US Banks (2008)

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mw
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Post by mw »

Back to US Banks:

S&P Cuts, Reviews $34 Billion of Alt-A Securities
May 28 (Bloomberg) -- Standard & Poor's cut or may lower ratings on almost $34 billion of securities backed by Alt-A mortgages, the firm's largest downgrade for the type of debt.

Ratings on 1,326 classes of the bonds created in the first half of 2007 were reduced, New York-based S&P today said today in a statement. S&P put another 567 similar bonds with AAA ratings under review. Based on the balances of the bonds at issuance, 14 percent of the total from the period were either cut or placed under review.

Late payments of at least 90 days and defaults among Alt-A loans underlying bonds issued last year rose to 6.64 percent as of April bond reports, up 65 percent since January, S&P said. Defaults on all types of home loans have surged amid record U.S. property-price declines.

``Monthly performance data reveal that delinquencies and foreclosures continue to accumulate,'' New York-based S&P analysts Scott Davey and Ernestine Warner wrote in the statement.
Nothing like getting it right the second, er third, er ?th time:
S&P has downgraded 66 percent of 2007 subprime-mortgage securities, by the number of classes, and 96 percent of 2007 second-mortgage bonds. The firm's downgrades on collateralized debt obligations used to repackage mortgage bonds into new securities total more than $350 billion, its biggest cuts amid the housing slump.
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Post by pitz »

kcowan wrote:Canadian Banks
- mortgage originations down
- credit card profits sold off
- trading volumes down
The banks still make plenty on the credit cards, even though they have divested the overall processing business (V and MA), as underwriters of high-interest rate loans that are extended to card users.

I think a good area of growth for the Canadian banks could be investment (ie: margin) loans. The same crowd that thought they could finance themselves towards prosperity by purchasing houses could also probably be convinced that they can finance their way into retirement by taking out investment loans to buy stocks.

And with the TSX having a nice solid 5-year track record of only going up consistently, with probably a few more good years ahead of us...

Canadian banks could (and should) also offer retail customers energy pricing hedging products. Instead of GICs, they could sell "Guaranteed Gas Certificates", that would allow a person to lock in their energy costs going forward, based on a combination of investment returns, and the purchase of futures contracts. Of course, in sizes that are palatable to retail clients.

Since Canadians are flush with cash from high oil prices and a good economy, there's plenty of a market for these products. Also, house price insurance is something the banks could sell to boomers who are looking to retire.

What will happen to
- consumer loans?
- banking fees?
- investment banking deals (e.g. TD and BCE)?
- foreign exchange fees?
- other sources of growth?
Well, for starters, I believe that the current problems in ABCP, etc., will shake a lot of the niche, smaller players out of the market, including mortgage brokers, and drive more finance business into bank branches. 3rd party mortgage brokering will cease to be an industry or even a profession for that matter going forward (already plenty of evidence that's happening down south). This will support the traditional brick and mortar banking industry.
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kcowan
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Post by kcowan »

pitz wrote:Well, for starters, I believe that the current problems in ABCP, etc., will shake a lot of the niche, smaller players out of the market, including mortgage brokers, and drive more finance business into bank branches. 3rd party mortgage brokering will cease to be an industry or even a profession for that matter going forward (already plenty of evidence that's happening down south). This will support the traditional brick and mortar banking industry.
I was under the impression that mortgage brokers really exist for the secondary providers like credit unions. Can you give an example of why a consumer might be forced back into a bank to get a mortgage?

I suppose if the bank offers some kind of package that includes different classes of debt (margin, HELOC, CC) it might prove attractive. But on a naked deal basis, it is all about the rate.
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Post by chiaroscuro »

David Goldman of Asteri painted a very grim picture on banks today on Bloomberg radio. I'd opinion that Canadian banks, as in the recent past, will follow the leaders.
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Post by mw »

US banks fear being forced to take $5,000bn back on balance sheets
Financial Times: Accounting changes could force US banks to take thousands of billions of dollars back on to their balance sheets in the coming months in a move that is likely to curb further their lending and could push them into new capital raisings, analysts have warned.

Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books.

The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them.

Birgit Specht, head of securitisation analysis at Citigroup, said: "We think it is very likely that these vehicles will come back on balance sheet.

