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As First Volcker Rule Victim Emerges, Implications Could "Roil The Market"

Tyler Durden's picture




 

Yesterday afternoon, Zions Bancorp, Utah's biggest lender, stunned the financial community with a regulatory filing in which it announced that as a result of the final Volcker Rule implementation, it will need to make some very dramatic changes to its balance sheet, which would also have a follow through, and quite adverse, impact on its income statement. To wit:

Zions Bancorporation (NASDAQ: ZION) (“Zions” or “the Company”) today announced that it believes substantially all of its portfolio of bank and insurance trust preferred collateralized debt obligation (CDO) securities, and certain other asset-backed CDO securities, will be considered disallowed investments under the revised, final “Volcker Rule” of the Dodd-Frank Act, which was released jointly by the Federal Reserve and a number of federal regulatory agencies last week. The final rule requires banking entities to divest such assets by July 21, 2015, unless, upon application, the Federal Reserve grants extensions to July 21, 2017.

 

Under the published rule, the Company would no longer have the ability to hold disallowed securities until the anticipated recovery of their amortized cost. Therefore, as of December 15, 2013, Zions anticipates that in the fourth quarter of 2013 it will reclassify all covered CDOs that currently are classified as “Held to Maturity” into “Available for Sale,” and that all covered CDOs, regardless of the accounting classification, will be adjusted to Fair Value through an Other Than Temporary Impairment non-cash charge to earnings. The net result would eliminate substantially all of the accumulated other comprehensive income adjustment to equity related to the covered securities.

In short: Zions can no longer keep TruPS (and perhaps any other kind) of "disallowed" CDOs on its books to maturity, explicitly in its "Held to Maturity" book and will instead be forced to dispose of these, in the process pushing them off to their "Available for Sale" inventory, and since this involves a Mark-To-Market repricing, hitting the Net Income line due to the P&L impact of moving a netting Comprehensive Income line item into the broader income statement where it would impair earnings materially on a non-cash basis (impacting equity, not cash).

This touches on several key regulatory loopholes that we have written about in the past, but more importantly, it exposes some key new ground that may lead to major impacts on bank capital and net income in the quarters to come, especially if indeed Zions is correct in its interpretation of Volcker, which suggest neither the Utah bank nor any of its peers will be able to hold either TruPS or potentially any other CDOs.

First of all, recall our recent series on unrealized bank "profits" (and losses) from Available for Sale books (courtesy of FAS 115), which recently plunged as a result of the surge in rates, hitting bank holdings of rate-sensitive securities held in AFS books. If indeed the Zions case study is a harbinger of things to come, look for this negative number (which in the past week dropped to the lowest cumulative total since the August near 3% on the 10 year blow out), to get even more negative.

But more importantly, should Zions be the canary in the coalmine on what Volcker means for bank prop holdings, then this is likely just the first shot across the bow of surprising announcements as one bank after another announces its intentions to reclassify and dispose of assets it had hoped to keep under the rug until Bernanke's reflation effort pushes their prices to their prior peak levels at which point they would no longer impair earnings even on a MTM basis.

To be sure, when it comes to just TruPS CDO holdings, it appears that Zions is the leader. Bloomberg reports:

Zions owned $1.23 billion of bank-issued trust-preferred CDOs as of Sept. 30, the most among all U.S. banks, according to analysts at Sterne Agee & Leach Inc. About 3 percent of U.S. banks held similar CDOs and a sudden sale by Zions could roil the market, Sterne Agee said.

 

“They are the 800-pound gorilla in this space,” Sterne Agee’s Matt Kelley said in an interview. “They have a lot at stake and they have an incentive not to tip their hand.”

 

The assets must be divested by July 21, 2015, unless regulators grant a two-year extension, Zions said.

 

“We’re not going to just go out and dump those things tomorrow,” Arnold said. “We’ll be exploring a variety of ways to come into compliance with the Volcker Rule, not all of which may involve the sale in the market.”

When anything could "roil the market", especially a market as illiquid as the current one, people pay attention. Even if for now the same people are happy to stick their heads in the sand and, unlike Zions, pretend Volcker does not apply to them. Sure enough:

All banks may not interpret the Volcker Rule the same way, according to Jason Goldberg, an analyst at Barclays Plc.

 

“There’s a lot of pages,” Goldberg said in an interview. “It’s going to take some time to figure this all out.”

Of course, if more banks end up with the same conclusion as Zions, then a roiling of the structured market is virtually assured.

At the end of the day it will all depend on a bank's interpretation of FAS 115 (and how Volcker accentuates this relationship) which, in a nutshell - see primer below - does not apply to unsecuritized loans. However, mortgage loans converted to mortgage-backed securities are subject to FAS 115 provisions. Furthermore, due to potential for impairment, interest only and super-premium MBS are not typically classified as "held to maturity." As of this moment neither are TruPS. What other securitization categories will emerge as having been held in HTM books and now have to be reclassified as AFS? We eagerly await the answer!

