MBS Putbacks, Basel III, Insufficient Loss Provisions: How Many More Problems for Banks? [View article]
Tom - - -
I am making the tacit assumption that a healthy asset ratio is 80% or higher. That was what was seen 1993-2008. The ratios seen below 80% before 2003 are associated with the S&L crisis and all the stress put on the banking system as a result. I have read comments from banking experts that many banks were actually insolvent back then, but regulators gave them enough slack so they could earn their way out of the problem in the boom years of the 1990s.
We now have similar poor ratios in what appears to me to be a much bigger problem (it certainly is in dollar terms) and no apparent prospects for another boom decade like the 1990s. That makes me very negative on bank earning prospects for several years or more TBTF bank failures if we don't successfully muddle through, to use John Mauldin's term.
bbro - - -
We have discussed this before and I respect your considered opinion. To avoid problems I believe we must avoid another major recession (or a series of closely spaced smaller recessions) and get a GDP growth rate north of 2.5% (even better above 3%) compounding for several years. This will only happen if we are adding 1.5 million jobs a year (or more to get above 3%). That is what it will take to stop the bleeding in housing which is still a bleed out path for the banks if home prices continue to fall.
My problem is that I am currently unable to rationalize a pathway to get the sustained job growth.
Put-Back Losses on Mortgages Estimated at $31 Billion [View article]
Librigar - - -
I feel that C is in the weakest position of all the large banks. The situation is not as dire as for AIG, but C is in a similar divestiture race to raise capital to offset liabilities that are still not recognized on their books and which they have no way to realize without vast amounts of additional capital.
There are those who have disagreed with me, quoting the SEC filings that C has made indicating that they are sufficiently capitalized. As I mentioned in the article, I have problems with credibility of the official financial records. When the liabilities reported from quarter to quarter are fluctuating all over the map the impression is that these are book entry items that are being manipulated as needed to provide the semblance of solvency. Of course, the debate about how many defective assets remain hidden by extend and pretend practices continues.
If the real estate market can recover some of its losses in the next 5-10 years, extend and pretend will have been successful, at least to some extent.
If real estate prices drop any further and remain depressed for the next five years, extend and pretend will merely have delayed some additional major bank failures.
Put-Back Losses on Mortgages Estimated at $31 Billion [View article]
Rick54 - - -
Thanks for the great reply. I always want to get some inside information response when I open a subject and you more than satisfied that want.
I hope readers will read your entire comment because it establishes some of the nuances in this subject far better than I am likely to do as an outsider.
In private discussions with Yves Smith (Naked Capitalism) I have also been made aware of the robustness of the guarantees that Fannie and Freddie have gotten on the MBS they have acquired. I assume the Fed has gotten similar contracts, but I do not know. I depend greatly on what I learn from Yves - she has essentially worked full time for several months on analysis of the mortgage documentation problem and ramifications for foreclosure and MBS.
The above background is why I brought John Talbott into the article. John is a former Managing Director at Goldman Sachs. (I like to call him a reformed managing director, although that is too harsh because he was from the traditional investment banking side of the business and not the newly ascendant trading side of that company.) The link in the article goes to discussion of something John wrote earlier this year warning of the potential for the MBS acquisitions of Fannie, Freddie and the Fed as a vehicle that could be used for further backdoor bank bailouts.
You see a lot of these issues from an inside perspective and can make inferences that I can not based on my 30,000 foot outside view.
I'll repeat my earlier suggestion to readers: Your comment should not be skimmed over quickly. Thanks for taking the time to give it.
Put-Back Losses on Mortgages Estimated at $31 Billion [View article]
ellasc - - -
What you should do depends entirely on your circumstances.
If the BAC position is a small part of your portfolio you can afford to wait to see what happens.
If BAC is the only stock you own you probably shouldn't consider keeping it unless you have more income from other (non-stock) sources than you will ever need.
