses can affect this bank, but the losses on the TRS referenced in the video, or more aptly put, the potential failure of counterparties such as Bank of America Lynch[ing this] CountryWide to pay these "faux" hedges without another massive government bailout. You see this bank is a powder keg sitting atop a tinder box in a match factory with sparks flying all around it!

Let's move on to Merrill Lynch[ing], who was one of the biggest swap writers on the street, credit and total return. What do you think will happen to those swap lines as Europe implodes? Yes, I know many say Greece is not big enough to do damage, but that is said because many can't see the forest due to excessive tree bark in their face...

In French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days! I made it clear that the French banks were the canaries in the coal mine that nobody hear chirping. At the time of the original analysis, no on was harping on the French banks, besides the BoomBust.

Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008image008

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipe out, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trastde and European Bank Run Trading Supplement

I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

Subscribers, reference pages 1-4 and 5 of Haircuts, Derivative Risks and Valuation to see how the losses through European contatgion can compound the loan exposure problems of this bank and its likely TRS "faux" hedges (remember, its not really a hedge if it doesn't get paid), not to mention direct PIIGS exposure and holdings. Again, reference the video for potential failure of counterparties such as Bank of America Lynch[ing this] CountryWide to pay these "faux" hedges without another massive government bailout.

So, What's the Next Shoe To Drop? Read on...

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

Now, let's refresh the output from And The European Bank Run Continues...and more importantly BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional, I strongly urge those who haven't to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP.  Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price...

image014

This is the US bank that will SHOCK everybody with a most violent reaction when the excrement hits those cooling machine blades (subscribers only): US Bank Derivative Exposure

This is the European bank that either will set off the global chain reaction or end up being a very significant part of it (subscribers only): 

 

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Published in BoomBustBlog

Warning! This is going to be a highly, highly controversial post. It is long, it is thick with information, and it hits HARD! Thus if you are easily offended by pretty women, intellectually aggressive brothers in cognitive war garb, your government regulators selling you out to the highest European bidder, or the cold hard facts borne from world class research that you can't find from the sell side or the mainstream media, I strongly suggest you stop reading here and move on. There is nothing further for you to see. As for all others, please keep in mind that I warned of Bank of America Lynch[ing this] CountryWide's swap exposure through a subscriber document on Thursday, 01 October 2009, then went public with it shortly thereafter.

There has been a lot of feedback and emails emanating from the last RT/Capital Accounts interview that I did earlier this week, as well as it should be. The dilemma is that I don't think the viewership is taking the topic seriously enough. I explicitly said, on air, that the Federal Reserve endorsed this country's most dangerous bank in shifting its most toxic assets directly onto the back of the US taxpayer through their most sacrosanct liquid assets, their bank accounts. In addition, when the shit hits the fan, those very same assets will be second in line for recovery, for the derivative counterparties will get first grabs.

Now, maybe its due to the fact that the interviewer was a cutie, or my voice was too deep, or because I didn't appear in my superhero garb, but I really don' think the message was driven home by the interview that I gave on Russian TV's Capital Account introductory show last week. So, let's try this again, but this time instead of donning that suit and tie, I go as that most unlikely of financial superheroes...

To begin with, for those who did not see the Capital Accounts interview on Russian Television, here it is...

Next, we need to see just how pertinent being 2nd in line is in the liquidation of an insolvent investment bank. I do mean insolvent. Yes, I know the big name brand investors who don't look like that rather unconventional superhero standing in front of the Squid headquarters above may believe that BAC has value, but I have told you since 2008, and I'll tell you now - the equity of Bank of America Lynch[ing this] CountryWide is effectively worth less than zero! Yeah, I know, many of those name brand analysts espoused in the mainstream media disagree, and to each their own, but several of Bank of America Lynch[ing this] CountryWide's latest acquisitions, ex. Countrywide, Merrill Lynch, etc. were enough to make it insolvent. Add several negative numbers together and do you think a little financial engineering is going to give you a positive number??? A little common damn sense is all that is needed to fill the bill here.

That $6 you see quoted on your equity screens is a freebie, a giveaway, and not indicative of economic book value in my opinion. Then again, I could be wrong, but I was correct on practically every major bank, insurance and real estate co. failure in the US over the last 4 years, as well as predicting many of the European ones. See Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

If Bank of America Lynch[ing this] CountryWide Goes Bust, How Much Can Bank Depositors Expect To Lose?

