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Goldman Believes Two-Thirds Of Financial Losses Realized, Completely Ignores Derivatives And FAS 166/167
"Bad loans = big losses" Golaman's most recent quantification of bank losses begins objectively enough, yet promptly devolves into yet another cheer fest for the financial system. GS promptly rehashes its estimate of "only" $2.1-2.6 trillion in bank losses, slighty adjusting the composition of loans it believes will go bad, while completely ignoring the onboarding of off-balance sheet liabilities (FAS 166-167) as well as any and all potential losses in the derivative realm, where Goldman itself is on the hook for tens of trillions in gross notional. The only thing missing from this fluff piece is a Conviction Buy rating on Goldman itself (but the Conviction Buy on toxic credit card and real estate debt laden BAC, JPM and COF is certainly present).
The highlights from the report:
We are entering the final third of loss recognition with $1.6 tn of losses realized to date. Key points:
(1) Stable estimate, changing composition: We have estimated $2.1-$2.6 tn of total losses from US credit since March of 2009. We still believe this is the right range but update the composition with more for prime mortgage and commercial real estate and less for consumer and C&I.
(2) Two-thirds through recognition: $1.6 tn of losses have been recognized, putting us about 2/3 through the cycle. Bank NPA and reserve levels are also about 2/3 of the way to the peak in prior regional home price depressions, which have exhibited similar cumulative loss rates.
(3) Remember the cause- bad lending: The core cause of the crisis – bad lending, particularly in real estate. 98% of losses can be traced to bad loans in general, and 70% of losses can be traced back to bad real estate loans. Regulators will likely re-focus on this. Consider that almost every bank that has failed cycle to date has either been overweight Option ARMs or construction loans.
(4) Prime problems: Prime mortgage credit trends continue to disappoint while commercial
real estate will be increasingly evident as well. Conversely, consumer and C&I losses seem likely to come in below our original expectations given recent improvement in the data and outlook.
(5) Q: Was the stress test enough? A: Yes: With unemployment at 10.2% vs. a 10.3% stress test peak, it is reasonable to ask if the stress test was enough. 2009 loan losses, trading results, and pre-provision earnings have all tracked better than the stress test forecast. Moreover, banks raised $10 bn more capital than the stress test required.
Continue to favor consumer credit.
A lower consumer cumulative loss outlook simply formalizes what we have been saying for some time – rate of change of unemployment matters more than the level. If unemployment flattens out at a high level, consumer credit will improve. Thus we remain positive on big banks and credit card stocks with JPMorgan Chase, Bank of America and Capital One rated CL-Buy.
If the last sentence is not enough to force you to projectile vomit all over your monitor, here are some of the pretty charts that accompany what is in the narrowest definition of the term, a fluff piece, which as we pointed out completely ignores any discussion on critical derivative reform (shhh, keep quiet - any problems will just go away... and those trillions in IR swaps GS is on the hook for will behave very nicely once (when, not if) the US can not sell its tens of billions in 0% yielding bonds at any one given time in the near or more distant future).
Estimates of total expected losses and current losses versus prior cycles:
Cumulative estimates by loan category:
Recognized losses to date and future estimates:
Here are the main culprits:
Any mention of derivative is strictly verboten. So the underlying has caused trillions of losses yet derivatives thereto are all hunky-dory? Tell that to Barney Frank. Instead, here is what GS does tell: "Despite the current attention being paid to derivatives and other trading activities, such activities accounted for less than 2% of total losses to date. 98% of losses to date began with loan decisions and consequently, we believe that regulators will likely re-focus on the topic of lending standards." We, on the other hand, believe Goldman is very wrong.
And somehow Goldman wants us to believe lending standards are sound... With the FHA giving virtually no money down loans to any semi-self aware bundle of protoplasm that can sign above the dotted line, we would have to feverishly agree.
And here is why banks have been selling every last MBS exposure on their books to the Federal Reserve. Ever wonder why that dollar in your pocket has lost so much value since Goldman started planning its bonus parties? Wonder no more.
If in need of more emetic content, full report attached.
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Gaaawwwd. Don't think I can make it through the full report.
...assuming that government becoming landlord to millions will mop up further subprime woes?!?
...thanks for letting us know the fuse is still burning, GS.
"Despite the current attention being paid to derivatives and other trading activities, such activities accounted for less than 2% of total losses to date. 98% of losses to date began with loan decisions...
(and none of those bad decisions were OURS of course).
To be fair, Goldman is at a disadvantage here conceptually because thanks to Geithner and Bernanke, they don't "do" derivatives losses... thank you AIG. So, in their moral hazard intoxicated world, derivatives don't in fact matter.
2/3rds realized? Bwhahahahahahahahaha. Oh my good christ, if I knew the Vampire Squid wasn't so deliberately full of shit I'd be sprinting to 85 broad to take a hit or ten.
If unemployment flattens out at a high level, consumer credit will improve. Thus we remain positive on big banks and credit card stocks with JPMorgan Chase, Bank of America and Capital One rated CL-Buy.
