Warning! This is going to be a highly, highly
controversial post. It is long, it is thick with information, and it
hits HARD! Thus if you are easily offended by pretty women,
intellectually aggressive brothers in cognitive war garb, your
government regulators selling you out to the highest European bidder, or
the cold hard facts borne from world class research that you can't find
from the sell side or the mainstream media, I strongly suggest you stop
reading here and move on. There is nothing further for you to see. As
for all others, please keep in mind that I warned of Bank of America Lynch[ing this] CountryWide's swap exposure through a subscriber document on Thursday, 01 October 2009, then went public with it shortly thereafter.
has been a lot of feedback and emails emanating from the last
RT/Capital Accounts interview that I did earlier this week, as well as
it should be. The dilemma is that I don't think the viewership is taking
the topic seriously enough. I explicitly said, on air, that the Federal
Reserve endorsed this country's most dangerous bank in shifting its
most toxic assets directly onto the back of the US taxpayer through
their most sacrosanct liquid assets, their bank accounts. In addition,
when the shit hits the fan, those very same assets will be second in
line for recovery, for the derivative counterparties will get first
Now, maybe its due to the fact that the interviewer was a
cutie, or my voice was too deep, or because I didn't appear in my
superhero garb, but I really don' think the message was driven home by
the interview that I gave on Russian TV's Capital Account introductory
show last week. So, let's try this again, but this time instead of
donning that suit and tie, I go as that most unlikely of financial
To begin with, for those who did not see the Capital Accounts interview on Russian Television, here it is...
Next, we need to see just how pertinent being 2nd in line is in the
liquidation of an insolvent investment bank. I do mean insolvent. Yes, I
know the big name brand investors who don't look like that rather
unconventional superhero standing in front of the Squid headquarters
above may believe that BAC has value, but I have told you since 2008,
and I'll tell you now - the equity of Bank of America Lynch[ing this] CountryWide
is effectively worth less than zero! Yeah, I know, many of those name
brand analysts espoused in the mainstream media disagree, and to each
their own, but several of Bank of America Lynch[ing this] CountryWide's latest acquisitions, ex. Countrywide, Merrill Lynch, etc. were enough to make it insolvent. Add several negative numbers together and do you think a little financial engineering is going to give you a positive number??? A little common damn sense is all that is needed to fill the bill here.
$6 you see quoted on your equity screens is a freebie, a giveaway, and
not indicative of economic book value in my opinion. Then again, I could
be wrong, but I was correct on practically every major bank, insurance
and real estate co. failure in the US over the last 4 years, as well as
predicting many of the European ones. See Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
If Bank of America Lynch[ing this] CountryWide Goes Bust, How Much Can Bank Depositors Expect To Lose?
Now, back to the point, how much can US depositors (you) expect to get when (notice I didn't say if) Bank of America Lynch[ing this] CountryWide goes bust? Well, here's a snippet from the WSJ.com:
group of more than a dozen investors who hold debt in Lehman’s
so-called operating subsidiaries today lobbed a proposal that would pay
some creditors up to 60.4 cents for each dollar of their claims, while
offering senior Lehman bondholders a 16% recovery, reported Deal Journal
colleague Eric Morath.
(Click HERE to read the rival plan to reorganize Lehman Brothers.)
stake is how to repay nearly $300 billion in money owed from the
collapse of Lehman Brothers, which filed for bankruptcy protection in
September 2008. A judge now may be forced to decide among three
different proposals to repay Lehman creditors.
own proposal to pay back debt holders calls for just a 21.4% recovery
for unsecured creditors. Under Lehman’s plan unveiled in January, the
operating company creditors would receive less than 60.4 cents on the
Lehman is also facing an additional rival plan
from another group led by hedge-fund manager John Paulson. Those
creditors are pushing for a 24% recovery for senior unsecured creditors
at the expense of subsidiary creditors.
