Christopher Whalen makes a remarkably convincing case for why we’ve simply kicked the can down the road and why the banks could be in for a repeat of their 2008 nightmares in 2011. If Mr. Whalen is right the banking sector is in for a whole new round of government intervention, takeovers, likely nationalizations and general disaster:
The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than frac14; of& the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1& in 5 mortgages could go into foreclosure without radical action.
Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.
The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007?2009 period only means that this process is going to occur over next three to five years –whether we like it or not. The issue is recognizing existing losses ?? not if a loss occurred.
Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re?creation of RFC?type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.
Fast forward to the 1:07 minute mark where Mr. Whalen begins.
It’s no secret that the economic recovery in the United States has been meager at best (and that’s assuming you believe this is not just one ongoing recession). While there is plenty of blame to go around for our current plight the buck ultimately stops with the most influential people in this economy – the leaders that help frame the regulations and policies that help to keep the U.S. economy running smoothly. I don’t think these men and women (mostly men) have been held accountable over the years. I personally believe many of these men have flawed models (Alan Greenspan has admitted as much and Ben Bernanke has essentially rehashed his flawed model) and continue to help promote and implement economic policy in the U.S. that is counterproductive, ineffective and at times downright destructive.
I’ve been highly critical of Obama’s economic team over the years because many of them were key players in helping cause the financial crisis. Tim Geithner was the head of the NY Fed when the banks were busy turning themselves into casinos. Ben Bernanke (who Obama should have never reconfirmed) failed to even acknowledge the potential existence of problems in the U.S. economy leading up to the financial crisis and then implemented his great monetarist gaffe which has now been proven to be what I called it from the very beginning – a bailout of Wall Street and a slap in the face for Main Street. He receives endless praise for helping to avoid a supposed second Great Depression. This is like the man who sees a fire in his front yard, ignores it, then when it’s finally becoming a widespread danger decides to save his own house from burning (the banks), lets all of the surroundings houses burn to the ground (Main Street) and then receives endless praise for his courage under fire.
But there have been few people in power over the last 25 years that have been more misguided and downright destructive than Larry Summers. This is a man who believes that women are intellectually inferior (I’ll tell you one thing – this economy wouldn’t be such a mess if it wasn’t run primarily by arrogant, narcissistic males) and has done more to help
The Obama administration plans to set up an emergency loan program for the unemployed and a government mortgage refinancing effort in the next few weeks to help homeowners after home sales dropped in July, Housing and Urban Development Secretary Shaun Donovan said.
“The July numbers were worse than we expected, worse than the general market expected, and we are concerned,” Donovan said on CNN’s “State of the Union” program yesterday. “That’s why we are taking additional steps to move forward.”
The administration will begin a Federal Housing Authority refinancing effort to help borrowers who are struggling to pay their mortgages, and will start an emergency homeowners’ loan program for unemployed borrowers so they can stay in their homes, Donovan said.
“We’re going to continue to make sure folks have access to home ownership,” he said.
These additional steps are really starting to hurt, when does it end? Oh duh, it ends when the rest of the world gets smart and realizes that we’re abusing our printing press. Obv.
Thanks for writing and sharing your wonderful column. It has been very informative and educational.
Could you please help us mere mortals decipher the ALLL/LLRNPT chart in a follow up post?
I have difficulty reconciling the units, and I suspect I’m not the only one. Exactly what does that chart depict?
Thanks.
Henry
From my previous post …
Assets at Banks whose ALLL Exceeds their Nonperforming Loans
The ALLL is a bank’s best estimate of the amount it will not be able to collect on its loans and leases based on current information and events. To fund the ALLL, the bank takes a periodic charge against earnings. Such a charge is called a provision for loan and lease losses.
One look at the above chart in light of an economy headed back into recession and a housing market already back in the toilet should be enough to convince anyone that banks already have insufficient loan loss provisions.
That is one of the reasons banks are reluctant to lend. Lack of creditworthy customers is a second. Quite frankly would be idiotic to force more lending in such an environment.
To further clarify, the chart depicts the ratio of loan loss provisions to nonperforming loans across the entire banking system (all banks). There are 33 ALLL charts by bank size and region for inquiring minds to consider. The above chart is the aggregate.
The implication what the chart suggests is that banks believe nonperforming loans are NOT a problem (or alternatively they are simply ignoring expected losses to goose earnings).
The implication what I suggest is banks earnings have been overstated. Why? Because provisions for loan losses are a hit to earnings. I believe losses are coming for which there are no provisions.
The chart depicts a form of "extend and pretend" and overvaluation of assets on bank balance sheets. The Fed and the accounting board ignore this happening (encourage is probably a better word), hoping the problem will get better. With more foreclosures and bankruptcies on the horizon, I suggest it won’t.
