For what it's worth, the DAX is almost back to yesterday's "flash" crash lows. I'm not sure what is going on there (Greece, sovereign debt in general, slowing economy) but it is unlikely that yesterday's move was solely related to a fat finger or rumors of a downgrade. The Dax is now down over 20% for the year. I think the weakening economy and horrible stock performance will further impact Germany's willingness to fund bailouts across Europe. Yes, maybe it would help their market, but I suspect the average German is going to be more worried about sending money out the door at a time of weakness, than what is the "right" decision longer term.
Bank Of America Scrambles To Defend Itself From Henry Blodget's Allegations It Is Massively UndercapitalizedSubmitted by Tyler Durden on 08/23/2011 11:35 -0500
Early this morning, Henry Blodget penned a post titled "Here's Why Bank Of America's Stock Is Collapsing Again" in which he used Zero Hedge data among other, to determine that the capital shortfall for the bank is between $100 and $200 billion. It took BAC exactly 6 hours to retort. Below is the full statement.
Bank Of America Continues Firesales To Shore Up Liquidity, Sells Canadian Credit Card Business To TD GroupSubmitted by Tyler Durden on 08/15/2011 06:52 -0500
After it was disclosed that Bank of America's firesale of its China Construction Bank is not going as well as expected, Moynihan's company, which was trounced by the market in the past week, continues to shed assets, this time offloading its $8.6 billion Canadian credit card portfolio to TD Bank for an unknown amount, a deal about which all BAC said was that the "transaction is expected to have a positive impact on the company's Tier 1 common and tangible common equity and the respective ratios." So it may also have a negative impact? That's encouraging. This news follows earlier disclosure that BAC has sold its UK and Ireland credit card business. Unfortunately for BAC shareholders, as long as the CFC bad bank is not nationalized by the Fed (sending its tracking CDS to parity with US default risk) such incremental asset sales will continue. Which also means that as BAC retains the non-performing assets, it is forced to sell its cash-generating trophies. At what point will there be nothing left of BAC but a husk that promises to everyone that going forward its Tier 1 ratio will be over 6% for real this time. And how long until the next Reps and Warranties lawsuit against BAC's mortgage handling practices?
SocGen CEO Dismisses Rumors, Says France Is Not US - He's Right, It's Worse And Bank Run Is Likely In Progress Now!Submitted by Reggie Middleton on 08/11/2011 09:08 -0500
Here is the next installment of the public evidence of a bank run in France. This is literally a carbon copy of Bear Stearns/Lehman Brothers, just on a larger scale. Listen to that sucking sound. It's the illustion of liquidity hitting the hard wall of reality! You heard it hear first.
- Global stocks rebound after Fed move (FT)
- Bernanke’s Interest-Rate Timeframe Draws Most Negative Votes in 18 Years (Bloomberg)
- Pass the Granade: BofA Sells Part of Mortgage Portfolio to Fannie Mae (WSJ)
- France Asserts Plans to Keep Triple-A (WSJ)
- S&P balks at SEC proposal to reveal rating errors (Reuters)
- Senate’s Baucus In Deficit Super Committee Trio (Reuters)
- SNB’s Franc Dilemma May Force Intervention Even After $36 Billion Losses (Bloomberg)
- Kan Moves Step Closer to Resignation After Japan agrees on Budget Funding (Bloomberg)
- Cracks in China Housing Push (WSJ)
- Australian Consumer Confidence Slumps to Lowest Since 2009 on Market Slump (Bloomberg)
- No exposure at all: none. Commerzbank Profit Drops 93% on Greek Debt (Bloomberg)
Sen. John kerry comments that the Chinese "are laughing all the way to the bank" on a downgrading of US Treasury securities. China owns about 8% of the U.S. debt, so does that mean the rest of 92% debtors, including the U.S. taxpayer, would also be "laughing"?
