Bank of America

And another banks loses its clients a boatload as Bank of America is forced to close out its long bank rish vs IG trade after the stop loss gets hit. With bank CDS surging the negative convexity is sure to send spreads in the sector even wider, rivaling only the stupidity exhibited by Apple which is now over $310 and has entered its parabolic move, as everyone is now in the stock. At this point look no further than the dot com crash to see how the move in the Nasdaq, better known as Apple, will end, and why deep OTM puts will soon rule the day. Back to BofA, Jeffrey Rosenberg instituted a $20MM short risk protection in IG15 last night. Hopefully that isn't stopped out imminently, on nothing more than intraday OpEx-POMO Vol.

In one sense, this is old news. But seeing all of "Linda Green's" signatures rounded up in one place is still pretty eye-opening.

Before we get into the latest bank assessment of fauxclosure, this
time from BofA's Michelle Meyer, we wanted to highlight one point from
today's JPM financial supplement which appears to have evaded pretty
much everyone (perhaps due to its appearance on the last page, and only
lawyers go that far). In today's earning call, Jamie Dimon stated that
the average length a mortgage is delinquent before it is finally
foreclosed upon is 14 months, or 448 days. However, it seems that average
and median in this metric are quite different. To wit, on page 21 of the supplement we read that the average delinquency at foreclosure for Florida is 678 days, while for New York, it is, get ready, 792 days! That's right, a house is delinquent on its payments, which usually means not paying anything, for over two years in New York before it is foreclosed upon. Which
also means that only now are those who stopped paying their mortgage
around the days when Lehman filed being foreclosed upon. And guess
what happened to the economy, and the stock market in the 6 months
immediately after... In other words, there is such a huge cliff of
accrued foreclosures that is supposed to be hitting right about...now,
that the double whammy of foreclosure gate and the accrued foreclosures
will blow right through the balance sheets of banks like JPM. And with
that out of the way, here is why BofA believes that there is a
"heightened risk of a more dismal scenario. If negative momentum in
the housing market kicks in, and feeds into the banking system and
broader economy, it will be hard to fight." Alas, Michelle, it already has.

As we expected when we reported that the Delaware AG got into the foreclosure fray (Delaware not being a judicial state), it was only a matter of time before foreclosures would be halted in all 50 states. Sure enough, Diana Olick has just reported that BofA has just expanded its foreclosure halt from the 23 judicial states, to all 50 states. And so, the pendulum swings from populist anger to adulation. The only question is when will Tarp 2 be enacted now that banks are facing tens of billions in losses.

Mary Ann Bartels, BofA's technical research analyst looks at the NDX large spec positions reported in last week's COT report, and does not like what she sees: "Large speculators aggressively bought NDX futures last week to a net long of $3.2bn notional from $0.8bn notional previously. Readings are in a crowded long. Between mid Feb and early April of 2010, HFs accumulated NDX aggressively into a crowded long position and S&P 500 went up 7.9% for this time period. The market corrected 10.2% from the peak crowded readings in the NDX in later April and May. We are estimating a market pullback of 10%-12%."

Update: "Bank of America is delaying foreclosures in 23 states as it examines whether it rushed the foreclosure process for thousands of homeowners without reading the documents."

The third major bank joins JPM and Ally, which have already halted foreclosures, in admitting that one of its officials "signed up to 8000 foreclosure documents a month and typically didn't read them." Which means Bank of America is about to halt its foreclosure process. Which leaves us with the last big mortgage lender: Wells Fargo, which is quietly doing the opposite. As American Banker reports, Wells is actually curtailing extensions on residential short sales, in a last ditch attempt to accelerate the foreclosure process before it also falls under the spotlight of fraudulent foreclosure disclosure. And Wells has more than everyone else combined, courtesy of its core market on the West Coast which, as it will soon be uncovered, has more mortgage fraud than any place in the known and unknown universe. As one reader wonders: "You think Wells is trying to hide more losses or are the banks switching to 100% bulk sale liquidations?" If indeed this is nothing than a last ditch attempt to dump as much as possible before the REO spigot is shut off, then shit is really about to hit the fan.

The much anticipated "low volume market" casualties are accumulating. As we noted first a few weeks ago, and subsequently picked up by other MSM publications, it was only a matter of time before Wall Street, which earlier in 2010 decided to foolishly lever up on the economic "reflation" myth and hire tons of people, is once again preparing to fire in droves, a phenomenon which traditionally is the best indicator a given economic cycle's peak has come and gone. Bloomberg has just disclosed that Bank of America is following similar actions from RBS disclosed earlier, and is firing as many as 400 employees in global banking and markets division. Charlie Gasparino, who first broke the news, also added the twist that the departures are taking place now "so as to deprive the unlucky employees year-end bonuses." Gotta love Wall Street's code of ethics. At least in the past layoffs would wait until after year end. No such luck anymore, now that most other banks are also likely considering comparable steps, and news of terminations start flooding in.

Feel like it is time to spread the market annihilation love courtesy of "any minute now" HFT-induced flash crashes? Have no fear, Bank of America is here. "High-frequency trading in the US and Europe has grabbed most attention in the market, but similar activities are quietly taking off in Asia as well." Thusly begins a pamphlet by BofA/ML's Carrie Cheung which explains the tremendous "advantages" that HFTs offer to any local market. Not mentioned is that these advantages include drastic market destabilization, and that the "attention" is of the "get that thing the hell out of here" variety. At least we get to learn some very useful facts about the proliferation of the little bloodsucking algos in the Pacific rim such as...