Now, back to the point, how much can US depositors (you) expect to get when (notice I didn't say if) Bank of America Lynch[ing this] CountryWide goes bust? Well, here's a snippet from the WSJ.com:

The group of more than a dozen investors who hold debt in Lehman’s so-called operating subsidiaries today lobbed a proposal that would pay some creditors up to 60.4 cents for each dollar of their claims, while offering senior Lehman bondholders a 16% recovery, reported Deal Journal colleague Eric Morath.

(Click HERE to read the rival plan to reorganize Lehman Brothers.)

At stake is how to repay nearly $300 billion in money owed from the collapse of Lehman Brothers, which filed for bankruptcy protection in September 2008. A judge now may be forced to decide among three different proposals to repay Lehman creditors.

Lehman’s own proposal to pay back debt holders calls for just a 21.4% recovery for unsecured creditors. Under Lehman’s plan unveiled in January, the operating company creditors would receive less than 60.4 cents on the dollar.

Lehman is also facing an additional rival plan from another group led by hedge-fund manager John Paulson. Those creditors are pushing for a 24% recovery for senior unsecured creditors at the expense of subsidiary creditors.

Whoa, a recovery of between 21 and 60%??? That doesn't sound to promising! You know why it doesn't? Because it's not accurate. The derivative counterparties of the bank get first shot at that 21 cents to 60 cents on the dollar, not the FDIC insured bank depositors. After the counterparties finish feasting at the trough, what would you think is left over for the Aunt Mabels of the US with their lifetime savings tied up in CDs paying .23%, which your aunt was perfectly willing to accept in exchange for the safety and protection of her US government and the FDIC (please excuse me as the taste of bile interferes with my ability to type this).

Let's revisit the story that Bloomberg broke on this topic.

BofA Said to Split Regulators Over Moving Merrill Derivatives to ...

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren't authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn't believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

... Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

The legislation gave the FDIC, which liquidates failing banks, expanded powers to dismantle large financial institutions in danger of failing. The agency can borrow from the Treasury Department to finance the biggest lenders’ operations to stem bank runs. It’s required to recoup taxpayer money used during the resolution process through fees on the largest firms.

Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.

I'm afraid that last statement is just not true. See 10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the US taxpayer. After that, seeBuried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!

Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

Hmmmm! As excerpted from a recent post on Naked Capitalism:

Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.

And back to the Bloomberg article...

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.

This is a very, very, very important point to BoomBustBlog paying susbscribers (see research excerpts below).

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

BoomBustBlog Subscribers, Feel Free to Indulge In Research That Will Likely Prove To Be Most Prophetic Given The Information Above

Colossal Derivative exposure

According to the latest quarterly report from the Office Of the Currency Comptroller the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Although the [subject bank] with the xth largest derivative exposure stands a significant distance behind JPM, Citi, Bank of America and Goldman Sachs (the four largest players); the exposure quoted in OCC report is only for the US entity. Overall, [subject bank]’s group derivative exposure in its balance sheet is 220% of its tangible equity, far higher in both absolute and relative terms when compared to its peers. [Subject bank]’s on balance sheet derivative exposure is higher than the combined share of Goldman Sachs ($74bn, or 115% of TEC), JP Morgan ($78bn, or 62% of TEC) and Morgan Stanley ($46bn, or 114% of TEC).  What is more worrying is the quality of these derivative assets. Of the total notional value of credit derivatives (over half trillion $US bn), nearly 60% are non-investment grade. [Subject bank] has the highest proportion of non-investment grade credit derivatives followed by Citi Group (55%), GS (52%), Bank of America (37%) and JP Morgan (32%). The tables below as well as on the following page compare [subject bank]’s on-balance sheet derivative exposure. This is the bank, apparently unrecognized by the markets, media and sell side, that will literally go boom when the match is put to the dry gunpowder (subscribers only): Haircuts, Derivative Risks and Valuation

This is the US bank that will SHOCK everybody with a most violent reaction when the excrement hits those cooling machine blades (subscribers only): US Bank Derivative Exposure

This is the European bank that either will set off the global chain reaction or end up being a very significant part of it (subscribers only): 

For those who don't follow BoomBustBlog regularly, I warned of Bank of America Lynch[ing this] CountryWide'srisks and related issues many times in the past, but this expose and research on their swap risk was most prophetic, and was dated Thursday, 01 October 2009, over two full years ago!

