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If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 5 - PNC Bank
This is the fifth in my series on what lies off balance sheet of your
local big bank. Since the media doesn't seem to focus on these risks,
and I have yet to see anything substantial from the sell side, I guess
its left up to me to spread the word. The precursors to this are:
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
- And the next AIG is... (Public Edition)
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo
Enter PNC Financial, the "off the books" edition!!!
Unconsolidated VIE (Variable interest entities) exposure
PNC's exposure to unconsolidated VIE's primarily consists of liquidity
commitments of $6.3 billion and other credit enhancements of $.6
billion to Market Street, a multi-seller asset-backed commercial paper
conduit. Other unconsolidated VIE exposure includes partnership
interests in some low income housing projects and CDOs. Based on
maximum exposure and the expected loss rate under each of these
arrangements, we expect the loss from unconsolidated VIEs at $989
million (6.9% of the tangible equity).
Market Street's activities primarily involve purchasing assets or
making loans secured by interests in pools of receivables from US
corporations that desire access to the commercial paper market. Market
Street funds the purchases of assets or loans by issuing commercial
paper.
PNC loan sale and securitization activity
PNC sells commercial mortgage loans to FNMA and FHLMC. Under the
sale agreements, PNC assumes up to one-third of the risk of loss on
unpaid principal balances. As of June 30, 2009, the unpaid principal
balance outstanding of loans sold as a participant in these programs
was $19.8 billion and PNC's potential exposure to loss was $5.9
billion. Based on the cumulative losses rate for commercial mortgage
loans in 2009 and 2010, we have arrived at expected loss of $512
million under the base case assumptions. The Bank already has created
$108 million of reserves under loan losses for these agreements. Thus,
the expected additional loss to be borne by PNC is $404 million (2.8%
of the tangible equity).
As of June 30, 2009, outstanding principal balances of loans
transferred to the securitization QSPEs was $2.8 billion and the
related liabilities were $2.2 billion. The loans are sold to the QSPE
on a non recourse basis, subject to representations and warranties made
at the time of sale. The retained interest in the securitization
entities include seller's interest, interest only strips and retained
asset backed securities.
To value the retained interests, the Bank makes assumptions
regarding expected credit losses. For valuing the interest only strips
from credit card securitization, the expected annual credit losses were
assumed at 6.77% (really wishful thinking!!!)
while we expect the annualized credit charge offs rate for 2009 and
2010 at 14.0% and 11.6%, respectively. Since the bank loss rates are
significantly lower than our expectations (not to mention significantly
lower than the industry trend, which is probably below that deserved by
the National City Acquisition), we expect additional loss of $39
million from fair valuation of the retained interest in credit card
securitization. Similarly fair valuation of retained interest in auto
loan securitization will result in loss of $0.4 million. Together, the
fair valuation of the retained interests in credit card and auto loan
securitization will result in loss of $39 million (0.3% of tangible
equity).
Per share impact of VIE and QSPE losses
Under the base case scenario we expect losses from unconsolidated
VIE's and QSPE at $1,433 million or $3.1 per share. This is gross of
the valuation in our latest PNC Subscriber Forensic Analysis below.
PNC stress test write up - public lite
The Fed will keep paying the band as long as it has to. If the music stops, the party is over. Problem is, the party is already over; they left over a year ago. Will the band keep playing even without a party? If so, how long?
there are people visiting this site that know what's going on inside these banks down to the contract language ...
this may be something to think about...
mom and pop put their money in the bank for 2%, not knowing what the bank is going to do with that money, nor do they ask. The bank lends that money to Trump to build another casino in a saturated market at the end of a bull market. Trump gets 20% short-term return, and he's deeper into the bank. How long before mom and pop's earnings are worthless, and Trump gets another bailout?
Natural selection is going to penalize mom and pop, and raise Trump, right up until mom and pop take their money out of that bank.
The run began a long time ago and is approaching a second tipping point; the banks can't get private block financing, and a mass of individuals are moving their money, ahead of a demonstration, in the face of increased structural, seasonal, and oil butterfly / currency costs, which presents the market need.
People need a utility to help them rationally move their finances to more appropriate facilities, that will work for them, or this is going to get ugly. They also need a transfer rate feedback loop, and that information would be quite useful in any number of ways.
Chicago is the place to be to move product, and build a client base with informal influencers in both large and small organizations, from across the country.
What is the threat; What should a bank financial statement look like, what do they look like, and how does the product make discovery simple; and who can they call to help them out?
something to think about ...
I ve got a question.
"Wells’ profit of $3.2 billion, or 56 cents a share, beat expectations, but Bove noted that the bank earned a stunning $3.6 billion from a hedging strategy related to its mortgage-servicing rights -- a gain that may be difficult or impossible to repeat."
who was on the other side of hedge, any leaking info?
Odds are good the hedges are swaps/derivatives with varying Street counterparties. Also, it is critical to net out the positive impact from the hedge gain against the market value loss in the MSR. I pulled the below comment from the horse's mouth, so to speak; Wells Fargo Q3 PDF earnings release:
“$1.5 billion combined market-related valuation changes to mortgage servicing rights (MSRs) and economic hedges (consisting of a $2.1 billion decrease in the fair value of the MSRs more than offset by a $3.6 billion economic hedge gain in the quarter), largely due to hedge-carry income reflecting the current low short-term interest rate environment, which is expected to continue into the fourth quarter; MSRs as a percentage of loans serviced for others reduced to 0.83 percent; average servicing portfolio note rate was only 5.72 percent. “
Probably the Fed...
Why are you guys hating on Reggie...lots of good guys like Peter Schiff saw crash coming and got hosed financially....and bears that saw a bear market coming were right and will be right, if they didn't know the timing of the bear market rally, I'm not going to hate him. I love Mike Morgan also, he has ripped GSacs but he has got hurt shorting things in this years rally...
If you don't agree with his research, say that.
Not Reggie's fault the govt and the Fed handed trillions to banks to let them cover their do-do and f-up a free market.
Interesting post, but PNC can always sell some of their stake in Black Rock if things get too tough.
Interestingly, the SEC fined them back when Enron failed for hiding losses incurred from equipment factoring in an off balance sheet entity. And they told shareholders that they were abandoning that line of business.
From the description of Main Street, sounds like they lied.
How is the portfolio doing Reggie, you were boasting about it all last year issuing challenges to anyone who could match your results. Havent seen any numbers or challenges from you in 2009...how goes it??
Thank you Reggie for your efforts and willingness to share.
I meant to post the following thought for your info (you may be aware, i simply don't know) on the wfc post....I find it very interesting that David "i love the financial sector" Bianco, chief equity strategist at BAC/ML still does not have a rating on WFC...it's still "under review".
If reggie middleton writes an article and nobody reads it.....does it even exist?
+1,000,000
Uncalled for.
Anyway, PNC could make a convenient "big bank sacrifice." PNC or KeyCorp...how about both?
And your resume includes the following widely read articles:
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