Wednesday, August 24, 2011

It Should Be Obvious To Everyone By Now:

The system in this country is in big trouble again and the banking system is at high risk of seizing up like it did in 2008.  There is no question in my mind that Bank of America is on the verge of insolvency and I also believe that there is some truth to the rumor that JP Morgan may be circling around BAC.  A source of mine who provides consulting services to BAC told me this morning that internally BAC has slashed expense and procurement budgets to the bone.  It's obvious that the "non-core" businesses being auctioned off by BAC to raise cash are the businesses being sold because they are the businesses that have a bid in the market.  The majority of BAC's "core" assets are commercial and residential mortgages, "goodwill," and who knows what off-balance-sheet elephant diarrhea (variable interest entities - an Enron specialty, credit default swaps, other toxic waste).

I did a quick glance at BAC's financials and if I ever get the time I will dissect them to the best of my ability.  But essentially BAC has $2.2 trillion in assets.  It also reports $222 billion of book value.  Of this, $80 billion is "goodwill and intangibles."  Henry Blodget rightfully asserted that we can safely assume that $80 billion is worthless.  So partially "adjusted" book value is down to $140 billion.  Also please note that in response to Blodget's quickie liquidity analysis yesterday, the BAC spokesman avoided addressing Blodget's goodwill assumption and instead attacked Blodget's legal problems from the internet bubble era.  THAT confirms that Blodget's assumption is accurate.  And actually it's my assumption now that I'm looking  and I know it's accurate.

So, subtracting goodwill from the asset tally, we're left with $2.1 trillion, of which $139 billion is home equity loans.  Now, in all sincerity, it is likely that BAC's home equity loans are worthless.  But let's assume they could unload them for 50 cents.  That's another $69 billion of impairment, thereby reducing "book" value to $71 billion. Everyone follow me here?  And, I might add, I will bet my last silver eagle that the assumption that BAC's home equity paper is worth 50% of book is true welfare. This asset class in all probability is a big goose egg.

After accounting for home equity, the remaining asset base would be a shade under $2 trillion.  For sake of brevity and simplicity - and given that nearly 50% of the remaining asset base is commercial/residential mortgage paper, let's assume that BAC has over-estimated the book value of its assets by a mere 10%.  Again, if we could sift thru each loan - or even statistically sample the loan pools - I can assure you that using only 10% is giving BAC a free lunch for the next decade.  At any rate, that's another $200 billion of impairment, thereby taking BAC's "book" value to a negative $129 billion.  Conclusion:  BAC is technically insolvent.

Please understand that this analysis does not include any work on the off-balance-sheet garbage, which would only make the case against BAC's solvency worse.  If I can find the time, which will require digging up BAC's 10K plus using the latest 10Q and going thru all of the footnotes with a fine-tooth comb, I'm sure I can make the case that BAC's true net worth is at least double the negative $129 billion estimate.  And even then I can only make some very educated assumptions.  But I can guarantee that the off-balance-sheet mess makes the stated balance sheet look like a walk thru a candy factory at Christmas time.

I actually meant to talk about why the system is in trouble and I got off on this BAC tangent because, in fact, BAC is the poster-child for what is going on beneath surface in our system right now.  The system is even more embedded with fraud, corruption and grand-scale taxpayer theft right now than it was in 2008.  And the economy is in the toilet, per the latest round of economic numbers, most notably housing plus all the regional Fed bank reports.

What's going to happen here is that eventually the Fed is going to have to roll out a massive QE3 program in order to keep the banks from collapsing.  This will include some sort of plan for either the Treasury or JP Morgan to assume responsibility for BAC.  If it's structured like last time around in 2008, expect that JP Morgan will cherry-pick at 10 cents on the dollar any assets that it can make a fortune on based on paying 10 cents, just like it was set up to do with Bear Stearns and Wash Mutual, and the rest of the garbage will be off-loaded on the Taxpayer via the Treasury, Fannie Mae and Freddie Mac.  Back in 2002, one of my original colleagues and I speculated that eventually the Fed/Treasury would use JP Morgan and Fannie Mae/Freddie Mac as conduits to monetize the massive mortgage/housing/debt bubbles that Greenspan was blowing.  I'd say that call looks pretty good right about now.

Anyone pissed off yet?  Don't get pissed, there's nothing you can do about any of the above.  I expect the precious metals market to get very volatile over the next couple of weeks and maybe even into mid-September.  This volatility will work both ways.  What you can do is not get scared off by this and slowly buy the heart-stopping drops in the market and hold onto to what you have when it climbs higher.  Please do not sell what you have.   Dagen McDowell, who's never been accused of being intelligent, was on Fox Business earlier today cheerily proclaiming an end to the gold bubble.  Not only that, CNBC is now overlaying charts of gold on top of a chart of the NASDAQ from 1999-2001 and other miscellaneous bubble market comparisons and suggesting that the gold bubble has popped.  This is coming from a news organization who failed to see the internet bubble and the housing bubble.  And now all of a sudden they have the ability to see a gold bubble?  LOL.  Both of these anectdotes are great indicators that things have yet to get interesting to the upside in the precious metals.

P.S.  Do yourself a favor and check to see if any of the mutual funds you own have a big position in BAC and get rid of those funds.  The obvious ones are the funds run by that dip-shit Bruce Berkowitz at Fairholme Capital Management, who is one of the largest holders and recently (like 30% higher) added to his doomed position.


