colorful macro image of human eye picjumbo com1100This is our Q4 analysis of Deutsche Bank. When analyzing and valuing entities such as banks and platform-driven tech companies, perception is always key. You see, what one maverick or true contrarian may see, very few others can perceive. The difference, oft times, is sometimes as simple as... They were looking. 

Published in BoomBustBlog

Bloomberg reports: Dodd-Frank’s Tentacles Go Deep. They Won’t Be Cut Fast or Easily. It took seven years to put these regulations in place. Is it rational to think they can be removed in less than 4? If not, then the financial's rally may be a tad bit premature and overdone.

 

Published in BoomBustBlog

My last post on the topic of disintermediation during a paradigm shift was Wall Street Should Be First To Invest In Reggie Middleton's UltraCoin, Much Of It Won't Be Here In 10 Years! I clearly illustrated the potential for growth of Bitcoin related companies and cited statistics for the transformation of the financial industry as we know it today.

This post introduces long form research from the analysts at Veritaseum, the same team that brought you the hard hitting BoomBustBlog research. The first page of the report says it all - "Stress Test on Banks’ Earnings Facing the Veritaseum UltraCoin Value Transaction Platform".

research report cover

Excerpts from deeper into the report...

research report 2research report 3

And of course the inevitable... What happens when a less expensive product is introduced into the market with similar or superior attributes? Margin Compression! We analyzed three big Wall Street banks, starting with the "Riskiest Bank on the Street" (time permitting, reference our hard hitting, prescient research from early 2008).

Veritaseum research report on Morgan Stanley Margin Compression

I invite all to download the free Veritasuem Research Report for July 2014. I also invite all to meet me for the soft beta launch of Veritaseum's UltraCoin Value Trading Platform in my suite at the Drake Hotel in downtown Chicago, the evening of Saturday July 19th (this is also the weekend of The North American Bitcoin Conference in Chicago, where I will be speaking on the topic of money center bank disintermediation.

You will get to touch, play with and trade value via UltraCoin. Below is a screenshot of UltraCoin running on a Mac. I will also be taking applications for large scale beta testers and entities who wish to have customized value trading solutions created for them.

Screen Shot 2014-06-26 at 11.05.24 

 
Published in BoomBustBlog

Bloomberg ran a story earlier this week illustrating the human capital flight out of the Wall Street machine and into tech:

At elite universities, fewer MBA and finance candidates are willing to even consider a life of missed weddings, busted romances and deep-into-the-night deal negotiations. The percentage of Harvard Business School graduates entering investment banking, sales or trading dropped to 5 percent last year from 12 percent in 2006, while those entering technology almost tripled to 18 percent during that period.

At the University of Pennsylvania’s Wharton School, the percentage of MBAs entering investment banking dropped to 13.3 percent last year from 26 percent in 2006, while those entering tech more than doubled to 11.1 percent.

 Those of you who have been following finance from the Wall Street/Bay Street/Canary Wharf perspective realize that this is a cyclical occurence. Basically, Wall Street falls out of favor with MBA whiz kids every ten years of so. But!!!! This time is different. This time around, Wall Street, et. al. is about to succumb to the destructive forces of technology that transformed, revolutionized, disintermediated, gutted and absolutely reinvigorated the media, news and retail industries. 

That's right! The Internet Paradigm Shift has finally hit Global Finance... and it's going to hurt, and hurt a lot!

As many know, the I've poured my time and resources into a start-up by the name of UltraCoin. Many have been clamoring for white papers and details, and I have been purposely secretive about such. The reason? I needed to entrency protection from my competition - the money center banks. How did I do this? Well...

I patented the future of Global Finance!

patent to the Future of finance big

This video illustrates my presentation to both the mainstream and alternative media as I start my capital raising rounds from venture capitalists and strategic investos alike. Check it out!

We're looking for financial and human capital as we prepare to expand globally. Financial capital is self-explanatory. On the human capital side...
We're seeking a full stack contract developer. Must be proficient in: Java or C#; git, bzr, or similar. Must have a solid understanding of: race conditions and how to avoid them; scalable concurrency and data integrity architectural concepts (replication, sharding, etc.); software development processes and best practices. Proficiency in some CRUD technology (*SQL, NoSQL, etc.) as well as and some scripting language (Javascript, PHP, Python, etc.) is highly preferred. Experience with the Bitcoin protocol is a huge plus. Your first interview is to e-mail your resume along with a response to this challenge: https://gist.github.com/mbogosian/28815ae606c663c983c3

Must be willing to sign an NDA. You should be knowledgeable and competent, but we prefer grit to genius. Prima donnas need not apply.