"This will not affect liquidity because [they] are funded, but it will affect debt-to-equity ratios [at banks] and so significantly impact banks' ability to lend."
This will affect tier 1 capital ratios as well as return on equity.

5 trillion is a lot to work through, to say the least.

Is this likely to happen? The current regulatory environment is in clamp down mode - its highly likely that the FASB proposal will become an adopted standard. It should be.
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Post by pitz »

mw, on the balance sheet or off-balance sheet, the losses are going to occur no matter what. Bringing the stuff on balance sheet, and marking it to market will render the (already insolvent) system insolvent twice over. Leaving it off will just prolong the pain for years.

Take your pick, what's better for the economy, complete annhilation of the US banks today, a big one-time dose of inflation, and a return to more productive activity tomorrow, or spending the next 10 years with high inflation, and continuing to pay a bunch of banker maggots, the very same people who created the mess in the first place, good money to preside over insolvent institutions?

I know which road I'd choose. :)
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Post by mw »

WASHINGTON, June 5 (Reuters) - Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday.

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry.
4 smaller banks have gone belly up (not talking about Bear Stearns) - this is already an increase for year to date failures; FDIC has been attracting former employees to come back from retirement, expecting more trouble.

Much of the fear has been centered around smaller regional banks so far, but the notion that the carnage may spread is supported by the extraordinary increase in defaults and delinquencies.
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Post by mw »

pitz wrote:Take your pick, what's better for the economy, complete annhilation of the US banks today, a big one-time dose of inflation, and a return to more productive activity tomorrow, or spending the next 10 years with high inflation, and continuing to pay a bunch of banker maggots, the very same people who created the mess in the first place, good money to preside over insolvent institutions? I know which road I'd choose. :)
I'm all for getting the pain over quickly but the banks, and individuals (with tiny savings rate and huge debt, ill prepared for retirement), are going to be suffering for years no matter which route is chosen.

Back in 2003 when I became a peak oil convert I assumed then that inflation would one day be a major issue, a generational issue. So far our portfolio has born a lot of fruit based on that assumption.

Hope I'm wrong on that one.
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Post by mw »

LEHman slugfest continues:

Lehman May Raise $5 Billion of Capital, Person Says
June 5 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, may raise as much as $5 billion in capital by early next week, a person with knowledge of the matter said.
Meanwhile, more mortgage insurers under ratings revision:
SAN FRANCISCO (MarketWatch) -- Fitch Ratings on Thursday downgraded MGIC Investment Corp and PMI Group, noting it has become much more pessimistic on its outlook for the mortgage insurance sector. Fitch lowered Mortgage Guaranty Insurance Corp.'s insurer financial strength to A+ from AA and MGIC Investment's long-term issuer rating to BBB+ from A. The ratings will remain on rating watch negative, indicating that further downgrades may be in the offing. Fitch also cut PMI Mortgage Insurance's rating to A+ from AA and PMI Group's long-term issuer rating to BBB+ from A. The outlook on PMI and PMI Mortgage Insurance is negative.
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Post by Mike Schimek »

"David Goldman of Asteri painted a very grim picture on banks today on Bloomberg radio. I'd opinion that Canadian banks, as in the recent past, will follow the leaders"

- Gotta agree. It looks like there's a never ending amount of mortgage foreclosures marching down the horizon in increasing numbers. After x years (not quarters) this will clear itself up, but the economy will be in pathetic shape, which wont help banks either, that's for sure.

Dropping the interest rate only seems to move the problem around; it causes the dollar to drop in value and makes everything more expensive, which in turn kicks the economy in the nuts.

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Post by adrian2 »

pitz wrote:the (already insolvent) system insolvent twice over
I'm challenging you again to put meat behind words. How is the system insolvent?
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kcowan
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Post by kcowan »

Does anyone else imagine a hissing sound?

It seems prudent to head for some cover.

There is a house of cards and a strong wind blowing.
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mw
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Post by mw »

adrian2 wrote:I'm challenging you again to put meat behind words. How is the system insolvent?
I've no idea exactly where the poster was going but in my view the word is appropriate:

Code: Select all

Not solvent; not having sufficient estate to pay one's
debts; unable to pay one's debts as they fall due, in
the ordinary course of trade and business;
Consumers are in debt up to their eyeballs and so is the U.S. government. Net worth in households is down another trillion last quarter. 5 trillion in additional write offs not on balance sheet may be on balance sheet soon enough.