By now some readers may have read ludicrous stories about the Fed coining multi-trillion precious metal coins in a way to loophole the debt ceiling situation. Granted, this plan is so far beyond ridiculous that we have not wasted the time to comment on it. That, however, does not mean that the Fed is powerless to assist the Treasury in a modestly long-term term fix of the debt ceiling fiasco. In fact, as Stone McCarthy's Raymond Stone observes: "The Fed does not want to be a player in this debt ceiling/potential default debate. It didn't want to be a player in the Bear Stearns debacle, or the Lehman situation. But when push comes to shove the Fed will do what it can to avoid a default." In summary there are three avenues that the Fed can pursue in order to help Tim Geithner prolong the cash illusion modestly longer. The three options for Bernanke are to i) book profits; ii) prepay expenses and, yes, iii) sell gold. Combined, these three approaches could squeeze out well over half a trillion dollars, giving the Treasury breathing room not only past August 2, but potentially into 2012! That said, "The Fed would not want to advertise to Congress the possibility of delaying default. It does not want to take Congress off the hook on increasing the debt ceiling." But it will, if it has to, and the end result will be a delay potentially of up to a month. And if it means selling off the Fed's gold, so be it.
A European Bank Run: Step-by-Step. I outline the problems of a single bank that, unfortunately, is shared by many. This time next year, never let anybody tell you that this couldn't be seen coming as I illustrate how it will happen, and in detail!
In a must read Op Ed, Bloomberg's Jon Weil takes another long hard look at the balance sheet of the most undercapitalized bank in America (thank would be Bank of America) courtesy of the worst M&A transaction in history, namely its purchase of Countrywide, observes what everyone, even John Paulson now knows, that due to trading at half its book value nobody in the market gives even remote credit to the bank's asset "marks", and concludes that this organization, courtesy of an extremely lax regulatory and audit structure, which continues to allow it to mark any assets at whatever price it desires, could well be the next AIG: "There’s more
at stake here, however, than whether Bank of America’s shares
are a “buy” or a “sell.” The main thing the rest of us care about is the continuing
menace this company and others like it pose to the financial
system, knowing we never should have let ourselves be put in the
position where a collapse in confidence at a single bank could
wreak havoc on the world’s economy. Here we are again, though.
Curse the geniuses who brought us this madness." Indeed: once again, right before our eyes, day after day we allow various higher status quo-embedded individuals to take advantage of the gullible public by misrepresenting the massive risk that the left side of BAC's balance sheet represents, which can have only one conclusion: the same epic implosion that brought down AIG once the market reality caught up the with book myth. Yet in the case of AIG unbridled risk-taking and book mismarking we can at least put the blame on one person: the man at the heart of AIG FP, Joe Cassano, whose reckless bets nearly brought down capitalism. So our question is: is there someone at or affiliated with Bank of America that could soon double as a Joe Cassano for the 2010s? We have one suggestion (although certainly not exhaustive): Brian Lin of RRMS Advisors.
85% Of Bank Of America's "Net Income" Comes From Reserve Release And MSR Adjustment, Capitalization Ratios PlungeSubmitted by Tyler Durden on 07/19/2011 07:14 -0500
Another horrendous quarter for Bank of America. While the company reported an adjusted EPS of $0.33 which shockingly came at the "at the high end of the prior guidance on June 29, 2011 when the company said net income excluding mortgage items and other selected items would be between $0.28 and $0.33 per share" the truth is that of the $5.6 billion in adjusted pretax net income, $3.3 billion was the result of credit loss releases. In other words 59% of the firm's "adjusted EPS" came from an accounting treatment and the CFO's interpretation of improving credit trends. As for the balance: another $1.5 billion came from a write-down in Mortgage Servicing Rights or another accounting gimmick. So take away the reserve release and MSRs, and one gets an EPS number that is 86% lower than the disclosed or about $0.05. The problem is that on an andjusted basis, the EPS was ($0.90) or a loss of $12.6 billion pre tax, driven by the previously disclosed settlements and a surge in provisions for Rep and Warranty settlements to $14 billion. Keep in mind this number will be far, far higher when all the Countrywide litigation is said and done. After all, the firm itself said that the "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at June 30, 2011. This estimate does not include reasonably possible litigation losses." So what about litigation losses? Well at $1.9 billion this was a huge surge from the $0.8 billion in Q1 and $0.6 billion Q4 2010. This number will also only go up as everyone and the kitchen sink sues Bank of America. And while one can play accounting games to paint the EPS tape, the cash that leaves the company is all too real: the firm's Common Equity Ratio plunged from 9.42% in Q1 to 9.09% in Q2, the lowest since Q2 2010, and the result was a plunge in the firm's (very much meaningless courtesy of Mark to Market being illegal - thank you FASB) Book Value per Share to $20.29: the lowest in well... ever since the firm's bailout by the US taxpayer.