As excerpted, and aptly named:

And the next AIG is... (Public Edition)...

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 (subscribers only)BAC Swap exposure_011009 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 (subscribers only): BAC 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:

Chronology of September 2008 liquidity crisis

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permits firms with the highest credit ratings to enter swaps without depositing collateral with its trading counter-parties. When its credit rating was downgraded, the company was required to post additional collateral with its trading counter-parties, and this led to an AIG liquidity crisis. [Here's a quick glance at Bank of America's current rating as compared to AIG's, both before and after their "incident". Be aware that this is not my proprietary rating (which would be substantially lower), but that of the oh so accurate major rating agencies. I doubt if they have taken this naked and unhedged exposure into consideration!]

Click graphics to enlarge

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AIG's London unit sold credit protection in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) that had by that time declined in value.[18] [The lower quality assets are the most likely to decrease in value dramatically. One should keep this in mind, for BAC has written $116 billion on non-investment grade (junk) credit derivatives and $3 billion in junk total return swaps. They have hedged, but not completely. My calculations and estimates have BAC with a carrying value of unhedged exposure of around $32 billion and a notional unhdeged exposure of $348 billion]. The United States Federal Reserve Bank announced the creation of a secured credit facility of up to US$85 billion, to prevent the company's collapse by enabling AIG to meet its obligations to deliver additional collateral to its credit default swap trading partners. [Keep in mind that BAC just gave up its government guarantee on the JUNKY assets acquired with the Merrill Lynch acquisition. Merrill Lynch was one of the, if not the LARGEST writer of CDS on Wall Street! BAC also bought Countrywide, arguably the most wretched pool of subprime and under-performing mortgage assets in this country.] The credit facility provided a structure to loan as much as US$85 billion, secured by the stock in AIG-owned subsidiaries, in exchange for warrants for a 79.9% equity stake, and the right to suspend dividends to previously issued common and preferred stock.[16][19][20] AIG announced the same day that its board accepted the terms of the Federal Reserve Bank's rescue package and secured credit facility.[21] This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.[22][23] [Well, we shall see, since Bank of America is currently the largest bank in America. We still have time to set a new record.]

AIG's share prices had fallen over 95% to just $1.25 by September 16, 2008, from a 52-week high of $70.13. The company reported over $13.2 billion in losses in the first six months of the year.[24][25] [Well, green shoots is a sproutin'! AIG is currently trading at $44.33. I am at a loss as to how anyone can justify such, but hey, people are still buying Bank of America stock as well...] The AIG Financial Products division headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. [Hmmm!!! BAC has written protection $2.6 trillion notional, with $348 billion unhedged (at least according to my calculations). For those "not to use notional nitwits", that translates to $198 billion carrying value with $32 billion apparently unhedged or written naked - just like AIG, with one big exception. It appears as if BAC has one the machismo contest of "mine is bigger than yours" with AIG - congrats fellas!] Of those securities, $57.8 billion were structured debt securities backed by subprime loans.[26] CNN named Cassano as one of the "Ten Most Wanted: Culprits" of the 2008 financial collapse in the United States.[27][Well, Ken Lewis, the BAC CEO, is not to popular around these parts either. I am sure the upcoming Cuomo/congress investigations will be juiced when they find out that BAC is doing the AIG thing, just on a much larger scale!!! Just remember who you heard it from first!]

As Lehman Brothers (the largest bankruptcy in U.S. history at that time) [Hey, I warned you guys about Lehman and Bear WAY in advance, just as I am doing ow with Bank of America - "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) - Is this the Breaking of the Bear? January 2008 - Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!) - Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 - Funny CLO business at Lehman Friday, 04 April 2008] suffered a catastrophic decline in share price, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the values used by Lehman which weakened investors' confidence in AIG.[24] [If BAC is not careful, the market may have similar misgivings on how BAC values its credit card receivables and mortgages held in off balance sheet trusts. See our my findings on what may lay off balance sheet - If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, to raise cash.[24] The Federal Reserve hired Morgan Stanley to determine if there are systemic risks to a financial failure of AIG, and asked private entities to supply short-term bridge loans to the company. In the meantime, New York regulators allowed AIG to borrow $20 billion from its subsidiaries.[28][29] [Why ask Morgan Stanley? In 2008, they were "The Riskiest Bank on the Street". I guess it takes one to know one! I ask my readers, is one of the biggest banks in the country that then swallows the biggest brokerage and at the time the sickest brokerage in the country right after swallowing the biggest and sickest mortgage lender in the country a systemic risk if it fails? I bet a lot of you guys and gals can answer that question for a whole lot more than the government paid Morgan Stanley. I wonder, why don't these guys ask me my opinion? NY bloggers don't get enough respect :-)]