Gosh, once you add a trillion here or there you are finally talking some real money!

Trillions of debt and a recession (highly likely to be deeper than anyone imagines presently) certainly do set the stage for insolvency that will manifest itself in bank and financial institution failures at worst, plenty more consumer (and ultimately commercial) bankruptcies certainly.

A few hundred US bank failures later (only 4 so far this year not counting BS) and we can chat again.
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Post by JaydoubleU »

In that case the governments of China and Japan, with their trillions of US treasuries, are also insolvent.
mw
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Post by mw »

No, they aren't insolvent, they are "investors" with a declining return.

On the other hand their economies have benefited by the U.S. consumer and outsourcing trends so they may simply look at their currency losses as a cost of doing business.

On the other foot, it currently costs the U.S. approximately 1 trillion a year for oil (a new record). That's a lot of money, and a recurring cost to boot.

China's usage is growing. Will they actually be able to afford it? And is there a scenario where high oil price might be used as a weapon by either side (or other parties)?

Whether or not anyone has control of price other than supply and demand is yet another question.
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Post by parvus »

mw wrote:
adrian2 wrote:I'm challenging you again to put meat behind words. How is the system insolvent?
I've no idea exactly where the poster was going but in my view the word is appropriate:

Code: Select all

Not solvent; not having sufficient estate to pay one's
debts; unable to pay one's debts as they fall due, in
the ordinary course of trade and business;
Consumers are in debt up to their eyeballs and so is the U.S. government. Net worth in households is down another trillion last quarter. 5 trillion in additional write offs not on balance sheet may be on balance sheet soon enough.

Gosh, once you add a trillion here or there you are finally talking some real money!.
A trillion here, two trillion there:
The U.S. central bank's "flow of funds" quarterly report showed the net worth of American households dipped to $55.97 trillion in the first quarter, from a downwardly revised $57.67 trillion in the final three months of 2007.

Net wealth in the third quarter of 2007 was $58.20 trillion.
More shoes to drop:
Real-estate woes of banks mount
Lenders dumping bad loans at discount; regulators see losses continuing.
Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.

Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses.
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Post by gyrfalcon »

adrian2 wrote:I'm challenging you again to put meat behind words. How is the system insolvent?
Regarding personal viewpoints on the US Banks, Credible is as Credible does.
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Post by mw »

Thornburg Mortgage Reports 1Q Results
June 12 2008 - Thornburg Mortgage, Inc. (NYSE:TMA), today reported a net loss before preferred stock dividends for the quarter ended March 31, 2008 of $3.306 billion, or a loss of $20.64 per common share, as compared to net income of $75.0 million, or $0.62 per common share, for the same period in the prior year. A significant portion of the company"s recorded losses for the quarter ended March 31, 2008, were unrealized market value losses of $1.542 billion, which were the result of the decline in the fair market value of the company"s mortgage-backed securities and securitized loan portfolios. Accounting rules require that these losses be reported in operations.
Thornburg closed at 0.72 on June 11; down some 94% from highs earlier this year.

"Consider filing for bankruptcy" but haven't as yet.
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Post by mw »

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Such important tests of previous lows invariably bring in some "double bottom" buying. Sometimes that's the right idea, sometimes not.

Longer term investors do not need to try to catch falling knives, but they persist in such activities - that's my observation over many years.

IF these levels are to hold, there will be *plenty* of time to buy down here or close enough.

I am willing to view an important retest of prior lows with an open mind. It will all depend on price action here over next few days. I might not go long financials here but I may close out some of my bank-sector short positions to take profits. Can always get short again.

My gut feel says prices get cheaper still... and not just financials but most sectors / the broad market indexes.

Dow 12100 is an important level at present. If price can't close and hold above that level in the near term, I suspect another 400 - 1200 points of Dow downside in front of us; Financials will hold up in the face of that.

PS: Note the "hammer" candle in the prior week; that is a formation many see as a bottoming sign. They don't work out as such all the time, but if one can picture the price action that forms such a candle - open, dip way down, and crawl way back up to close near the open - its easy to see why people feel these formations mark a low which can hold.

A broken hammer is a negative thing indeed.