Published in BoomBustBlog

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Let's quote some of the last lines of my last article on Bitcoin: "Witness the drivel that comes out of the the analyst's reports (and yes, I thoroughly ridiculed each one):

  1. Theres' Something Fishy In The House Of Morgan, Pt. 2: Bitcoin Fear, Envy & Loathing
  2. Does the Mainstream Media Assist Wall Street In Hypocritical Hypothesis For Fear Of The Next Paradigm Shift?"

You see, first JP Morgan threw baseless fear tactics, then Citibank jumped into the fray. Well, guess whose next? Goldman Sachs, of course. Everybody's favorite fair game player. As excerpted from Business Insider today:

"Dominic Wilson and Jose Ursua of the firm's markets research division are first up. They argue that Bitcoin fails to meet both basic criteria of a viable currency: while there remains an outside chance for widespread acceptance as a medium of exchange, as a stable source of value, it has so far failed. That undermines the premise that Bitcoin could serve as a way of short-circuiting exchange rates in inflation-prone countries."

 And Reggie, Chief of Bullshit Patrol & Related Crimes Division chimes in with a Google search on promintent "failed" currency processors:

Bitpay user growth google searchcoinbase user growth google search

But wait a minute! Goldman's business business is growing at a fraction of this pace, and actually negative in some areas. So, if Bitcoin as a currency and payment system is a failure, what the hell is Goldmam? Of course, Business Insider goes on to report...

For most users what matters is not the comparison with other currencies, but a comparison with the volatility of the currency that they hold (dollars in the US for instance) in terms of the things that they need to buy. The volatility of consumer prices (in dollars) has been even lower than FX rates, even if measured over a period including the 1970s. Put simply, if you hold cash today in most developed countries, you know within a few percentage points what you will be able to buy with it a day, a week or a year from now.  

This is Bullshit! Say it to the more mathematically challenged, my bonus hungry friends. Let's run the math using theusinflationcalculator.com:

Dollar as a store of value

As you can see, if you measure things from the '70s as the esteemed, erstwhile Wall Street aficiaondo from Goldman recommended, then you would have less than 17% of your buying power left. Yes, bitcoin is volatile, but its volatility stems from the price going up and down, while the USD has primarily just went down. You know that saying about the frog in the slowly heated boiling pot of water, right?

In addition, both of the largest Bitcoin payment processors absorb the exchange rate volatility for their customers, or did the best of breed Goldman analysts somehow overlook this pertinent fact?

 

Eliminate the bitcoin volatility risk with BitPay's guaranteed exchange rates. ... Import your BitPay sales into QuickBooks, to report and reconcile your bitcoin  ...

 

In addition, there are cutting edge products being introduced by tall, handsome, charsimatic and highly intelligent entrepeneurs who have a long track record of out gunning Goldman et. al. that allow anyone to hedge Bitcoin volatlity against any prominent fiat currency.

Back to those Goldman guys...

Wilson and Ursua include this graph showing volatility of Bitcoin versus the Argentine peso, the yen, the euro, the pound, and U.S. inflation. It's not even close. 

bitcoin volaitlity

But wait a minute! If the largest payment processors absorb the volatility and market risk of their customers, then Goldman must assuredly be referring to the currencies above from an investment perspective, no?

Yes! Bitcoin is truly volatile, indeed, but the guy at Goldman are cheating, hoping that the rest of us don't know our finance and/or basic common sense. You see, they are looking at just one side of the equation - the side that favors fiat currencies and disfavors bitcoin. You see, risk is the price of reward. For every reward you seek, you pay a price in risk. The goal, as a smart investor, is to pay little risk for much reward. Goldman is trying to make it appear as if you are paying nothing but risk for bitcoin and getting little reward in return. Let's see how that pans out when someone who knows what they're doing chimes in. From the BoomBustBlogresearch report File Icon Digital Currencies' Risks, Rewards & Returns - An Into Into Bitcoin Investing For Longer Term Horizons:

Bitcoin risk adjusted returns

You see, with high volatility (aka, risk), it's hard to earn your cost of capital, not to menton surpass it. Isn't that right, employess of Goldman Sachs? Let me jog your collective memories, as excerpted from the BoomBustBlog post on When the Patina Fades… The Rise and Fall of Goldman Sachs???

GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.

gs_roe.jpg

 

 Now that we see how hard it is to truly produce Alpha, I query thee... What do you think would happen if a financial maverick, an out of the box thinker who's different from all of those other guys, got a seed round of funding for the most disruptive product to hit the finance world since the printing press? What if that seed round was for $8 million dollars, with a preferred A series coming right behind it? What would such a cash flush company do, being one of the most cash flush Bitcoin companies in the world? Hmmmnnn!!!

Speakin' of Goldman Sachs...

I anticipate being in the market very soon for (I'm not thier yet, but hopefully very soon):

CTO - Chief Technology Officer

COO - Chief Opertating Officer

General Counsel

CMO - Chief Marketing Officer 

CFO - Chief Financial Officer

As well as skilled Java and Blockchain developers.

Hit me via reggie at ultra-coin.com if you have an interest in coming on board.

Published in BoomBustBlog

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Before I get started, I just want everyone to know that I always declared that There's Something Fishy at the House of Morgan (Wednesday, 27 April 2011). Here are a few historical graphics to bring you up to speed to what should now be painfully obvious, re: JPM!

I have warned of this event. JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011.

Traditional banking revenues: manifest destiny as forwarned - Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks

Okay, now back to today's news...

JP Morgan reported this morning and we got more of the same, simply that much harder to ignore. On Thursday, 06 January 2011 I posted "As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies". Today Bloomberg reported JPMorgan’s Dimon Posts First Loss on $7.2 Billion Legal Cost to mounting litigation and regulatory probes. No surprises here. We saw it coming two years ago and warned accordingly. As excerpted:

The third-quarter loss was $380 million, or 17 cents a share, compared with a profit of $5.71 billion, or $1.40, a year earlier, the New York-based company said today in a statement. Shares of the company rose 2.6 percent at 7:50 a.m. after profit adjusted for one-time items beat analysts’ estimates. 

...The pretax legal charge was $9.2 billion, compared with $684 million a year earlier. Litigation reserves at the end of September were $23 billion, the bank said, adding that “reasonably possible” losses in excess of those reserves were $5.7 billion.

And the (now perennial) kicker...

JPMorgan rose to $53.90 in New York trading from $52.52 at the close yesterday. Earnings adjusted for one-time items were $1.42 a share, exceeding the $1.30 average estimate of 20 analysts surveyed by Bloomberg.

Pray thee tell me, how many times do "one time" items have to occur before they're no longer considered "one time" items???!!! JP Morgan "found" earnings in the form of reserve releases (again), from the press release:

$1.60 billion pretax benefit; $992 million after-tax ($0.26 per share after-tax increase in earnings) from reduced reserves in Consumer & Community Banking

Now, we've seen this movie before haven't we? The following is an excerpte from a post I made TWO YEARS AGO!:

 As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. Time will tell if I am correct, but the trends are still moving in my favor. From Bloomberg:

JPMorgan Chase & Co. and the biggest U.S. banks face billions of dollars in legal costs related to their role in the financial crisis, threatening their profits and the stock price gains they made in 2010, analysts said.

JPMorgan, the second biggest bank by assets, reported $5.2 billion of legal costs in the first nine months of 2009, compared with a gain of $10 million in the same period a year earlier. The costs would rise if the bank reserves for multibillion-dollar lawsuits byLehman Brothers Holdings Inc. and the trustee liquidating Bernard L. Madoff’s firm.

... JPMorgan’s third-quarter net profit of $4.4 billion, up 23 percent from the year earlier, would have been larger if it hadn’t set aside $1.3 billion of pretax income for lawsuits and $1 billion for mortgage repurchases. Banks haven’t yet reported their results for the fourth quarter.

