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You Know Those Bombastic Warnings I Gave About Banks Being The New Tobacco Industry? Well, You Might As Well Light Your Stogies
Just last week I penned and posted "The Banking Industry Still Looks Dismal Despite Rising Share Prices". Well, it looks as if the Chickens Are Coming Home To Roost! The NY Times reports U.S. Is Set to Sue a Dozen Big Banks Over Mortgages:
The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.
The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs andDeutsche Bank, among others, according to three individuals briefed on the matter.
Hmmm... Let's go back as far as 2008 and as recently as last quarter to see if this was hard to anticipate for the followers of BoomBustBlog...
- BoomBustBlog Traders Armed With BoomBustBlog Research Caught ~10% Deutsche Bank Fall: The DB CEO telegraphed this coming last quarter. You just have to be able to read and comprehend CEO Sanskrit.
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The Putback Parade Cometh: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages
For those that have followed me over the past 4 or 5 years, I am known to definitely go against the tide of popular opinion. One of those heterox moments was when I directly challenged the most well respected banks in the world, JP Morgan. Why did I do it? Because much of that oft lavished, pop media respect was not deserved and didn't reflect the reality on the ground (or in the books). For justification of said statement, I pray thee reference As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies
JPM also increased its mortgage repurchase reserves increased $1.0 billion pretax in anticipation of pressures from GSE’s for repurchase of troubled mortgages and made a provision of $1.3bn for litigation reserves. I explicitly outlined this risk this time last year (Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results) and reiterated it days before JPM’s earnings release (The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!) wherein I told BoomBustBlog readers to carefully follow the “warranties and representations” numbers, which is nearly guaranteed to spike – and spiked it has.
I would like to note that I don’t recall anyone making a big deal about this topic when it first reared its head last year, although the trend was quite obvious. Now, it is one of the biggest issues of discussion in the earnings call Q&A. Was it potentially my advice on watching the spike in the repurchase requests? I do hope somebody was paying attention!
If you haven’t noticed, despite the fact JPM is pulling provisions to, IMO, pad accounting earnings ahead of what I feel to be a tsunami of macro and fundamental issues, they are at the same time going to the capital markets for a re-up, and willing to pay a premium to do so…
So, the question is, "Was JPM management correct in releasing reserves ahead of what appeared to be improving credit metrics?". After all, said reserve releases do wonders for the bottom line, at least from an accounting perspective which is what most investors pay attention to. Well, now with the benefit of hindsight, we have a preliminary answer to that question - that is assuming the collapse in housing prices were the cause for drop in the first place. After all, the more houses underwater, the riskier these mortgages are, right? Let's peruse As Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their Downward Price Movement In Search Of Equilibr; ium Scraping Depression Levels Tuesday, December 28th, 2010
Before we go on, this is an ideal time for subscribers to review our latest JPM Forensice Research and Valuation - 
JPM Q1 2011 Review & Analysis.
Additional warnings came in October of 2010, when I posted The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! and <>As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. The headlines of that day read.. From Bloomberg:
JPMorgan Chase & Co. and the biggest U.S. banks face billions of dollars in legal costs related to their role in the financial crisis, threatening their profits and the stock price gains they made in 2010, analysts said.
JPMorgan, the second biggest bank by assets, reported $5.2 billion of legal costs in the first nine months of 2009, compared with a gain of $10 million in the same period a year earlier. The costs would rise if the bank reserves for multibillion-dollar lawsuits by Lehman Brothers Holdings Inc. and the trustee liquidating Bernard L. Madoff’s firm.
... JPMorgan’s third-quarter net profit of $4.4 billion, up 23 percent from the year earlier, would have been larger if it hadn’t set aside $1.3 billion of pretax income for lawsuits and $1 billion for mortgage repurchases. Banks haven’t yet reported their results for the fourth quarter.
Of course, there are a few tidbits missing from this statement that can add to its accuracy. Let's see... Where did those profits come from? Again, you will find divergence between how BoomBustBlog reports and that of mainstream financial reporting. 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!!! Sunday, October 17th, 2010
For public consumption of additional JPM material, I released a long form excerpt of our subcriber material to the public in late 2009, An Independent Look into JP Morgan. Again, more warning that just weren't heard in the pop media or the sell side of Wall Street... Oh Yeah! JPM IS the sell side of Wall Street... You see, with that being the case, maybe there is no one to truly take an "INDEPENDENT LOOK" at JPM, at least outside of the blogoshere. Let's delve into the aforementioned document...
