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

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

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

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

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

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

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

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

Published in BoomBustBlog
Wednesday, 09 December 2009 00:00

Financial Innovation vs Financial Fraud

I was reading a post by George Washington over at ZeroHedge that actually spurred the following rant. An excerpt reads:

The Telegraph notes:

The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful".

Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.

When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk."

He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out of investment banks and to hedge funds where they belong".

It is not just George Soros.

Published in BoomBustBlog


The world's most handsome and charismatic blogger stands outside his beloved friends at Goldman Sachs to congratulate them on the outstanding CMBS offering made through TALF government leveraging for Developers Diversified Realty (notice the funny looks that I am getting from the women in the background, haven't they seen a handsome and charismatic blogger before??? Cool). I have a few questions about follow on offerings and what that may portend for REITs who are in a even better situation than DDR, but let's read up on why I walked past GS headquarters in the first place. After the article excerpted below, we will discuss some tidbits of data and info that neither Goldman nor the REIT prolific Merrill Lynch, or anyone within a bonus' throw or subway distance from 85 Broad will bother to tell you about the REITs, save that handsome and charismatic guy who dares poke fun at the "Almighty at 85"!

From WSJ.com:

Demand is expected to be strong Monday for the first sale of commercial-mortgage-backed securities under a government rescue program designed, in part, to ease the mounting stress in the commercial-property sector.

But the strong demand is partly a reflection of the conservative underwriting of the $400 million in bonds backed by 28 Developers Diversified Realty Corp. shopping centers, in terms of the quality of the assets underlying the loan and the loan amount relative to the value of the properties. [If BoomBustBloggers remember, DDR is the company which was part and parcel of what appears to be (but only if you were to really use your imagination) a "pump'em, dump'em, double tax'em" plan with Merrill Lynch/BofA, see "Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!"] While the deal may help reopen a vital funding source for some commercial-property investors, it will likely provide little solace to owners of tens of billions of dollars of office buildings, shopping centers and other commercial real estate that are now worth less than their mortgages. [more on this in a minute]

Published in BoomBustBlog
Thursday, 12 November 2009 00:00

News Recap for 11/12/09

Are we in consecutive back to back bubbles or what?

From Bloomberg:

KKR Puts Higher Valuation on Dollar General Than Walmart in IPO Offering: Wasn't the private equity/LBO biz dead just a year ago?

Wall Street Faces `Live Ammo' as Congress Tries to Dismantle Biggest Banks: So all of that posting about busting up the big banks didn't go to waste! See Any objective review shows that the big banks are simply too big for the safety of this country, Big Bank (and the Treasury) vs. Little Bank: Whose risking your tax dollars?, The Next Step in the Bank Implosion Cycle??? and the very important JPM Public Excerpt of Forensic Analysis Subscription (1878)

Japan Credit Default Swaps Seen Unraveling as Aiful Defers Payment on Debt: The Japanese version! See The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk - Beware what lies beneath!, Reggie Middleton says the CDS market represents a "Clear and Present Danger"!, CDS stands for Credit Default Suckers... and Will this be the first domino in the CDS collapse? .

Spanish Economy Contracts for a Sixth Quarter, Slowing European Rebound: BBVA may be seen as more viable than it actually is. See Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-02-23 09:05:09 439.80 Kb

And from my friends over at Calculated Risk: Fannie, Freddie, Counterparty Risk and More - excerpt from Freddie Mac's 10-Q:

We believe that several of our mortgage insurance counterparties are at risk of falling out of compliance with regulatory capital requirements, which may result in regulatory actions that could threaten our ability to receive future claims payments, and negatively impact our access to mortgage insurance for high LTV loans.

Those that follow me know how bearish I have been on the mortgage insurers for two years running now. I pretty much promised my readers that Ambac and MBIA were insolvent back in 2007:

Published in BoomBustBlog

Yes, you've been bamboozled! Hoodwinked! You're being taken for suckers that not only can't count, but whose memories have been washed away by threats of swine flu and reality TV shows. Do not fret, though. What I have is PROOF of the great Banking Bamboozle, for all to see. Now, armed with this proof, all I need for you is to go out and do something about it. Don't sit there staring at your screen, thinking "damn, he's got a point". Send a copy of this proof along with your comments to all of your elected officials, congressspersons, senators, bankers, insurers, business partners and the media outlet of your choice. The other alternative is... Maybe the powers that be have a point and threats of swine flu combined with the latest episode of survivor and flowery proclamations of "green shoots" amid 10.2% unemployment is all it takes to pull the wool over your eyes. We shall see, shall we??? This is a fact and figures packed blog post, complete with a plethora of downloadable models and references. Please do take the time to read through it before you return to your daily dose of government recommended "American Idol"... Yes, my goal is to piss you off! To goad you into action! To elicit a response.... and it gets worse as you read on.