If you are in good health and have had family members live well into their 90s, holding the stock carries less risk than if your health is questionable and you can not realistically have high hopes for living another 15-20 years. BAC could go significantly lower and not recover either price ($20 and higher) and dividends, even 1/2 of what they used to be, for many years.
The best I can do is give you these generally applicable guidelines to consider. What you should do depends on careful examination of your situation and financial planning details.
Put-Back Losses on Mortgages Estimated at $31 Billion [View article]
Rick54 - - -
Please read the article again. I did not assume 100% write-offs. I did not assume any level of success rate. I did not identify a put-back severity line of any sort, except for speculating that a 5% "settlement" level for Fannie, Freddie and the Fed would amount to a back door bailout. Perhaps you placed your comment on the wrong article?
If I am so dense that I missed what you were trying to say with respect to what I wrote, try again to illuminate me. I am trainable, although at times it is a lengthy process.
Banks are Still at the Derivatives Casino [View article]
gakushi - - -
The source of the number is Agora Financial whose graphic I used to start my discussion. They attribute the data to U.S. Office of the Comptroller of the Currency. It can be found in Table 1, near the end of www.occ.treas.gov/ftp/....
The Office of the Comptroller of the Currency attributes their data to corporate 10Qs. At this point I don't know how to reconcile the differences between to BAC 10Q yahoo.brand.edgar-onli... and the government data.
More Prosecutions of Investment Banks Coming? [View article]
There will be hesitancy to pursue these cases too vigorously because the capitalization of banks might not withstand too much activity in these areas. The extend and pretend strategy of the Treasury and the Fed could be washed out with devastating results.
Justice is supposed to be blind but I expect that at least one eye will be open in these cases.
What is quite likely is that a few selected cases will be brought at a time and they will be determined on the basis of who is the most able to withstand the financial stress. This maintains a charade of "going after the crooks" while allowing most of them to escape timely prosecution. After some time has passed the public fervor for justice will fade and it may be that many miscreants will go unpunished.
Banks Recruit Investors to Oppose Honest Valuation of Assets; Just How Unprepared Are Banks for Major Losses? [View article]
DM - - -
Mish probably does not feel it is necessary to reply to this comment from levin70. I addressed levin70's misunderstanding in a comment on another Mish article seekingalpha.com/autho... and informed Mish of that by e-mail.
Sorry, I have to correct your repeated mis-statement. Here is a definition of the ratio number in the graphs (from the St. Louis Fed research.stlouisfed.or... :
"Each bank is classified by whether the ratio of its allowance for loan and lease losses to nonperforming loans is greater than one. The allowance for loan and lease losses is the sum of call report items rcfd3123 and rcfd3128. Total nonperforming loans equals the sum of call report items rcfd1403 and rcfd1407. For each size category, the sum of all assets held by banks where this ratio is greater than one is divided by the sum all assets held by banks in the class."
The ratio doesn't give the fraction of banks that have ALLL covering non-performing loans (NPL), but it does give the fraction of assets that are in banks that have exceeded full coverage.
Let me translate:
Looking at the graph for banks with assets over $20 billion, 14% of assets in that class are in banks that have ALLL/NPL greater than 1. That means that 86% of the assets are in banks that have under reserved.
This is completely different than your incorrect assertion, which you made previously and repeated in this comment stream. The data presented by Mish is far more foreboding than you would have others believe.
A good reference for the 2000-3000 troubled banks would be the report in February from Elizabeth Warren's COP (Congressional Oversight Panel) that stated nearly 3,000 banks would be in trouble (seekingalpha.com/artic... ).
Another good reference is the 2009 estimate by bank analyst Chris Whalen that 1,882 banks were in trouble.
Keep reporting on this issue. Bank accounting is a big unknown and many have their heads in the sand. It doesn't help that the basic concept of fractional reserve banking is an accounting balancing act in healthy times. It also doesn't help that securitization has spread risk around and made its location and magnitude uncertain.