The bell rings once again on "Foreclosure Friday". The toll this week is 8 banks. One of the banks, Shore Bank, has ties to the Obama administration, Goldman Sachs, and other notables.
ShoreBank Corp., the Chicago lender operating under a Federal Deposit Insurance Corp. cease-and- desist order for 13 months, and seven other banks were shut by regulators as 2010 bank failures climbed to 118.
Regulators also closed four banks in California, two in Florida and one in Virginia. All eight closures cost the FDIC’s deposit-insurance fund $473.5 million, the agency said yesterday. This year’s bank failures will surpass last year’s total of 140, FDIC Chairman Sheila Bair said last month in a Bloomberg Television interview.
Regulators seized ShoreBank Corp. on Friday and agreed to sell assets to a team led by the community lender’s executives and backed by several large U.S. financial firms.
The bank closure, among the 118 failures in the U.S. this year, caps months of uncertainty for a $2.16 billion Chicago bank that had ties to the Obama administration and deep roots on Chicago’s South Side. The new institution will be known as Urban Partnership Bank and led by William Farrow, a former First Chicago Corp. executive who was ShoreBank’s president and chief operating officer at the time of its failure.
The decision to sell to management is a rare move by the Federal Deposit Insurance Corp., which generally bars investors who own more than 10% of the failed bank from bidding on its assets. The FDIC also typically wants to know if bidders have "ever been an officer or director of a failed institution" and "participated in a material way in one or more transactions that caused a substantial loss to any such failed institution," according to an FDIC document.
The structure of the deal "is unusual," said Atlanta banking attorney Chip MacDonald.
The holding company will remain intact, according to a person familiar with the deal. Urban Partnership is backed by a consortium of large U.S. financial institutions, including Bank
This situation is an analogue to the US economy, where increasingly larger portions of the financial markets in the US are being ceded to white collar fraud and manipulation by the gangs of New York. The problem is not with law enforcement per se, but that the basic functions of government are being overwhelmed by inept and corrupt lawmakers and regulators, the powerful rule of special interests, and a general lack of concern and disdain for the needs of the ordinary citizens. These are the root cause of the failures of government in the US.
This is not a problem of Republicans versus the Democrats. It is the age old problem of the avarice of an oligarchy of the self-proclaimed elites against the rights of the private individual, and the common people.
"From whence shall we expect the approach of danger? Shall some trans-Atlantic military giant step the earth and crush us at a blow? Never. All the armies of Europe and Asia…could not by force take a drink from the Ohio River or make a track on the Blue Ridge in the trial of a thousand years. No, if destruction be our lot we must ourselves be its author and finisher. As a nation of free men we will live forever or die by suicide."
Abraham Lincoln
"In a press conference ignored by the American national media, the sheriff described how his deputies were outmanned and outgunned by the cartel smugglers who increasingly operate using military tactics and weapons. The result, said Sheriff Babeu, was that a wide corridor of Arizona from the border North to the outskirts of Phoenix is effectively controlled by the cartels. "We do not have control of this area," the sheriff said.
At the same time as the sheriff’s ignored press conference, the national media did cover assurances from the Obama Administration that crime was down at the border; that the border had never been safer. This ludicrous propaganda was based on selected crime stats from San Diego, Phoenix, Austin and San Antonio. The new reign of terror on the border in Arizona was airbrushed out of the picture.
Here’s the real picture Obama does not want you to see. Warning signs were posted this past month by the federal government 80 miles…
The United States is ceding parts of Arizona to the Mexican drug cartels. So says Pinal County (Ariz.) Sheriff Paul Babeu.
In a press conference ignored by the American national media, the sheriff described how his deputies were outmanned and outgunned by the cartel smugglers who increasingly operate using military tactics and weapons. The result, said Sheriff Babeu, was that a wide corridor of Arizona from the border North to the outskirts of Phoenix is effectively controlled by the cartels. "We do not have control of this area," the sheriff said.
At the same time as the sheriff’s ignored press conference, the national media did cover assurances from the Obama Administration that crime was down at the border; that the border had never been safer. This ludicrous propaganda was based on selected crime stats from San Diego, Phoenix, Austin and San Antonio. The new reign of terror on the border in Arizona was airbrushed out of the picture.
Here’s the real picture Obama does not want you to see. Warning signs were posted this past month by the federal government 80 miles North of the border on the South side of I-8 between Casa Grande and Gila Bend urging U.S. citizens not to camp or hike in the "Active Drug and Human Smuggling Area" because "Visitors May Encounter Armed Criminals." Here is a picture of one of those signs:
Think about it. A part of America is off limits to U.S. citizens because it is now controlled by an army of foreigners.
U.S. Fish and Wildlife staffers report that the 3,500 acre Buenos Aires National Wildlife Refuge in this area is closed to U.S. citizens as well and is
“Only fraud and falsehood dread examination. Truth invites it.”