At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent.[30] The Federal Reserve continued to meet that day with major Wall Street investment firms, hoping to broker a deal for a non-governmental $75 billion line of credit to the company.[31] Rating agencies Moody's and Standard and Poor downgraded AIG's credit ratings on concerns over likely continuing losses on mortgage-backed securities. [Now, this is just simply hilarious. With friends like the credit rating agencies, who needs enemies? Think about the fire alarm that starts to go off just when the smoldering embers of what use to be your house begin to cool... How much money has AIG paid the credit ratign agencies over the last 10 years or so?] The credit rating downgrade forced the company to deliver collateral of over $10 billion to certain creditors and CDS counter-parties.[32] [Well, we shall see what will happen with that "other" bank] The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17.[33] Just before the bailout by the US Federal Reserve, AIG former CEO Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert B. Willumstad offering his assistance in any way possible, ccing the Board of Directors. His offer was rebuffed.[34] [And why wasn't this man's assistance accepted???]

Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG could draw up to $85 billion. The loan was collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of "substantially all" of its regulated subsidiaries, and with an interest rate of 850 basis points over the three-month London Interbank Offered Rate (LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility, the U.S. government received warrants for a 79.9 percent equity stake in AIG, with the right to suspend the payment of dividends to AIG common and preferred shareholders.[16][20] The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.[20][35][36] AIG's board of directors announced approval of the loan transaction in a press release the same day. The announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve.[16][21][37] AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.[38] On September 22, 2008, AIG was removed from the Dow Jones Industrial Average.[39] An additional $37.8 billion credit facility was established in October. As of October 24, AIG had drawn a total of $90.3 billion from the emergency loan, of a total $122.8 billion.[40]

Maurice Greenberg, former CEO of AIG, on September 17, 2008, characterized the bailout as a nationalization of AIG. He also stated that he was bewildered by the situation and was at a loss over how the entire situation got out of control as it did.[41] On September 17, 2008, Federal Reserve Bank chair Ben Bernanke asked Treasury Secretary Henry Paulson join him, to call on members of Congress, to describe the need for a congressionally authorized bailout of the nation's banking system. Weeks later, Congress approved the Emergency Economic Stabilization Act of 2008. Bernanke said to Paulson on September 17:[42]

[Oh, this soap opera gets worse. Bank of America's bailouts have totaled $168 billions so thus far, and we haven't even addressed the naked swap writing issue as of yet. Then again, BAC did buyout the Merrill Lynch loss guarantee from the government after much wrangling. I don't think this was the wisest idea, for they very well may still need it. Again excerpted from Wikipedia]:

Bank of America received US $20 billion in federal bailout from the US government through the Troubled Asset Relief Program (TARP) on 16 January 2009 and also got guarantee of US $118 billion in potential losses at the company.[45] This was in addition to the $25 billion given to them in the Fall of 2008 through TARP. The additional payment was part of a deal with the US government to preserve Bank of America's merger with the troubled investment firm Merrill Lynch.[46] Since then, members of the US Congress have expressed considerable concern about how this money has been spent, especially since some of the recipients have been accused of mis-using the bailout money.[47] The Bank's CEO, Ken Lewis, was quoted as claiming "We are still lending, and we are lending far more because of the TARP program." Members of the US House of Representatives, however, were skeptical and quoted many anecdotes about loan applicants (particularly small business owners) being denied loans and credit card holders facing stiffer terms on the debt in their card accounts.