Of course, there are a few tidbits missing from this statement that can add to its accuracy. Let's see... Where did those profits come from? Again, you will find divergence between how BoomBustBlog reports and that of mainstream financial reporting. See 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!!! Sunday, October 17th, 2010

In a Nutshell, JPM’s quarterly results were downright horrible – as we expected and warned of in our previous quarterly analyses (see notes at bottom of page)…

JP Morgan’s Q3 net revenue declined 11% y/y (-5% q/q) to $24.8bn as investment banking revenue declined 18% y/y (-9% q/q) to $12.6bn from $13.9bn in the previous year and net interest income declined 2% y/y (-2% q/q, off of a combination of ZIRP victimization and a rapidly shrinking asset base and loan book) to $12.5bn versus $12.7bn in the previous year. Non-interest expense increased 7% y/y (-2% q/q) to $14.4bn as compensation expenses to net revenues remained broadly flat (28% vs 27.5%) while non-compensation expenses to net revenues jumped to 33% vs 23% in the corresponding period last year. As a result of “Fraudclosure” we expect this number to skyrocket next quarter. Overall, the efficiency ratio (total expenses-to-net revenues) increased to 60% vs 51% and we expect this ratio to spike next quarter as well as the banking business becomes even more expensive.

Click to enlarge…

However, despite a decline in net revenue and increase in non-interest expenses (both of which appear to be part of an obvious trend), profit before taxes was up 22% y/y as provisions for credit losses were slashed by 60%. JPM decreased its provision for credit losses despite no evidence of a substantial, sustainable improvement in credit metrics (please reference As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves). Provisions have lagged charge-offs for two consecutive quarters in a row.

As a result, banks allowances for loan losses have decreased to 4.9% in Q3 from 5.1% in Q2 and 4.7% in previous year.  Although under provisioning has helped the bank to mask its dearth in profits it has also materially undermined its ability to absorb losses if economic conditions worsen. The Eyles test, a measure of banks ability to absorb losses, has consequently worsened to 1.9% in Q3 from 3.7% in Q2 and 5.9% in Q3 09.

Wait a minute! If Reggie Middleton complained about reserve pulling and legal expenses 1,2 and 3 years ago and was proven right, how are the occurence of these items in 2013 to be considered "One Time" items????

Exactly!

ZeroHedge puts itsuccinctly: 

In short: of the firm's $1.42 in pro forma EPS, a whopping $1.59 was purely from the addback of these two items.

 
 
Published in BoomBustBlog

Anglo Irish Bank/IBRC bondholders will actually get some of their money back!

April Fools!!!

As if on cue, a day after my expose on Anglo Irish Bank and its shenanigans (see Global Banking Crisis - How & Why YOU Will Get "Cyprus'd" As This Bank Scrambled For Capital!!!), The Irish Business Post announces senior bondholders will get wiped out. That's right, a 100% loss! Zilch! Zero! Nada! Now, that's investing. That's getting "Cyprus'd", plus some!!! From businesspost.ie: IBRC senior bondholders to be burned

 

anglobondwipeout copy

If you thought this was interesting, you ain't seen nothing yet. This was just the preamble, I have a whole list of banks, each with a story more ludicrous than the last, each still taking deposits, and yes.... for the US centric Americans, with operations in the US and securities trading on our exchanges. Paying subscribers (at this point, I don't see why most of you aren't paying, you'll let these banks take your money for .7% interest, but you won't pay a few dollars for a hardcore educational analysis???) can access the first of these banks right now - File Icon EU Bank Capital Confusion, Potential Failure. You may click here to subscribe...

businesspost.ie

Published in BoomBustBlog

On Monday, 25 June 2012 I penned "No Capital Controls In The EMU? Liar Liar Pants On Fire". Let me excerpt the first paragraph so as to bring those who have not read it up to speed before we jump into current events...

I have outlined the upcoming EU bank runs up to two years in advance (see the many links below). Whenever one expects a bank run, the first things TPTB do is institute capital controls to stem said bank run - which of course makes the bank run that much more necessary to get your capital out - wash, rinse, repeat! Remember, by treaty, no country in the EMU may use capital controls without automatically being removed from the union. Well, do you believe that to be fact that will last? Yeah, I don't either. Simply watch as the money bleeds from the banks and the bumbletrons attempt to staunch the flow using mechanisms that will simply exacerbate the flow. Even more incredible is the fact that even to this date, with the existence of publications such as BoomBustBlog, entire nations as well as their financial advisors, leaders, regulators and politictians STILL DO NOT EVEN COMPREHEND the nature of the modern bank run. You cannot stem the tide with capital controls, you can only exacerbate it. 