As you can see from the 2 year old doc above, there is a very significant reason why the government and monolines want their money back. Hey, how about all of those foreign buyers of MBS? You think they'd want to get "unrobbed" too, eh? As for how significant this really is, let's reread the telling part of the aforementioned document, once again, shall we?
The acquisition of Washington Mutual and a degeneration of the overall credit environment have caused JPM’s non-accrual loans to increase to an astounding $18.9 billion (2.8% of loan portfolio, or just a little more than the GDP of
Macau, which is $18.6 billion) in 2Q09 from $6.9 billion (1.3% of loan portfolio) in 2Q08. Furthermore, including securitized loans’, nonaccrual loans increased to a massive $77.8 billion, or 7.1% of loans. To put this into perspective, since the beginning of this "Asset Securitization Crisis" seems to have numbed many with the constant bandying about of large numbers – JP Morgan’s deadbeat mortgages + deadbeat securitized loans are greater than (with the slight exception of the first entrant) the GDPs of:
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- Bangladesh $78.9 billon
- Croatia $69 billion
- Belarus $60 billion
- and Sudan $58 billion
JPM’s bum mortgages and related loan products are more than half the GDP of the United Arab Emirates at $163 billion, and that’s with all of that oil that they sell to us at $60 to $146 per barrel!
As you can see, the WaMu mortage portfolio has turned out much worse than JPM management has anticipated, but just about exactly as I had expected back in 2008.
On Wednesday, 29 June 2011, I wrote The Beginning of the End of the Beginning of the Gutting of the Big Banks Has Begun! I felt it was a very powerful piece consisting of then current newsclips that proved prescient my prognostications from the previous three years, of which I excerpt as follows...
You've Been Had! You've Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do!
As far back as 2009 (yes, over a year ago) I have been warning readers and subscribers of the (not so) hidden risks of putbacks, warranty and rep reserves, and the overly optimistic under reserving of the big commercial banks. I used JP Morgan as an example (see link list below), but made it clear this warning stood for several big banks(several of the big banks – As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves, As a matter of fact I said that the banks ‘May Become The “New” Tobacco Companies‘ due to legal risk. This risk was significantly exacerbated the day after making that post, Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! wherein the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifying and vindicating my post from the day before and clearly demonstrates that The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
Step one: Hide the Truth!
fasb_mark_to_market_chart.png
JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now
See As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves or “After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????” As excerpted from the The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
This is the part that everybody seems to be overlooking…
All you really need to do is find the banks that accepted a lot of broker business, factor in the expense of the class action suit litigation that is popping up in nearly every state (try Googling it, you will be amazed as big firms and store front lawyers alike are throwing their hats in the ring), and you will see the easiest way out of a potentially tough bind for investors is the put back. Where does this land? Squarely on the balance sheet of the banks – who, BTW have the money to attract even more predatory lawyers. A forensic review of high LTV loans between 2003 and 2007 should find that at the very least 30% were aggressively valued, with a more realistic number coming in at about 60%. Ask anyone who was in in the business at that time, I doubt they will disagree.
When I warned of this LAST YEAR, it was not taken very seriously. I suggest all should think again – Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results. Let’s reminisce…
I have plenty of additional, fresh subscriber research and analysis as well as free commentary and opinion on this topic coming up. Next, we review the effects of JPM's continuing legal woes on other parts of its business and how those parts then effect the rest of the banking industry ala 2008! Then we will discuss the problems of other name brandname US banks and the issue of contagion!
Subscriber ony:
Federal Reserve MBS Purchasing Analysis (1.96 MB 2010-12-15 13:10:09)
BAC Q1 2010 Earnings Review (272.63 kB 2010-04-21 11:32:13)
Bank Charge-offs and Recoveries 2Q10 (272 kB 2010-10-01 12:06:03)
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Reggie provides free work product that most posters on this thread couldn't even imagine in a brazillion years. I thank him for his vision and generous gift, making public his work efforts which got me into SKF. BOOYAH!
Hats off and three cheers for RM, a top shelf analyst and officially designated Hero of the Current Economic Slump. tip of the hat to Frank Zappa for that award title.
Amen to that, Mr. Steve....SKF now my largest holding. +7.5%....today. Double thanks to RM. His free research helps give me the confidence to act on what I already believe. I made a ton of cash swing trading SKF, TWM, & FXP in '08 & early '09, but like matches, these are not for kids. You can get burned fast if you don't watch it. Plus, the FED was not the wild card then as it is today, so double caution is warranted.
nice one RM. Banks should have never been allowed to become so big, use massive leverage, dissolve Glass-Steagall and lobby Congress soley for their own gain while putting the world's economies at risk.
Reverse all the above measures and we avoid many of our current problems.
The latest lawsuit against the banks is all smoke and mirrors. If the judgement amounts are in the trillions, and they will be, it will just be another TBTF momemt that will require a massive taxpayer bailout, aka TarpII.
time to play another round of "Good Bank", "Bad Bank"?
or, it all ends in debt forgiveness? but then, what would all those lawyers get out of it?
At least tobacco companies make a product that their customers want.
Maybe we need a "credit" patch. You know, to stop that urge to borrow...
Have the Banks take the loans back and refund GSE’s original principal balance.
Force Banks to sell housing inventory at real cash market price, and then we will be on our way to a bottom.
GSE’ want cash from banks so they can keep artificial no money down high pricing in place, that’s no solution.
Wow, Reggie, you summed it all up. I read that the ROBO signing goes back to the 90's. Now what implications is that going to have?
BAC will be backstopped by the GOVT.
I was thinking of Malcolm when you wrote "chickens coming home to roost"
also, what happened after "git yo hand out a my pocket!"
Reggie,
I have a feeling that Bank of America will be allowed to fail. Restructuring needs to be completed and even though the Oracle of Omaha bought preferred stock, Bank of America is riddled with cancer and will do better being broken up and sold off. The Countrywide mess will be 'nationalized' and added into FNMA.
Thanks for the information.
This begs the question...where goeth the FDIC? BOA is the largest consumer bank in the US. Is the FDIC going to make good on their promise given the size of this gigantic piece of crap? Does TBTF truly meet Not Enough Money to Go Around?
leads me to wonder if it's possible Buffet pumped 5bil in with one hand and via the back door shorted another 10bil in a massive pump and dump.
Didn't BoA pass the government approved "Stress" Test?
Thanks much Reggie. You nailed it. The only issue is that thanks to Teh Fed we have synthetic levitation of markets still. According to my research we should be in the midst of a CRASH right about now. Instead, WS is high on upcoming QE. I am afraid lawsuits cannot counter the effects of funny money; at least not for the short term.
What are your thoughts medium term, coming out of QE hopium and into detox phase?
I understood the subprime crisis and the greed that caused it---unregulated, unadulterated massive greed.
I understood the need to "save" the financial system.
I don't undertstand why these CEOs of Banks were handed Trillions of Bonus money.
bombastic is that bombastic does. Will WB continue to buy BofA stock?
As risk assets melt inspite of Zirp etc. we will have correction. The question is WHERE and WHEN.
Will it be Euro or US that burns down its capital base? Not that it matters in financial terms; its all interlinked. But it may in political terms as it will determine who takes the initiative when we go to rebuild. That will be the game changer.
Nobody has a clue right now how it will unfold. The game changer...
step back and look at the big picture. this is all orchestrated. the goal of global control is at the root of it. As king willie said "its not about money mon, its about POWER". He is right. increasing power in fewer and fewer hands. collapse and neuter the middle class around the world. pile debt higher and deeper knowing that collapse will eventually come, and use that collapse to consolidate power. so the banks are getting sued? great all part of the plan. they will be collapsed into something bigger. same for the dollar and other currencies. make the people suffer, in long drawn out agony, and they will beg for what you offer... in fact, they will believe that what you (NWO) offer is in fact the solution for the problems. they will welcome the raping. now comes a pivotal time. its up to the people around the world to wake up and fight. withdraw support from the political and banking systems entirely. no it won't be easy, but the alternative of passively going along will end up far worse.
Sorry, I don't buy the NWO, one world currency meme. No way in hell will China, BRICs, MENA, European Union, et al line up for a single world currency that's contolled by the IMF.
they all want out from the USD as reserve currency. They want the exorbitant privilege to end, especially as the US is now hocked to its underwear.
But they haven't found an alternative. Also, the US will fight tooth and nail to keeps its exorbitant privilege. Up to the last greenback.
duplicate
goddamn. BAILOUT BITCHEZ!
BAC 7.37- Way to go Whitney Tilson!!!
Well Done Reggie, very well done Sir!
Eventually the alliance will break down, and they'll have to totally blame the other. Power always needs a viable bogeyman, and they can't blame gold... yet. And let's face it, politicians and bankers will do whatever is necessary to protect the next election / bonus.
Although there will be a time when all gold holders will be branded economic terrorists for bringing down the common mans' dollar. And the common man will grab their pitchforks and defend the slimy politicians' efforts to reclaim the wealth of the dollar / the common man stolen outright by the economic terrorism of those who treasonously chose gold over the nation's currency.
I pledge allegiance to the dollar, the nation for which it stands.....
Survey says... BZZZT!
You're an idiot!
http://www.cnbc.com/id/43898638
In all seriousness: That survey says you couldn't be more wrong.
In defense of low profile, the survey on the page looks like it's currently broken / unavailable...
I'm throwing out the economic terrorist idea out there as a potential warning of something that's entirely plausible. As much has already been hinted at by political opportunists going after those who expose insolvency by shorting, and those who expose inflation by speculating in the commodities markets.
Now, you can rely on the survey all you want, but if you actually think Johnny Lunchbucket and Patty Punchclock (let alone the 20% of the population on perma-welfare) is actually reading CNBC and reflected in that survey, you're the idiot. When push comes to shove, and the dollar is toast, the average person who is desperate and dependent on Uncle Sam to be his savior will be very open to lots of redistributionista ideas. I posit that those who protected real purchasing power as opposed to pieces of paper will be the targets. They are alway the targets of despots and dictators, and the slime-bucket politicians class looking to save their own asses or rally the rabble to their own aggrandizement.
I am thinking that either you did not properly read the other poster's message or you did not read the so called "survey", which was not in fact a survey, but a commentary on what some people think and what some other people think. There are no survery results in your link.
This would make YOU the idiot, not him/her.
By the way, IMO the biggest problem with a gold standard for us is that the US, which is a 70% consumer economy that buys pretty much everything it uses from everywhere EXCEPT the US, will lose virtually all of its purchasing power on a gold standard... and because of the massively negative balance of payments it would also lose all of its gold very quickly.
Once the US ran out of money on a gold standard, then would be forced to go to work and start producing again, which would be a good thing.
The problem you point out is precisely why a backed currency is needed. It forces a balance of payments, preventing the institutionalized dipshittery we've seen the U.S. A. pursue over the last 70 years, where it was perfectly feasible for consumers to export their livelihoods abroad on endless credit.
This arrangement has been very good for the banksters who get a cut of it regardless, and the politicians, who were able to punt a host of other problems into the future by allowing money printing (essentially) to paper over a highly business unfriendly and corrupted sytsem that benefits the power structure most, enabling those politically connected to siphon most of the wealth of the nation from the common man who used to be able to keep the fruits of his own labor and grow it.
Now days, The Man gives you zero % on your savings, and the common Joe says "Help me, nanny state! I'm so desperate for help!" not realizing that his votes are really boot-licking and the nanny is really his Slave Master, making off with most (but, so generously, not all) of his labor.
Run for the hills....it's Bankstageddon!
"get to da choppa"
So bofa fails instead? Failure to launch on this one. I never saw this rally in treasuries but i'm no fool as to who it benefits. Insurance companies like Met Life and Travellers are never discussed much in the media or by you-but this is their capital base and they can "lend" in this environment. In this sense it could be considered the death of these banks because if these behemouths used the Wall Street standard thay would literally kill these banks. We'll see what happens to The Goldman Saxon but for the whales i would imagine the government with its massive stake in AIG is pulling for a more...American outcome.