According to a March 15, 2009 article in The New York Times, Bank of America received an additional $5.2 billion in government bailout money which was channeled through American International Group.[48]

As a result of its federal bailout and management problems, The Wall Street Journal reported that the Bank of America is operating under a secret “memorandum of understanding” (MOU) from the US government that requires it to ”overhaul its board and address perceived problems with risk and liquidity management.” With the federal action, the institution has taken several steps, including arranging for six of its directors to resign and forming a Regulatory Impact Office. Bank of America faces several deadlines in July and August and if not met, could face harsher penalties by federal regulators. Bank of America did not respond to The Wall Street Journal story.[49]

This is exactly what I am talking about when I say these institutions CANNOT hedge their large risks. The number 2 derivative holder in the country (Bank of America) and the number 3 derivative holder in the country (Goldman Sachs) had to be bailed out by the government through AIG (another large derivative holder) when AIG had just $10 billion dollars in collateral calls that it could not pay. AIG was the largest insurer in the world!!! The number 1 derivative holder in the country (JP Morgan) needed $90 billion or so in bailout monies when its major counterparty failed - Bear Stearns. See Is this the Breaking of the Bear? January 2008 for how easy that was to see coming at least 3 months in advance! That circle of concentrated risk is even smaller now then it was back then. Now 5 institutions hold 97% of the notional vale and 88% of the market value in derivatives, and they are all basically in the same business and all basically hedge with each other. It is not a true hedge when the other side can't pay, and history has clearly proven how easy it is for the other side not to be able to pay. See a sampling of my many posts on this topic:

    1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
    2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
    3. As the markets climb on top of one big, incestuous pool of concentrated risk...
    4. Any objective review shows that the big banks are simply too big for the safety of this country
    5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
    6. An Independent Look into JP Morgan | Reggie ...

      1. image001.png

        Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide.

        This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent - particularly if that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent). You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish -JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

         

Additional Bailouts of 2008

On October 9, 2008, the company borrowed an additional $37.8 billion via a second secured asset credit facility created by the Federal Reserve Bank of New York (FRBNY).[43] From mid September till early November, AIG's credit-default spreads were steadily rising, implying the company was heading for default.[44] On November 10, 2008, the U.S. Treasury announced it would purchase $40 billion in newly issued AIG senior preferred stock, under the authority of the Emergency Economic Stabilization Act's Troubled Asset Relief Program.[45][46][47] The FRBNY announced that it would modify the September 16th secured credit facility; the Treasury investment would permit a reduction in its size from $85 billion to $60 billion, and that the FRBNY would extend the life of the facility from three to five years, and change the interest rate from 8.5% plus the three-month London interbank offered rate (LIBOR) for the total credit facility, to 3% plus LIBOR for funds drawn down, and 0.75% plus LIBOR for funds not drawn, and that AIG would create two off- balance-sheet Limited Liability Companies (LLC) to hold AIG assets: one will act as an AIG Residential Mortgage-Backed Securities Facility and the second to act as an AIG Collateralized Debt Obligations Facility.[45][47] Federal officials said the $40 billion investment would ultimately permit the government to reduce the total exposure to AIG to $112 billion from $152 billion.[45] On December 15, 2008, the Thomas More Law Center filed suit to challenge the Emergency Economic Stabilization Act of 2008, alleging that it unconstitutionally promotes Islamic law (Sharia) and religion. The lawsuit was filed because AIG provides Takaful Insurance Plans, which, according to the company, avoid investments and transactions that are"un-Islamic".[48][49]

Counterparty Controversy

AIG was required to post additional collateral with many creditors and counter-parties, touching off controversy when over $100 billion was paid out to major global financial institutions that had previously received TARP money. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps purchased from AIG by the institutions), a number of Congressmen and media members expressed outrage that taxpayer money was going to these banks through AIG.[50]

Had AIG been allowed to fail in a controlled manner through bankruptcy, bondholders and derivative counterparties (major banks) would have suffered significant losses, limiting the amount of taxpayer funds directly used. Fed Chairman Ben Bernanke argued: "If a federal agency had [appropriate authority] on September 16 [2008], they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now."[51] The "situation" to which he is referring is that the claims of bondholders and counterparties were paid at 100 cents on the dollar by taxpayers, without giving taxpayers the rights to the future profits of these institutions. In other words, the benefits went to the banks while the taxpayers suffered the costs.