Now, As Predicted Last Year, The French and the Greeks Are In A Race For The Biggest Bank Run!

 On Saturday, 23 July 2011 I penned "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" wherein I went through both the motive and the mechanism of a European bank run, focusing on Greece and France as impetus.

Okay, I'm writing this on 3/23/2013, referring to the events of yesterday. I apologize to my paying subscribers for being 9 months and a few miles/kilometers off, but as the more intellectually capacitive among you know, this stuff is not an exact science. Now, yesterday's headlines...

Cyprus passes laws for capital controls

Lawmakers in Cyprus passed legislation to impose capital controls on its banks and create a "solidarity fund" to pool state assets, according to media reports late Friday. The measures will help fulfill conditions for Cyprus to get a euro-zone bailout. With a Monday deadline, Cypriot lawmakers still need to vote on measures needed to restructure banks in Cyprus and possibly place levies on deposits.

I appeared on the Max Keiser show in London yesterday, and broke down the Cyprus issue as simply as could be done. In essence, "What is a bank???!!!"

In "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" I detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

image015

 

You see, the problem with this bank holiday thing is that the real damaging bank run will not be staunced by the conventional bank holidays, et. al. because it is a counterparty run that will cause the damage, not depositors. TPTB in Europe don't have the chops to stem this one, at least not from what I've seen. As for how that institutional bank run thing works, we excerpt "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

 

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors. In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

 

 

Make no mistake - modern day bank runs are now caused by institutions!

 

And Yes!!! The fodder for bank rungs are ALL OVER THE EUROPEAN SPACE!!!!

Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series). 

A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Model that we developed in 2010. Long story short (if it's not already too late), my next extensive series of posts on this topic will likely spark bank runs throughout the periphery and the core of Europe, for much of the assets that depositors think are there are simply not, and I proffer ample proof for all to see. For the banks, it's too late to pull the evidence down from your various web sites, for I already have it safely stored and distributed. Keep in mind, once the fissures form in one section of the already weakeed EU, cracks widen in the other sections... 

Description: foreign claims of PIIGS

Stay tuned and follow me:

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Published in BoomBustBlog

 Bloomberg ran a very interesting article yesterday, jumping on the bandwagon of what I espoused years ago - and in great detail. Let's take a look at the article as I run down a check list of Reggie's favorite bank busting hits...

On television, in interviews and in meetings with investors, executives of the biggest U.S. banks -- notably JPMorgan Chase & Co. Chief Executive Jamie Dimon -- make the case that size is a competitive advantage. It helps them lower costs and vie for customers on an international scale. Limiting it, they warn, would impair profitability and weaken the country’s position in global finance.

Hmmm.... JP Morgan, Jamie Dimon, check... An Independent Look into JP Morgan

image001.pngimage001.pngimage001.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".

Back to Bloomberg...

So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?

Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.

Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.

 In one relatively thorough effort, two researchers -- Kenichi Ueda of theInternational Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

Big Difference

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.

Big bank bailouts? Check!

The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

Hmmmm. Taxpayer subsidized, big name hedge fund bank barely breaking even without bailout funds... Check!

The BoomBustBlog Review of Goldman Sach's 2nd Quarter, 2010 ...

GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.

gs_roe.jpggs_roe.jpggs_roe.jpg

Subscribers can download my full review of GS's most recent quarter here: File Icon GS 2Q10 review. It is a recommended read, for we have performed some sleuthing and believe we may have conclusive evidence that the solvency of this overly marketed hedge fund investment bank is again at risk, just as it was in 2008. For those who wish to partake in our services, you may subscribe here.

And back to Bloomberg...

Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy.

Hmmm! Hundreds of millions of bank bonus cum taxpayer dollars recycled back into government official's pockets in teh form of lobbying dollars, donations and gifts? Check!

How Regulatory Capture Turns Doo Doo Deadly

  • Regulatory capture (adopted from Wikipedia): A term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is an explicit manifestation of government failure in that it not only encourages, but actively promotes the activities of large firms that produce negative externalities. For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether - blah, blah....