- Dr. Samuel Johnson
The SEC is formally charging Goldman Sachs with fraud in the derivatives markets, specifically with regard to Collateralized Debt Obligations related to subprime mortgages.
Investors in Goldman’s Abacus CDO lost one billion dollars.
In addition to the company, an individual VP in Goldman’s international group is being charged, Fabrice Tourre.
Paulson and Company, a major hedge fund, paid Goldman to structure a CDO based on mortgages that Paulson selected, so that they could bet against it.
"The product was new and complex, but the deception and conflicts are old and simple. Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” said Robert Khuzami, director of the division of enforcement.
This could be construed as a deft way of throwing red meat to the angry mob, nailing a specific individual at Goldman while limiting the criminal charges against the company although there will be significant civil cases, and dealing with the billionaire hedge fund owner Paulson who made a fortune betting against the subprime market.
This could be more damaging if this includes other Goldman bets against its customers on products it represented and created, and it shows an overall intent to create fraudulent products for the purpose of shorting them. For now the SEC will not say if this fraud is a singular event or more systemic.
Goldman will almost certainly attempt to spin this as the actions of a ‘rogue trader‘ who was an aggressive exception.
Last week the White House asked Jamie Dimon and Lloyd Blankfein to ‘cool it’ on their intense lobbying efforts against derivatives and financial reform.
Perhaps this will help them in their decision.
This is just the tip of the iceberg. The Wall Street Banks are knee deep in fraud.
Last Friday, the Obama administration announced changes to its Home Affordable Modification Program (HAMP) The most significant change is "principal reduction". By reducing the balance on underwater loans, the administration hopes to lower the number of foreclosures which have soared to more than 300,000 per month. This looks like a plan that could work, since most foreclosures are the result of negative equity or unemployment. If the banks and other investors agree to the terms of the program (and it looks like they will) then more homeowners will be able to avoid foreclosure, prices will stabilize, and the recovery will gain momentum. There is one drawback, however, which is moral hazard writ large. The new program rewards the speculators who bet on dodgy investments and who’ll be able to exchange their garbage securitizations for government-guaranteed FHA loans.
In fact, it looks like that was the real purpose of the program from the very beginning. This is an excerpt from March 30, Bloomberg News:
"Subprime-mortgage securities are rising at an accelerating pace as the U.S. begins to encourage reductions to homeowners’ balances, which may lead to fewer foreclosures and a quicker end to the housing slump….Subprime-loan bonds rated AAA when created in the first half of 2006 climbed 3.2 percent last week to 49.1, the highest since January 2009, according to Markit Group Ltd.
“Senior-ranked bonds tied to borrowers with poor credit will mostly benefit after the Treasury Department said for the first time it would seek to cut the size of mortgages, reducing the likelihood that loan modifications will fail, according to JPMorgan Chase & Co., Morgan Stanley and Barclays Plc. The revised plan also supports the housing market by helping avert more foreclosures, Amherst Securities Group LP analyst Laurie Goodman said." (Bloomberg)
So, it looks like Obama’s modification program has touched-off a gold rush in toxic paper. Subprime securitizations which had been worth next to nothing, are presently the hottest item on Wall Street. Main Street’s loss will, once again, mean windfall profits for Wall Street’s hedge fund managers and brokerage kingpins. It’s a subprime bonanza! A recent interview I had with a Wall Street veteran (anonymous) had this to say on the topic:
"It sounds like the investors in securitizations will be swapping underwater real estate for government-insured paper… I
Oil futures spiked more than 2% in one day to their highest level in nine months on Tuesday Feb. 21. WTI front month contract closed at $105.84, while Brent ended at $121.66 on ICE, primarily on investors fear of potential conflict over the escalating tensions between the US, Europe, Israel, and Iran. A second Greek bailout deal of €130bn (£110bn; $170bn) also helped to inject some optimism into the market (which would seem totally mis-placed as we may need to relive this Greek drama in two years). Nevertheless, the fact remains crude oil market supply and demand has not changed a bit to warrant a 2%+ price jump in one day.
Earlier today, we learned the first stunner of the Greek bailout package, which courtesy of some convoluted transmission mechanisms would result in some, potentially quite many, Greek workers actually paying to retain their jobs: i.e., negative salaries. Now, having looked at the Eurogroup's statement on the Greek bailout, we find another ...
In recent years, traders and investors have increasingly turned to social media to discuss their investments. Now, interested parties can get a scientific look at what is being discussed on a weekly, monthly, and even hourly basis.
Provided by Social Market Analytics, here is the morning social media outlook for Wednesday, February 22.
Most Bullish
Sentiment has been most bullish this morning on two tech companies.