We started with a fragile banking structure that had reasonable reinforcements in place and grew it into a Taj Mahal of cards with a foundation on shifting sands. The real economy has become the servant of finance. The correct structure has a financial system which is the servant of the real economy. See an interesting blog note by Dirk Ehnt by150w.bay150.mail.liv...
Banks Recruit Investors to Oppose Honest Valuation of Assets; Just How Unprepared Are Banks for Major Losses? [View article]
bbro - - -
See my first sentence ".....some of which are not home mortgages..."
Thanks for researching RE to total numbers. I have been reading that some commercial loans are being rolled over without interest (interest deferred to a balloon payment) so these would all be listed on the books as performing, whether they are likely to perform at the balloon maturity or not. This would drive the non-performing percentage down.
Thus, non-performing mortgages would be higher than the overall 5.5%. That could get the banks mortgage non-performance closer to the 9-14% of the rest of the world.
Of course, the banks have MBS as assets that are not on their loan books and evaluated by some opaque process. This may be another exposure which is not understood. Are they all evaluated based on a reduction in potential future foreclosures because house prices are up year/year by some 3-5%? (Sorry I don't have the exact number.)
Then what happens if house prices go down 3-5% in the next year instead of continuing up? What if they go down 10%? These are very real possibilities.
This situation is a mess of uncertainty. Anyone who has it figured out correctly should be able to make a fortune.
Banks Recruit Investors to Oppose Honest Valuation of Assets; Just How Unprepared Are Banks for Major Losses? [View article]
Mike - - -
There is a big mis-match between what the banks are reporting ($7 trillion loans and leases, some of which are not home mortgages, with a 5.5% non-performing rate) and what the Mortgage Bankers Association reports ($11.5 trillion in mortgages with a 14.4% delinquency rate, 9.5% seriously delinquent). Of course some of the mortgages are held by non-banks in MBS (try the Fed for $1 trillion plus and numerous institutional investors like pensions who bought this AAA junk) but how can it be credible that 5.5% non-performing exists on the same planet with 9.5% to 14.4% delinquency rates?
Mortgage obligations are necessarily the elephant on the bank's books (or held off their books in various securities). It's called liars' poker. Unfortunately the liars continue to conceal their cards. How can the banks be experiencing 5.5% non-performance? If that were real, then all other mortgage and mortgage security holders would have a non-performance rate averaging somewhere between 14% and 23% if each group (banks and others) each held half of all mortgages.
It just does not seem credible that bank mortgage assets could be that much better than mortgage assets held by other. It must be simply that many delinquencies are not recognized as non-performing by the banks.
I am not making any new accusation here. Many others have pointed this out.
College Loan Debt: A Big Problem for Borrowers, Lenders and Government [View article]
Rich - - -
I don't know of such a study but at least the correlations could be established. I would need a good source of tuition (and total college expenses) over the past 40-50 years and the time line of federal college loan and grant programs.
Once I had the two data arrays I would look at how the correlations change if the time lines are shifted. Do correlations increase or decrease if the cost is moved to later dates (after the change in federal support). This would establish implications about whether the funding drove the costs or vice versa.
TARP: What Happened and Does Anyone Care? Part 1 [View article]
Elliott - - -
Thanks for this comprehensive update. This is an ongoing saga of the financial crisis. The unofficial problem bank list at Calculated Risk is now up to 792 (about 200 more than the beginning of the year) in spite of 103 banks being removed from the list by reason of failure and FDIC take-over. So 300 more banks are in deep trouble than could be identified from public records seven months ago. This increase is more than the total FDIC bank closures to date in this crisis. See seekingalpha.com/insta...
We may be waiting a long time for these programs to be completed. Although it applies to a different concept, I am reminded of an old saying: "Payback is hell."
