Reggie Middleton with Max Keiser on the Keiser Report and RTT Television. The topics in this interview stem from the post Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!
Go to 12:20 in the video to see the portion with Reggie Middleton
On the difference between accounting earnings and economic earnings…
… accountants have not been – and
currently are not, trained in the economic realities of corporate
valuation. They are trained to tabulate business operations data. There
is a marked and distinct difference. That difference is as stark as
night and day for investors, yet despite this stark difference, Wall
Street still reports corporate performance metrics strictly in
accounting terms, and the media (both mainstream and the more
specialized financial media) simply follow suit. Hence we hear much
about easily manipulable and manageable accounting earnings, revenues,
operating margins, earnings per share, etc. These measures are highly
flawed in a variety of ways, with the primary flaw being that they do
not account for the efforts both required and undertaken to achieve
them. Basically, they measure JUST HALF (and coincidentally, the
positive half may I add) of the risk/reward equation that should be at
the root of every investors move. Long story short, they do not account
for, nor do they EVEN RESPECT, the cost of capital. This concept ties
in closely with Chairman Bernanke’s current course of action as well as
the ZIRP discussion later on this missive demonstrates (capital
offered at zero cost causes reckless abandonment of risk management
principles which eventually causes crashes – yes, more crashes).
Acknowledgment of the cost of capital enforces a certain discipline on
both corporate management and investors/traders. Without respect for
such, it is much too easy to create and portray a scenario that is all
too rosy, since we are only looking at rewards but never bother to
glance at the risks taken to achieve said rewards. I reviewed this
concept in detail as it relates to bonuses and compensation on Wall
Street in The Solution to the Goldman (and by Extension, the Securities Industry) Compensation Dilemma.
Net revenues, net profits, and earnings
per share are totally oblivious to what took to generate them. As a
result, anyone who adheres solely to these metrics is probably
oblivious as well to what it takes to generate these measures. It’s
really simple, put more money into the machine to get more money out –
damn the risks taken, or the cost of the monies used. This has been the
bane of Wall Street for well over a decade, is the direct and sole
reason for this current crisis, and is the reason why bonuses based
upon revenue generation alone engender systemic risk. Just sell more,
do more, to get a bigger bonus. It doesn’t matter what you sell or who
you sell it to, as long as it blows up AFTER the bonus is paid. This
short term-ism is now so deeply ingrained within the investor psyche as
to allow companies’ to rampantly destroy economic shareholder value
with the abject blessing of the shareholders, with cheer leading by the
analysts – as long as those accounting earnings per share keep rolling
in higher and higher!
Ignoring the cost of capital inflates
returns by default, because those returns were never costed in the
first place. The problem is, ignoring something does not make it go
away. Capital does have a cost whether you acknowledge it or not, and
if you ignore that cost you may skate for awhile but eventually it will
come back to reassert itself, and often with a vengeance towards the
wayward investor. On that note, here is JPM’s return on average equity –
and here’s JPM’s return on average equity less the cost of said
equity. It’s negative, very, very negative!!!
On Zero Interest Rates (ZIRP) and How It Is Literally Starving JP Morgan
Even as the Fed tries to reduce the cost
of debt capital to damn near zero, bad things are still happening to
those this exercise was meant to save. Why??? Because the responsible
world wants capital to have a cost, for if it does, it enforces
discipline upon those who use it – whether they acknowledge that cost
or not (here’s to you Wall Street).
In regards to JP Morgan and despite zero
interest rate policy (ZIRP), fed funds as a proportion of interest
bearing assets have increased due to lower risk appetite. The
proportion of fed funds to interest bearing assets have increased to
12% as of end September 2010 from 7.7% as of end March 2009 while
proportion of loans have declined to 35.8% from 38.9% in the
corresponding period. Lower interest rates together with a higher
proportion of lower interest bearing assets have taken a toll on banks
spreads and net interest margin.
ZIRP, low demand, plus the slow
investment banking environment is what forced a disgorging of reserves
and provisions by management. In a catch 22, ZIRP is not so slowly
starving the patient it was intended to save. This is analogous to the
use of chemotherapy in treating cancer. The treatment needs to
eradicate the disease in a confined period of time or the patience is
at risk at succumbing to the treatment, itself.
On JP Morgan’s Foreclosure Pipeline: Not
Only Is It Packed Tight, It Is Progressively Getting Much Worse As The
Time To Foreclosure Extends AND the Delinquency Rate Continues to Climb
At The Same Time That Real Economic Housing Sales Value Is At An All
Time Low As Well – and Getting Worse!!!
Future Losses Are Mounting at an Incredible Pace Yet JPM is reducing provisions due to improving credit metrics. See JP
Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder
of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can
Be When They Say XYZ Bank Can Never Go Out of Business!!! and JP
Morgan’s Analysts Agree with BoomBustBlog Research on the State of
JPM (a Year Too Late) but Contradict CEO Jamie Dimon’s Conference Call
Statements
JP Morgan’s average delinquency at foreclosure is 448 days (with
Florida and New York having a record 678 days and 792 days of
delinquency at foreclosure). Average delinquency for the industry is
about 478 days and is increasing consistently since the start of the
crisis. During 2009 the average days from delinquent to foreclosure
process was 223 days while as of August 2010 average days from
delinquent to foreclosure process is 478 days. A very important, yet
often under appreciated fact is that although serious delinquencies are
still climbing, the lengthening of foreclosure process has resulted in
these loans still being classified as delinquent. The difference
between delinquency rates and foreclosure rates has increased to 5.3%
(9.8% delinquency rate vs 4.6% foreclosure rate) in August 2010 from
3.6% in March 2002 (5.1% delinquency rate vs 1.5% foreclosure rate). As
the difference between delinquencies and foreclosure rates normalizes,
and shadow inventory overhang moves to further depress real estate
prices, real estate related write-downs could further balloon. So, you
see, the marginal improvements in credit metrics that JP Morgan’s
management has used to justify the releasing of provisions (which also
just so happened to have padded a weak quarter of accounting earnings)
is really kicking the can of reckoning down the road…
Add to this the difficulty in getting rid of the properties once they
are foreclosed upon and you will find that the big banks such as JP
Morgan (or after looking at these numbers, particularly JPM (although I
suspect BAC and certain others are worse off) will become the nations
largest distressed residential housing REITs!!!
