Bank of America

So now that Vikram Pandit has exited stage right from the CEO position at Citigroup, a number of people have asked me about the Zombie Dance Queen.  

Before the campaign contributors lavished billions of dollars on their favorite candidate; and long after they toast their winner or drink to forget their loser, Wall Street was already primed to continue its reign over the economy. For, after three debates (well, four), when it comes to banking, finance, and the ongoing subsidization of Wall Street, both presidential candidates and their parties’ attitudes toward the banking sector is similar  – i.e. it must be preserved – as is – at all costs, rhetoric to the contrary, aside. Obama hasn’t brought ‘sweeping reform’ upon the Establishment Banks, nor does Romney need to exude deregulatory babble, because nothing structurally substantive has been done to harness the biggest banks of the financial sector, enabled, as they are, by entities from the SEC to the Fed to the Treasury Department to the White House.

• Japan grapples with own fiscal cliff (Bloomberg)
• Japan Protests After Four Chinese Vessels Enter Disputed Waters (Bloomberg)
• Asian Stocks Rise as Exporters Gain on China, U.S. Data (Bloomberg)
• An obsolete Hilsenrath speaks: Fed Keeps Rates Low, Says Growth Is Moderate (WSJ)
• ECB Said to Push Spain’s Bankia to Swap Junior Debt for Shares (Bloomberg)
• Spain’s Bad Bank Seen as Too Big to Work (Bloomberg)
• China postpones Japan anniversary events (China Daily)
• Carney Says Rate Increase ‘Less Imminent’ on Economy Risk (Bloomberg)
• Credit Suisse to Cut More Costs as Quarterly Profit Falls (Bloomberg)
• Obama offers a glimpse of his second-term priorities (Reuters)
• Draghi defends bond-buying programme (FT)

There was a time when the announcement of lawsuits against Bank of America for the fraudulent mortgage practices of the worst M&A acquisition of all time - Countrywide Financial - sent the stock of BAC plunging. Now, it has become a daily thing and any incremental news barely cause a budget in the stock. One just needs to look at the surging Reps and Warranties claims against the bank (most recently in the latest Q3 earnings report) for improper mortgage conduct in the past to get a sense that very soon the firm's entire market cap will be less than the liability and litigation reserve it will need to establish against the avalanche of lawsuits we predicted back in October 2010. The litigation against the bank now is so large, that it will soon have to pull its TBTF get out of bankruptcy card just to avoid being sued to death in a 1000 legal paper cuts. This explains why the just announced latest lawsuit against BAC by the NY District Attorney, seeking $1 billion or so, for fraudulent loan-origination practices barely caused a stir in the stock.

By now everyone knows that as part of QEternity, Uncle Ben is currently monetizing $40 billion in MBS per month, a number which as we first forecast hours after its announcement and which everyone is now piling on to reaffirm, will rise to $85 billion in outright, unsterilized monetization beginning January 1, 2013 (as anything less would be seen as impllicit tightening in a market which now needs $85 billion in Fed Flow monthly simply not to collapse). This is fungible money which is going solely to benefit the banks, whose reserves with the Fed swell, and which proceeds can be used for virtually any purpose - from buying MBS (which they are doing) to 300x P/E stocks like AMZN - but not to be lent out to those desperately seeking loans? Why: one simple reason - the banks are already mired in legacy litigation from loans made during the last housing bubble (just see the hundreds of mortgage-related lawsuits Bank of Countrywide Lynch is a defendant in and you will get a sense of how bad it is) and the last thing they need is a repeat of that. And while the Fed has only one monetary easing pathway, which always goes through the banks, we wish to demonstrate to our readers what, in a thought experiment ignoring all the obvious practical considerations, the equivalent benefit to the general population would be if instead of being held by the banks and used to make the rich even richer, this money would bypass the banking syndicate and go straight to the US job seeker...

• China May Forgo Easing as Economy Rebounds, Survey Shows (Bloomberg)... or as food and house inflation has never gone away
• China Edges Out U.S. as Top Foreign-Investment Draw Amid World Decline (WSJ)
• Fed to keep buying bonds despite firmer U.S. growth (Reuters)
• Bernanke Seen Attacking Jobless Rate With QE Until His Term Ends (Bloomberg)
• Mortgage applications plunge 12%, down for third week in a row (Dow Jones)
• Exchanges Retreat on Trading Tools - Fund Managers, Regulators Say Certain Orders Are Risky, Aid High-Speed Firms (WSJ)
• Europe Bank Chief to Defend Bond-Buying Plan (WSJ)
• Japan, China Envoys Met Last Week for Talks on Island Feud (Bloomberg)
• Goldman’s Pill Says ‘Guerrilla’ ECB to Impose Losses on Skeptics (BBG)
• Chance rise of an Obama defeat (FT)
• King Says BOE Is Ready to Add to QE If U.K. Recovery Fades (Bloomberg)
• Rajoy Sees Case for Slowing Spain’s Austerity as Economy Shrinks (BusinessWeek)
• Hong Kong Intervenes to Defend Peg as Upper Limit Tested (Bloomberg)