Sourcefire (NASDAQ: FIRE) reported stellar earnings yesterday afternoon, which prompted several analysts to upgrade their price targets on the stock. The company hit a fresh 52-week high earlier this morning, as shares surged over 23%.
In today’s market, it’s more important that ever to have a mindset to maintain a sane mental state and stay peaceful calm and centered. Keep in mind with the markets as stretched as they are, we are in a high risk zone for pulling back as we have been in an accelerated uptrend with barely any pullback to speak of which as we all know can not continue forever — it never does. That said the music can stop at a moment’s notice and odds favor when it does it will be a gap down. So using that as a backdrop let’s look at SXCI. SXCI — SXC Health Let’s say that issue breaks above the pink line and triggers a long side trade. That’s all fine and dandy HOWEVER it’s what happens next that we have no control over. At that point it either follows through or it doesn’t. WE NOR YOU HAVE ANY CONTROL ...
Top 5 RisersStockRatingAnalysisAGBUYAn increasingly attractive expected long term growth rate and a significantly higher projected valuation from just a few weeks ago make AGCO a company to watch.PCUBUYThe recent earnings history for Southern Copper shows significant improvement while projected valuation continues to rise.PAGBUYAn increasingly attractive expected long term growth rate and a significantly higher projected valuation from just a few weeks ago make Penske a company to watch.FEICBUYAn increasingly attractive expected long term growth rate and a significantly higher projected va...
Other than that rally last Thursday that caught a lot of technicians flat footed (i.e. post the Apple reversal) the breadth in this market has been relatively poor the past 5 sessions or so. The Russell 2000 has been lagging the major indexes dominated by large caps, and my watch lists have contained far more red than green. Some people have been calling it the NBA market ("Nothing but Apple") but it's been a bit broader than that – i.e. Microsoft has acted well, and some groups are still working.
A bearish take on this is of course what I cited above – breadth is narrowing which usually happens near tops. Fewer and ...
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Monday comes and goes with no agreement on Greece until late night settlement on Greece.
European finance ministers met in Brussels Monday and deep into the night and finally, in the wee hours, apparently have struck an agreement for the next round of bailout money for Greece.
In overnight trading, the European indexes were up with the DAX gaining 1.46%, the STOXX 50 adding 1.2% and the FTSE climbing 0.7%
In Asia, major indexes were down slightly as the world waited for an answer on Greece.
The U.S. Dollar (NYSEARCA:UUP) declined after announcement of the agreement while the Euro Dollar (NYSEARCA:FXE) jumped.
Here is a quick update of past trades and our current position.
AA Money
No trade this week as we wait for AA to settle. Phil remarked last week that AA seemed overvalued. In the meantime, it looks like we might have to roll our Feb 9 calls. Good thing we sold only 5 of them against our position.
Last week P&L - 310.00
We lost ground last week, but we still have 11 months to sell premium!
FAS Money
Very good week for FAS Money as we benefited from the large amount of premium sold the previous week. We covered most of the shorts in advance of the Fed speech, but sold another set of options on Wednesday after the speech - 2 FAS calls that expired worthless on Friday, 2 FAS put that we are still holding and 2 FAZ put that we bought back for a profit on Friday. A late stick comparable to last week's almost gave us problems at the end of the day though!
Last week P&L - $4277.00
IWM Money
A decent week in this virtual portfo...
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Finding new and exciting Biotech companies that target novel mechanisms is like trying to find a needle in a haystack. Sure there are many companies working on cutting edge science, but investing in those companies to reap the rewards of their work is a very dangerous game. More often than not, companies fail because the mechanism does not pan out, the compound(s) do not have pharmacokinetics (get into the body or last very long in the body), or an adverse event happens that knocks years off a development timeline. In addition, the stock can be manipulated by market makers so investors don't know which way is up. I approach investing in biotechs as a long term prospect. I continue to like our current portfolio of biotech companies (join in chat for many of those plays), and we continually add/subtract shares and sell/buy options on ...
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Last week the White House asked Jamie Dimon and Lloyd Blankfein to ‘cool it’ on their intense lobbying efforts against derivatives and financial reform.
Last Friday, the Obama administration announced changes to its Home Affordable Modification Program (HAMP) The most significant change is "principal reduction". By reducing the balance on underwater loans, the administration hopes to lower the number of foreclosures which have soared to more than 300,000 per month. This looks like a plan that could work, since most foreclosures are the result of negative equity or unemployment. If the banks and other investors agree to the terms of the program (and it looks like they will) then more homeowners will be able to avoid foreclosure, prices will stabilize, and the recovery will gain momentum. There is one drawback, however, which is moral hazard writ large. The new program rewards the speculators who bet on dodgy investments and who’ll be able to exchange their garbage securitizations for government-guaranteed FHA loans.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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