From Banks, Brokers, & Bullsh1+ part 1:

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:

From Banks, Brokers, & Bullsh1+ part 1:

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:

Implied volatility for the big banks is down across the board, just about where it was before the system went into convulsions. This implies the coast is clear, as do the share prices of many banks.

Hard core forensic and fundamental analysis implies otherwise. So does the Fed's actions, which still incorporates ZIRP policy, as well as the waffling at FASB. We will either have smooth sailing from this point on out or there is a nasty surprise waiting (on and off balance sheet) for bank investors in the near future. I invite readers to weigh in with their opinions.

image001.png

As you can see, we are just about where we were in 2007 in terms of average volatility. 

Implied volatility for the big banks is down across the board, just about where it was before the system went into convulsions. This implies the coast is clear, as do the share prices of many banks.

Hard core forensic and fundamental analysis implies otherwise. So does the Fed's actions, which still incorporates ZIRP policy, as well as the waffling at FASB. We will either have smooth sailing from this point on out or there is a nasty surprise waiting (on and off balance sheet) for bank investors in the near future. I invite readers to weigh in with their opinions.

image001.png

As you can see, we are just about where we were in 2007 in terms of average volatility. 

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!

bank_ficc_derivative_trading.png

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:

 

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!

bank_ficc_derivative_trading.png

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:

 

This is part 3 in my quest for the truth in what lies off balance sheet of the big banks in America. Please reference If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? and If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan for the prequels. As was noted before, I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is. Now, on to the bank to be owned by America - I'm sorry, that's Bank of America...

Bank of America Securitization Activities

Bank of America securitizes residential mortgages, commercial mortgages, credit card receivables, and home equity loans and automobile loans that it originates or purchases from third parties. As of June 30, 2009, the total principal balance outstanding of securitized portfolio was nearly 1.7 trillion (including 1.1 trillion of mortgage backed securities, securitized by Government sponsored entities). The total senior securities and subordinated securities held by BAC on its balance sheet amounted to about $27 billion (28% of tangible equity) and $10 billion (10% of tangible equity), respectively. 

This is part 3 in my quest for the truth in what lies off balance sheet of the big banks in America. Please reference If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? and If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan for the prequels. As was noted before, I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is. Now, on to the bank to be owned by America - I'm sorry, that's Bank of America...

Bank of America Securitization Activities

Bank of America securitizes residential mortgages, commercial mortgages, credit card receivables, and home equity loans and automobile loans that it originates or purchases from third parties. As of June 30, 2009, the total principal balance outstanding of securitized portfolio was nearly 1.7 trillion (including 1.1 trillion of mortgage backed securities, securitized by Government sponsored entities). The total senior securities and subordinated securities held by BAC on its balance sheet amounted to about $27 billion (28% of tangible equity) and $10 billion (10% of tangible equity), respectively. 

One of the quandaries of running a subscription service is that when you have some really juicy stuff, you inherently limit the audience that you are able to reach. Normally, this isn't that big a deal. When you believe that there is a mass cover up aiming to prop up the largest cadre of zombie, insolvent companies in modern history it becomes a much bigger deal. This leads me to distribute a significant amount of research for free. On that note, I have been following the breadcrumb trail of hidden (or more aptly put, concealed) corporate liabilities, and it has led me to (of all places) off the balance sheet of the big banks. I have spent a lot of time concentrating on exactly where the losses, if any, will come from in these banks. We have already established that the smaller banks had, have and will totally drain the FDIC's insurance fund over a year and a half ago (see As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades Friday, 23 May 2008, notice how many of the banks have went under since then) in the post "I'm going to try not to say I told you so...

I would also like to add that I have raised the flag on this regional bank/commercial real estate issue many months before the sell side and the main stream media said a peep. This is not to brag or boast, for I am a fundamental investor and the market has definitively ignored the fundamentals for 7 months running. The point that I am trying to convey is that analysts in the big sell side banks work for their trading desks, underwriting and sales departments, and not for the investor (be it retail or institutional). Thus, proclamations of "Buy! Buy! Buy!" do not necessarily mean we have entered into a fundamentally firm area in which to buy stocks, bonds or any other risky assets covered by these guys. For a sterling example, see "The sell side is pushing with all of their might to inflate the market...".

As a matter of fact, I have also focused on those very same brokerages, banks, insurers and REITs that went bust, starting as far back as 2007, again before it was fashionable to do so (see Is this the Breaking of the Bear? January 2008, GGP and the type of investigative analysis you will not get from your brokerage house November 2007 to December 2008, A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007, etc.)

Now, that everyone feels the coast is clear and we will be entering a new bull market amid a broad economic recovery sprouting green shoots all over the place, I am intent on quantifying what remaining risks there are - if there are any remaining risks I am also in the process of fine tuning the market neutral strategy that can produce profits up until and through the period that these banks bring the market and economy back down (see Option Strategy Analysis Update for the strategy analysis and their performance thus far).

One of the quandaries of running a subscription service is that when you have some really juicy stuff, you inherently limit the audience that you are able to reach. Normally, this isn't that big a deal. When you believe that there is a mass cover up aiming to prop up the largest cadre of zombie, insolvent companies in modern history it becomes a much bigger deal. This leads me to distribute a significant amount of research for free. On that note, I have been following the breadcrumb trail of hidden (or more aptly put, concealed) corporate liabilities, and it has led me to (of all places) off the balance sheet of the big banks. I have spent a lot of time concentrating on exactly where the losses, if any, will come from in these banks. We have already established that the smaller banks had, have and will totally drain the FDIC's insurance fund over a year and a half ago (see As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades Friday, 23 May 2008, notice how many of the banks have went under since then) in the post "I'm going to try not to say I told you so...

I would also like to add that I have raised the flag on this regional bank/commercial real estate issue many months before the sell side and the main stream media said a peep. This is not to brag or boast, for I am a fundamental investor and the market has definitively ignored the fundamentals for 7 months running. The point that I am trying to convey is that analysts in the big sell side banks work for their trading desks, underwriting and sales departments, and not for the investor (be it retail or institutional). Thus, proclamations of "Buy! Buy! Buy!" do not necessarily mean we have entered into a fundamentally firm area in which to buy stocks, bonds or any other risky assets covered by these guys. For a sterling example, see "The sell side is pushing with all of their might to inflate the market...".

As a matter of fact, I have also focused on those very same brokerages, banks, insurers and REITs that went bust, starting as far back as 2007, again before it was fashionable to do so (see Is this the Breaking of the Bear? January 2008, GGP and the type of investigative analysis you will not get from your brokerage house November 2007 to December 2008, A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007, etc.)

Now, that everyone feels the coast is clear and we will be entering a new bull market amid a broad economic recovery sprouting green shoots all over the place, I am intent on quantifying what remaining risks there are - if there are any remaining risks I am also in the process of fine tuning the market neutral strategy that can produce profits up until and through the period that these banks bring the market and economy back down (see Option Strategy Analysis Update for the strategy analysis and their performance thus far).

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