Firstly, TD, I did not vomit as my natural reaction is to laugh and guffaw at great comedy.
flattening of unemployment and consumer credit improving is not likely at all....all those unemployed people will increase rates of default as the timeline goes on longer as the unemployment check does not cover expenses and many will lose unemployment benefits, or have already. naturallly, if they have savings, they will continue to deplete those resources.
this is truly a funny one GS.....if you said that credit would remain static, it would have taken the punch line out of the joke and might have been just a bit more believeable. but improving?
enjoy the comedy show folks.
as to fasb 166, 167, that's a pretty convenient "ignore" on GS' part. I would still throw in 157 in terms of how long will we continue to play hide the sausage up our collective asses?
still waiting for the FDIC decision (yes, i know it will be decided by bernanke, summers and waterboy geithner) on how to handle the necessary (in a sane world where 2 plus 2 still equals 4) capital additions that are going to be required to handle the Grand Cayman incoming tsunami. how about an over/under on how many years the FDIC stretches out the capital? I'll say at least 5 yrs. And, if they try to do the 3 yr thing to appease the insane groups out there who actually believe it is a good idea for banks to have capital cushions, there will be a little piece in there that the 3 yr can be extended depending on circumstances.
Silly, it's unemployment flattening out at such a high level, that gives the economy and credit it's real boost.
And notice they say only if (and when) it flattens at such a high level will there be such an effect. So if it declines and flattens at a lower level, we're outa luck
Such a fine line between comedy and tragedy
and clever and stupid
Man, a direct shootout between TD and GS would be so interesting. I pray for that to happen someday.
I posted on my blog on November 26 a chart of FAS (Direxion Daily Financial Bull 3X Shares). The chart was a daily chart to 11-11-09. FAS was trading at about $80 I recommended it short. Its at around $71.50 right now. I'm quite bearish on the financial index so I guess its me versus GS.......lets see who wins out...:-)
http://jacobin777.wordpress.com/
"Remember the cause- bad lending: The core cause of the crisis – bad lending, particularly in real estate. " (Talking point #3)
They seem to leave out the part where the bad lending was encouraged and abetted by the Fed, the bad practices part of an ongoing rating agency and Wall Street criminal enterprise, and the "risk" off-loaded in CDS's to anyone who loved the game.
Just as the market faces some negative news and threatens to drop, GS rushes out and conviction buy lists the big banks and US Steel. I'd be surprised if this market rolls over.
That's interesting. I just posted a piece stating the exact same thing, from a bit more of an objective perspective though. For instance, subprime loss rates are already past the 38% mark as of last month, and that is GS's worse case scenario.
We both agree that this is an underwriting crisis, hence loans will go bad. Then they go in to say that it will be primarily real estate loans. Why is that? Real estate loans had depreciating collateral, but so did auto loans, and how about those uncollateralized loans (ex. credit cards, et. al.). The logic is nonsensical. If unemployment flatlining allows a stabilization of credit deterioration, then why doesn't this apply to real estate loans as opposed to all other loan categories. The answer is that it doens't apply at all. High unemployment leads to a daisy chain effect of deteriorating credit throughout multiple loan classes.
Are we to believe that creeping unemployment from 4% to 5% is worse than static unemployment at 11%???
See http://boombustblog.com/200911291224/The-Truth-The-Truth-Banker-s-Can-t-Handle-the-Truth.html
As for those banks (PNC, WFC, et. al.) they have yet to recognize the losses from the beginning of the year, despite the fact that the loss rates have accelerated into the 4th quarter. This is from May of 2009 (notice that the numbers are materially worse for October):
one wonders about the bonus of the "fluffer"
one wonders about the bonus of the "fluffer"
I often wonder if we are closer to the end of this crisis than the beginning. My sense, mostly uninformed, is that we are in the eye of the storm and the relative calm is an illusion. I discount Goldman research because experience tells me that almost everything they release for public consumption turns out to be wrong.
its killing time
Fix your broken record and your watch.
This is why I like Zero Hedge and why it's a privilege to be able to contribute here. Good thinking!
I think Citi and Wells will be the first to go, like WTC Tower #1. Then BAC, JPM, and MS go like Tower #2, with GS trying to "ride it down"... to no avail. Then we have cannibalism.
Whatever FAS rules that come up will be suspended, so we can keep living in our little dream world.
I believe the optimal solution (certainly over a "transaction tax" would be to require investment banks to set aside capital in the form of maintenance margins for the derivatives they create. This would simultaneously limit the growth of the derivatives, the institutions, compensation, etc. while limiting systemic risk.
A 2% margin requirement on say $684 trillion outstanding OTC contracts (as of June 2008) would be $342,000,000,000 or roughly 21 times JPM's current market cap. I know there is bilateral netting, but the numbers are ginormous and it would take JPM years of actually retaining profits just to build the required capital to put them in the ballpark.