Which brings us to point #2, one which is likely far more important:

Under the Volcker rule and the bank’s own rewritten guidelines, Zions would give a lot more scrutiny before buying any more structured securities, Arnold said. “We haven’t bought any CDOs really since almost pre-crisis probably, and certainly wouldn’t touch them today,” he said.

Paraphrase: Volcker may have just frozen any future CDO-strucutred issuance in its tracks. Why is this a problem? Because as readers may recall, one of the necessary (if not sufficient) QE exit conditions is not only the return of housing as "high-quality collateral", a status it lost in the crash, but also the associated securitization machinery. Recall from page 30 of the May TBAC presentation appendix:

Simply said: without securitization, banks will have a far more difficult time assisting the Fed in its exit from the bond market (where it is the marginal buyer), which in turns means QE may never be exited period.  Sure, banks may be able to structure housing exposure on a levered basis using some whole loan structuring instrument, however if Collateral Debt, which be definition is pure leverage defined, is not one of the financial tools, kiss the Fed's handover of excess leverage to the private sector goodbye.

Expect to hear much more about this in the coming weeks if even one more bank were to admit that Zions' take on Volcker is indeed accurate, and CDOs - either TruPS of generally - are suddenly non-grata.

We will write more about bank securitized trading book exposures shortly, and just how pervasive of a problem this may become.

In the meantime, a bonus: our 2009 primer on SFAS 115:

fas115

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Tue, 12/17/2013 - 09:18 | 4253571 Mae Kadoodie
Mae Kadoodie's picture

There's a market?

Tue, 12/17/2013 - 09:24 | 4253580 SafelyGraze
SafelyGraze's picture

"the Company would no longer have the ability to hold disallowed securities until the anticipated recovery of their amortized cost."

not to worry.

I will be buying them from you and from every other financial institution.

happy xmas!

hugs,
misteryellenz 

Tue, 12/17/2013 - 09:42 | 4253629 BandGap
BandGap's picture

Were MBOs packaged and sold to European and Japoanese banks, too? Because this won't be limited to the US shores.

Tue, 12/17/2013 - 09:58 | 4253684 DOT
DOT's picture

Bad assets must be moved to the muppets before they become worthless. There are billions of muppets available in our global economy.

 

Does "roiling the market" mean the same as "ass raping muppets" and taking a big bonus for it ?

Tue, 12/17/2013 - 10:06 | 4253709 NoDebt
NoDebt's picture

OK, so let me get this straight.  The largest holder (the 800 lb. gorilla) of this small, illiquid CDO market segment comes out and immediately says "we're going over the cliff, boys!" rather than quietly soft-pedal it to prevent a crash in their stock price.  Even thought they don't have to actually divest themselves until mid-2015.

I'm smelling a game being played here.  This is a threat, not them rolling over in submission.

Tue, 12/17/2013 - 10:22 | 4253769 Hedgetard55
Hedgetard55's picture

Any interpretation of Volcker that implies assets must use mark to market rather than fantasy will be rescinded, guaranteed.

Tue, 12/17/2013 - 10:37 | 4253812 hedgeless_horseman
hedgeless_horseman's picture

 

 

In Texas, ZION is Amegy Bank. 

Locally, their bankers have been told by senior management, "what the country needs is a few years of 8% inflation," so act accordingly.

Tue, 12/17/2013 - 10:41 | 4253842 all-priced-in
all-priced-in's picture

I hate their ads - they call themselves

The "A" bank - I always think they forgot the hole.

 

 

Tue, 12/17/2013 - 10:42 | 4253845 MonsterBox
MonsterBox's picture

Is all this the first step towards a Bail-In?  Banksters are not going to eat these losses all on their own.....

Tue, 12/17/2013 - 10:44 | 4253852 hedgeless_horseman
hedgeless_horseman's picture

 

 

Cyprus was not a template.

Cyprus was not a template.

Cyprus was not a template.

Tue, 12/17/2013 - 11:25 | 4253956 Ying-Yang
Ying-Yang's picture

Zions would give a lot more scrutiny before buying any more structured securities, Arnold said. “We haven’t bought any CDOs really since almost pre-crisis probably, and certainly wouldn’t touch them today,” he said.

If you have not bought any since pre-crisis, then you have not bought any in 5 years?

Cry me a river... like banks are going to solve the problems

and 800 lb gorilla has a little over a billion exposure? Does not sound like a big problem against other crap going on.

 

 

Tue, 12/17/2013 - 13:12 | 4254352 cro_maat
cro_maat's picture

You forgot to click your heells three times.

