BCA on Bank Worries

[HenryTo]

The Bank Credit Analyst discusses the recent underperformance of banks as well as the rise in the TED spreads:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20070622.GIF

[Rubedo]

Incidentally, First Priority Bank just cost the FDIC 72 million this weekend.

http://www.jsmineset.com/

Posted On: Monday, July 28, 2008, 3:10:00 PM EST
FDIC Severely Undercapitalized To Handle Coming Bank Failures


Author: Jim Sinclair

Dear CIGAs,

Because all of us here at JSMineset care, here is the FDIC and SIPC missive from this weekend.

Have you protected yourself?

FDIC Insurance quoted by all banks to calm the fear of depositors is another exercise in smoke and mirrors. This can be seen in the recent commentary from FDIC on last week’s takeover of the insolvent banks, First National and First Heritage.

The FDIC notes that this bailout cost only $862 million dollars, or 0.30 percent of the $13.4 trillion dollars insured at approximately 8500 insured institutions.

We know the FDIC had net assets of $53 billion before IndyMac, which according to the FDIC will cost them between $4 billion and $8 billion. Taking the lower estimate and last week’s double-header, the FDIC’s available assets would have been reduced from $53 billion to $48 billion. We therefore have $48 billion in available funds guaranteeing $13.4 trillion in deposits. By rounding out the total FDIC assets, they represent 0.35% of what is insured.

This amounts to a vastly undercapitalized insurance company that makes outrageous claims, guaranteeing all US depositors up to $100,000 through 8,500 institutions.

I estimate that with the failure of one more major bank and ten reasonably sized regional banks the FDIC will be screaming for additional capital. That is monetizing bankrupt banks. This is true because the funds will come from public money.

Are you still in a freeze frame about protecting yourself?

Think about the other smoke and mirror game called SIPC that your broker assures you will take care of any loss in client assets, which is capitalized at $1.5 billion. Any of the big 6 has more than that in customer assets. It is possible that just one account at one of the big six has that amount alone.

You might consider all the calming brokers speaking about the additional insurance they carry for their clients, written to the firm for the benefit of their clients, even though your name is not on it. Now we all trust our brokers to do right by us, don’t we?

I wonder how long a bankruptcy judge would take to distribute the secondary funds to clients. I am sure it would take at least a few years.

If such an event were to occur, I imagine the dollar would be confetti by the time of distribution.

Respectfully yours,
Jim

[Rubedo]

It's more likely that Citi overpayed in the deal with Ambak to raise the mark to market on the rest of their holdings.

BTW, hopefully your folks don't have over 100,000 in WaMu because WaMu isn't offering 4.25% simply because they are being generous. This is basically more than what both IndyMac and Countrywide were offering. Banks wouldn't jack up their CD rates for no reason.

http://www.usatoday.com/money/industries/banking/2008-07-31-fed-loan-program_N.htm?csp=34

NEW YORK — Banks borrowed a record amount of funds from the Federal Reserve in the latest week as the year old credit crisis took a persistent toll, while the commercial paper market continued to contract, signaling tough conditions for short term borrowers.

Banks' primary credit borrowings averaged $17.45 billion per day in the latest week, the second straight week this had hit a record and up from $16.38 billion the previous week, Fed data showed Thursday.

"It shows there's a shortage of liquidity in the system," said Christopher Low, chief economist at FTN Financial in New York.

Secondary credit the Fed extended, which is usually taken out by banks in need of emergency cash, rose to $89 million in the latest week, from $34 million the week before. Although these numbers are still very small compared with primary credit, "What that tells you is that there's an increasing number of banks that the Fed is classifying as 'unsound' or inadequately capitalized," Low said.

Analysts may watch the trend of secondary credit closely, given the travails of U.S. regional and smaller banks and the likelihood that a continued decline in house prices and rise in foreclosures and bad loans will deepen the difficulties of the banking sector for many months or years.

http://bigpicture.typepad.com/comments/2008/07/fasb-ok-for-usa.html

FASB: OK For USA to Turn Japanese
Wednesday, July 30, 2008 | 09:30 PM
in Derivatives | Legal | Valuation

Just when you think there is a glimmer of hope that some of these ne'er do well, lying, cheating, sniveling, cowardly bank CEOs might finally be forced to step up to the confessional and tell all, this comes along: FASB Postpones Off-Balance-Sheet Rule for a Year.

Which makes me wonder: How precarious is the financial health of the US banks and brokers that they need yet another year before they can, oh, I don't know -- disclose what they own on their balance sheets?

Ubiq-cerpt:™

"The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books.

FASB, the Norwalk, Connecticut-based panel that sets U.S. accounting standards, voted 5-0 today to delay the rule change until fiscal years starting after Nov. 15, 2009. The board needs to give financial institutions more time to prepare for the switch, FASB member Thomas Linsmeier said at a board meeting.

"We need to get a new standard into effect,'' Linsmeier said, though ``it's not practical'' to begin requiring companies to put assets underlying securitizations onto their books this year.

FASB proposed having companies put new securitization structures on their balance sheets for fiscal years starting after Nov. 15 this year. The Securities Industry and Financial Markets Association and the American Securitization Forum complained that the changes, which could affect as much as $11 trillion of off-balance-sheet entities, may make companies appear short of capital to regulators and lenders. Financial companies' responses may in turn worsen the credit crisis by further constraining lending and investing, they said."

The longer they wait, the worse it ultimately will be. The long Japanese Recession (1989-2003) was caused by precisely this refusal to take the markdown, and engage in all manner of delays, excuses, procrastinations. Eee-diots -- This only will make it worse!

Here's the money quote:

"Under FASB's Statement 140, one of the rules the board is considering changing, the trusts can remain off-balance-sheet if their activities are "significantly limited'' and "entirely specified'' in the legal documents that created them."

Man, if ever a legal clause was made to be folded spindled and mutilated, this was it.


Question: How can anyone value a financial company if they cannot tell what are on their balance sheets?

Answer: You cannot. If you buy a financial under these conditions, you are flying blind.

Investment Thesis: Ritholtz Rule #1: Know What You Own.
Whoever buys Financials under these circumstances loses the right to whine down the road about companies not being forthcoming. If you own them, don't complain when you get what you deserve.

[mtvk]

Henry,

After listening to Henry Blodget in 1999 and being cheered by
all others, never would trust them.

You may be correct that she is making use of the bearish time.
Usually the wall street media worships perma bulls. I never seen
even in last bear market an analyst who has been bearish.

Before taking any ones saying, I look for their past history in
predictions, how truthful and intelligent they are.
I don't know her past history.

[HenryTo]

hedgstrat,

Think Henry Blodget in the late 1990s. His record was even more impressive as the streak lasted at least a couple of years. In a bull market, the most bullish bull is always the most correct, and in a bear market, vice-versa. 12 months of making calls on the bear side means nothing unless one can call the turning point in financial stocks and make money for her clients. In her own words, the time to buy financial stocks is when their earnings are much better again but history has shown that financial stocks turn much more earlier.

So far, BoA hasn't cut its dividend yet - and it has already powered 60% higher since July 16th. Obviously, the jury is still out but the $150 million write-up by Ambac last week suggests we may be reaching a turning point.

I have also seen the Citi/Merrill reports from Oppenheimer. Ms. Whitney applies a broad stroke when it comes to the mortgage holdings of these financial institutions. There are no in-depth analyses such as what Tom Brown has done with the ABX indices, nor even what Bill Ackman has done with the bond insurers. It is grade school math - so you can call it a math problem, if you want, but in reality, it is more of the "back of the envelope" math or more realisticially, a mighty good guess that has simply turned out to be correct because she has chosen to be a major bear in a bear market in financial stocks (except for her call on Lehman, of course).

[mtvk]

Thanks for the link. I wish there are more analysts like her. Majority
humans go with consensus. Analysts are human too.

I watched some of her interviews posted in msn. She seems truly
interested in understanding things in the companies she follows. To say in
other words, other analysts are too sloppy in their work. When even
great money managers were loading up Citibank thinking its a value
stock, to be bold enough to tell what she thinks shows her true nature.
Just imagine she is becoming enemy of her own industry folks.

In the bloomberg link, she says even though analyst job pays less she
has enjoyed the work.

Coming back to what she said, like MER others will be selling
their assets and raise capital soon. She said 25 financial companies. Wow!!

More over she says these companies with dramatic less capital, will have
less earning going forward.

She praises JPM, GS.

http://video.msn.com/?mkt=en-us&brand=money&tab=s55

[hedgstrat]

While I appreciate the cynical attitude toward the meteoric rise of Ms. Whitney, I have yet to hear her say something that did not come to pass during this crisis, including dividend cuts, capital raises, etc.

http://www.bloomberg.com/apps/news?pid=20601039&sid=aSApdA59SFok&refer=columnist_lewis

My impression is Ms. Whitney is the ony analyst acutally doing the math on these stocks (when the figures are available--frequently these matters are shrouded in mystery on these companies' balance sheets).

And what is the essence of a financial institution (and it's collateral) but a math problem anyway?

[HenryTo]

Re: Ms. Whitney

She's been immensely bullish on Lehman until late March:

http://seekingalpha.com/article/69677-oppenheimer-s-meredith-whitney-downgrades-lehman-she-s-right

She's also a sell-side analyst who would be working for a financial services hedge fund if her timing has been consistently good - but then, it seems like she loves the publicity more than she does in making money for her clients.

Re: Businessspectator article. That article was dated July 25th. I guess someone forgot to tell Ambac that they should've written down their CDO holdings earlier this week, and not write them up. To extrapolate a minute holding from an Australian bank (a major bank in Australia but still marginal in the global financial system) is not only misleading but irresponsible. Do CDOs or securities in the $7 trillion MBS market come in one flavor? Obviously, no.

[Rubedo]

http://www.businessspectator.com.au/bs.nsf/Article/NAB-will-shock-Wall-Street-GV4M7?OpenDocument&src=stf

NAB will shock Wall Street

The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a “meltdown”.

We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans – an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.

It means the cost of bailing out housing exposures to the two mortgage insurers will be so great that it will leave no room to bail out anything else and there are several US banks that are now in big trouble. NAB says that the dislocation in the residential market is separate from the corporate market, but the flow on is inevitable.

While global banks have been writing down their balance sheet assets, few have tackled their conduit exposures which are off balance sheet but to which they are ultimately liable.

This morning at around 6am I wrote that we had been experiencing a 'dead cat bounce'. I had no idea that NAB would trigger the downturn and confirm what I had written. And of course Wall Street will receive a deep shock when it wakes up.

How did NAB get caught in $1.2 billion mess? They had a number of big clients who wanted to invest in these US housing loans. They were sucked in by the 'triple A rating' given to the securities by the rating agencies. They did not take into account that the monoline insurers who guaranteed some of the loans had no substance. To become a player NAB took out $1.2 billion in these triple A securities and 90 per cent of it has been lost.

Many Australian institutions are very angry. NAB is paying out far too much in dividends and should be conserving capital. The American bank it purchased, Great Western, was a good idea but it is now clear it overpaid for it. Fortunately it only has a small exposure to the bad loans. But what’s happening to the NAB is not the main game.

The global banks have been marking to market the assets they held on their balance sheet, but the vast amounts held in so called 'conduit trust accounts' have not been written down because they were not marketable. NAB wrote them down when they saw the bad mortgages.

US banks have written down $450 billion in bad housing loans. The revelation from NAB means that they will now certainly need to take provisions to $1,000 billion. But write-downs of $1,300 billion and perhaps even more are on the cards.

Where will the equity come from to cover these bad loans? The world has never attempted a rescue effort of this size and it will make liquidity in the globe very tight. That’s why corporates will be hit. All Australian companies that need equity should raise it now.

[hedgstrat]

Meredith Whitney remains the only analyst who actually seems to understand the mess in our financials:

http://video.msn.com/dw.aspx?mkt=en-us&from=truveo&vid=18ff6aff-4ab2-43bb-a028-c7a9b6b06029

[HenryTo]

Debt ratings of Morgan Stanley, Merrill, and Lehman cut by S&P on the probability of more write-downs:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aboab0yH.acg&refer=home

[HenryTo]

Meredith Whitney saying the credit crisis isn't over - and that it is now spilling over to the consumer. Also believes that a heavier regulatory hand will dry up access to revolving (credit card) consumer credit:

http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vKMrzqdJgUD8.asf&vCat=/av

[mtvk]

Better video link from msn moneycentral news:

http://video.msn.com/video.aspx?mkt=en-US&brand=money&vid=7150e45e-accd-44a0-951d-bc1dbd391db6

[mtvk]

hedgstrat, Thanks for the link.

Wow, She doesn't seem to be the normal hype analyst.

[hedgstrat]

why not listen to someone (Meredith Whitney) who has been right all along?

[/url]http://www.cnbc.com/id/15840232?video=698017587

[HenryTo]

Given the lingering solvency issues - as well as the more stringent regulatory environment going forward - there is no doubt that banks would need to continue to raise more capital going forward, even if they have to be done in the open market:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20080327.GIF