Monday, August 22, 2011

Is Another Big Bank Collapse Brewing?

Take a look at the financials today.  The BKX bank stock index initially spiked higher with the Dow/SPX and has since faded into negative territory today.  Almost every big bank stock that I track is red.  Bank of America stock opened briefly to the plus side and is now down over 6%.  Despite the half-assed salesmanship on behalf of BAC done by its lame CEO last week, BAC is in an irreversible death spiral.  BAC credit default swaps are trading +342 basis points above Treasury bonds, indicating a mid double-BB implied credit rating, which is a junk bond rating.

But the real story in the banking sector is about asset quality, or lack thereof, on the big bank balance sheets.  Everyone knows that for most of the last two years, the big banks like JP Morgan and Wells Fargo have generated most of their GAAP/accounting earnings by marking up the carried position of the largely illiquid assets they hold on their balance sheet.  And now that the "mark-em-up" game has run out of room, the same banks generated accounting earnings last quarter by reducing the size of their reserves held against loan losses.  Please note that both games, the mark-up game and the loss-reserve release game, the "earnings" are nothing more than paper earnings and do not generate cash or reflect true economic rent (economic rent is otherwise know as cash profits). 

What got me thinking that we may be heading toward another credit collapse like in 2008 again is that I had noticed that the stock of MGIC (MTG) was down like 18% one day last week and has taken a 66% beating since July 15.  MTG provides mortgatge insurance to the home mortgage mortgage, primarily single-family home mortgages.  And the stock of MBIA (MBI) was hammered last week and is down over 40% since July 15.  MBI provides insurance for municpal, asset-backed (credit cards, cars, student loans, housing) and mortgage bonds.  And AIG stock, despite being heavily supported by Tim Geithner and the Fed on behalf of the U.S. Taxpayer, was hammered last week and is down over 21% since August 3.  A large component of AIG's "insurance" business is residential mortgage guaranty insurance.

Although it's next to impossible to get any kind of truth reported by our nation's leaders, corporate leaders or the media, it is hard over the long run to hide the truth from the stock market.  And right now the stock market is telling me that 1)  the big banks, led by Bank of America, are in trouble again; and 2) the root of the trouble is the poor quality of the assets held by these banks is rapidly deteriorating.   The fact that the stock price of the big mortgage insurance companies is getting hammered reflects the expectation that companies are going to be on the hook soon for some huge losses by the holders of the insurance.  The holders of the insurance are - in large part - the big banks who still have a lot of impaired and defaulted mortgages - and other asset-backed garbage - on their balance sheets. 

Just like in 2008, it would be my expectation that the mortgage insurers will never in this lifetime be able to pay out the enormous claims that are going to be issued against the insurance they've underwritten.  This is EXACTLY what happened in 2008 with AIG before Tim Geithner (and Henry Paulson, and Bush and Obama) stepped in to use Taxpayer money to pay off the enormous credit default claims in 2008.   Clearly, based on the performance of its stock, BAC is in the worst position now, which makes sense since the Paulson and Bernanke tandem stuffed BAC with Countrywide and Merrill Lynch.  Both of those firms were among the most aggressive originators of subprime mortgages (and other subprime garbage, in the case of Merrill).

The other big banks that I would expect to see thrown against the ropes of illiquidity again are Goldman, JP Morgan, Morgan Stanley,  Citi and Wells Fargo.  If I have time, I plan on dissecting WFC's balance sheet and seeing what's really going on there 1) because I hate Warren Buffet and I think he's complete hypocritical, disingenuous scumbag and 2) John Paulson has recently added to his big position in WFC after he got his ass kicked in the stocks of BAC and Citi.  I am betting he is going to eventually have to regurgitate his WFC stock just like he recently did with BAC and C.

At any rate, I ultimately think we are going to see another big bailout of the banking system.  But more on that at a later date.  In the meantime, here's some charts for your viewing pleasure - you can click on each chart to make them bigger:





  1. remember?...

    In Praise of Sorkin’s Praise of Lowenstein’s Praise of Financial CEOs

    This is the first of a multi-part response to Lowenstein’s column. The
    remaining columns will address why control fraud drove the current
    crisis and respond to Lowenstein’s strawman arguments. The sources of
    the quotations used in this column, from Messrs. Lowenstein and
    Sorkin, are provided below.

    Roger Lowenstein has just taken the brave step of praising the failure
    to prosecute elite financial managers for fraud as a demonstration of
    the greatness of America. Lowenstein declares (1) that Blankfein was
    right – Goldman really was doing “God’s work,” (2) virtually no
    financial elites committed crimes, (3) any crimes they may have
    committed were trivial and played no material role in causing the
    crisis, (4) those that wish to hold fraudulent elites accountable for
    their crimes are (a) financially illiterate, (b) paranoid conspiracy
    theorists equivalent to those claiming the U.S. attacked the twin
    towers on 9/11, (c) a threat to our democracy and constitutional
    rights, and (d) engaged in “punishing profit,” (5) the prosecutors who
    refuse to bring criminal charges where they find elite frauds are the
    heroes safeguarding our democracy and constitutional rights, (6) the
    FBI is conducting a “serious” investigation of the elite financial
    frauds (despite points one through four above), and (7) the crisis was
    caused by “society” – because we’re all guilty no one should be held
    accountable – except those paranoids who want to destroy America’s
    greatness by prosecuting financial CEOs on fraud charges.


    Goldman Sachs CEO hires high-profile defense attorney

    Goldman Sachs Chief Executive Lloyd Blankfein has hired Reid Weingarten, a high-profile Washington defense attorney whose past clients include a former Enron accounting officer, according to a government source familiar with the matter.,0,7664505.story

  2. All US Mint Numismatic Gold Coins Suspended

    This morning the US Mint has suspended sales of all remaining numismatic gold coin offerings. The move comes as the market price of gold has jump another $35 to nearly $1,890 per ounce. Prior to the suspension, products were priced based on an average gold price in the $1,750 to $1,799.99 range.

  3. Why is Bank of America’s Stock Cratering Yet Again? It’s the Extend and Pretend Endgame

    We are now seeing the downside to extend and pretend. Years of regulatory forbearance mean that investors know the marks on the balance sheet of a beast like Bank of America (and frankly all the other big banks) have a ton of air in them. And now that the economy is looking seriously wobbly and the odds of son of Credit Anstalt are well above zero, it means big banks are at real risk of getting seriously whacked in a major stress event. Worse, with Dodd Frank (supposedly) barring bailouts and Tea Partiers on an anti-bank, anti-Fed, anti-spending warpath, it might not be so easy for the authorities to rescue a big bank if a run started (not that I’m advocating a rescue, mind you, I’m looking at this from the vantage of a bank shareholder).

    Steve Waldman set forth the basic issue in a very important post last year:

    Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

    The point is that there is objectively a lot not to like about Bank of America. And now that investors have decided to start thinking critically, as opposed to blindly accepting bank equity as the faith-based paper that it is, one shouldn’t be surprised that they are getting cold feet. And the fact that the authorities have undermined the limited value of bank balance sheets via allowing all sorts of rosy accounting treatments is a self inflicted wound.

  4. Hello Richard Bove, Repeating Nonsense Does Not Make It True; Bank of America Will Not Survive in One Piece

    Mark-to-market rules were supposed to go into effect in 2007. Those rules were twice suspended. Now it seems they have been postponed indefinitely, if not scrapped altogether for the benefit of Citigroup and Bank-of-America.

    Where's There's Smoke There's Fire

  5. As Richard Bernstein (on cnbc 8-24-11 want it on record so people can chase him down street in 2 years) bashes gold for being in the 8th or 9th ending of a bubble mania...

    See basic math section.. scroll down$2,100_Within_Weeks.html

    here's a news flash for that useless mf...

    Here's your version of safe...

    Fed Made State Street Profitable as Middleman

    State Street Corp. (STT) and JPMorgan Chase & Co. (JPM) profited during the financial crisis by borrowing $200 billion almost risk-free from the Federal Reserve under a program intended to rescue money-market mutual funds.

    The Fed lent State Street a total of $89 billion to buy securities from the funds in 2008 and 2009 after the credit crisis triggered by the collapse of Lehman Brothers Holdings Inc., according to Fed data compiled by Bloomberg News from information released in response to Freedom of Information Act requests, related court orders and an act of Congress. The central bank also guaranteed against losses on the short-term notes as long as they met eligibility guidelines.

  6. Central banks, net buyers of gold
    for the first time in a generation, are likely to retain their
    holdings even if they need to raise cash to counter an
    escalating debt crisis, according to Morgan Stanley.

    Currency Credibility
    “The European central banks won’t sell their gold because while it may be a means to raise cash, it definitely won’t be enough to settle their debts,” said Duan Shihua, head of corporate services at Haitong Futures Co., China’s largest brokerage by registered capital. “Besides, none of the central banks believe in the currencies of other countries.”

  7. Astrology, black holes, and bank financials...

    Wednesday, August 24, 2011
    More on the Opacity of Bank of America’s Financial Statements

    But digging further into their financials does not improve the picture. Consider their Level 2 and Level 3 assets. Remember, Level 3 are commonly referred to as “mark to make believe” and Level 2 are derived using models, but at least some of the inputs are “observable” (click to enlarge):

    Ignore the derivatives section and the netting adjustment, just look at the asset section, starting with “AFS debt securities”. On a roughly $2.3 trillion balance sheet, you have roughly $58 billion of Level 3 assets. I can tell you with great confidence the $12 billion of mortgage servicing rights is worth zero and should probably be reclassified as a liability. I owe you a post on the recent “sales” of servicers, and the dirty secret is they have been dressed up in quite a misleading manner as far as the public is concerned.

    And look at the Level 2 assets, roughly $500 billion in the section I highlighted. Ouch.

  8. If they don't know...why do they opine that all is well!

    Is ignorance bliss?

    Regulators to require minimum derivatives data

    LONDON (Reuters) - Banks must report a minimum set of data on their derivatives trades from the end of next year to help regulators monitor financial stability and spot abuses, a draft plan from market supervisors and central bankers said on Wednesday.

    Regulators want a full picture of the $600 trillion off-exchange derivatives market at all times by requiring banks to provide transaction details to repositories.

    Several repositories have already been set up for different types of derivatives, such as the Trade Information Warehouse for credit default swaps and the Equity Derivatives Reporting Repository, both run by U.S. DTCC.

    Current formats are based on voluntary agreements with banks and regulators want a consistent set of information.

    "The proposed requirements and data formats will apply to both market participants reporting to trade repositories and to trade repositories reporting to the public and to regulators," the CPSS-IOSCO report said.

    "The report also finds that certain information currently not supported by TRs would be helpful in assessing systemic risk and financial stability," it added.

    Frederic Hervo, a CPSS member from the Banque de France, said that so far there is no deadline for reporting this "value added" information above the planned minimum requirements.

    CPSS-IOSCO also wants a global system for tagging each trade to identify the counterparties from the end of 2012.

  9. Buy gold coins including US rare gold coins, sliver coins, and other precious metals with ITM Trading with expert advice on gold bullion and Numismatic gold.