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: