Bank of America Provisions $1 Billion For Reps & Warranties Liability In Q1 As Claims Jump By $2.9 Billion, Pays Monoline AGO $1.1 Billion To...Submitted by Tyler Durden on 04/15/2011 - 07:57
Bank of America continues crawling along the razor's edge, with the biggest threat to its continued business model: ongoing legacy CFC fraud being largely unprovisioned for. In the just released earnings presentation, we learn that the bank provisioned only $1 billion for its ongoing Reps and Warranties liability, after charging off a minuscule $238 million - the lowest in over a year, bringing its total liability accrual to $6.2 billion. Yet over the same period total outstanding claims by counterparty surged by nearly 30%, from $10.7 billion to $13.6 billion, primarily due to GSEs, although the steady putback rise in monoline GSE claims is relentless (and appears to have gotten to the bank considering the just announced Assured Guaranty settlement, see below). Total outstanding claims at the end of Q1 totalled $13.6 billion. Also someone please explain to us how Merrill Lynch (see footnote
2) is one of the parties responsible for filing new claims against its
parent and rescuer Bank of America. As for a real world example of just what the real cost of these
liabilities is in a full discharge scenario, we have the just announce
settlement with Assured Guaranty which cost the company $1.1 billion to
settle loss-sharing reinsurance arrangement on 21 first
lien RMBS transactions totalling $4.8 billion net par. In other
words the settlements that are about to be announce with MBIA and other
monolines could possibly be in the double digits, crushing BAC's earnings in whatever quarter they are announced.
Gold and silver have reached new all time and 31 year record highs in trading in London this morning. Silver is particularly strong and the euro particularly week on sovereign debt contagion concerns. Inflation and sovereign debt fears are leading to continued safe haven demand. It is import as ever to note that the record highs are nominal highs and inflation adjusted gold and silver remain a long way from their respective highs of $2,400/oz and $140/oz in 1980. These inflation adjusted highs remain viable long term price targets. $1,500/oz and $50/oz remain short term targets. Resistance levels have been breached and thus these psychological price points will likely now be tested. Trading and timing markets remains high risk but astute hedge funds and other traders will continue to “make the trend their friend’. The negative treatment of gold and silver is in marked contrast to the treatment of more high risk individual equities and equities in general. Bearish sentiment abounds and we have seen a lot of profit taking this week. These are tell signs and contrarian signals that gold and silver are far from the bubbles that some have been claiming for some time.
Following China's blistering CPI which came as leaked at 5.4%, today we get our own number which is known by only very select traders on Wall Street. We will also get the Empire Index, TIC treasury flow data, Industrial production and capacity utilization, UMichigan consumer sentiment, a couple of Fed speeches and of course, POMO.
Bank of America EPS Misses Consensus Of $0.26, Comes At $0.17, Despite Credit Loss Provisions Plunging 72%Submitted by Tyler Durden on 04/15/2011 - 07:12
Just as JP Morgan, Bank of America takes accounting manipulation to the next degree and lowers its credit loss provision to $3.8 billion, down $6.0 billion from a year earlier, and $2.3 billion from Q4, even though the actual amount of charge offs sequentially barely declined from $6.7 billion to $6.0 billion. "The provision for credit losses was $3.8 billion, which was $6.0 billion lower than the same period a year earlier. The provision was lower than net charge-offs, resulting in a $2.2 billion reduction in the allowance for loan and lease losses, including the reserve for unfunded commitments, in the first quarter of 2011 (net of reserve additions of $1.6 billion related to consumer-purchased credit-impaired portfolios as noted below). This compares with a $1.0 billion reduction in the first quarter of 2010." Even so, the company still was unable to goal seek its EPS consensus of $0.26, coming in at $0.17. Without this accounting gimmick, BAC would have had a sizable loss in Q1.
RANsquawk European Morning Breaking News - Stocks, Bonds, FX -- 15/04/11
Nobody could have seen this one coming: "Mounting downside risks to current exceptionally high crude oil prices are leading us to recommend an underweight allocation to commodities on a 3 to 6-month horizon, but we maintain an overweight on a 12-month horizon on tightening fundamentals over the next year....Not only are there now nascent signs of demand destruction in the United States, but also elections in Nigeria, a potential ceasefire in Libya and record market length on contagion fears. Further, softening near-term base metals balances suggest that a stock-out in copper inventories and associated price spikes has now been deferred beyond 2011, and recent gold price strength has pushed us close to our near-term price targets. As a result, we now recommend an underweight allocation to commodities on a 3 to 6-month horizon." Translation: please line up and convert your hard assets for dilutable fiat courtesy of the good folks doing god's work.
Phil Angelides Discusses America's Dual Justice System: One For Wall Street And One For Everyone ElseSubmitted by Tyler Durden on 04/14/2011 - 21:56
Lisa Murhpy of Bloomberg interviewed the chairman of the now defunct FCIC, Phil Angelides to discuss the findings presented yesterday by Carl Levin. The topic was the "greased pig" that is Wall Street. The conclusion is that America now has a dual justice system: "One for ordinary people and then one for people with money and enormous wealth and power." As for crime deterrents, considering that to this day not one person has gone to prison, even an idiot can foresee what Angelides has to say on this issue: "To the extent laws were broken, we need deterrents. If someone robs a
7-11, they took $500 and they were able to settle the next day for $50
and no admission of wrongdoing, they'd knock over that 7-11 again. And
we've seen time after time where people and firms have made tens, one
hundreds, billions of dollars. They've settled charges for pennies on
the dollar. At Citigroup for example they represented that they had $13
billion of subprime mortgage exposure when they really had $55 billion.
The penalty to the chief financial officer who made $19 million that
year, 2007, was $100,000. Goldman was fined $500 million but the date
they settled their stock moved up $2 billion. There's been no real
consequence." Too bad there is no acknowledgment that it is people like Angelides who through their corrupt behavior over the years allowed Wall Street to singlehandedly usurp the democratic process and replace it with that of a fascist corporatocracy. But that's irrelevant: at some point, sooner or later, the American peasantry will snap. Maybe not tomorrow, maybe not the day after the Apple borg hypnosis ends, and the fascination with American Idol expires, but at some point thereafter, absolutely. And the primary reason will be the glaring trampling of the tenets contained in both the Declaration of Independence and Constitution, by the kleptocratic "superclass." Then what happens when the billions of ones and zeros held in some bank vault and imparting some ephemeral monetary greatness to these people, finally is exposed for the sham it is, and they have nothing to protect them from the hordes of hungry, angry and very well armed? We can only hope they will be able to bribe their way to the top in that world order as well as they can in the current one. Somehow we doubt it.
For those confused why gold just hit a new all time high of $1,480, it may have something to with this. In the week ended April 13, the Fed's balance sheet hit a new all time record of $2.65 trillion, primarily due to an increase of $15 billion in Treasury holdings by the Fed (chart 1). Not surprising to those who have read our previous post on the matter, prepayments to the Fed have all but dried out, and for the third time in a row there were no MBS prepayments, which at $937.2 billion have declined by just $12 billion since the beginning of March: so much for magnetization demand arising from QE Lite (chart 2). Excess reserves continue to surge increasing by $29 billion in the last week. The increase at this point is more than just one accounting for the $195 billion SFP program unwind (which finished last month): should the economy really improve and banks start lending, all hell may well break loose. At this point the surge in excess reserves (liabilities) is rapidly overtaking the increase in Fed assets since the beginning of QE2 (chart 4). "Other Fed Assets" hit a fresh new ridiculous total: $125 billion, an increase of $2.5 billion over the prior week (chart 5). If this number is indeed a form of capitalized POMO commission to the PDs, then America likely has a right to know. Lastly for those still curious, the Fed's asset maturing within 1 year are $143 billion (chart 6). Putting this all together, presents the following picture: in a period during which the Fed's assets increased by $203 billion, GDP increased by about 1.5%, once all revisions are in the books. QE2 ends when Q2 ends. And so far, the economic in this quarter is without doubt starting to turn down. What will happen when there is no incremental monetization once Q3 kicks off, and GDP is about to go negative?
Reuters surveyed 32 major oil traders, bank analysts and hedge fund managers in the first week of April, launching the poll after Brent oil gained $8 in five days to surpass $120 per barrel. Two-thirds of those surveyed expect the current rally to fizzle out fairly soon but think oil will roar back above $130 per barrel in the second half of the year. One in five expect oil to hit $150 per barrel by the end of the year. We all like to gripe about greedy traders pushing up the price of oil. But at present, the most important oil-producing region in the world is grappling with fundamental changes, the results of which are almost impossible to predict. Uncertainty makes commodities more expensive. And for at least the rest of the year, uncertainty is the most reliable aspect of oil.