Well, Bank of America may very well give Ben Bernanke and the American taxpayer an opportunity to find out if we have learned our collective lessons. With the S&P pushing 1100 while practically all of the problems from the period illustrated above remain extant, and if anything exacerbated (ex. counterparty and concentration risk, credit risk and asset quality concerns, and above all, government sanctioned opacity in reporting), I doubt so very seriously.

This is what the US banks, and now you Mr. and Mrs. US taxpayer and bank depositor, have been backstopping all along...

You've been BAMBOOZLED! HOODWINKED! LED ASTRAY RUN AMOK!

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I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.
For those that are new to the blog, these are pics of previous meet and greets...

  

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Published in BoomBustBlog

Note: Please be sure to check the twitter feed in the upper right hand corner of this site for real time updates, as well as the comment section below.

It is now time to start putting in some serious short positions across the board - globally - for all those who have not already done so. Anyone who has followed me on BoomBustBlog knows that I have clocked heavy four digit gains (250% to 450%), mostly unlevered, throughout the first leg of the financial crisis - see Sample Research & Performance. This was accomplished by keeping my eyes open and objective, and in doing so recognizing the enormous holes in economic value that were trading at ridiculously high risk adjusted prices. The result of which enabled me to publicly call the fall of nearly every major collapsed FIRE sector institution that did actually fall, and do so months in advance, including Bear Stearns, Merrill Lynch, WaMu, Countrywide, Lehman Brothers, General Growth Properties, etc. The near 100% equity run up at the height of the correction was easily seen by my and my staff, but I (and I put the blame squarely on myself and no one on my staff) severely underestimated the breadth and depth of this synthetically contrived, central bank centrally planned, bear market rally. This underestimation of the depths that our Federal Reserve would stoop to in mortgaging the future of this country, and this country's children of the next generation cost me 50% of the gains that I made over the previous two years. For this I was actually forced to apologize to my subscribers in a lengthy letter with tears dripping off of my virtual typewriter, reference 2009 Year End Note to BoomBustBlog Readers and Subscribers. I felt horrible about underestimating the self destructive staying power of the concerted efforts central bankers around the globe attempting to rescue a failed oligarchy, but despite this significant shortcoming, I still ran many circles around what the best Sell Side Wall Street had to offer, reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Yesterday, I went through a quick timeline that illustrated what was once considered sensationalist now considered by most to be fact: The ECB, several national central banks, and a good portion of the private banking system are insolvent. This is the case regardless of what name you want to cut and paste on the state of insolvency. As excerpted from :

European Banks’ Capital Shortfall Means Greece Debt Default Not an OptionA failure by European regulators to make banks raise enough capital to withstand a sovereign default is complicating efforts to resolve Greece’s debt crisis. The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain. “European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd. in London. While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent, even before any sovereign default.

Here’s a newsflash for all of you who are still not grounded in reality. The loss to the banks have already occurred it just hasn’t been officially recognized. You see, their bond and debt holdings are already devalued. The value is gone, vamoosed, disappeared. I have made this perfectly clear, both in my keynote speech at the ING valuation conference and here on BoomBustBlog.

Published in BoomBustBlog

I’m fresh back from my trip to Amsterdam where I lectured ING institutional clients and staff on the potential of a European banking collapse. Below are a few clips from the first of two lectures.

Now that the mainstream media has been reporting what BoomBustBloggers knew as fact as far back as two years ago. Today, the FT printed an article titled “Greek debt hit by restructuring fears“, whose pertinent points are as follows:

The euro tumbled on Thursday and premiums charged on Greek debt over Germany’s hit euro-era highs after the countries’ respective finance ministers talked of Greece needing more time and raised the prospect of debt restructuring.

In an interview with the Financial Times, George Papaconstantinou said Greece needed more time to convince international investors of its commitment to reform its finances.

Separately, Wolfgang Schauble, Germany’s finance minister, told Die Welt newspaper that, if a study already under way showed Greece’s debt levels were unsustainable, “further measures” would have to be taken.

When asked what those could be, he ruled out any involuntary restructuring before 2013, but warned investors could face losses after that point…  Yields on Greek two-year bonds jumped nearly a full percentage point to 17.884 per cent.

… “Greek bonds are getting crushed today due to the comments from the German finance minister and the Greek equivalent,” said Gary Jenkins, head of fixed income at Evolution Securities. “The European Stability Mechanism allows a roadmap towards restructuring, indeed it insists upon it if debt cannot be restored to a sustainable path.”