Tue, 12/17/2013 - 10:50 | 4253863 Manthong
Manthong's picture

ok.. understood.. but the conundrum is that the "deposit" account is an unsecured loan to the bankster..

so that means they capture your productive work,, hold it hostage to inflation but can steal it with a "buy-in" at a moments notice.

I tinks we oughts to be havin a chat wit them guys. 

Tue, 12/17/2013 - 10:58 | 4253868 hedgeless_horseman
hedgeless_horseman's picture

 

 

At least you understand. 

Because I haven't said it here for many months...

Disintermediation, bitchezzz!!!

Tue, 12/17/2013 - 10:58 | 4253887 Manthong
Manthong's picture

:-)    Dudd Fwank 13.3...  says it all.

Tue, 12/17/2013 - 11:12 | 4253915 mess nonster
mess nonster's picture

!!!

Tue, 12/17/2013 - 12:36 | 4254151 Manthong
Manthong's picture

..just put a few bucks down on a short Beretta .40.. of course,  .gov does not consider me trustworthy, even though a vet, to take it home the same day although I might or might not have some other stuff that they would be concerned about.

a little heavier than the Glocks, but oh gee, there is something that a real Pietro does that the Austrians don't.

  

Tue, 12/17/2013 - 20:56 | 4255547 Manthong
Manthong's picture

..taking my little (very petite and pretty hot) sister to the range this weekend to teach her how to use the .380 auto LCP I bought for her.

times like these are when you appreciate the gifts you are given.

Wed, 12/18/2013 - 00:33 | 4256036 Manthong
Manthong's picture

if you do not know dodd frank 13.3..

get edjumicated..

Tue, 12/17/2013 - 11:56 | 4254053 CrazyCooter
CrazyCooter's picture

Well, as I told my old man, "At zero percent interest, anyone that doesn't keep surplus cash in gold or a safe deposit box deserves what they get."

Regards,

Cooter

Tue, 12/17/2013 - 11:55 | 4254054 CrazyCooter
CrazyCooter's picture

<duplicate>

Regards,

Cooter

Tue, 12/17/2013 - 17:35 | 4255140 Manthong
Manthong's picture

geez. cash is crap anymoar.

Wed, 12/18/2013 - 20:27 | 4259191 gallistic
gallistic's picture

And the cheerleading disinfo machine (Reuters) cranks out its latest product-

U.S. finalizes Volcker rule, curbing Wall Street's risky trades

I am so relieved...

http://www.reuters.com/article/2013/12/11/us-financial-regulation-volcke...

Tue, 12/17/2013 - 10:22 | 4253779 ArkansasAngie
ArkansasAngie's picture

Just another way to reduce the number of banks.  Goldman et al are licking their chops.  Brought to you by a FED and CONgress near you.

Tue, 12/17/2013 - 10:53 | 4253825 Manthong
Manthong's picture

good one... 

Tue, 12/17/2013 - 09:57 | 4253679 resurger
resurger's picture

i wont take any "Zion" even for free.

Hope they go fucking bankrupt already.

Tue, 12/17/2013 - 10:02 | 4253698 BigJim
BigJim's picture

Yes, I find it hard to believe our leaders would do anything to harm the interests of any entity that has 'zion' in its name.

Tue, 12/17/2013 - 10:12 | 4253747 SamAdams
SamAdams's picture

it's sort of like naming your bank, "Shysters"....

Tue, 12/17/2013 - 10:23 | 4253774 Hedgetard55
Hedgetard55's picture

That's Mormon Zion, not Jewish Zion.

Tue, 12/17/2013 - 11:11 | 4253922 Uchtdorf
Uchtdorf's picture

Did somebody say 'Mormon?'

So is this like good cop/bad cop?

Tue, 12/17/2013 - 09:25 | 4253582 ghengis86
ghengis86's picture

Lol. There is a market, a meat market. And we're the calves being fattened up on cheap credit and lead to slaughter.

Until these fuckers are in jail or hanging from lamp posts, nothing will change and the giant circle jerk will continue. Fuck all these bankers, and that manbearpig BerYellen too!

Tue, 12/17/2013 - 09:51 | 4253663 Freddie
Freddie's picture

Isn't Volcker's Rule designed to kill smaller or regional banks like Zions?  A rule to help the TBTF big banks?

 

Tue, 12/17/2013 - 10:16 | 4253759 Bobbyrib
Bobbyrib's picture

You have to pass it to find out what the TBTF lobbyists wrote.

Tue, 12/17/2013 - 10:42 | 4253835 Liquid Courage
Liquid Courage's picture

It's the "Pull My Finger" style of legislation.

Tue, 12/17/2013 - 10:54 | 4253873 BigJim
BigJim's picture

 “There’s a lot of pages,” Goldberg said in an interview. “It’s going to take some time to figure this all out.”

Modern banking - surely the most complex, regulated form of counterfeiting in history.