Whoa, a recovery of
between 21 and 60%??? That doesn't sound to promising! You know why it
doesn't? Because it's not accurate. The derivative counterparties of the
bank get first shot at that 21 cents to 60 cents on the dollar, not the
FDIC insured bank depositors. After the counterparties finish feasting
at the trough, what would you think is left over for the Aunt Mabels of
the US with their lifetime savings tied up in CDs paying .23%, which
your aunt was perfectly willing to accept in exchange for the safety and
protection of her US government and the FDIC (please excuse me as the
taste of bile interferes with my ability to type this).
Let's revisit the story that Bloomberg broke on this topic.
Bank of America Corp. (BAC), hit
by a credit downgrade last month, has moved derivatives from its
Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren't authorized to speak publicly. The Fed
has signaled that it favors moving the derivatives to give relief to
the bank holding company, while the FDIC, which would have to pay off
depositors in the event of a bank failure, is objecting, said the people. The bank doesn't believe regulatory approval is needed, said people with knowledge of its position.
years after taxpayers rescued some of the biggest U.S. lenders,
regulators are grappling with how to protect FDIC- insured bank accounts
from risks generated by investment-banking operations. Bank of America,
which got a $45 billion bailout during the financial crisis, had $1.04
trillion in deposits as of midyear, ranking it second among U.S. firms.
Keeping such deals separate from FDIC-insured savings has been a
cornerstone of U.S. regulation for decades, including last year’s
Dodd-Frank overhaul of Wall Street regulation.
legislation gave the FDIC, which liquidates failing banks, expanded
powers to dismantle large financial institutions in danger of failing.
The agency can borrow from the Treasury Department to finance the
biggest lenders’ operations to stem bank runs. It’s required to recoup
taxpayer money used during the resolution process through fees on the
Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first,
in 2008, included $15 billion for the bank and $10 billion for Merrill,
which the bank had agreed to buy. The second round of $20 billion came
in January 2009 after Merrill’s losses in its final quarter as an
independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.
I'm afraid that last statement is just not true. See 10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the US taxpayer. After that, seeBuried
Deep Within The Files That The Federal Reserve Released On Thier MBS
Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!
of America’s holding company -- the parent of both the retail bank and
the Merrill Lynch securities unit -- held almost $75 trillion of
derivatives at the end of June, according to data compiled
by the OCC. About $53 trillion, or 71 percent, were within Bank of
America NA, according to the data, which represent the notional values
of the trades.
That compares with JPMorgan’s
deposit-taking entity, JPMorgan Chase Bank NA, which contained 99
percent of the New York-based firm’s $79 trillion of notional
derivatives, the OCC data show.
Moving derivatives contracts between units of a bank holding company
is limited under Section 23A of the Federal Reserve Act, which is
designed to prevent a lender’s affiliates from benefiting from its
federal subsidy and to protect the bank from excessive risk originating
at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.
doesn’t want a bank’s FDIC insurance and access to the Fed discount
window to somehow benefit an affiliate, so they created a firewall,”
Omarova said. The discount window has been open to banks as the lender
of last resort since 1914.
Hmmmm! As excerpted from a recent post on Naked Capitalism:
the effect of the 2005 bankruptcy law revisions: derivatives
counterparties are first in line, they get to grab assets first and
leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC,
which would have to make depositors whole after derivatives
counterparties grabbed collateral. It’s well nigh impossible to have an
orderly wind down in this scenario. You have a derivatives counterparty
land grab and an abrupt insolvency. Lehman failed over a weekend after
JP Morgan grabbed collateral.
But it’s even worse than
that. During the savings & loan crisis, the FDIC did not have enough
in deposit insurance receipts to pay for the Resolution Trust
Corporation wind-down vehicle. It had to get more funding from Congress.
This move paves the way for another TARP-style shakedown of taxpayers,
this time to save depositors. No Congressman would dare vote against
that. This move is Machiavellian, and just plain evil.
And back to the Bloomberg article...
a general rule, as long as transactions involve high- quality assets
and don’t exceed certain quantitative limitations, they should be
allowed under the Federal Reserve Act, Omarova said.
In 2009, the Fed granted Section 23A exemptions
to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth
Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp.,
CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among
others, according to letters posted on the Fed’s website.
This is a very, very, very important point to BoomBustBlog paying susbscribers (see research excerpts below).
central bank terminated exemptions last year for retail-banking units
of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and
Deutsche Bank AG. The Fed also ended an exemption for Bank of America in
March 2010 and in September of that year approved a new one.
23A “is among the most important tools that U.S. bank regulators have
to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.
Subscribers, Feel Free to Indulge In Research That Will Likely Prove To
Be Most Prophetic Given The Information Above
Colossal Derivative exposure
to the latest quarterly report from the Office Of the Currency
Comptroller the top 4 banks in the US now account for a massively
disproportionate amount of the derivative risk in the financial system.
Although the [subject bank] with the xth largest derivative exposure
stands a significant distance behind JPM, Citi, Bank of America and
Goldman Sachs (the four largest players); the exposure quoted in OCC
report is only for the US entity. Overall, [subject bank]’s group
derivative exposure in its balance sheet is 220% of its tangible equity,
far higher in both absolute and relative terms when compared to its peers. [Subject
bank]’s on balance sheet derivative exposure is higher than the
combined share of Goldman Sachs ($74bn, or 115% of TEC), JP Morgan
($78bn, or 62% of TEC) and Morgan Stanley ($46bn, or 114% of TEC). What
is more worrying is the quality of these derivative assets. Of the
total notional value of credit derivatives (over half trillion $US bn),
nearly 60% are non-investment grade. [Subject bank] has the highest
proportion of non-investment grade credit derivatives followed by Citi
Group (55%), GS (52%), Bank of America (37%) and JP Morgan (32%). The
tables below as well as on the following page compare [subject bank]’s
on-balance sheet derivative exposure. This is the bank, apparently
unrecognized by the markets, media and sell side, that will literally go
boom when the match is put to the dry gunpowder (subscribers only): Haircuts, Derivative Risks and Valuation
This is the European bank that either will set off the global chain reaction or end up being a very significant part of it (subscribers only):
For those who don't follow BoomBustBlog regularly, I warned of Bank of America Lynch[ing this] CountryWide'srisks
and related issues many times in the past, but this expose and research
on their swap risk was most prophetic, and was dated Thursday, 01 October 2009, over two full years ago!
As excerpted, and aptly named:
have posted this warning of Bank of America's naked swap writing to my
subscribers a few weeks ago. Since BAC is reporting this week, I have
decided to make my suspicions public. I have found evidence that this
bank has $32 billion of naked (as in apparently unhedged) swaps on its
books - just like AIG. The difference is this bank is bigger, probably
has more exposure, and has already been bailed out - several times. Oh,
did I mention the insured collateral is nearly half BBB rated or
lower??? How about extreme management issues at the top, and I mean all
the way to the top (the CEO may actually bring down the ex-treasury
secretary and maybe even the Fed Chairman. A trunk full of junk,
surrounded by drama! It should be an interesting conference call
tomorrow when they report, that is if anybody decides to ask the right
As many of my subscribers
and readers know, I have caught many companies on the short side as
they imploded. One company that I did not get was American International
Group. The reason it escaped me? I was too close to it. I have met
Frank Tizzio (then president), Maurice Greenburg (then CEO and
Chairman), and a several of their upper management to collaborate on
deals, and was impressed with the way they ran their shop. Because of
this, I didn't apply the same critical, skeptical eye that I used with
the other prospects. Alas, because of such, I overlooked the inevitable,
and in retrospect, the blatantly obvious. Well, I have learned my
lesson. The lesson learned from AIG was not wasted on me, but does seem
to have been wasted on many others. With this thought in mind, let's
review the net, unhedged swap exposure of a few of our analysis
subjects. I think a few of my readers may
have their eyebrows raised. Some things are actually hiding in plain
sight. I have made this short description of what I see as Bank of
America, the naked swap dealer, available for free download, but you
must register (I made the process very quick) to get it. I know it is a
pain in the ass, but I want to be sure that the disclaimer is
acknowledged by all who access the document. Thank our litigious
society. See (subscribers only) BAC Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb.
I need for all to know that, in my opinion, bank reporting is quite
opaque, so it is not very easy to get granular information out of it.
The conclusions drawn from this post and the accompanying downloads are
derived from BAC's publicly available documents and are the result of my
best efforts to piece the information together. For those who do not
know of me, you can reference the "who am I"section below to see how
well this process has worked in the past.
For the sake of nostalgia, here is an old post of Bank of America's estimated ABS inventory (subscribers only): ABS Inventory 2008-02-25 06:48:09 0 bytes. I will be releasing similar analysis of other banks and insurers to subscribers over the next day or two, and then to the public a day or two before their respective earnings announcement.
Chronology of September 2008 liquidity crisis
On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permits firms with the highest credit ratings to enter swaps
without depositing collateral with its trading counter-parties. When
its credit rating was downgraded, the company was required to post
additional collateral with its trading counter-parties, and this led to
an AIG liquidity crisis. [Here's a quick glance at Bank of
America's current rating as compared to AIG's, both before and after
their "incident". Be aware that this is not my proprietary rating (which
would be substantially lower), but that of the oh so accurate major
rating agencies. I doubt if they have taken this naked and unhedged exposure into consideration!]
Click graphics to enlarge
AIG's London unit sold credit protection in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) that had by that time declined in value. [The
lower quality assets are the most likely to decrease in value
dramatically. One should keep this in mind, for BAC has written $116
billion on non-investment grade (junk) credit derivatives and $3 billion
in junk total return swaps. They have hedged, but not completely. My
calculations and estimates have BAC with a carrying value of unhedged
exposure of around $32 billion and a notional unhdeged exposure of $348
billion]. The United States Federal Reserve Bank announced the creation of a secured credit facility of up to US$85
billion, to prevent the company's collapse by enabling AIG to meet its
obligations to deliver additional collateral to its credit default swap
trading partners. [Keep in mind that BAC just gave up its
government guarantee on the JUNKY assets acquired with the Merrill Lynch
acquisition. Merrill Lynch was one of the, if not the LARGEST writer of
CDS on Wall Street! BAC also bought Countrywide, arguably the most
wretched pool of subprime and under-performing mortgage assets in this
country.] The credit facility provided a structure to loan as much as US$85 billion, secured by the stock in AIG-owned subsidiaries, in exchange for warrants for a 79.9% equity stake, and the right to suspend dividends to previously issued common and preferred stock.
AIG announced the same day that its board accepted the terms of the
Federal Reserve Bank's rescue package and secured credit facility. This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier. [Well, we shall see, since Bank of America is currently the largest bank in America. We still have time to set a new record.]
share prices had fallen over 95% to just $1.25 by September 16, 2008,
from a 52-week high of $70.13. The company reported over $13.2 billion
in losses in the first six months of the year. [Well,
green shoots is a sproutin'! AIG is currently trading at $44.33. I am
at a loss as to how anyone can justify such, but hey, people are still
buying Bank of America stock as well...] The AIG Financial Products division headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. [Hmmm!!!
BAC has written protection $2.6 trillion notional, with $348 billion
unhedged (at least according to my calculations). For those "not to use
notional nitwits", that translates to $198 billion carrying value with
$32 billion apparently unhedged or written naked - just like AIG, with
one big exception. It appears as if BAC has one the machismo contest of
"mine is bigger than yours" with AIG - congrats fellas!] Of those securities, $57.8 billion were structured debt securities backed by subprime loans. CNN named Cassano as one of the "Ten Most Wanted: Culprits" of the 2008 financial collapse in the United States.[Well,
Ken Lewis, the BAC CEO, is not to popular around these parts either. I
am sure the upcoming Cuomo/congress investigations will be juiced when
they find out that BAC is doing the AIG thing, just on a much larger
scale!!! Just remember who you heard it from first!]
As Lehman Brothers (the largest bankruptcy in U.S. history at that time) [Hey, I warned you guys about Lehman and Bear WAY in advance, just as I am doing ow with Bank of America - "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) - Is this the Breaking of the Bear? January 2008 - Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!) - Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 - Funny CLO business at Lehman Friday, 04 April 2008]
suffered a catastrophic decline in share price, investors began
comparing the types of securities held by AIG and Lehman, and found that
AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the values used by Lehman which weakened investors' confidence in AIG. [If
BAC is not careful, the market may have similar misgivings on how BAC
values its credit card receivables and mortgages held in off balance
sheet trusts. See our my findings on what may lay off balance sheet - If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, to raise cash. The Federal Reserve hired Morgan Stanley to determine if there are systemic risks to a financial failure of AIG, and asked private entities to supply short-term bridge loans to the company. In the meantime, New York regulators allowed AIG to borrow $20 billion from its subsidiaries. [Why ask Morgan Stanley? In 2008, they were "The Riskiest Bank on the Street".
I guess it takes one to know one! I ask my readers, is one of the
biggest banks in the country that then swallows the biggest brokerage
and at the time the sickest brokerage in the country right after
swallowing the biggest and sickest mortgage lender in the country a
systemic risk if it fails? I bet a lot of you guys and gals can answer
that question for a whole lot more than the government paid Morgan
Stanley. I wonder, why don't these guys ask me my opinion? NY bloggers
don't get enough respect :-)]
At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent.
The Federal Reserve continued to meet that day with major Wall Street
investment firms, hoping to broker a deal for a non-governmental $75
billion line of credit to the company. Rating agencies Moody's and Standard and Poor downgraded AIG's credit ratings on concerns over likely continuing losses on mortgage-backed securities. [Now,
this is just simply hilarious. With friends like the credit rating
agencies, who needs enemies? Think about the fire alarm that starts to
go off just when the smoldering embers of what use to be your house
begin to cool... How much money has AIG paid the credit ratign agencies
over the last 10 years or so?] The credit rating downgrade forced
the company to deliver collateral of over $10 billion to certain
creditors and CDS counter-parties. [Well, we shall see what will happen with that "other" bank] The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17.
Just before the bailout by the US Federal Reserve, AIG former CEO
Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert B.
Willumstad offering his assistance in any way possible, ccing the Board of Directors. His offer was rebuffed. [And why wasn't this man's assistance accepted???]
Federal Reserve bailout
On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG could draw up to $85 billion. The loan was collateralized
by the assets of AIG, including its non-regulated subsidiaries and the
stock of "substantially all" of its regulated subsidiaries, and with an
interest rate of 850 basis points over the three-month London Interbank Offered Rate
(LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility,
the U.S. government received warrants for a 79.9 percent equity stake in
AIG, with the right to suspend the payment of dividends to AIG common
and preferred shareholders. The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.
AIG's board of directors announced approval of the loan transaction in a
press release the same day. The announcement did not comment on the
issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing
of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve. AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008. On September 22, 2008, AIG was removed from the Dow Jones Industrial Average.
An additional $37.8 billion credit facility was established in October.
As of October 24, AIG had drawn a total of $90.3 billion from the
emergency loan, of a total $122.8 billion.
Maurice Greenberg, former CEO of AIG, on September 17, 2008, characterized the bailout as a nationalization of AIG. He also stated that he was bewildered by the situation and was at a loss over how the entire situation got out of control as it did. On September 17, 2008, Federal Reserve Bank chair Ben Bernanke asked Treasury Secretary Henry Paulson
join him, to call on members of Congress, to describe the need for a
congressionally authorized bailout of the nation's banking system. Weeks
later, Congress approved the Emergency Economic Stabilization Act of 2008. Bernanke said to Paulson on September 17:
this soap opera gets worse. Bank of America's bailouts have totaled
$168 billions so thus far, and we haven't even addressed the naked swap
writing issue as of yet. Then again, BAC did buyout the Merrill Lynch
loss guarantee from the government after much wrangling. I don't think
this was the wisest idea, for they very well may still need it. Again
excerpted from Wikipedia]:
Bank of America received US $20 billion in federal bailout from the US government through the Troubled Asset Relief Program (TARP) on 16 January 2009 and also got guarantee of US $118 billion in potential losses at the company.
This was in addition to the $25 billion given to them in the Fall of
2008 through TARP. The additional payment was part of a deal with the US
government to preserve Bank of America's merger with the troubled
investment firm Merrill Lynch.
Since then, members of the US Congress have expressed considerable
concern about how this money has been spent, especially since some of
the recipients have been accused of mis-using the bailout money. The Bank's CEO, Ken Lewis,
was quoted as claiming "We are still lending, and we are lending far
more because of the TARP program." Members of the US House of
Representatives, however, were skeptical and quoted many anecdotes about
loan applicants (particularly small business owners) being denied loans
and credit card holders facing stiffer terms on the debt in their card
According to a March 15, 2009 article in The New York Times, Bank of America received an additional $5.2 billion in government bailout money which was channeled through American International Group.
As a result of its federal bailout and management problems, The Wall Street Journal
reported that the Bank of America is operating under a secret
“memorandum of understanding” (MOU) from the US government that requires
it to ”overhaul its board and address perceived problems with risk and
liquidity management.” With the federal action, the institution has
taken several steps, including arranging for six of its directors
to resign and forming a Regulatory Impact Office. Bank of America faces
several deadlines in July and August and if not met, could face harsher
penalties by federal regulators. Bank of America did not respond to The Wall Street Journal story.
is exactly what I am talking about when I say these institutions CANNOT
hedge their large risks. The number 2 derivative holder in the country
(Bank of America) and the number 3 derivative holder in the country
(Goldman Sachs) had to be bailed out by the government through AIG
(another large derivative holder) when AIG had just $10 billion dollars
in collateral calls that it could not pay. AIG was the largest insurer
in the world!!! The number 1 derivative holder in the country (JP
Morgan) needed $90 billion or so in bailout monies when its major
counterparty failed - Bear Stearns. See Is this the Breaking of the Bear? January
2008 for how easy that was to see coming at least 3 months in advance!
That circle of concentrated risk is even smaller now then it was back
then. Now 5 institutions hold 97% of the notional vale and 88% of the
market value in derivatives, and they are all basically in the same
business and all basically hedge with each other. It is not a true hedge
when the other side can't pay, and history has clearly proven how easy
it is for the other side not to be able to pay. See a sampling of my
many posts on this topic:
- The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
- Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
- As the markets climb on top of one big, incestuous pool of concentrated risk...
- Any objective review shows that the big banks are simply too big for the safety of this country
- Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
graphic above, eh? There is plenty of this in the public preview. When
considering the staggering level of derivatives employed by JPM, it is
frightening to even consider the fact that the quality of JPM's
derivative exposure is even worse than Bear Stearns and Lehman‘s
derivative portfolio just prior to their fall. Total net
derivative exposure rated below BBB and below for JP Morgan currently
stands at 35.4% while the same stood at 17.0% for Bear Stearns (February
2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear
Stearns and Lehman Brothers, don't we??? I warned all about Bear
Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?":
On February 20th, 2008) months before their collapse by taking a close,
unbiased look at their balance sheet. Both of these companies were
rated investment grade at the time, just like "you know who". Now, I am
not saying JPM is about to collapse, since it is one of the anointed
ones chosen by the government and guaranteed not to fail - unlike Bear
Stearns and Lehman Brothers, and it is (after all) investment grade
rated. Who would you put your faith in, the big ratings agencies or your
favorite blogger? Then again, if it acts like a duck, walks like a
duck, and quacks like a duck, is it a chicken??? I'll leave the rest up
for my readers to decide.
This public preview is the culmination
of several investigative posts that I have made that have led me to look
more closely into the big money center banks. It all started with a
hunch that JPM wasn't marking their WaMu portfolio acquisition
accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful!
), which would very well have rendered them insolvent - particularly if
that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent).
You can download the public preview here. If you find it to be of
interest or insightful, feel free to distribute it (intact) as you wish - JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb
Additional Bailouts of 2008
October 9, 2008, the company borrowed an additional $37.8 billion via a
second secured asset credit facility created by the Federal Reserve
Bank of New York (FRBNY).
From mid September till early November, AIG's credit-default spreads
were steadily rising, implying the company was heading for default.
On November 10, 2008, the U.S. Treasury announced it would purchase $40
billion in newly issued AIG senior preferred stock, under the authority
of the Emergency Economic Stabilization Act's Troubled Asset Relief Program.
The FRBNY announced that it would modify the September 16th secured
credit facility; the Treasury investment would permit a reduction in its
size from $85 billion to $60 billion, and that the FRBNY would extend
the life of the facility from three to five years, and change the
interest rate from 8.5% plus the three-month London interbank offered rate (LIBOR)
for the total credit facility, to 3% plus LIBOR for funds drawn down,
and 0.75% plus LIBOR for funds not drawn, and that AIG would create two
off- balance-sheet Limited Liability Companies (LLC) to hold AIG assets:
one will act as an AIG Residential Mortgage-Backed Securities Facility
and the second to act as an AIG Collateralized Debt Obligations
Federal officials said the $40 billion investment would ultimately
permit the government to reduce the total exposure to AIG to $112
billion from $152 billion. On December 15, 2008, the Thomas More Law Center
filed suit to challenge the Emergency Economic Stabilization Act of
2008, alleging that it unconstitutionally promotes Islamic law (Sharia)
and religion. The lawsuit was filed because AIG provides Takaful
Insurance Plans, which, according to the company, avoid investments and
transactions that are"un-Islamic".
was required to post additional collateral with many creditors and
counter-parties, touching off controversy when over $100 billion was
paid out to major global financial institutions that had previously
received TARP money. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps
purchased from AIG by the institutions), a number of Congressmen and
media members expressed outrage that taxpayer money was going to these
banks through AIG.
AIG been allowed to fail in a controlled manner through bankruptcy,
bondholders and derivative counterparties (major banks) would have
suffered significant losses, limiting the amount of taxpayer funds
directly used. Fed Chairman Ben Bernanke argued: "If a federal agency
had [appropriate authority] on September 16 , they could have been
used to put AIG into conservatorship or receivership, unwind it slowly,
protect policyholders, and impose haircuts on creditors and
counterparties as appropriate. That outcome would have been far
preferable to the situation we find ourselves in now."
The "situation" to which he is referring is that the claims of
bondholders and counterparties were paid at 100 cents on the dollar by
taxpayers, without giving taxpayers the rights to the future profits of
these institutions. In other words, the benefits went to the banks while
the taxpayers suffered the costs.
Well, Bank of
America may very well give Ben Bernanke and the American taxpayer an
opportunity to find out if we have learned our collective lessons. With
the S&P pushing 1100 while practically all of the problems from the
period illustrated above remain extant, and if anything exacerbated (ex.
counterparty and concentration risk, credit risk and asset quality
concerns, and above all, government sanctioned opacity in reporting), I
doubt so very seriously.
This is what the US banks, and now you Mr. and Mrs. US taxpayer and bank depositor, have been backstopping all along...
You've been BAMBOOZLED! HOODWINKED! LED ASTRAY RUN AMOK!
I can be reached via the following channels, or directly via email:
the NYC meet and greet within the next 24 hours or so, so we can chat,
drink, debate, argue and fraternize with pretty woman together in a
trendy spot in the Meat Packing District or the Bowery (I apologize in
advance to all of my female readers/subscribers). Those who are
interested in attending should email customer support.
the venue - I simply need to get the travel and venue organized due to a
change of plans. For those that are new to the blog, these are pics of previous meet and greets...
BoomBustBlog in the 79th Street Boat Basin, NYC
BoomBustBlog at BuddhaKahn, Meatpacking District, NYC