MBS Putbacks, Basel III, Insufficient Loss Provisions: How Many More Problems for Banks? [View article]
I am making the tacit assumption that a healthy asset ratio is 80% or higher. That was what was seen 1993-2008. The ratios seen below 80% before 2003 are associated with the S&L crisis and all the stress put on the banking system as a result. I have read comments from banking experts that many banks were actually insolvent back then, but regulators gave them enough slack so they could earn their way out of the problem in the boom years of the 1990s.
We now have similar poor ratios in what appears to me to be a much bigger problem (it certainly is in dollar terms) and no apparent prospects for another boom decade like the 1990s. That makes me very negative on bank earning prospects for several years or more TBTF bank failures if we don't successfully muddle through, to use John Mauldin's term.
bbro - - -
We have discussed this before and I respect your considered opinion. To avoid problems I believe we must avoid another major recession (or a series of closely spaced smaller recessions) and get a GDP growth rate north of 2.5% (even better above 3%) compounding for several years. This will only happen if we are adding 1.5 million jobs a year (or more to get above 3%). That is what it will take to stop the bleeding in housing which is still a bleed out path for the banks if home prices continue to fall.
My problem is that I am currently unable to rationalize a pathway to get the sustained job growth.
Put-Back Losses on Mortgages Estimated at $31 Billion [View article]
I feel that C is in the weakest position of all the large banks. The situation is not as dire as for AIG, but C is in a similar divestiture race to raise capital to offset liabilities that are still not recognized on their books and which they have no way to realize without vast amounts of additional capital.
I have written on my view of the problem several times: seekingalpha.com/artic... , seekingalpha.com/artic... , and seekingalpha.com/artic... .
There are those who have disagreed with me, quoting the SEC filings that C has made indicating that they are sufficiently capitalized. As I mentioned in the article, I have problems with credibility of the official financial records. When the liabilities reported from quarter to quarter are fluctuating all over the map the impression is that these are book entry items that are being manipulated as needed to provide the semblance of solvency. Of course, the debate about how many defective assets remain hidden by extend and pretend practices continues.
If the real estate market can recover some of its losses in the next 5-10 years, extend and pretend will have been successful, at least to some extent.
If real estate prices drop any further and remain depressed for the next five years, extend and pretend will merely have delayed some additional major bank failures.
Put-Back Losses on Mortgages Estimated at $31 Billion [View article]
Thanks for the great reply. I always want to get some inside information response when I open a subject and you more than satisfied that want.
I hope readers will read your entire comment because it establishes some of the nuances in this subject far better than I am likely to do as an outsider.
In private discussions with Yves Smith (Naked Capitalism) I have also been made aware of the robustness of the guarantees that Fannie and Freddie have gotten on the MBS they have acquired. I assume the Fed has gotten similar contracts, but I do not know. I depend greatly on what I learn from Yves - she has essentially worked full time for several months on analysis of the mortgage documentation problem and ramifications for foreclosure and MBS.
The above background is why I brought John Talbott into the article. John is a former Managing Director at Goldman Sachs. (I like to call him a reformed managing director, although that is too harsh because he was from the traditional investment banking side of the business and not the newly ascendant trading side of that company.) The link in the article goes to discussion of something John wrote earlier this year warning of the potential for the MBS acquisitions of Fannie, Freddie and the Fed as a vehicle that could be used for further backdoor bank bailouts.
You see a lot of these issues from an inside perspective and can make inferences that I can not based on my 30,000 foot outside view.
I'll repeat my earlier suggestion to readers: Your comment should not be skimmed over quickly. Thanks for taking the time to give it.
Put-Back Losses on Mortgages Estimated at $31 Billion [View article]
What you should do depends entirely on your circumstances.
If the BAC position is a small part of your portfolio you can afford to wait to see what happens.
If BAC is the only stock you own you probably shouldn't consider keeping it unless you have more income from other (non-stock) sources than you will ever need.
