OCC Reports Second Quarter Bank Trading Revenue of $5.2 Billion

WASHINGTON — U.S. commercial banks reported trading revenues of $5.2 billion in the second quarter of 2009, compared to record revenues of $9.8 billion in the first quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

“After such a strong first quarter, we expected to see a seasonal decline in trading revenues, and indeed that occurred,” Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. “Still, second quarter trading revenues were the sixth strongest since we’ve been keeping records.” With the advent of the relaxation of the mark to market rules, I am suspect of some of this trading revenue gain. I know the reduced competitive landscape led to higher spreads which leads to higher profits, but the ability to print your own profits with the adjustment of assumptions is scary, to say the least.

Published in BoomBustBlog

I could have sworn that I posted I was taken small positions against the publicly rated ratings agencies a month or so ago, but when I searched for the post to comment on it I couldn't find it. My apologies. Well, it seems as if the chickens have come home to roost for this group, and none too soon if I have anything to say about.

I have written alot about these clowns, you can search my site for the term "ratings agencies' for a list, but a picture (or two) is worth a thousand words (from A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton)...

Published in BoomBustBlog
Friday, 18 September 2009 01:00

I told you so, part 34

From Reuters - Thu Sep 17, 2009 7:49pm: "Option" mortgages to explode, officials warn

The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.
In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

"It's the other shoe," he said. "I can't say it's waiting to drop. It's dropping now."

Rewind the blog's database 8 and a half months:

Option ARMs: The Banking Backdrop of 2009 (January 04, 2009)

The problem ahead: According to Fitch, of the nearly $200 bn of option ARMs outstanding, roughly $29 bn of loans are expected to recast by 2009. Of this $6.6 bn constitute 2004 vintage (that would be recast as a result of completion of the end of five-year term in 2009) and $23 bn constitute 2005 and 2006 vintage loans that would recast early due to the 110% balance cap limit.
Further an additional $67 bn is expected to recast in 2010, of which $37 bn belong to 2005 vintage (that would be recast as a result of completion of the end of five-year term in 2010) and the balance $30 bn consist of 2006 and 2007 vintage loans that would be recast early due to the 110% balance limit cap

Who are the current option ARM kings due to acquisition?

Published in BoomBustBlog
Friday, 18 September 2009 01:00

An Independent Look into JP Morgan

The JP Morgan forensic preview is now available. Remember, this is not subscription material, but a "public preview" of the material to come. I thought non-subscribers would be interested in knowing what my opinion of the country's most respected bank was. There is some interesting stuff here, and the subscription analysis will have even more (in terms of data, analysis and valuation). As we have all been aware, the markets have been totally ignoring valuation for about two quarters now. It remains to be seen how long that continues.

Click graph to enlarge

Published in BoomBustBlog

First of all, I would like to call attention to a well written article by J.S. Kim, The Coming Consequences of Banking Fraud. It just so happens to mirror my thoughts, exactly. Those who have been following my subscription services for a while, or even have just started, should realize that I have been quite accurate in my fundamental analysis. Although I am not always 100% on the money with everything, I am within the ballpark 80% to 90% of the time, give or take - which is quite a strong track record. The problem has been over the last quarter or two, that accuracy with the fundamentals has meant relatively little in terms of actual share prices. This means (it always has and always will) that we are in a severe speculative bubble (or conversely a fear driven post crash lull). I think we all know which one it is. It has even gotten to the point where some commenters on the blog claim "fundamentals no longer matter". The last time I heard that preached consistently was right before the dot.com crash, which was notoriously hard to time, but was clear as day in the ability to be seen coming by those who still counted profits and losses.

Published in BoomBustBlog
Friday, 21 August 2009 01:00

The Folly of US Financial Poitical Games

In a previous post, I featured this chart sourced from Bloomberg:


It is quite telling, considering the state of affairs. Let us move on to this story from the WSJ:

U.S. banks have been dying at the fastest rate since 1992, mainly because of bad loans they made. Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks.

Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history, and broker a sale of the Texas bank to Banco Bilbao Vizcaya Argentaria SA of Spain (See my proprietary research on this Spanish bank which suffers from the Spanish coastal real estate boom and bust - pdf Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-02-23 09:05:09 439.80 Kb ). Guaranty's woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation's worst lenders.

Texas-based Guaranty Financial Group was crippled by investing in securities issued by other lenders.

Guaranty owns roughly $3.5 billion of securities backed by adjustable-rate mortgages, with two-thirds of the loans in foreclosure-wracked California, Florida and Arizona, according to the company's latest report. Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank's capital.

Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions. "Under most scenarios, they were good and prudent investments -- as long as we didn't have a housing or banking crisis," says John Stein, president and chief operating officer at FSI Group LLC, a Cincinnati company that invests in financial institutions.

Published in BoomBustBlog

Do dogs have fleas? Do floozies jump bed linen? Finally, Do Wall Street banks that own data providers and a monopoly on CDS data have unfair access to said data?

From Bloomberg:

July 14 (Bloomberg) -- The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street's largest banks.

... The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter. U.S. lawmakers plan to regulate the $592 trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression.

Published in BoomBustBlog

Since so few people actually read government docs when they are released, I decided to post a summary of the report from the SIGTARP - the TARP special investigator.

Summary of SIGTARP Report on TARP programs

TARP funds are expected to be deployed under 12 separate programs. Originally, TARP was envisioned to involve purchase, management, and sale of up to $700 billion of "toxic" assets, primarily troubled mortgages and mortgage-backed securities ("MBS"). However, subsequently, the scope of and the funds involved under these programs increased dramatically and the total funds involved, after including Federal Reserve loans, FDIC guarantees, and private money, are expected to reach nearly $3 trillion.

As of March 31, 2009, Treasury has announced the parameters of how $590.4 billion, out of $700 billion TARP funds, would be spent. Out of this, about $328.6 billion has actually been spent as of March 31, 2009. Following table summarizes the details of the 12 programs.


Published in BoomBustBlog

This is your daily dose of the Goldman Sachs Stress Test Scenario Analysis, Professional edition. I will be releasing the Stress Tests for Wells Fargo, PNC, Sun Trust, Morgan Stanley and the top secret asset managers, insurers, and banks whose identity are for subscribers eyes only over the next day or two (or three - or as fast as I can get them out). Since the subscriber content pipeline is so rich, I have decided to let out excerpts from the Goldman report in dribs and drabs. I will do so until the mainstream media catches the hint: Goldman's Doo Doo smells no sweeter than anyone else's on the Street. As a matter of fact, I find it to have a particularly more intense, pungent odor.

What you don't know can collapse you! A primer on what lurks off the balance sheet...

Goldman Sachs is a very large, very diverse financial operation (although it appears that the vast majority of revenues and profits are emanating primarily from trading operations, hence it is essentially an overpriced public traded hedge fund). A very significant amount of Goldman's assets and operations are not privvy to the average investor or the capricious analysts. How significant an amount, you ask? How about to the tune of US$16 to US$58+ billion. I am getting ahead of myself though. In order to increase implied leverage and minimize collateral and reserve requirements, many entities carry much of their risk off of their balance sheet through vehicles called Variable Interest Entities (VIEs). Why are they doing this? Well, because they can. How are they doing this? Well, let's reference my favorite (okay second favorite - BoomBustBlog carries a bias) open source info hub, Wikipedia: A Variable Interest Entity (VIE) is a term used by the United States Financial Accounting Standards Board in FIN 46 to refer to an entity (the investee) in which the investor holds a controlling interest which is not based on the majority of voting rights. It is closely related to the concept Special Purpose Entity. The importance of identifying a VIE is that companies need to consolidate such entities if it is the primary beneficiary of the VIE.


A VIE is an entity meeting one of the following three criteria as elaborated in paragraph 5 of FIN46:

  1. The equity-at-risk is not sufficient to support the entity's activities (e.g.: the entity is thinly capitalized, the group of equity holders possess no substantive voting rights, etc.);
  2. As a group, the equity-at-risk holders cannot control the entity; or
  3. The economics do not coincide with the voting interests (commonly known as the "anti-abuse rule").
  4. External links

But "Wait", you may proclaim! "I never see these off balance sheet entities consolidated, measured, quantified, or even mentioned in my brokerage reports, SEC reports, or by may investment advisor or asset manager." Don't worry, don't fret, your brother from another mother has come to your rescue.

