Book Value

As First Greek CDS "Anstalt" Appears, A Question Emerges: Did Banks Not Square Off Margins?

The irony is not lost on us that Bloomberg is reporting that KA Finanz, an Austrian bad-bank supported by the Austrian government, faces as much as a €1 billion need for funding to cover its exposures to Greek CDS (coughcreditanstaltcough). In a statement this morning, which we noted in a tweet, the bank noted "activation of the CDS with an assumed loss ratio of about 80% would mean an additional provisioning charge of EUR 423.6 million". KA Finanz's total amount of Greek CDS exposure is around EUR1bn. What is shocking and should be of great concern is that we have been led to believe that very little net cash will change hands on the basis of the $3.2bn net aggregate market exposure. This was based on the now false premise that variation margin was maintained and transferred throughout the process (as we note below from recent IMF filings). What appears to have happened is that dealer to dealer variation margin has been, let's say, less rigorous as perhaps all collateral was netted up across all exposures (or simply ignored on the basis of government backstops). The far bigger question then is: are banks simply marking ALL sovereign CDS at par, and not paying off cash to other dealers? Remember it only takes one counterparty in the chain to turn net into gross and quality collateral seems tied up a little right now at the ECB (or with margin calls).

Ex-ECB's Juergen Stark Says ECB's Balance Sheet "Gigantic", Collateral Quality "Shocking"

The German criticism of a mess they themselves have enabled (and benefit from via peripheral current account deficits funded via TARGET2 as shown previously here) at the ECB continues, and following public protests by Bundesbank head Jens Weidmann about recent ECB activity, it is the turn of former ECB executive board member Juergen Stark to take center stage. In an interview with the Frankfurter Allgemeine, warned that following the massive expansion in the ECB's balance sheet, in which it is clear to anyone that the ECB will accept used candy bar wrappers as collateral, that "the balance sheet of the euro system, isn't only gigantic in size but also shocking in quality."

A&G's AIG Moment Approaching: Moody's Downgrades Generali, Cuts Megainsurer Allianz Outlook To Negative

For a while now we have said that the very weakest link in Europe is not the banks, not the ECB, not triggered CDS, and not even the shadow banking system (well, infinitely rehypothecated Greek bonds within a daisychain of broker-dealers, which ultimately ends up at the ECB at a negligible repo discount, that could well be the weakest link - we will have more to say about this over the weekend) but two very specific insurers: Italy's mega insurer Assecurazioni Generali, which at last check had more Greek bonds as a % of TSF than anyone else, and Europe's biggest insurer and Pimco parent, Allianz, which is filled to the gills with pretty much everything (for more on Generali, or as we like to call it by its CDS ticker ASSGEN read here, here, here, and here). Well, Moody's just gave them, and the entire European space, the evil eye, and soon the layering of margin calls upon margin calls, especially if and when Greece defaults and a third of ASSGEN's balance sheet is found to be insolvent, will make anyone who still is long CDS those two names rich. Assuming of course the Fed steps in and bails out the counterparty the CDS was purchased from.

Half Of Citi Pretax Income Over Past Two Years Comes From Loan Loss Reserve Releases

Wonder why nobody trusts bank numbers, and why US financial institutions trade at some fraction of book value? The chart below should explain a big part of it. As can be quite vividly seen, of the $28 billion in pre-tax net income from continuing operations "generated" over the past two years, exactly half, or $14 billion, has been due from a simply accounting trick, namely the release of loan loss reserves, which have been positive for 8 quarters in a row, and which in the just completed quarter amounted to more than the actual pretax number, confirming EPS would have been negative absent accounting trickery (source). One wonders what happens to Citi Net Income once the world openly re-enters a recession, and releases have to become builds again... And for those who enjoy the myth of reported numbers, and are trying to reconcile the resurgence in bank stocks with abysmal earnings, yet wish to understand why Citi has let go the well known Rohit Bansal, and Chris Yanney, who headed the bank's distressed and HY trading respectively, below is also a chart showing the dramatic collapse in the bank's Securities and Banking revenue which just came at the lowest in the past two years, with Norta American top line in particular being decimated.

Citigroup Misses Big On Top And Bottom Line: Earnings Negative Absent Loan Loss Release

Following last week's Easter egg by JPMorgan, the misses by financials continue, with Citi crapping the bed following a big miss in both top and bottom line after reporting $17.2 billion and $0.38 EPS on expectations of $18.5 billion and $0.52 per share. The biggest hit to the top line was the DVA adjustment courtesy of tightening CDS spreads, which while adding to top and bottom line in Q3, took out $1.9 billion in Q4 - of course like everything else it was also priced in. And while we are confident the full earnings presentation will be a labyrinth of loss covering, the first thing to realize is that absent a $1.5 billion in loan loss reserve releases, the bank would have reported negative net income, which was $1.364 billion pretax. Yet there is no way to explain the absolute bloodbath in the Securities and Banking group, which saw revenues implode by 53% from $6.7 billion to $3.2 billion Y/Y, and down 10% Q/Q. Notably, Lending revenues down 84% from $1 billion to $164 million. RIP Carry Trade.