If you are in good health and have had family members live well into their 90s, holding the stock carries less risk than if your health is questionable and you can not realistically have high hopes for living another 15-20 years. BAC could go significantly lower and not recover either price ($20 and higher) and dividends, even 1/2 of what they used to be, for many years.
The best I can do is give you these generally applicable guidelines to consider. What you should do depends on careful examination of your situation and financial planning details.
Put-Back Losses on Mortgages Estimated at $31 Billion [View article]
Please read the article again. I did not assume 100% write-offs. I did not assume any level of success rate. I did not identify a put-back severity line of any sort, except for speculating that a 5% "settlement" level for Fannie, Freddie and the Fed would amount to a back door bailout. Perhaps you placed your comment on the wrong article?
If I am so dense that I missed what you were trying to say with respect to what I wrote, try again to illuminate me. I am trainable, although at times it is a lengthy process.
Banks are Still at the Derivatives Casino [View article]
The source of the number is Agora Financial whose graphic I used to start my discussion. They attribute the data to U.S. Office of the Comptroller of the Currency. It can be found in Table 1, near the end of www.occ.treas.gov/ftp/....
The Office of the Comptroller of the Currency attributes their data to corporate 10Qs. At this point I don't know how to reconcile the differences between to BAC 10Q yahoo.brand.edgar-onli... and the government data.
Any thoughts?
More Prosecutions of Investment Banks Coming? [View article]
Justice is supposed to be blind but I expect that at least one eye will be open in these cases.
What is quite likely is that a few selected cases will be brought at a time and they will be determined on the basis of who is the most able to withstand the financial stress. This maintains a charade of "going after the crooks" while allowing most of them to escape timely prosecution. After some time has passed the public fervor for justice will fade and it may be that many miscreants will go unpunished.
Banks Recruit Investors to Oppose Honest Valuation of Assets; Just How Unprepared Are Banks for Major Losses? [View article]
Mish probably does not feel it is necessary to reply to this comment from levin70. I addressed levin70's misunderstanding in a comment on another Mish article seekingalpha.com/autho... and informed Mish of that by e-mail.
FDIC Quarterly Banking Report: 'Reduced Loan-Loss Provisions Boost Earnings'; Commercial Banker Comments on Loan-Loss Provisions [View article]
Sorry, I have to correct your repeated mis-statement. Here is a definition of the ratio number in the graphs (from the St. Louis Fed research.stlouisfed.or... :
"Each bank is classified by whether the ratio of its allowance for loan and lease losses to nonperforming loans is greater than one. The allowance for loan and lease losses is the sum of call report items rcfd3123 and rcfd3128. Total nonperforming loans equals the sum of call report items rcfd1403 and rcfd1407. For each size category, the sum of all assets held by banks where this ratio is greater than one is divided by the sum all assets held by banks in the class."
The ratio doesn't give the fraction of banks that have ALLL covering non-performing loans (NPL), but it does give the fraction of assets that are in banks that have exceeded full coverage.
Let me translate:
Looking at the graph for banks with assets over $20 billion, 14% of assets in that class are in banks that have ALLL/NPL greater than 1. That means that 86% of the assets are in banks that have under reserved.
This is completely different than your incorrect assertion, which you made previously and repeated in this comment stream. The data presented by Mish is far more foreboding than you would have others believe.
FDIC Quarterly Banking Report: 'Reduced Loan-Loss Provisions Boost Earnings'; Commercial Banker Comments on Loan-Loss Provisions [View article]
A good reference for the 2000-3000 troubled banks would be the report in February from Elizabeth Warren's COP (Congressional Oversight Panel) that stated nearly 3,000 banks would be in trouble (seekingalpha.com/artic... ).
Another good reference is the 2009 estimate by bank analyst Chris Whalen that 1,882 banks were in trouble.
Keep reporting on this issue. Bank accounting is a big unknown and many have their heads in the sand. It doesn't help that the basic concept of fractional reserve banking is an accounting balancing act in healthy times. It also doesn't help that securitization has spread risk around and made its location and magnitude uncertain.
