I feel this month has thrown enough events at the market to force it to start taking the real fundamentals into consideration. Of course, battling this ideal is the US Federal Reserve and their QE 2.1 policy. This should be a time to reflect upon exactly where we stand thus, I will review my thoughts and observations over the last 30 to 45 days and then summarize a truly unbiased and independently calculated view of the downright nasty side effects of the US shadow inventory of distressed housing. All paying subscribers can download the full shadow inventory report here: File Icon Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel - Shadow Inventory.

Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves and provisions to pad lagging accounting earnings under the auspices of increasing credit metrics are simply setting their investors up for a major reversal which will bang those very same accounting earnings: JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! and ).

Published in BoomBustBlog

"Goldman, unlike the rest of the street and practically the rest of the I banking world, is ratcheting up off balance sheet risk!!! Is BoomBustBlog the only one inquiring as to WHY??? We have a few reasons in mind... And to think, many thought the Enronesque days of off balance sheet "hide the sausage" games have come to an end..." Go through your sell side analyst's quarterly update and if you don't find these tidbits of information thoroughly explained, but instead see a Goldman fan boy(girl) cheering section, come back and subscribe to BoomBustblog. At the very least, we tell it like it is!

My opinion and updated valuation for Goldman and its 3rd quarter performance is available for download to all paying subscribers: File Icon GS 3rd Quarter 2010 Update. While I can't spill the beans on the entire contents of the subscription document, there  are a few issues (as usual) and observations that I would like to make public.

To begin with, I must commend Goldman's management. They do a helluva job massaging numbers and attempting to right their ship, particularly in relation to some other banks. Anecdotally, I'm aware of their losing some talent on the equities side but I am sure they have no problem replacing it. There is also the issue of their subprime servicing unit, Litton Loans, which I am sure will bring them nothing but heartache in the near to medium term, but at least that aspect of the business has been recognized by the sell side, if not under appreciated in terms of potential risk. Despite its small size in relation to Goldman's aggregate operations, it carries with it material reputation risk as well as the prospects for significant litigation and more.

Now, on to the aspects which the sell side decided not to cover - or somehow overlooked. Goldman was applauded for having strong accounting earnings. In Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!, I warned of the danger at looking at accounting earnings as if they were actually a legitimate barometer of a companies actual economic value. If that were the case, wouldn't accountants be the best investors in the world? I will delve into the folly of relying strictly on accounting earnings later on this missive as well, particularly in regards to a company with management as crafty and capable as Goldman - but before I do let's realize that even those accounting earnings were down significantly from previous periods...

Published in BoomBustBlog

I have received a lot of feedback concerning my article posted yesterday, A Step by Step Guide to Exactly How Much Derivatives Risk Each of the 5 Big Banks Actually

Pick up your own "Fiery Swords of Truth" and aggressively seek out the facts. Don't be afraid to ask questions under the pretense you don't understand. Chances are, if it is so complex that you can't understand it, it is either wrong or many other people, including the creators and proponents, don't understand it either!!!

Have, and How It Could All Go Boom! (a must read precursor to this piece) in which I picked up the fiery sword of Truth and attacked all misinformation within reach. A decent amount of derivatives traders, salesman and financial engineers chimed in. Of course, being the simpleton that I am, I am at a loss how anybody can argue that the hedging and netting system actually works with the utter failure of the monolines, Lehman (wherein contracts were unwound and rewritten, but why would they have to be if everybody was netted???) and Bear Stearns (where the government had to step in to be the counterparty of last result), all of which allegedly netted out much of their risk - RIIGHHHT??? Nonetheless, I will go through some of the responses I received via email, all of which were cogent, intelligent and polite - but most of which took a swing at my thesis. Okay, I'm swinging back - and I'm swinging back with the "Fiery Sword of Truth" as well!

Here's the first one:

Hi reggie, love the independance of the blog. Couldnt help but wonder though, as to if the big 5 were really cross exposed to that degree. Surely hedge funds, private banks, real world commodity producers etc are other swap counter parties that you fail to include in your calculations. 1.7 trillion of unlevered hedge fund assets arent included anywhere for a start. How about other smaller banks too, that dont show up in the comparison, maybe there is more diversification than you think.

Published in BoomBustBlog

Over the three years since I have been publishing BoomBustBlog, I have amassed what many consider a remarkable track record, having called nearly every major market crash and large financial/real estate/bank collapse over said time period.  Believe it or not, many have even went so far as to call me "intelligent". While I would love to bask in the light of potential admiration, let me assure you, although I am in no way lacking in confidence or ability, I am also quite average in the intelligence arena. While not being any more intelligent than the average man, I do have an uncanny knack for seeking out that rarest of rare concepts these days - the TRUTH! This increasingly uncommon ability (to both speak and seek the truth) has served me quite well in both my investing pursuits as well as in the personal aspects of life. Let's delve into how I translate this personal talent into a product that I distribute from my BoomBustBlog, and then into the facts in regards to the current state of concentrated risk in today's US banking system - to wit, the systemic risk of derivatives concentration.