I have compartmentalized this rather lengthy, yet interesting (to the right people) diatribe into major segments. Feel free to skip ahead or pick and choose the ones which most interest you - or if you have been freshly unplugged from the Matrix, I suggest you sit back with a good glass of wine and read through this entire missive:

  1. Social mobility: The reason why the big banks are being protected at all costs and on the breaking backs of the unemployed taxpayer
  2. The truth behind the Stress Tests and Unemployment
  3. The truth behind credit loss assumptions: Where the hell did the stress test numbers come from?
  4. The Grand Finale: So, what banks are in trouble and how much trouble are they in? A very granular and unprecedented look at the weaknesses of some of the anointed 19 that you cannot get from anywhere else!

You may have seen bits and pieces of stress test analysis in other blogs and news sites, but I doubt if you have seen all pieces of the pie stitched together, as below. You see, many complain about Goldman Sach's $40 billion of bonuses during a time of near depression, but as all who bother to even consider have probably summarized - this government is ran by, and ran for, the capitalist class. If you even have to ask a question after this statement, you can be rest assured you are not part of that class that the government truly serves. In preparation for the social mobility thesis behind the protection of the banks below, you should download this handy-dandy model that shows you (in full detail) where YOU stand in the grand scheme of socio-economic stratification, or to put it more simply, how much the powers that be believe CNBC can effect your behavior (quick registration is required, you may choose the free option to subscribe) - Socio-economic stratification model Socio-economic stratification model 2008-11-07 13:47:25 156.00 Kb. For many, going through this model is the equivalent of choosing between the blue and red pill in the Matrix, literally risking an unjacking from the network of make believe.

For those who feel you must get offended when social class is discussed, I strongly suggest you stop here and watch Cramer scream BUY! BUY! BUY! or otherwise get a solid dose of MSM, mind numbing programming. For the rest of you who choose to continue reading, you have just chosen the Blue Pill - prepare to be unplugged from the Matrix!

Published in BoomBustBlog

Riddle me this. An industry gets into trouble due to chasing fads, loading up on debt and overpaying for property. Many participants in said industry flirt with insolvency due to difficulty meeting debt service and asset values that have dropped below liabilities. This industry has been gifted with a special tax provision that allows them to pay no corporate taxes as long as they pay out 90% of their income to their shareholders. By now I am sure you have guessed the industry, but let's move on .

After special meetings with the IRS, who were told that the world would end if these entities were forced to dump distressed real estate onto an already distressed market (in reality, commercial real estate prices will simply return to fundamentally supportable prices), these companies were given a special reprieve on top of their already gifted special reprieve that allows them to pay said dividends in stock rather than cash.

The need to conserve cash, as explained above, stems directly and primarily from imprudently participating in bubble binging, and from a tertiary perspective, the dwindling refinancing market - of which would not be such a big deal if companies didn't overpay for, and overleverage properties in the first place. The solution? Team up with the Wall Street banks that gave you the imprudent loans that most should have known couldn't be paid back in an effort to shift the losses to the retail investor. This is a win -win situation for the banks that made the loans as well as for the REITs that took the loans. Here is the playbook (for illustrative purposes only, of course):

Step #1: Pump the stock - Reference the upgrades, and notice they happen to occur right before a secondary offering - From ZeroHedge: Merrill Lynch In Full REIT Upgrade Mode - The Sequel. Notice that the upgrades are made despite the fact that the CRE market is in total shambles with no near to medium term improvement in sight.

Published in BoomBustBlog
Sunday, 01 November 2009 01:00

The Future of Banking?

I saw this clip on Calculated Risk, and just couldn't resist. The Brits absolutly kill me Sealed.

It brings me to mind of Warren Beatty in "Bulworth" (1998), an absolutely hilarious movie based on what would happen if a politician were to actually tell the truth for any extended amount of time.