  1. Tell the gold cartel thank you and scale into gold/silver...

    Embry - $2,500 Gold to End the Year Wouldn’t Shock Me

    John Embry continues:

    “It was interesting overnight in Asia, the gold price rallied back into the $1,850’s and that just seemed to fire them (the cartel) up even more and they went to work again in London and Comex, they crushed it again. But you know what this means in the fullness of time, nothing.

    The fact is the fundamentals haven’t changed one iota from two days ago when the price was over $1,900 and I expect we will be going through the all-time high in the not too distant future. I suspect that the vast majority of the correction is behind us already, albeit quick and violent. In fact I am probably going to go and buy a kilo bar of gold myself.

    The fact is these types of corrections are painful and can sort of take people by surprise, but they are healthier because they very quickly get rid of every ‘Johnny Come Lately’ that shouldn’t be there in the first place. This cleans the market out in next to no time and gets us ready for the next leg up....$2,500_Gold_to_End_the_Year_Wouldnt_Shock_Me.html

  2. Daegan's dufus husband, Jonas Max Ferris has been publicly short gold since $500. Jonathan Hoenig used to make fun of him every week for that trade. Not sure if he covered it yet, but Daegan's probably bitter about gold crushing their net worth.

  3. Jeez you this only happened at bsc?

    Report Says: Bear Stearns Executives Sold Illegal RMBS and Covered It Up

    Former mortgage staffers from Bear Stearns are coming out of the woodworks to explain how Tom Marano’s mortgage group cheated their own clients out of billions. This week I reported at The Distressed Debt Report, EMC insiders say they were told to make up the classification for whole loans, packaged into mortgage securities, to get them switched out of the trust. By classifying the loans as ‘prepaid’ or having ‘subsequent recoveries’ Bear staffers were able to fool the trustee into giving them back loans they were not able to legally service. A move New York Attorney General Eric Schneiderman is actively investigating now.

    A year latter, when senior executies realized the mishap instead of Bear going out and informing their regulator and applying for a license, they orchestrated a cover up and even threaten EMC staffers not to talk about it. Verschleiser was the head trader for the subprime trading desk reporting directly to Tom Marano. Marano was the head of mortgages for the bank. Verschleiser now works for Goldman Sachs and Marano is CEO of ResCap a division of Ally Bank.

  4. (Dave)

    Dagen McDowell is retarded and so is her husband.

    1. dave: I think it is YOU that is the RETARD

  5. McDowell needs to stick with NASCAR and her husband is
    A douche bag.

  6. (Dave)

    ROFLMAO. I was thinking Dagen should go back to being a manicurist. Her husband is an example of why women shouldn't do meth when they're pregnant.

  7. Really love your blog. I check it daily for updates.
    Keep up the great work.

  8. (Dave)

    Thanks anonymous. Appreciate the feedback.

  9. In regards to PM's-

    Find a quiet place.
    Sit comfortably in a cross legged position.
    Close the eyes and after about 60 seconds have the thought...

    "Long term."

    Silently repeat this mantra every 15 seconds.

    Practice twice a day for the next few years.

    Life is Bliss.

  10. You think someone might be forced to liquidate gld????

    Hedge-fund manager John Paulson continues to see losses mount at his largest funds at Paulson & Co., The Wall Street Journal reported late Wednesday. As of this past Friday, Paulson's Advantage Plus fund has lost 38.7% for the year, according to the Journal. About 21.7% of that loss comes from August alone. Another fund, Paulson Partners, has lost 14.4% in August and is down 11.8% for the year, according to the report.

  11. The Federal Government Is Our Servant Not Our Master

    Does the government fear us? Or do we fear the government?

    What prompts me to write this are the comments received on Joyce's last post, Blankfein and Others Lawyer Up at Goldman Sachs.

    Most of the readers comments relate to the disbelief that fraud is so blatant yet no one in government seems to do anything about it. In fact, government seems to be protecting the fruadsters and even more alarming the fact that government gives them more of our money to continue their criminal, fraudulent activities.

    The old saying, the rich get richer and the poor get poorer is very true today. The elimination of the middle class and the growth of the poor in contrast with the ever increasing wealth of the already rich (be they corporations or individuals) is alarming.

    As we sit in our living rooms every night, we witness the people of countries who for years and even centuries have been governed under dictatorial rule, take control of their lives and overturn their oppressive dictatorships.

  12. Nice work Dave.

    Funniest story of the day: Gold drops 5% due to better than expected durable goods report.

  13. ...follow who makes JPM's physical signage, and you will find your answers....

  14. Extremely good posts Dave.

    Thank you.

  15. Of course its obvious to everyone that the system is screwed.

    It going to be painful till this fraudulent system crashes.

    Pray for a fast death of the system

  16. The Bullion Banks (JPM) will EAT the paper banks long before the BIS and CBs settle in gold. The fantasy paper holders are ALL technically insolvent.

    I am happy to see the "system" cannabalize itself in this final starvation of debt.

    Flies eating each other atop a steaming dung pile is a vision of loveliness.

    Gold will clean up their mess.

  17. We seem to be helpless in the face of all this corruption; but are we really helpless?

    Check this out

  18. Good information. There's so much corruption and the trouble with the bank systems and mortgages are serious. Apex helps small businesses during this time of need find Small Business Mortgages that are best for them.