Published in BoomBustBlog

While chatting with Herb Greenberg before my interview at CNBC on the banks, he asked me why I was short the banks, JPM in particular (JP Morgan’s 3rd Q & Just How  XYZ Bank Can Never Go Out of Business!!!). I told him that I believe they are overly optimistic about the reserve thingy (Big Banks Will Pay for Optimism), the mortgage put back cosequences (JP Morgan’s Analysts Agree with BoomBustBlog Research, Contradict CEO Jamie Dimon’s Conference Call and The Putback Parade Cometh: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages) and real estate in general. I also said that in the scheme of things, Jamie Dimon appears to be, by far, the most effective manager of the big banks, and JPM  seems to be the best run of the big banks. He negotiated a literal coup with Bear Stearns purchase, getting the billion dollar head quarters for free, the company for $10 per share and government backing for the legacy assets. He made a mistake with WaMu by not demanding a deeper discount. I know it seems like 28% or so off seems like a good deal, but it was not  - and I clearly stated it several times (Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!). I just want to make this clear. There is nothing personal here, at least in terms of investments and financial analysis. The stream of events are of such grave consequence that this goes beyond mere finance, though. Why? This country has been "Bamboozled by the Banking Industry", but the "Chickens Are Coming Home to Roost". Let me explain...

Throughout most of 2009, while 10%+ of unemployed middle America stopped paying their mortgages, busy standing in line for shiny fat margin iThingies while in rabid debate about how many pieces of tail Tiger Woods may or may have not hit (yes, that story got 2160 tweets and 375 comments on how well endowed "the Tiger" is - would you dare to bet that this article on a potential depression will get even one third of that?) the  greatest mass fraud of this lifetime against said persons was underway.

This should be played 720 HD full screen mode

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Mr. and Mrs Middle America, you've been Had, you've been Took, Bamboozled, Hoodwinked, led Astray, run Amok (yes, YOU have, see You’ve Been Bamboozled, Hoodwinked and Lied To! Here’s the Proof. What Are You Going to Do About It? and click your rung in the socio-economic ladder, ex. your "social class"). From rating agency subprime madness to stress tests designed not to apply any stress to robo-signing and beyond (Mortgage Putbacks, the Harbinger of the Collapse that Will Dwarf 2008!) the financial and political elite appear to be running a real time experiment to demonstrate how numb they can prove the mainstream populace to really be? Will the experiment fail this time around? After all, things are different with the Web, and independent thought rocketed around the world in the form of blogs. We shall see what becomes of this real time socio-economic lab session, we shall see!

A few have been emailing me looking for a bio. I believe my track record should speak louder than any paragraph or two about my prior occupation(s). Credibility should come from accomplishment, not pedigree, no?  Click here to find out who I am what I have done. Be sure to scroll all the way down to the bottom of the page.

Next up:

  1. the updated JP Morgan forensic valuation (yes, what I think it is actually worth) for subscribers (there's  a surprise or two in here that I'll reveal to the public)
  2. the Goldman Sachs forensic valuation update
  3. and my proprietary research on the foreclosure backlog this one will be a doozy)!

The Truth goes Viral!

Published in BoomBustBlog

In early 2008, I warned my readers that several states and municipalities in this country are going to run into some very rough times, with the spectre of default definitely on the table for a few. See Municipal bond market and the securitization crisis – part I and Municipal bond market and the securitization crisis – part 2 (should be read by whoever is not a muni expert – this newsbyte may be worth reading as well).

Of course, the highly contrarian nature of my views were (and are) bound to bring about its fair share of naysayers, pointing to the sparse record of actual municipal defaults. Of course, we all know the safety of driving forward while staring in the rear view mirror, California creating its own currency in the form of IOU’s and all... I also brought up the risks that the CDS market posed in Counterparty risk analyses – counter-party failure will open up another Pandora’s box (must read for anyone who is not a CDS specialist). This was done right about the time that I also called several companies out for their CDS (and direct) exposure to real estate, mortgage debt and municipalities – namely:

I considered three of the four to be insolvent in 2007 and early 2008. History has shown whether I had a point or not. I rehash history because a review of the lessons that hurt so bad, but were never learned brings us back to the muni markets, CDS and overleveraged exposure. Is this 2008, 2010, or some non-descript chrono-anomaly from a Twilight Zone episode?

Illinois Municipal Debt Defies Gravity

Published in BoomBustBlog

On Wednesday, May 26th, 2010 I released "A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina" in which I explicitly outlined the restructuring of Greek debt using the Argentina experience as a template (I suggested that mixture of zero coupon bonds and explicit haircuts would be utilized to re-wrap debt). During that time, many analysts and government officials at the time (and even now) said that I was totally unrealistic in expecting a Greek default or explicit restructuring (reference Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!). Well, fast forward about 60 days, and voila, guess what the hell is going on???  Zero coupon bonds! Haircuts! Where have we heard this before??? Thanks and hat tip to BoomBustBlogger Shaunsnoll, "It’s no secret: Greece is restructuring debt" (via FT.com)

...consider the cost of sending lawyers and consultants – you could call them spies – to hang around Brussels and Frankfurt to assess the risk of a Greek default.