Full video - Banking with Bird & Fortune at the Financial Times.

Published in BoomBustBlog
Wednesday, 28 October 2009 01:00

Deposit Insurance Arbitrage

I'll coin this term in order to explain the travesty that is being allowed in the banking industry. Institutions are literally paying little old ladies' less than a half a percent on their life savings and using said funds to gamble in the risk fraught derivatives market, with the risk being totally underwritten by the government through the:

  1. FDIC (deposit insurance and bond insurance - although to date this expense has been born by the industry, the FDIC is insolvent and may very well have to tap the Treasury, ie. the taxpayer: see I'm going to try not to say I told you so...),
  2. Treasury (via TARP and associate measures, see America, You have been outright lied to! Bamboozled! Swindled! Hoodwinked! The Worst Case Scenario) and
  3. Federal Reserve (ZIRP, QE, and a whole slew of programs I only wish I knew about - see The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets).

A perfect example of how the big banks are carrying this arbitrage out is outlined in "The Next Step in the Bank Implosion Cycle???", but the global economy risking behemoths are not the only one's that arbitrage bank deposit funds via FDIC guarantees. Earlier this year, I featured research on a smaller bank, Bank of Oklahoma, which I found participated in some pretty suspect accounting moves. Despite these "gimmicks" the stock floated higher with the general market and particularly the banking sector. OF course, this does nothing to cure the ills that they have been papering over. Subscribers should reference:

BOK 1Q09 BOK 1Q09 2009-05-07 06:34:52 460.74 Kb

BOK 2Q09 review BOK 2Q09 review 2009-08-01 05:04:06 1.05 Mb

March Actionable Note - Banking Sector BK March Actionable Note - Banking Sector BK 2009-03-03 11:58:22 184.25 Kb

March 2nd Actionable Note Preview - banking March 2nd Actionable Note Preview - banking 2009-03-02 09:44:20 61.88 Kb

Well, one of my subscribers have pointed out another "gimmick" that they are into, and that is the FDIC arbitrage thing. That's right, not the giga-billion dollar Wall Street TARP babies, but the Bank of Oklahoma. Here's how it works:

  1. As a deposit taking institution, CDs and savings accounts are insured by the FDIC. The banks use the funds from these CDs and savings accounts to fund their operations, which use to be primarily loans and checking/cash management services.
  2. The Fed has enabled expanded margins for many of these institutions through ZIRP (zero interest rate policy), but that is not enough to help the truly sick banks. See "The Anatomy of a Sick Bank!".
  3. Thus, many banks have ventured off into the arcane world of derivatives to boost earnings, and avoid having to polish all of those toasters to offer to Grannie! These banks include JP Morgan, Citibank, and Bank of America (see The Next Step in the Bank Implosion Cycle???"), but also much smaller regional and even some local institutions. The Bank of Oklahoma is offering what appears to be option-embedded CDs that sport the FDIC insured moniker on them. These instruments allow the owner to participate in the equity markets while having the federal guarantee on the principal. So, you ask, what's so bad about that? Well, let's walk through what their marketing material has to say, "For discussion purposes only", of course...

Published in BoomBustBlog
Tuesday, 27 October 2009 01:00

The Next Step in the Bank Implosion Cycle???

Of the many issues that I have been warning about concerning banks, their balance sheets and the risks that they take, one of the (and there are a few) most underappreciated is the currency risk of the "mother of all carry trades". See Roubini Not Alone in Fearing Dollar Carry Trade and Roubini Sees `Huge' Asset Bubbles Growing in `Mother of All Carry Trades'.

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

“The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”

As has been the case at least twice in the past, I am in agreement with the man. 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!


See the following for a backgrounder on my opinion before we move on to the risks of currency volatility and interest rate swaps in the "Too Big To Fail, but Too Big to Let Survive Intact" club:

Published in BoomBustBlog

This is the fifth in my series on what lies off balance sheet of your local big bank. Since the media doesn't seem to focus on these risks, and I have yet to see anything substantial from the sell side, I guess its left up to me to spread the word. The precursors to this are:

  1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
  3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
  4. And the next AIG is... (Public Edition)
  5. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo

Enter PNC Financial, the "off the books" edition!!!

Published in BoomBustBlog