Investors… flight left yields on equivalent Greek debt 24bp higher at 13.162 per cent while Portuguese 10-year notes yielded 8.88 per cent, up 14bp. Mr Jenkins said investors expected that any restructuring would start with Greece trying to extend repayment deadlines on existing debt, or asking investors to “forgive” interest on the loans. But he warned it could take more than that. “Ultimately we believe that if the idea is to get the debt back to a sustainable level then the target will be the Maastricht treaty limit of debt-to-GDP of 60 per cent. In order to reach that level bonds will have to take a haircut of some 62 per cent,” he said.

Online Spreadsheets (professional and institutional subscribers only)

Professional and institutional subscribers should feel free to look at a variety of haircut scenarios via out proprietary sensitivity analysis for the Greek head grooming. If you remember last year when  illustrated How Greece Killed Its Own Banks!, you realize the main reason why the EU has been using the kids gloves with the Greeks. To make a long story short, let’s employ the old adage “A picture is worth a 1,000 words”…

Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)…

The same hypothetical leveraged positions expressed as a percentage gain or loss…

When I first started writing this post this morning, the only other bond markets getting hit were Portugal’s. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following:

If you think those charts look painful, imagine if the Maastricht treaty was actually respected. Our models haven’t pushed passed 80% debt to GDP, but if you were to put the treaty’s debt ceiling in you would see the very definition of contagion. The following chart represents the first order consequences of a 62% haircut on Greek debt…

From ZeroHedge: Greek 10 Year-Bund spreads just passed 1,000 for the first time ever and were last trading north. Following this statement from Germany's Hoyer, it seems all hell is about to break loose for peripheral spreads.

  • *GERMANY WOULD BACK VOLUNTARY GREEK RESTRUCTURING, HOYER SAYS
  • *GREEK DEFICIT CUTTING MAY NOT BE ENOUGH, HOYER SAYS
  • *GERMANY ‘WORRIED’ ABOUT GREEK FISCAL DEVELOPMENTS, HOYER SAYS
  • *GREEK DEBT RESTRUCTURING `WOULD NOT BE A DISASTER,' HOYER SAYS
  • *GERMAN EUROPE MINISTER HOYER SPEAKS IN INTERVIEW IN BERLIN
Published in BoomBustBlog

For anybody who didn't catch the hint, another banking crisis the continuation of the banking crisis is inevitable. I've said it before, Is Another Banking Crisis Inevitable? This is the current landscape, undoubtedly fudged over by optimistic marks.

Banks NPAs to total loans

Source: IMF, Boombust research and analytics

Euro banks remain weak as compared to their US counterparts

Health of European banks is weaker when compared to US banks. European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.

I really do mean substantial!

Published in BoomBustBlog

This is my response to an inciteful insightful comment posted by GJK313. It is in reference to an article which readers can find here, titled "FASB Surrenders - America Win". I suggest readers read the aforelinked document in its entirety before moving on. Notice how this is written by economists and analysts, not real world investors that are investing THEIR OWN CAPITAL! When I state "own capital" I mean their money, and not that of their clients. I cannot fathom how anyone who had their own money at stake would ever want more ambiguity in pricing assets, in lieu of less.. Let me pick this apart...

"Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place"
Well, when the market is illiquid, the assets in said market have a lower market value. It really is that simple.
"Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place"
Yes, because if said banks had to liquidate their loans the only place to liquidate them would be said "illiquid" market. This goes to show you how the value of the loans are probably highly overstated by those such as the authors of this article. Guarantee me that no bank will ever go bust again - guarantee me that no bank will never, ever need to sell assets, and I will soften my stance some on mark to market accounting. Until then...
"banks will be allowed to carry loans on their books at amortized cost, reflecting cash flow (payments), as well as reasonable estimates of likely loan losses."
This should now mean that the price of all unsecured loans should drop immediately and dramatically for all consumers, for FASB and these authors are not differentiating between loans backed by collateral and loans not backed by collateral. Many formerly overcollateralized real estate loans are now partially or fully unsecured due to the collapse of real estate "Values" and "Prices" (yes, there is a difference). They are also not taking into consideration the financial and strategic advantages of defaulting on a loan against an asset with negative equity. So, if the banks can now benefit from pricing loans at will (as the authors stated, "reasonable estimates of likely loan losses" - who will make these estimates?), regardless of collateral, why shouldn't that benefit be passed onto the consumer and allow them to enjoy said valuation/pricing perks. Picture me going to a bank and saying, "Just loan me $4 million with nothing hard to back it for no more than you charge that guy with a 40% overcollateralized loan. You can't charge me more since I will keep my payments current and you will be able to make a "reasonable estimate" of the losses, of which of course there will be none because.... Well, just because!"
Does this scenario make any sense to you?
Published in BoomBustBlog