Back in December, when noting the first material blow out in PIIGS spreads following the first Greek bailout 6 months earlier, we touched upon Italy, and specifically looked at a way to best play the coming shift in Eurozone contagion from the periphery to the core, coming up with one unique corporate name. Back then we said: "We all know what has happened to Italian bond prices in the past weeks: as of today, Bund spreads have just hit a fresh all time high. But all this is irrelevant since the bank must have a capital buffer to accommodate the losses. After all, what idiot would run a company with almost €300 billion in Euro-facing bond exposure and not factor for deterioration in risk after the events of May... Well the ASSGEN CEO may be just such an idiot. The company's balance sheet as of 9/30 discloses that the firm had a mere €10 billion in tangible capital (excluding €10.7 billion in intangible assets). So let's recap: €262 billion in Euro bonds on.... €10 billion in tangible equity! A 26x leverage on what is promptly becoming the most impaired asset class in the world." In a nutshell, Assecurazioni Generali, one of Italy's largest insurers, is a highly levered windsock for Italian and other PIIGS stress, and better yet, can be played in either equity or CDS. Now that the European bond vigilantes are once again looking beyond Greece and focusing particularly on Italy (especially based on recent Sigma X trading), none other than JP Morgan (which just cut its estimates on GASI.MI, a very appropriate equity ticker) validates the thesis that Generali (or ASSGEN per its memorable corporate/CDS ticker) is the best proxy for contagion: "Generali is one of the most sensitive stocks to both the sovereign debt crisis and the implications for the financial sector through both its government, corporate and equity investment portfolios...Generali’s sovereign exposure is mainly concentrated in Europe with Italy accounting for the largest share (37%; home market bias)."
From the Telegraph (UK): Moves by [UK] stronger banks to cut back their lending to weaker [EU] banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.
This is exactly what I've been crowing about for 2 years. It's actually much worse than Lehman... Much Worse!
Don’t be fooled by the IMF’s announcement that Greece will get a new round of money. This bailout is merely to give a couple of months for the parties to seriously negotiate what haircuts and debt extensions investors need to take in Greece, and Ireland and Portugal. Virtually all the comments made by the parties involved fit in with the view that we are now in a phase where people are negotiating how much they will write off and what else they will do. Almost none of the comments indicate that anyone is really trying to put together a plan that is going kick the can down the road for a long time. I am fading this rally as only the most optimistic investor can believe that this problem doesn’t lead to real default/restructuring with haircuts in the next couple of months.
Last week I used the analogy of a shotgun wedding to describe how the bailout was being forced upon the Greek people. Maybe, after the events of this weekend, I wasn’t being harsh enough in my choice of analogy. As I continue to digest the news and various opinions, I still reach the same conclusion. Default or restructuring is the most logical outcome and should occur sooner than later. I believe that the image of the IMF has been tainted and it will make it more difficult for the Greek people to accept a deal from them, unless the terms are incredibly favorable. I’ve also listed several of the arguments most commonly used to encourage Greece to delay restructuring, and point out the flaws in each of them.