About a year and a half ago, after sounding the alarm on the regionals, I placed strategic bearish positions in the sector which paid off extremely well. The only problem is, it really shouldn't have. Why? Because the problems of these banks were visible a mile away. I started warning friends and family as far back as 2004, I announced it on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be ready to collapse some time soon. Most investors and pundits won't realize it because a) they don't read BoomBustblog, and b) due to regulatory capture, the bank has been given the OK by its regulators to hide the fact that it is getting its insides gutted out by CDOs and losses on loans and loan derivative products. Alas, I am getting ahead of myself. Let's take a quick glance at regulatory capture, graphically encapsulated, then move on to look at the recipients of the Doo Doo Award as they stand now...

A picture is worth a thousand words...

fasb_mark_to_market_chart.png

And back to the Bloomberg article...

The result is a bloated financial sector and recurring credit gluts. Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009.

Excessive liablities potetially outstripping the ability of the .gov to bail? Check! The BoomBustBlog Review of Goldman Sach's 2nd Quarter, 2010 ...

So, what is GS if you strip it of its government protected, name branded hedge fund status. Well, my subscribers already know. Let' take a peak into one of their subscription documents (Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional2009-04-20 10:06:454.04 Mb- 131 pages). I believe many with short term memory actually forgot what got this bank into trouble in the first place, and exactly how it created the perception that it got out of trouble. The (Off) Balance Sheet!!!

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Contrary to popular belief, it does not appear that Goldman is a superior risk manager as compared to the rest of the Street. They may the same mistakes and had to accept the same bailouts. They are apparently well connected though, because they have one of the riskiest balance sheet compositions around yet managed to get themselves insured and protected by the FDIC like a real bank. This bank's portfolio looked quite scary at the height of the bubble.

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More recently...

Bigger Tax Payer Bank Bailouts Cometh?

But there are solutions, as detailed in How To Prevent Bailouts, Bank Runs & Other Fun

Observe the setting of the infamous "Bamboozled" speech delivered by Malcom X on 125th Street in Harlem in the video below. Take careful note of the signs and banners and tell me if they don't apply to today's situation & what banks/captured regulators have gotten away with today...

A discussion on bank bailouts, bank runs and other fun things to do with your hard earned dollars... Plus a simple solution to prevent such occurrences.

Let there be no mistake, most have been "Bamboozled by the Banking Industry"

If rampant bank bailouts irk you, read this and get ready to SPIT FIRE!!!

10 Ways to say No, the Banks Have Not Paid Back Their Bailout ...

Dipping into the BoomBustBlog archives with "Bank Run" on the brain???...

Bernanke's Bold Bailout Of The Banking Sector Has

Reggie Middleton's REALity TV #2 - Bernanke's Bank Bailouts Blow ...

Bank of America Lynch[ing this] CountryWide's

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Published in BoomBustBlog

 I participated in a very interesting debate in the NY Times regarding how to fix the rating agencies

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I end my contribution to the debate as follows:

How do you fix this (if it’s not obvious already)?

Eliminate perverse incentives. Whoever wants to buy an asset should have to pay to have it rated. Credit agencies shouldn’t be paid by the same entities they might have to chastise.

It would also help if agencies could no longer hide behind the excuse that their rating was only an opinion, rather than empirical research they must stand behind. There's no need to do a reliable job if you face no credible legal liability, and the government essentially limits the competition you face.

For six years, I have run circles around the three major agencies with timely and accurate predictions of where regional banks, commercial/investment banks (Bear Stearns collapseLehman Brothers), insurerscommercial real estateresidential real estate, US home builders (Lennar), and the pan-European sovereign debt crisis participants were heading. If I can do it, the agencies can too.

One thing many commenters seem to be confused about is the ability for investors to pay for ratings. You don't get anything for free. Never does something emanate from nothing. Any credible advice HAS to be paid for, period! S&P actually sells equity research to the end user, yet gives away fixed income research. Which do you think is the most credible? Most fized income investors are institutions, who are more than capable of paying for advice, and regularly do so anyway. 

We can fix the problems we have with rating agencies as end users, but you have to realize that the agencies themselves are not broken. It appears as if the agencies are broken only if you don't understand their business model...

This clip is an excerpt from the VPRO documentary on rating agencies, a worthwhile view. In the meantime, let's revisit my historical viewpoints on the topic:

The Embarrassingly Ugly Truth About Spain: The IMF, EC and ALL Major Rating Agencies Are LYING!!!

Rating Agencies vs Reggie Middleton, Part 3

Published in BoomBustBlog
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