About a year ago, after hearing so many pie-in-the-sky perma-bullish pundits and bankers say how banks paid every cent of TARP and government assistance back, I went on the following rant - 10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the Taxpayer! Monday, January 18th, 2010:

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….

    1. What was the value for bank charter, to get cheap access to the Fed’s funds? did they pay back this value yet? No!
    1. How about the payment of interest on the banks’ excess reserves at the Fed. Have the banks repaid that yet? No!
    2. The Fed and the Treasury have purchased hundreds of billions of dollars of Agency debt, Agency mortgage-backed securities (MBS) and related securities through Treasury purchase programs. Have the banks paid back the capital behind those purchases yet? No!
    3. How about the Term Auction Facility? Has the capital behind the benefits of that program been paid back? No!
    4. Then there is the Primary Dealer Credit Facility (PDCF), has this been paid back? No!
    5. Do you remember the Term Asset-Backed Securities Loan Facility (TALF)? Have the funds behind that been paid back? No!
    6. What about the PPIP? No!
    7. Hey, there’s the Foreign Exchange Swap programs (the currency swap lines, that saved not only our banks but out banks facing counterparties who were short on dollars), has that been paid back? No!
    8. There’s the Commercial Paper Funding Facility (CPFF), have the funds behind that been paid back? No!
    9. Most importantly, the opportunity cost of ZIRP, which hurts those who do not speculate (or have not speculated) with near free money! How do you pay that back to grandma and her .017% CDs?

Well, all rants aside, if you bothered to go through the mass dump of data that the Fed produced as a result of the Bloomberg FOIL suit, you will find that not only did the banks not pay back the massive amount of assistance that was given to them, they were actually granted more in the form of MOPTARP (MBS Overpayment Troubled Asset Repayment Program), and yes, I did make that up. How much more? Well, potentially more than the original TARP bailout! I'm getting ahead of myself though, so let's backtrack.

Published in BoomBustBlog

One of my interns made an interesting observation after going over the Feds recent data dump of bailout info.  It reads as follows:

Some quick observations from the data on MBS purchases:

- 8558/10007 MBS purchases by the Fed were done at par or a premium.  These are only agency MBS too.

- A majority of the Maiden Lane holdings were agency MBS

- It looks like the safety net put under AIG was done to protect the agencies.  If all those agency guaranteed MBS had to be liquidated, all that AAA paper would have gone down as the biggest sucker bet in the modern history of financial markets

- I have yet to find any equity collateral data for BAC, C, and AIG.  AIG is what is important here though, because I have no doubt they are writing some of these CDS on European sovereigns, and I'm sure they are undercapitalized yet again, which means if they pledged equity to the Fed, that could destroy a part of the balance sheet and simultaneously blow up the CDS market since none of the sellers are capitalized adequately.  I'm digressing, but I bet CDS will get moved to an exchange, because there are going to be a lot of buyers (both hedgers and speculators) who get burnt by undercapitalized counterparties.

There is a sharp drawdown coming in both MBS and sovereign CDS land if the accounting numbers and the institutional investment sheeple get even a whiff of reality. I am working on the Spain haircut numbers (and yes, Spain will have to restructure in some form or fashion, be it maturity extension, coupon reduction, haircut - or a combination of the three) and anyone who has read my work has seen the housing numbers and opinion - as well as my historical accuracy. For those who have not been reading me or don't subscribe, there's a related reading list at the bottom of this post, such as

  1. The 3rd Quarter in Review, and More Importantly How the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies! Wednesday, November 10th, 2010
  2. Banks, Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street Hustlers! Its a Sucker’s Bet, Who’s Going to Fall for it in QE2? Tuesday, November 9th, 2010

On that note, here is a snapshot the results of our digging into the monoline exposure.

Published in BoomBustBlog