In an advance look at how the Q2 trading season turned out for Bank Holding Hedge Funds, some of which even accept your deposits to fund their 100x leveraged steepener trades, we have the first detailed 10-Q report out of Bank of America. Granted, the bank has a bunch of chimps running its trading operation and is thus not nearly indicative of the crack prop trading gurus at firms like Goldman and MS, due to not quite streamlining the whole prop-flow synergy bit while it had time (incidentally BofA is now looking for a seller for its prop operation) but the Fed and the government (or the Goved JV as it is known by those who suckle on its discount window teat) have made it so even a room full of chimps with Bloomberg terminals will pretty much generate trading perfection no matter what they do. So it comes as a shock that in the quarter following BofA's trading perfection days (which would be completely normal from a statistical point of view in a hyperbolic Universe, where superstrings don't need 10 dimensions, and where particle physicists are actually not superfluous), the bank has reported just 81% profitable trading days. Even scarier, the bank actually reported a day in which it lost $102 million, an event that has not occurred in over 60 days.

One of the longest running Conviction Buy ratings in Goldman history, that of Bank of America, is no more. As of this morning, Richard Ramsden has taken the firm from the coveted position at the top of the ratings pedestal. "BAC results showed many similar operating trends as JPM and C but with the least amount of credit improvement. While we still see significant upside to BAC, in our view JPM is more attractive given the recent convergence in valuation and superior credit trends. Hence we remove BAC from the Conviction list (but retain our Buy rating) and reiterate our CL-Buy on JPM...the current concern is banks are now fighting shrinkage in both trading and net interest income (NII). Given market volatility, the first can be attributed to a weak quarter but net interest income is a function of low rates and weak loan demand. We believe that NII trend is likely to remain a headwind for the coming two quarters, but based on the experience of regional and trust banks, NII should recover in 2011." Look for Bank of America to return the favor soon enough.

In what will come as a complete lack of surprise to everyone, Bank of America has officially confirmed it "mistakenly" used Repo 105-type transactions on $10.7 billion in assets, which had been misclassified as sales rather than borrowings, or repos, in the period between 2007 and 2009. As Bloomberg reports, the bank used the excuse that a $10+ billion fraud is simply an rounding error so you must acquit: "Bank of America said the inaccuracies aren’t material and
“don’t stem from any intentional misstatement of the
Corporation’s financial statements and was not related to any
fraud or deliberate error.” We are sure that late night comedians can come with enough material in which a $10.7 billion "mistake" is not material so we will leave it to them, and instead we will ask another question as pertains to the whole end of quarter window dressing theme: namely - why does it continue to this day? As per the FRBNY's public disclosure of Primary Dealer holdings, the week ended June 30 once again saw the traditional balance sheet collapse, with total PD assets as of June 30 closing once again at the lowest level of the entire quarter. This marks the 7th consecutive quarter in which primary dealer assets finished the quarter at or near the lowest exposure during the quarter, and 9 out of the last 10. But it's all fine - according to the SEC mangled rules of corrupt statistics (soon taught at a Princeton University near you), an event that occurs 90% of the time is not at all significant or notable.

Bank of America, via economist Ethan Harris, has joined the chorus of large banks reducing economic forecasts, and as a result has reduced its GDP projections for 2010 and 2011 to 3.0% and 2.6%, from 3.2% and 3.3% respectively. The inflection in 2011 is notable as now the bank sees a material slow down in the economy where before it saw growth. Also, BofA is now expecting that the Fed will leave the Fed Fund language unchanged unchanged for 18 months, until March 2012. This is not surprising: with QE2.0 around the corner, it means that the Fed will soon be implicitly lowering rates. Of course, should the Fed find some naughty pictures of Barney and Chris, it may soon pass laws that allow negative interest rates for the first time. Of course, nothing at this point would be surprising.

From Bank of America Energy Analyst Douglas Becker: "Pictures show a potential oil leak next to DO’s Ocean Saratoga, a 2nd generation semisubmersible working ten miles offshore in Mississippi Canyon Block 20. The rig is working for privately held Taylor Energy. While there is no  confirmation either way (leak or no leak), we believe the rig is in the process of plugging and abandoning (P&A) a well where the platform was damaged during Hurricane Ike, rather than engaged in exploration drilling. While more details will emerge, this is not another well control incident like the blowout on the Deepwater Horizon, but appears to be clean up mandated by the Minerals Management Services (MMS). See the imbedded link for more info (http://www.gomr.mms.gov/homepg/fastfacts/LeaseLiab/leaseliabilities.asp)."

The WSJ reports that, as broadly expected, Lehman is not alone in its illegal Repo 105 window-dressing scam: it turns out that Citigroup and Bank Of America also routinely used such shady practices for years. As Michael Rapoport reports, "Citigroup said the misclassified transactions-of $5.7 billion as of the end of 2009, and as much as $9.2 billion over the past three years-involved "a very limited number of our business units" that "used this type of transaction in very small amounts." So its all good - fraud may have been performed but it was just nickel and diming: after all it's not like Citigroup was robbing cemeteries or anything (and since guilt was neither admitted nor denied in that specific case, one can say Citi was never sleeping because it was robbing graveyards but only due to honest mistake). Sure enough, this disclosure come only after the SEC demanded clarification on Repo-105 comparable transactions at all major firms. And with such daily distractions as ten trillions point swings in the market, and crude oil filling up the world ocean, who really cares anymore that all US banks commit fraud on a daily basis. The punchline: "Bank of America and Citigroup say their misclassifications were due to errors--not an attempt to make themselves look less risky." Well, that surely justifies everything.

A completely worthless analysis on quant factors from Bank Of America (probably written in conjunction with David Bianco), which concludes that momentum quants have ruled so far this year. What is amusing is that in the very same report, BofA confirms that Momo outperformance such as the one seen currently and evidenced by the appearance of numerous services catering to momo trading echochambers in twitter and elsewhere, is associated with the Euphoria phase of markets, which usually precedes at least a 20% drop. Brilliant.