We started with a fragile banking structure that had reasonable reinforcements in place and grew it into a Taj Mahal of cards with a foundation on shifting sands. The real economy has become the servant of finance. The correct structure has a financial system which is the servant of the real economy. See an interesting blog note by Dirk Ehnt by150w.bay150.mail.liv...
Banks Recruit Investors to Oppose Honest Valuation of Assets; Just How Unprepared Are Banks for Major Losses? [View article]
See my first sentence ".....some of which are not home mortgages..."
Thanks for researching RE to total numbers. I have been reading that some commercial loans are being rolled over without interest (interest deferred to a balloon payment) so these would all be listed on the books as performing, whether they are likely to perform at the balloon maturity or not. This would drive the non-performing percentage down.
Thus, non-performing mortgages would be higher than the overall 5.5%. That could get the banks mortgage non-performance closer to the 9-14% of the rest of the world.
Of course, the banks have MBS as assets that are not on their loan books and evaluated by some opaque process. This may be another exposure which is not understood. Are they all evaluated based on a reduction in potential future foreclosures because house prices are up year/year by some 3-5%? (Sorry I don't have the exact number.)
Then what happens if house prices go down 3-5% in the next year instead of continuing up? What if they go down 10%? These are very real possibilities.
This situation is a mess of uncertainty. Anyone who has it figured out correctly should be able to make a fortune.
Banks Recruit Investors to Oppose Honest Valuation of Assets; Just How Unprepared Are Banks for Major Losses? [View article]
There is a big mis-match between what the banks are reporting ($7 trillion loans and leases, some of which are not home mortgages, with a 5.5% non-performing rate) and what the Mortgage Bankers Association reports ($11.5 trillion in mortgages with a 14.4% delinquency rate, 9.5% seriously delinquent). Of course some of the mortgages are held by non-banks in MBS (try the Fed for $1 trillion plus and numerous institutional investors like pensions who bought this AAA junk) but how can it be credible that 5.5% non-performing exists on the same planet with 9.5% to 14.4% delinquency rates?
Mortgage obligations are necessarily the elephant on the bank's books (or held off their books in various securities). It's called liars' poker. Unfortunately the liars continue to conceal their cards. How can the banks be experiencing 5.5% non-performance? If that were real, then all other mortgage and mortgage security holders would have a non-performance rate averaging somewhere between 14% and 23% if each group (banks and others) each held half of all mortgages.
It just does not seem credible that bank mortgage assets could be that much better than mortgage assets held by other. It must be simply that many delinquencies are not recognized as non-performing by the banks.
I am not making any new accusation here. Many others have pointed this out.
College Loan Debt: A Big Problem for Borrowers, Lenders and Government [View article]
I don't know of such a study but at least the correlations could be established. I would need a good source of tuition (and total college expenses) over the past 40-50 years and the time line of federal college loan and grant programs.
Once I had the two data arrays I would look at how the correlations change if the time lines are shifted. Do correlations increase or decrease if the cost is moved to later dates (after the change in federal support). This would establish implications about whether the funding drove the costs or vice versa.
TARP: What Happened and Does Anyone Care? Part 1 [View article]
Thanks for this comprehensive update. This is an ongoing saga of the financial crisis. The unofficial problem bank list at Calculated Risk is now up to 792 (about 200 more than the beginning of the year) in spite of 103 banks being removed from the list by reason of failure and FDIC take-over. So 300 more banks are in deep trouble than could be identified from public records seven months ago. This increase is more than the total FDIC bank closures to date in this crisis. See seekingalpha.com/insta...
We may be waiting a long time for these programs to be completed. Although it applies to a different concept, I am reminded of an old saying: "Payback is hell."
Banks are Still at the Derivatives Casino [View article]
Great discussion on speculative demand. I hope others will find it here at the end of an aging comment thread.
Thanks for your input.