At a stroke, Obama offered to tax the rich, cut the military budget and yet never accept a cut that would “compromise our ability to defend our homeland or America’s interests around the world”, protect the middle class, promote economic growth, reduce health care costs by not reducing health care (in fact, he proposed to make Medicare and Medicaid far stronger by saving $500 billion - hell, why not save $1 trillion and make them impervious to pain altogether?), strengthen Social Security without slashing benefits for future generations, find the Fountain of Youth, ride a unicorn across the White House Lawn and explain the final episode of Lost. He laid out a bunch of plans and strategies to achieve all these aims, paused for effect at ALL the right times and conveyed the necessary gravitas. In style terms it was a very good speech. Joe Biden certainly thought so.
Contextually , credit and vol were much clearer about their directional view today (deteriorating) than stocks (mixed) . Financials saw modest vol compression but the rest saw vol increase on average at the sector level. Tech, Energy, and Media were the worst (risk-adjusted) performers in credit while Financials and Media were worst on average in stock land (risk-adjusted). Interestingly equity outperformed credit (divergently - as in equity rose and credit widened on average) in Basic Materials, Consumer Noncyclicals, Energy, Healthcare, Tech, Telecoms, and Utilities and the fact that Utes and noncyclicals were the best risk-adjusted performers in stock land suggest less rotation out of stocks and more rotation across sectors today.
Citi Issues USD Warning: "Significant Downside Risk For USD And JPY If Market Begins To Price In Unsustainable Debt Risk"Submitted by Tyler Durden on 04/14/2011 - 17:49
As anyone who has been following the VIX, US CDS (which is quite interesting as the US catastrophe trade appears to have become selling CDS to fund gold purchases in euros: more on that eventually), or stock markets in general has grown to appreciate all too well, no matter the amount of perceived risks, the market continues to shrug off any bad news: after all, the Bernanke put means that the greater the systemic shock, the higher the likelihood that the Fed will get involved yet again and push up all risk assets. However, the same can not be said about the dollar. The currency which in 2011 has traded like anything but the world's reserve currency is less than 1 point away from 2009 lows. But that could be just the beginning. Citi's head of FX has released a not warning about the potential coming avalanche to the greenback should debt ceiling negotiations hit a snag: "what we are looking at here is very much the tail risk event that the debt ceiling negotiations unexpectedly hit an impasse. The question is what the impact would be on USD." Englander's summary observations: 1) The USD will be in big trouble if investors get the sense that the debt ceiling negotiations have gone beyond the expected choreography into a zone where there is perceived risk to US credit; 2) More broadly, we think FX markets are increasing the attention they pay to fiscal sustainability relative to monetary policy; 3) The FX response may be non-linear so G10 countries may have a false sense of security in seeing little FX response to deterioration so far. Then again, perhaps a major step down in the dollar is precisely what the Fed wants...
Now that it is proven that even Goldman commodity downgrades have a half life of 2 days, here come the exchanges. In a move that would surprise exactly nobody, the CME announce at close of trading that it is hiking the initial and maintenance margins for Crude, WTI and Brent Tiers 1-6 anywhere from 6% to 15%. Curiously, the CME is concurrently lowering margins on a variety of natgas, gasoil and crack futures contracts. Still, the move begs the question: why did the CME not hike margins when WTI and Brent were trading about 4% higher is unclear. What is clear is that the ongoing attempt to kill the "speculators" who are solely responsible for the surge in crude prices (and not the Fed, never the Fed) will continue. As we have been saying, prepare for more deflationary downgrades of all asset classes by Goldman, especially if this latest margin hike has the same effect it has had over the past several months: none.
In 2020 the CBO estimates net interest payments of $778 billion. They estimate the deficit to be $685 billion. Our whole deficit will be a result of the interest on accumulated debt. That seems crazy. Net Interest paid is $202 billion in 2010 and $778 billion in 2020. Sadly that is a growth rate I can believe. We have gone past the point of the deficit doesn’t matter thinking. Ignoring the impact of growing debt service is short sighted, irresponsible, and downright dangerous. The cumulative debt is a problem, and debt service will be the single biggest budget line item. That cannot be fair to future generations. We need to attack the deficit become the cost of carrying prior deficits is too high, and the in meantime we have to manage our exposure to interest rates and hedge as much as possible and future possible shocks until the problem is under control.