It was just over a month ago that the Chairsatan formalized the incorrect named QE 3, aka the open-ended QEternity, whose purpose, for now, was to increase the Fed's balance sheet by $40 billion/month in new MBS purchases. Well, according to MarketWatch, whose previously unheard of Greg Robb is seemingly vying for the role of Jon Hilsenrath, Ben Shalom is preparing to unveil a number bigger than eternity: " After historic changes last month, Federal Reserve officials this week will discuss a possible expansion of the size of its third round of bond buying and better ways to guide markets about future policy actions." Just because $40 billion per month in new flow is apparently not enough, and because the market is now well below the level it was when "QE 3" was announced.

Once again confusion is rife overnight, following yesterday's main European event, Spain's first "mixed" regional election, which saw Rajoy's PP party in his home state of Galicia eeking a majority by a few seats, offset by wins for nationalist parties in the Basque Country. The immediate read here is that the Galician win is an endorsement of Rajoy's "austerity poilicies" and thus EUR positive (which have yet to be actually implemented as Spanish spending continues to rise, as tax revenues continue to drop), yet it makes the likelihood that Spain requests a bailout before the Spanish regional election on November 25, which is about secession, virtually nil, and thus SPGB negative. Furthermore as Bank of America points out "some euro-area govts may remain reluctant to support Spain’s request as long as yields continue to be low, banks haven’t been recapitalized; probably reinforced by Catalonia elections" but that is a reality tale for another day - the "market" can only handle so much.

Earlier this week two former Merrill colleagues, since separated, were reunited on several media occasions, and allowed to spar over their conflicting views of the world. The two people in question, of course, are Gluskin Sheff's David Rosenberg, best known during the past 3 years for not drinking the propaganda Kool-Aid, and systematically deconstructing every "bullish" macroeconomic datapoint into its far more downbeat constituent parts, and his ebullient ex-coworker, Richard Bernstein, formerly head of equity strategy at a firm that had to be rescued by none other than Bank of America and currently head of RBA advisors, who just happens to be bullish on, well, everything. And since any attempt at holding an intelligent conversation on CNBC is ultimately futile (as can be seen here) and is constantly broken up by both ads, and interjecting anchors and show producers who care far less about facts than keeping the presentation 'engaging' (and going to such lengths to even allow Jim Cramer to have his own TV show), Rosenberg decided to dedicate his entire letter to clients today to "providing a rebuttal" of the slate of reasons why according to Bernstein the "we are on the precipice of a 1982-2000 style of secular market." What follows is one of the most comprehensive "white papers" debunking the bullish view we have seen in a while. Read on.

• Germany will pay Greek aid (Spiegel)
• Spain Banks Face More Pain as Worst-Case Scenario Turns Real (Bloomberg)
• China’s Growth Continues to Slow (WSJ)
• Executives Lack Confidence in U.S. Competitiveness (WSJ)
• Poor Market Conditions will See 180 Solar Manufacturers Fail by 2015 (OilPrice)
• Wen upbeat on China’s economy (FT)
• Gold remains popular, despite the doubts of economists (Economist)
• Armstrong Stands to Lose $30 Million as Sponsors Flee (Bloomberg)
• IMF urges aid for Italy, Spain but Rome baulking (Reuters)
• EU Summit Highlights Financial Divide (WSJ)
• FOMC Straying on Price Target, Former Fed Officials Say (Bloomberg)
• Putin defiant over weapons sales (FT)

Today Europe awakes to yet another Eurozone summit, one at which such topics as Greece, Spain, the banking union project or a economic/budgetary union will have to gain further traction, if not resolution. In fact Greece could hardly wait and has already launched it latest 24 hour strike against austerity. The same Greece which demands a 2 year, €30 billion extension from Europe to comply with reform, a move which Europe has/has not agreed to as while the core have said yes to more time, all have refused to fund Greece with any more money. Alas the two are synonymous. As SocGen predicts unless there is some credible progress today, all the progress since the September ECB meeting, which has seen SPGB 10 Year yields decline from 690 bps to sub 550 bps, may simply drift away. And as everyone knows, there is never any progress at these meetings, except for lots of headlines, lots of promises (the Eurozone June summit's conclusions have yet to be implemented) and lots of bottom line profits by Belgian caterers. Elsewhere, Spain sold 3, 4 and 10 year bonds at declining yields on residual optimism from the pro forma bailed out country's paradoxical Investment Grade rating. In non-hopium based news, Spanish bad loans rose to a record 10.5% in August from 10.1% previously while the oldest bank in the world, Italy's Banka Monte dei Paschi was cut to junk status. All this is irrelevant though, as no negative news will ever matter again in a centrally-planned world. Finally the only real good news (at least until it is revised)came out of the UK, where retail sales posted a 0.4% increase on expectations of a 0.2% rise from -0.2%.