Tue, 12/17/2013 - 09:33 | 4253585 Popo
Popo's picture

"Under the published rule, the Company would no longer have the ability to hold disallowed securities until the anticipated recovery of their amortized cost. "

 

Holy shit.  What?   You can hold a security on your books at its ANTICIPATED value???    In that case, I've got $10 BILLION worth of bitcoin, because that's what ANTICIPATE it will be worth in another decade.  Can I please borrow against it?   I'd like to borrow a mere billion in USD from the treasury.   I promise I'll pay you back as soon as my bitcoin hits its anticipated value.  

Good lord there's so much bullshit out there.   How many other banks are using this ridiculous accounting method?   The more you peel away, the more it becomes clear that there are nothing but criminals and fraudsters running the show.

And what do they mean "disallowed" securities?  Does that mean that there are some "allowed" securities that you still *can* hold at their "anticipated" value -- even under the Volcker rule?  Fuck you, Congress.  You are a criminal cartel.  Period.

Tue, 12/17/2013 - 09:48 | 4253646 BandGap
BandGap's picture

Yep. I think it was a wink-wink, nudge-nudge type of thing.

How the fuck did the Volcker Rule get passed? Someone had to know this would result.

Tue, 12/17/2013 - 11:10 | 4253902 Things that go bump
Things that go bump's picture

The thing is 900 pages long and written by lobbyists for the benefit of their employers. I'm sure the good folk in the legislative branch were much too busy to actually read the thing. No doubt the authors gave them a brief synopsis, probably illustrated like a comic, so as not to overtax their limited intellectual capacity or tolerance for tedium. Like the Affordable Care Act, I guess they had to pass it to find out what was in it. Severe intended and unintended consequences are going to be likewise multiple. Vampires are an excellent metaphor for the FIRE industry, just as zombies metaphorically represent the FSA. The rest of us are stuck in a scary place. The suspense is killing me - are we going to sucked dry until we are empty husks or eaten alive? On second thought that's probably not an either/or proposition. We are probably going to be sucked dry and then eaten alive.

Tue, 12/17/2013 - 15:30 | 4254702 post turtle saver
post turtle saver's picture

long wooden stakes, head shot training, and cardio

Tue, 12/17/2013 - 11:10 | 4253910 hedgeless_horseman
hedgeless_horseman's picture

 

 

How the fuck did the Volcker Rule get passed? Someone had to know this would result.

Does BofA CEO, Brian Moynihan, look worried to you?

Fear not.  His magical asset-pricing powers and unicorn, Fasbee, are as strong as ever.

Tue, 12/17/2013 - 09:54 | 4253674 resurger
resurger's picture

Fuck you!

i too want to mark my books to rainbows and unicorns

Tue, 12/17/2013 - 10:21 | 4253773 astoriajoe
astoriajoe's picture

What's the present value of a unicorn skittle shitted 10 years from now?

Tue, 12/17/2013 - 10:41 | 4253834 noless
noless's picture

Whatever the fuck you can get people to believe.

Tue, 12/17/2013 - 10:08 | 4253722 NoDebt
NoDebt's picture

Remember in 2009 when they suspended "Mark to Market" accounting?  This is it.

Tue, 12/17/2013 - 10:58 | 4253879 Oldwood
Oldwood's picture

Yes they suspended it after they enforced it, taking out a bunch of banks that mysteriously ended up being absorbed by more "favored" institutions.

Tue, 12/17/2013 - 12:39 | 4254210 donsluck
donsluck's picture

One sign of despotism, capricious law enforcement.

Tue, 12/17/2013 - 10:20 | 4253764 Bobbyrib
Bobbyrib's picture

"Holy shit.  What?   You can hold a security on your books at its ANTICIPATED value???    In that case, I've got $10 BILLION worth of bitcoin, because that's what ANTICIPATE it will be worth in another decade.  Can I please borrow against it?   I'd like to borrow a mere billion in USD from the treasury.   I promise I'll pay you back as soon as my bitcoin hits its anticipated value."

_______________________________________________________________________________________________________________________________________________

Dude, our whole economy has been based on Enron accounting standards (mark to fantasy) since the 2007 financial crisis.

Tue, 12/17/2013 - 10:19 | 4253765 Beatscape
Beatscape's picture

Funny how the term Moral Hazard has kinda been dropped from the media lexicon.

Tue, 12/17/2013 - 12:40 | 4254217 donsluck
donsluck's picture

That's because the hazard is now real. We are now in immoral land.

Tue, 12/17/2013 - 10:36 | 4253822 Bangin7GramRocks
Bangin7GramRocks's picture

Banking in 2013. I anticipate that the garbage on our balance sheet will be worth $20 billion more than 2012, so we will distribute $10 billion of these anticipated earnings to our esteemed employees immediately.

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