Presenting America's Most Expensive Repossessed Property

When one hears of foreclosed real estate or its sibbling REO (real estate owned) aka repossessed property, typically visions of dilapidated shacks in Detroit, Las Vegas, or the Inland Empire come to mind. And with the average foreclosed home selling at $182,489 according to RealtyTrac, this is understandable. However, such a vision would be wildly incorrect when talking about the property located at 188 Minna St., in San Francisco, which just happens to be America's most expensive bank-owned home. As MSNBC reports, the property in question is quite unlike any other REO out there: because "there's the waterfall in the foyer. And the 2,500-square-foot master bedroom with a hallway just for closets. And the 22-foot glass walls that look out on San Francisco's Arts District." And while we don't know who the original owner is who happens to have walked away on this mortgage, we know which bank got stuck with it. Who else, but Bank of America. Luckily for the bank which recently tested a 4 handle stock price, this property won't be stuck on its books generating zero cash. "According to San Francisco real estate blog, lender Bank of America, which picked up the deed to the 20,000-square-foot penthouse in lieu of foreclosure back in July, just sold the condo. Listed at $35 million, 188 Minna St. was purchased for an eye-popping $28 million, making it the most expensive residential sale in the city's history." To be sure, whoever bought the REO from BAC likely got a good deal on it: "the bank's asking price is half of what the original owner, developer Victor MacFarlane, was seeking for the unit back in 2008, although he did slash the price to $49 million the following year." Which also means that Bank of America was likely largely was underwater on the "half off" sale, which also means a huge writedown on the paper value of the apartment. And one wonders why Bank of America trades at fractions of its book value.

Assured Guaranty (AGO) Initiated With $35 Target At BTIG

A week ago, BTIG upgraded MBIA on the same thesis we had noted two months prior. Today, it is AGO's turn, on virtually the same assumptions and the same thesis as MBIA. To wit: "We view Assured Guaranty?s equity as deeply undervalued at current trading levels and anticipate that as the fears that have depressed its share price abate and the viability of its business model becomes more apparent, it will gravitate toward its intrinsic value. Consequently, we believe investors who can appreciate that Assured?s risk profile is overstated, and that its ability to generate profitable new business is understated, could realize outsized returns. We are initiating coverage of Assured Guaranty with a BUY and a $35 price target which is based on a 0.75x multiple of the company?s 2012E year-end stand-alone adjusted per share book value of $48.56. We believe some discount to adjusted book value is appropriate, for while we view the AGO?s portfolio exposures as manageable, they nevertheless present the potential for some loss of value. AGO trades at 0.23x the company?s 3Q11 adjusted per share book value. We believe the market reacted appropriately in providing AGO?s stock with a boost last week after Standard & Poor?s announced that the company would maintain its vital „AA? rating, particularly when the company?s ongoing efforts to boost capital appear to have given the rating staying power. However, we also believe that the stock price does not come close to reflecting what the removal of the rating overhang could mean for AGO as the only currently functioning monoline, and that last week?s price action may presage much larger gains ahead." And while AGO does not have the massive short overhang which could lead to an explosive short squeeze when unleashed, the underlying thesis is quite credible.

MBIA Soars Following BTIG Initiation With $22.50 Target

It is no secret that MBIA has long been one of our favorite longs (and by longs it is really a contrarian bet on various bad things happening - our latest piece can be found here). Today, we are happy to see that BTIG has come out with an initiating coverage report on the name following virtually all the same logic we presented two months ago, only with a price target that makes even us blush: $22.50. To wit: "We are initiating coverage of MBIA with a BUY rating and a $22.50 price target which equates to a 1.0x multiple of 2012E year-end stand-alone adjusted per share book value of National ($26.26) less the holding company net debt per share ($3.73). Our valuation is based on our view that if MBIA is able to resolve the fraudulent conveyance and Article 78 cases challenging its transformation either through a settlement or a court judgment, the value of National will flow up to the holding company and to shareholders.... Given our view that the challenges to MBIA?s transformation will be resolved through a settlement and that its shares could nearly triple in a post-announcement short squeeze, we believe MBIA offers one of the market's most compelling risk-reward propositions. Following almost four years of uncertainty during which its status as a viable entity has been in question, MBIA appears closer to resolving the various challenges it faces, unlocking the value of National Public Finance Guaranty Corporation – the company?s public finance unit – to the benefit of shareholders, and resuming its role as one of the last remaining players within that industry." and the kicker: "We would note that the large short interest in the stock relative to its float - 28.5 mm shares short versus a float of 140.4mm shares – combined with highly concentrated institutional ownership could set the stage for a dramatic short squeeze as short sellers might have to scramble to find shares to cover." Remember: "Is MBIA A Volkswagen-Like Short Squeeze Candidate?"  Mmhmm.