Yet simply by looking “on internet”, you could find out that Greece has already started to restructure its state debts. Look at the site for the Hellenic Association of Pharmaceutical Companies (www.sfee.gr), and you will find a link to a joint press release by the Greek Ministry of Health and Social Welfare and the Ministry of Finance. On June 9, unnoticed by most in the financial world, they stated: “The [Greek state hospital system] debts of 2007, 2008, 2009 amounting to €5.36bn [£4.4bn, $6.7bn] will be settled with zero coupon bonds.” The hospital debts lingering from 2007 will be paid with two-year zeros, 2008 with three-year zeros, and 2009 with four-year zeros.

There is some, actually a lot, of detail missing from the one page release, which presumably will be filled in by the legislation that will be introduced, and probably passed, to implement the restructuring. The release does say: “It is certain that the banks co-operating with the suppliers will show interest in prepaying these bonds, transforming the corporate risk undertaken on behalf of their customers – hospital suppliers – in credit risk against the Greek state, in the form of a bond which can be financed through ECB.” And, according to the release: “In case suppliers settle these bonds by January 2, 2011 . . . the above ‘discounts’ corresponds to a total percentage of about 19 per cent.”

Published in BoomBustBlog

Relevant commentary from BoomBustBlog and sources throughout the Web on the accounting change that added 80% to the S&P since March 2009!!!

Warning Shots from the IASB: FT

  • The IASB came under fire in the fall/winter of 2009 in regards to mark to market rules
  • Banks wanted continued relaxation of valuing models in order to “smooth out volatility swings in asset prices”
  • IASB and FASB plan to converge on mark to market ruling by 2011, both have stated a desire for more transparent financial statements, but have been politically compromised by bankers and commercial lenders

FASB Plan Would Force Banks to Report Loan Fair Value: BusinessWeek

  • FASB is seeking to approve a proposal that would force banks to mark loans at market value by 2013, potentially having billions of dollars at risk for writedowns
  • In April 2009, FASB gave significant leeway to banks in regards to pricing and modeling loan values, banking consultants are very opposed to a reversal of the measures
  • Pension obligations and leases will be exempt from new measures
Published in BoomBustBlog

In order to assess the impact of sovereign debt restructuring on the market prices of the sovereign bonds that undergo restructuring (haircut in the principal amount or maturity extension), we retrieved price data of the Argentinean bonds that underwent restructuring in 2005. The sovereign debt restructuring in case of Argentina was a combination of maturity extension and principal haircut. Argentina defaulted on its international debt in November 2001 after a failed attempt to restructure the debt. The markets priced in the risk of a substantial haircut around this time and the bond prices plummeted sharply. We at BoomBustBlog are in the habit of taking market prices seriously, and have factored historical market reactions into our analysis in calculating prospective price action in distressed and soon to be Sovereign debt. Before moving on, it is highly recommended that readers review our haircut analysis for Greece (“With the Euro Disintegrating, You Can Calculate Your Haircuts Here”) and our more likely to occur restructuring analysis for the same (What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates).

The restructuring of the Argentina debt in default was occurred in 2005 when the government offered new bonds in exchange of old securities. The government gave the option of either accepting A) a par bond with no haircut in the principal amount but substantially lower coupon and longer maturity or accept B) a discount bond with a haircut in principal amount to the extent of 66.3% but relatively better coupon rate and shorter maturity than in case of Par bond. If the bondholder accepted A), for each unit of bond, one unit of Par bond will be allotted. If the bondholder accepted B), for each unit of bond, 0.33 unit of Discount Bond will be allotted. The loss to the creditor, which is decline in the NPV of the cash flows, was nearly the same in both cases as the lower principal amount in Option B was offset by better coupon rate and shorter maturity. The price of the par bond in the market and the price of the discount bond multiplied by the exchange ratio (real price to the bond holder) were largely the same when they were listed in the market in 2005.

Published in BoomBustBlog

It has taken a while to get this out, but the core message hasn't changed...

 

1Q10 Results review

For 1Q10, MS reported significant increase in its net revenues to $9.1 billion from $6.3 billion in 4Q09 and $2.9 billion in 1Q09, primarily driven by trading and principal investments revenues which increased to $4.1 billion versus $1.3 billion and $205 million in 4Q09 and 1Q09, respectively. Trading and principal investment revenues in 1Q10 increased off improvement in debt-related credit spreads and better results in Fixed Income. Revenues from Investment banking and Asset management, distribution and admin fees increased 21.4% and 126.7% (y-on-y) to 1060 million and $1,963 million, respectively. However, both the categories reported a quarter-on-quarter decline in revenues of 36.6% and 0.6%, respectively. Commissions earned for the year increased 63.8% (y-o-y) and 1.1% (q-o-q) to $1.3 billion. Compensation expenses increased to $4.4 billion from $2.0 billion in1Q09 and $3.8 billion in 4Q09, while non-compensation expenses were up 38.4% (y-o-y) mainly off MSSB inclusion and higher business activity. Consequently, net income from continuing operations increased to $2.1 billion, which was further supported by a $382 million tax benefit associated with prior year’s undistributed earnings of certain non-U.S. subsidiaries.

MS1q10

Published in BoomBustBlog