The Dow, not just Financials, broke last week's "hammer". S&P 500 still an inside week as of this writing.
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Post by gyrfalcon »

We lost it; You find it.
--------------------------------------------------
" June 18 (Bloomberg) -- The following table shows the $396 billion in asset writedowns and credit losses at more than 100 of the world's biggest banks and securities firms as well as the $302 billion capital raised in response.

All the charges stem from the collapse of the U.S. subprime-mortgage market and reflect credit losses or writedowns of mortgage assets that aren't subprime, as well as charges taken on leveraged-loan commitments. Capital raised includes common stock, preferred shares, subordinated debt and hybrid securities which count as Tier 1 or Tier 2 capital, depending on local regulations and the amount of each that's already on the bank's books. "

http://www.bloomberg.com/apps/news?pid= ... fer=canada
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Post by mw »

WSJ: Market Woes Sting Morgan Stanley
Morgan Stanley's second-quarter profits fell 60% from a year ago, even as the bank got a lot of help from a pair of asset sales that raised more than a billion dollars. Net revenue at the bank's fixed-income trading powerhouse fell 85% amid a $436 million loss from trading mortgage-related assets and weak results in the booming commodities area.

Earnings Transcript
People cannot gloss over lightly the event that took place in March and the effect that had on the market. Since then you've had a number of other deterioration in the consumer lending sector, and so on. So that is what made us pull down the sails, sail close to shore, preserve our ammunition.
I've news for Colm Kelleher - when sailing close to shore you need power (wind in your sails) otherwise you've got no steerage and are more likely than not to drift ashore or run aground.
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WaMu Commits an Additional $1 Billion in Assistance to Help Borrowers
SEATTLE--(BUSINESS WIRE)--Washington Mutual (NYSE:WM) today announced that it is dedicating an additional $1 billion as part of its borrowers' assistance program designed to help WaMu homeowners with subprime mortgage loans stabilize their finances and avoid foreclosure.

“Since the fund was first established in April, 2007, WaMu has helped more than 7,500 homeowners work to avoid foreclosure. Now that we have utilized most of the initial funding, we are adding an additional $1 billion to the original commitment for a total of $3 billion dedicated to assisting our borrowers,” said Kerry Killinger, chief executive officer of Washington Mutual.
And turning a negative into a marketing feature, WaMu cancels some, but not all, bad loan products.
WaMu’s prime first mortgage product set falls into four basic categories: fixed rate mortgages; hybrid amortizing adjustable rate mortgages (ARMS); hybrid interest-only ARMS; and Home Equity products. WaMu will discontinue all negative amortizing loan product options, and will also cease to offer its WaMu Mortgage Plus™ loan product.
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MBIA, Ambac on `Ratings Cliff'
losses posted by bond insurers may threaten to breach the capital limits allowed by regulators, making them insolvent.

That once-unthinkable scenario would trigger clauses in $400 billion of derivative contracts written to insure collateralized debt obligations and other securities, allowing policyholders to demand immediate payment for market losses, which have reached $20 billion, according to company filings. Downgrades of the insurers would cause a drop in rankings for the $2 trillion of debt that the companies guarantee, wiping out the value of the CDO insurance held by Wall Street firms, analysts at Oppenheimer & Co. said.
(Oppenheimer is home base for noted financials analyst Meredith Whitney, too.)
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Post by mw »

Just another typical day in the U.S. financials (which as a group closed up, but many closed much lower. Rally in some names due to being "cheap", analyst upgrade, and you know... many analysts do use charts so perhaps in the hope that revisiting 5 year lows might cause enough for a bounce!)

- Citigroup announces "substantial" CDO write downs to come, even if they won't be as big as prior quarters
- Huntington Bancshares announces bad loans to be at high end of forecast
- Bear Stearns former hedge fund managers arrested, among others involved in mortgage industry
- Sec Treas Paulson basically hints that Fed has to save big banks, moral hazard extended by default. Market rallies on his words, for a while.
- Thornberg Mortgage (TMA) states "the future of the home-mortgage finance company as a viable business remains in doubt."
- BAC offer for Countrywide Financial dropped by $1B
- MF global stock whacked after if notes short term credit spreads hurting interest income.
- BB&T announces it may cut dividend in half
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