Goldman Sachs Unconsolidated Varaible Interest Entities ($ mn)30-Nov-08 (last quarter)
VIE Assets Maximum Exposure to Loss in Nonconsolidated VIEs
Purchased and retained interests Commitments and Guarantees Derivatives Loans and investments Total
Mortgage CDOs 13,061 242 0 5,616 0 5,858
Corporate CDOs and CLOs 8,584 161 0 918 0 1,079
Real estate, credit-related and other investing 26,898 0 143 0 3,223 3,366
Municipal bond securitizations 111 0 111 0 0 111
Other mortgage-backed 0 0 0 0 0 0
Other asset-backed 4,355 0 0 1,084 0 1,084
Power-related 844 0 37 0 213 250
Principal-protected notes 4,516 0 0 4,353 0 4,353
Total 58,369 403 291 11,971 3,436 16,101
Base case 27.6%

Remember in my last article (Who is the new Riskiest Bank on the Street?) I made clear that leverage can come in more forms than mere plain vanilla loans, hence we include derivatives, commitments and guarantees as well as loans and investments in the mix of exposure. This means that although these assets are held off of Goldman's balance sheet, they are still on the hook as a derivative counterparty, lender (direct or contingent), or a provider of a commitment or a guarantee. These risks are direct and real and rightfully should be reflected in the balance sheet and not the footnotes of a 60 page document.

How real are these risks, you ask (Yeah, I heard you ask that right through your screen)? Well, let's attempt to run through them...

Unconsolidated VIE's ($ mn) VIE assets Maximum loss exposure Maximum loss as % of assets Default assumptions Recovery rates Net losses (in $ mn)
Mortgage CDOs 13,061 5,858 45% 13% 70.0% 527 <-Recoveries stated here are very optimistic
Corporate CDOs and CLOs 8,584 1,079 13% 4% 90.0% 32 Losses and recoveries here may surprise to the downside, but I'll be conservative
Real estate, credit-related and other investing 26,898 3,366 13% 4% 50.0% 505 <- Manna from heaven if they get this!
Municipal bond securitizations 111 111 100% 30% 100.0% 0
Other mortgage-backed 0 0 0% 0% 0.0% 0
Other asset-backed 4,355 1,084 25% 7% 50.0% 163
Power-related 844 250 30% 9% 70.0% 23
Principal-protected notes 4,516 4,353 96% 29% 80.0% 261
Total 58,369 16,101 27.6% 1,511
Total VIE loss (after tax) 1,058
% Loss on total VIE exposure 2.6% Be aware that this is off of a US$58 billion base.

Now, keep in mind the reason for GS to hold all of this stuff off


Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb - 17 pages

Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages

balance sheet. They pull revenues and profits from these assets while denouncing ownership and attempting to trivialize liability. It's almost as if it were financial engineering magic! Nothing goes in, and just profit pops back out (well, if you read my last report, this would be viewed very differently from a risk adjusted reward perspective, but for now, feeble investors are sated with simple, manipulable accounting earnings).

What's that? Speak up. Yes, you in the background! You know I can read your thoughts through my keyboard. It was a good question. That smart guy inquired, "If Goldman is allowed to carry on operations off balance sheet and the corporate entity collateral and reserve requirements are based off of what was on the balance sheet, then doesn't this allow Goldman to cheat the system? Doesn't this mean that we really don't know what Goldman's real leverage ratio is since there are no leverage numbers for the VIE's?"

Ya' Damn skippy my intellectual blog pundit!

As a matter of fact, the use of off balance vehicles make literally impossible to accurately determine the leverage used by entities such as Goldman Sachs. One thing we can be relatively sure of, though. The actual leverage is greater than the leverage stated by Goldman.

The vast majority of the assets held in VIEs are most likely level 3 assets, and it is a very safe bet to assume excessive leverage was used in financing these assets. Once you adjust for the bullsh1t normally identified as equity in an effort to placate investors and regulators, you will find that you get an adjusted leverage ratio that is much higher than most would consider prudent.

Let's walk though this process in the table below then look at some pretty graphs to bring the point home.


Level 3 Assets

Total Assets

Shareholders Equity

Adjusted Shareholder Equity

Adjusted Leverage

Level 3 Assets-to-Total Assets

Level 3 Assets to Equity

Level 3 Assets-to-Adjusted Equity

Goldman Sachs









Lehman Brothers









As you can see, Goldman Sachs has a higher Level 3 assets to adjusted equity ratio than Lehman Brothers, and Lehman Brothers was bad enough to drive them out of business.


When comparing the top investment banks, Goldman has - by far - the greatest gross and net exposure to off balance sheet risk. As a matter of fact, it is so great that I will have to dedicate a whole other article to it and Goldman's level 3 exposure.


We will go over Goldman's level 3 exposure in detail tomorrow. For now, I need to work on getting the updated PNC stress test out.

Must read, related content:

  1. The Official Reggie Middleton Bank Stress Tests

  2. GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months

  3. For those that attempt to argue that short sellers are bad for the market, I bring you GGP!

  4. More on the Goldmans Sachs - GGP Connection

  5. Who is the Newest Riskiest Bank on the Street?
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