The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months, has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. Needless to say, the subsidization of this wholesale purchasing of foreclosures, coupled with the ongoing "foreclosure stuffing" pursued by the big banks (as a reminder days to foreclose in New York just hit a record 1,072 per RealtyTrac as banks simply refuse to clear housing inventory faster knowing full well withheld inventory is an additional clearing price subsidy) is the main reason why the punditry has been confused into believing there is a housing rebound. That this "rebound" is merely a subsidized demand pull phenomenon a la the "cash for clunkers" auto sales program is patently clear to most. Nonetheless what little confusion is left, is finally coming to an end, thanks to none other than one of the first entrants in the REO-To-Rental space, $31 billion hedge fund Och Ziff, which a year after entering the program with hopes of quick riches, is now looking to cash out.

When one combs through the usual hodge podge of purposefully distracting headline bullets in Bank of America's quarterly release one as usual ends up with a sorry picture. Here are the key numbers: Noninterest income for the firm, traditionally about half of total revenues in addition to Net Interest Income, has continued to decline, and slid fo $10.5 billion, down from $12.4 billion in Q2 and down from $18.0 billion in Q3 2011. The other side: Total Interest Income (before expenses) also has continued to decline, and dropped to $13.976 billion from $13.992 billion a quarter ago, and down from $15.853 billion a year earlier. These numbers are hard to fudge. The number that is very easy to fudge is the Net Income (and per share) line, which was reported at $340 MM or $0.00 in diluted earnings per share after dividends. What helped substantially here is the following: while the firm booked a provision for credit losses of just $1.774 bilion, in line with Q2 and half of the $3.4 billion in Q3, 2011, what more than offset this was the surge in reserve reduction which soared to the highest in years at $2.348 billion, up from $1.853 billion in Q2 and way up from the $1.679 billion in Q3 2011. What is even more paradoxical is that despite what Moynihan is saying about an improvement in the housing market, the bank's total chargeoffs rose to the highest in a year, at $4.122 billion, up from $3.626 billion in Q2, and the highest since Q4 2011. The result is that the Net charge off ratio also spiked to the highest in a year, at 1.86%.

• Obama takes offensive against Romney in debate rematch (Reuters)
• Obama Says Romney Words Aren’t ‘True’ in Second Debate (Bloomberg)
• Obama takes Romney head-on in debate (FT)
• And another joins the club: Thailand Unexpectedly Cuts Rate as Global Outlook Worsens (Bloomberg)
• PBOC Injects Less Cash (WSJ)
• Japan to Hold Special Cabinet Meeting After Economy Downgraded (Bloomberg)
• Greek Coalition Duo Reject Labour Moves Proposed by Troika (WSJ)
• Opposition wanes to Spanish aid request (FT)
• RBS to Exit U.K. Asset Protection Plan After $4 Billion Fees (Bloomberg)
• Spain Retains Investment Grade Credit Rating From Moody’s (Bloomberg)
• US diplomat asks Japan, ROK to resolve islands spat (China Daily)
• Stagnation not due to austerity, says OBR (FT)

Nearly four years ago, we started a series of articles in which we methodically presented evidence that LIBOR was manipulated. Then, in late June, the biggest (to date) bank conspiracy was exposed, in which it was found beyond a reasonable doubt that at least one, and in many case all (including the BOE and Fed) were if not engaging, then certainly aware of numerous instances when daily USD LIBOR fixing was fudged one way or another for various non-fiduciary, read illegal purposes. When our conspiracy theory was confirmed to be conspiracy fact (as usual), we suggested the following: "Our advice to anyone who had an adjustable rate mortgage in the period between 2005 and today: speak to a lawyer immediately about suing the living feces out of Barclays, and all other banks who crawl out of the woodwork with purported settlements. Because due to their undisputed mark manipulation, it is absolutely safe to say that ARMs, which rely on Libor for interest rate formation, were grossly manipulated by the same idiot traders who left written evidence of their manipulation year after year. Now it is their turn to pay." As of last night, this too has occurred, after several homeowners, aka Adams et al (Southern New York, 12-cv-07461) launched a class action lawsuit against Bank of America and all other LIBOR banks, accusing the defendants of "unjustly enriched themselves" by manipulating the rate, which allowed them to increase the payments by homeowners on adjustable rate loans, and boosting profits.