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It's HELOC Deja Vu,All Over Again
A little more than a year and a half ago, I penned "A little more on HELOCs, 2nd lien loans and rose colored glasses",:
I
syndicate my work across various sites on the web and occasionally go
through the comments to see what people think. I get viewers of all
types, from first time investors and the curious to multi-billion
dollar portfolio managers and directors of analytical departments of
the bulge brackets. It is the guy in the middle, the arm chair investor
that seems to throw some of the wierdest comments, though. One of which
was, "banks are more complicated than HELOC exposure and LTVs and it
will take more than that to determine a bank short". Well, that comment
is partially true. Today's banks are much more complex than LTVs and
2nd liens, but when these risky products on the downturn are multiples
of your tangible capital, it really doesn't take more than that to
start causing some severe solvency issues. You can have a trillion
dollars in assets, but if you have $20 billion in equity with $100
billion in investments that will take a 50% loss, you are underwater by
$30 billion. You can talk about these banks using terms such as
"complicated", "complex", "fancy" and all of the other high falutin'
adjectives that you can think of, but at the end of the day, if you
lose more than you are worth you are insolvent. Now, that's a simple concept
and it works quite well for my investment pursuits. This is coming from
a guy who use to design offshore, option embedded structured products
to fund illiquid private sector liabilities for things such retiree
health care risks. Having some experience in the structured product
arena, being an entrepreneur, and simply having to balance the family
budget, I have come to learn - without a doubt - that complicated
usually means less valuable. Either that, or it means an opportunity to
charge the client more through lack of transparency in the pricing and
profit structure.Following the geographic default graph for
HELOCs reproduced from the last posting, you see the two states that
have been in the news the most lately have big spikes in my pretty
little graph.
Now, if we drill down into those two big stalks we see above and
observe who has the most concentrated exposure there, we see the
following...
This
article is like deja vu, all over again. First, there is the 2nd lien
portfolio that JPM purchased from WaMu, which will be akin to a blood
bath - see Reggie Middleton on JP Morgan's "Blowout" Q4-09 Results, Then there are the events of today.
I think I was rather accurate in assuming that these loans will take
significant chunks out of the companies that own them, even when
purchased at 25% discounts.
See Bloomberg: Treasury's Delay Cutting Home-Equity Debt Threatens U.S. Housing Recovery
an.
19 (Bloomberg) -- The U.S. Treasury Department has failed to win
agreements to get struggling borrowers’ home- equity debt reworked,
among the biggest roadblocks to reducing foreclosures that may reach a record 3 million this year.None
of the lenders holding a combined $1.05 trillion in the debt has signed
contracts requiring participation in the second-mortgage modification
plan announced eight months ago. The largest banks remain “committed”
to joining, Meg Reilly, a department spokeswoman, said in an e-mail.President Barack Obama
in February announced a $75 billion program to cut first-mortgage
payments. The Treasury detailed a plan on April 28 in which
second-mortgage owners modify or retire debt when the first lien is
changed, saying it would be running in a month. The near-record level
of home-equity debt held by lenders including Bank of America Corp. and
Wells Fargo & Co. may lead to foreclosures that threaten housing
stability after the worst slump since the 1930s.“The issue of the second liens has to be escalated,” said Richard Neiman,
New York’s banking superintendent and a member the Troubled Asset
Relief Program’s Congressional oversight panel. The government should
consider forcing banks to participate and to recognize the “true value”
of second liens, he said.Bank of America, Wells Fargo,
JPMorgan Chase & Co. and Citigroup Inc. carry such mortgages at
about $150 billion more than their value, according to estimates by Joshua Rosner, an analyst at Graham Fisher & Co. in New York.Equity
lines and other second mortgages rank junior to typical mortgages,
meaning they get wiped out in a foreclosure unless sale proceeds from a
seized home exceed the first debt.
Government policy is just wonderful. They are telling banks:
1. Increase your equity capital base ratios
2. Make more loans - you are not lending enough
3. Pay $90 billion in more taxes
None of those are contradictory are they??
Except 1 and 2 (increase your capital ratios by shrinking the loan portfolio).
And maybe 2 and 3 (more taxes = less capital = less lending).
And I guess 1 and 3 (taxes deplete equity capital)
But regardless, let's fully embrace government and its amazing wisdom and effectiveness. So while the bank pursues one of the three objectives, we crucify them for not pursuing the other two. A perfect system for non-stop criticism. Perfectly delicious.
"unless there's a run on the banks"
I've already started my run - converting to greenback cash in safe places.
Excellent, Reggie.
JPM and BAC both shot up with a dirty needle loaded with toxic Hep C junk. I had always assumed that JPM bought the retail of WaMu without a load of junk seconds. How stupid of me to assume they weren't really that stupid afterall. At any rate the WaMu bondholders got hosed in another weekend banker bloodbath.....included me....sigh.
more proof that the banks will just zombie their way along the timeline.
nice update on HELOCs Reggie and thank you once again.
Keep in mind these important numbers from before the begining of The Great Prestidigiflation:
March 2006
"Meet the typical American family. It has about $3,800 in the bank. No one has a retirement account, and the neighbors who do only have about $35,000 in theirs. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but can't manage to pay off a $2,200 credit card balance."
"That is the portrait of the median American household as painted by the Federal Reserve Board's Survey of Consumer Finances. The survey, which does not distinguish between sizes of families, nevertheless offers the most detailed look available of the balance sheet of U.S. households."
The typical American Family is worse off, now, with higher prices on most expenses. I find myself wanting to short all companies where earnings are primarily derived from discretionary spending by the American consumer. Then I remember that fundamental and technical analysis are things of the past, and I thank God I don't need to trade to feed my family.
thanks for the dose of sanity, Mr. Middleton
The financials are the one sector giving me a splitting headache! How can these guys have stock going up when I can hear their "Giant sucking sound"? These banks are playing god, but (question) when do they get taken off of their "sacred" pyramid and brought down to us, so we can cut their bloody heads off! It all seems without value to me, Reg. 'Merica on discount, 90% off!! Why not the stupid banks?
If you were to bet $100.00 even, on the Jets to win by a field goal, and you lost, you'd be out $100.00.
If Lord Blankfein, John Mack, Jamie Dimon, and the newbie bet $100.00 on the Jets and they lose, Ben and Tim will open up their checking account and tap-tap-tap, reimburse them their hundred dollars and pay them a dividend. And they will do that for every other NATF (Not allowed to Fail)
banker that has purchased the disUnited States from Bush and Obama in exchange for some MBSs for homes in Florida, Southern Californica, Las Vegas, and Utah.
Even worse: Lloyd, John and Jamie bet about $10,000 (in money they borrowed from the newbie's --and a lot of other people's--- mutual fund accts, etc). They lose the bet, Ben and Timmay make good on the 10K loss, interest and all of the derivative bets associated. Total reimbursement, about 25K. In the future the newbie can't make any bets because the bookie has confiscated his existing account.
Good info, but bad charts, the 3d perspective distorts how the data is viewed by the user. The first suffers from it more due to the lack of lines at the percentage points.
But that way he gets to draw better attention to the annoying Middleton "branding" in 36 pitch font.
I think most sophisticated investors realize that C, JPM, WFC's loan losses will exceed their current capital base.
But current FED's policies (dollar devaluation, zero interest rates, suspending mark to market, etc.) might let the banks report enough "income" to offset those losses. Plus, they don't seem to have any problem selling additional stock.
As long as there is no run on deposits, the Bernanke put and "extend and pretend" may yet save their worthless asses.