Reggie,
Great interview. Thanks for sharing your work.
JFC
Reggie, what's up man? You seem kinda stiff, my friend. Chill out, (like that 70s Show) we're all alright !
This was great! He didn't let Max misrepresent his arguments, and came off reasoned, and without an ax to grind.
I could listen to Mr. Middleton all day!
Keiser is a buffoon. Reggie, showing up on Keiser is almost as degrading for someone of your intellect as it is degrading to the office of the President for Obama to show up on Jon Stewart.
WFT?
It's not about the players, it's about the play! Keep you eye on the ball.
LMAO
Thx Reggie,
You were nice and comfy there dude!
Great performance and so much better than the last "CNBS press eveything into 1 Min. rush"
LMAO
reggie your my new hero!
"JPmorgan, fraud is their primary business" m.keiser
reggie, i really liked seeing you and love your yellow tie you are a real sharp dresser. i liked watching the soccer game showing on your TV monitor, that is way cool.
max and you looked real good together. stacy has luminous skin.
Very informative Reggie.
I think Max's no Oligarchy room v. Your everybody gets 5 feet is a moot argument under the current conditions.
Counter example: The William K. Black Method:
Prosecute for fraud and the Oligarchy, Dimon Blankfein et al get space...
8x10 next to Bernie Madoff...
No prosecutions -- Oligarchy remains in place.
Circle Jerk of Milking Taxpayer Bailouts: TBTFs all Owe Each Other
There is an argument and I forget where I read it that is in line with your JPM derivatives analysis. The TBTFs all owe each other. So you have to liquidate the TBTFs together as a group. When you net out who owes who, the debts will be wiped out amongst them.
Otherwise, you liquidate a BofA and Lloyd and Jamie get a taxpayer free gift huge bonus. Liquidate all TBTFs and wipe the debt off of the books and the tax payers have minimal bailout $$s.
I am sure glad that I rent. 2015-2018 as bottom? It is noted.
Red crap.
Keiser has good guests on his show, but the guy is a complete imbecile. He rants on and on with the same manic catch-phrases and is a shlocky pseudo-journalist.
Max has a pile of physical gold he has been accumulating outside the US for a number of years...
How imbecilic is that?
Max called derivatives frauds, the Greenspan housing bubble all before they came to MSM and Amerikan public attention...
How imbecilic is that?
Max called MBS frauds, Wall Street fraudulently securitizing the same mortgage over and over again, hence the shredded notes long before it came to the public's attention...
How imbecilic is that?
Max uses the Jon Stewart method of comedy shtick in his shows...
Some people like it, some can not stand it...
Sometimes you need a little showbiz to keep it fun. My guess is that you are an imbecile and Max isn't.
My guess is you live in your mom's basement.
Hey, that's a good one.
Great video, "When Egos Clash"!
Very informative and entertaining.
Reggie: Spellcheck exists. Using it or having a proofreader will help your credibility.
And the administration does its ostrich act:
http://www.huffingtonpost.com/2010/10/27/cop-slams-obama-treasury-foreclosure_n_775054.html
One juicy bit from a panelist grilling the hapless administration witness, after she could not assess the market value of the RMBS for which investors (including the Fed) are seeking putbacks in droves:
"OK, fine. Let me tell you what the Fed says they're worth. The Fed tells us they're worth 50 cents on the dollar. So if the Fed's request to Bank of America is honored, right, Bank of America, assuming they are carrying these bonds, assuming when they buy them back they mark them to market, Bank of America will take a $23 billion loss.
"The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities -- meaning they have not been chosen...because they're particularly bad. They believe they are of a common quality with the rest of Bank of America's underwritten mortgage-backed securities. There are $2 trillion [worth] of Bank of America's underwritten mortgage-backed securities.
"Five such deals -- five such requests, if honored to Bank of America...will amount to more than the current market capitalization of Bank of America, which is $115 billion.
"Now do you wish to retract your statement that there is no systemic risk in this situation? And the word is 'risk' -- not 'certainty' -- but 'risk'? And I would urge you to do so, because these things can be embarrassing later."
...... luv Reggie Middleton ...... he's cool . I just wish I was half as smart as he is.
Max has the Lloyd doll, doesn't anyone know a good voodoo shaman?
You are awesome
agreed, max and stacy too
You look sharp Reggie. Very articulate too.
Ha! Reggie for President?
apropos of nothing, think usa debt is $13t?
try $200t!!!
http://www.theglobeandmail.com/report-on-business/commentary/neil-reynol...
YEAH !!!!!!!!
Nothing is going to happen for the better until entrepreneurship gets a lot bigger....and the government gets a lot smaller....and this in concert with allowing for mark to market for real....
Work it ....RM !!!!!!!!!!
YEAH !!!!!
Get an article of TRUTH posted in the ECONOMIST....and you are off to the races.....
Rock it !!!!!
Max is funny. Thanks Reggie for a great presentation.
I vote for decapitation.
Current valuations based on mark to fantasy accounting.
Reggie you continue to be d bom diggity....well done sir...thanks for speaking the truth and letting the chips fall as they may. Watch your back bro...