Banks Stressing the System vs. Potential Winners of the TARP Repayment Race [View article]
Tyler:
Good piece. You sure that the T1 capital series in the chart is correct? Tier One Risk Based Capital excludes many but not all intangibles. Are you subtracting the remaining intangibles to get tangible common? For example, Citi has $30bn in total intangibles in the lead bank. $20b is disallowed as part of T1 RBC. But there is still $10b in intangibles in T1 RBC, so I take out the remaining items.
US Bancorp: The Other Big Bank with Big Problems [View article]
Note sure that USB, WFC are good indicators for rest of the industry. We rated both of these banks "A" as of Q3 on our soundness ratings, but expect both of these names to weaken in 2009 along with the ROTW. With WFC, the issue is Wachovia. With USB, let's see how the charge-offs look in Q1 then we'll know how much to put USB with the big zombie banks. Bottom line is credit culture and how quick these banks are willing to clean house. Right now, some of the nasty looking situations are actually righteous, while turkeys are still hiding among the "above peer" banks. Picking the righteous and avoiding the turkeys is the trick right now.
Is Bank of America Actually Behind Citigroup on the Problem Bank List? [View article]
Agree on FVA. After got of BB TV yesterday, David Reilly (formerly WSJ editorial page) came down and declared my road to Jerusalem coversion after I conceeded that FAV helped deflate the bubble more quickly. Oh boy. The impact on valuation of financials due to FVA is clearly negative now, but the lunacy will work for the longs when credit conditions start to bounce. The thing which bothers me is how affected assets or income due to FVA helps the investor. I don't believe that it does.
Netting Derivatives: Slippery Slope Marred by Opaqueness [View article]
Good comment. The last several graphs are especially important. I still do not think people appreciate how entirely screwed up CDS contracts are as an insurance/barrier option type offering. In plain vanilla, single name CDS, we are pricing the obligation to fund par less recovery on a corporate bond default, but we price this risk vs. short-term spreads and volatility!!!
Then there is the correlation problem. Unlike ship sinkings and earthquakes, traditional low-beta insurance risks uncorrelated to the economy/markets (and, indeed, were a hedge to the economy/markets!!!!), CDS is high beta and thus cannot really be hedged. Even a very broad portfolio of such risks will still go to hell in a severe downturn such as we see today. CDS does not manage risk, it creates risk in vast amounts in order to generate commission income for the CDS dealer community.
That is why I believe that clearing is not really the issue when it comes to "fixing" CDS. I think we need to abandon the ISDA model, which was copied from the IR/FX template, and look at more traditional insurance type models and capital/collateral levels before CDS or its successor make sense and thus gain investor support
Kovacevich's Delayed Retirement: Bove's Criticism is Totally Off Base [View article]
Ditto. What is the deal with Dick Bove and the FT? If the CFC BOD wants Dick Kovacevich to stay, he stays. This is one of the best run banks in the world. What is the issue Dick?
I have never understood mandatory retirement rules. People like former Fed Chairman Paul Volcker or former GAO chief Chuck Bowsher are both over the mandatory retirement age for most corps, but I'd have both of them as directors of my firm tomorrow.
FDIC Won't Run Out of Money, But WaMu May Be Toast [View article]
Thanks for the comments. People who call people names, and don't have trhe courage to use their real names, usually are beneath contempt. When I put up a post, I used my real name so you know who is talking. People who hide behind screen names are cowards and have no credibility. That said, I understand that folks are under the gun this week.
Bottom line on WaMu: 1) how high does the loss rate go and 2) how long does it stay there. WaMu is already 2x peer in terms of loss rates w/o the rancid Providian credit card book. Add the cc book, which is around 1,000 bp of default now, and life gets real interesting. That is why I expect WaMu to be recapitalized by Uncle Sam.
Are Countrywide Financial Bond Holders Bankruptcy Remote? [View article]
Thanks Bluejay. The value of the liabilities of CFC are finite, the assets are not. A reasonable haircut on the conduit paper, etc held at the parent level might cause a mismatch of $10-15bn. More, don't assume that the extension of duration makes servicing a home run. LEH and others have been playing a game of marking up servicing without recognizing the significantly higher costs of managing such portfolios in a down market. Finally, the potentially huge liability on CFC from the flow of securitization over the past five years is a big question mark. What does a settlement on $1T in securitization cost?
Given your view, the real question is why BAC continues to make public statements that they are not willing to stand behind the CFC debt. All that Ken Lewis need do is lay that issue to rest.
Wachovia, Clear Channel and Fair Value Madness [View article]
Thanks for the comment and news clip. The key issue right now is whether the market for speculative paper such as Clear Channel or Harrah's is going to recover. If not, then the US economy is in cold turkey for a while. I don't believe the US economy can withstand such a reduction in credit availability. Will kill valuation of financials for foreseeable future, which means very hard for broad market to advance.
Questioning Bill Gross: $250 Billion in CDS Losses? [View article]
Felix:
Your analysis assumes that these risks will never be realized, that is, that the CDS buyers and sellers will always be able to rebalance positions and just keep on trading net flat in terms of risk. What Floyd, myself and others are concerned about, however, is when some of the leveraged "weak hands" in the market, aka hedge funds, are forced to start consuming client funds because of an actual "net" payout on protection. Hedge funds are not insurance companies and they take premiums on CDS as income in a given period. The shift in credit spreads in LTM has made it prohibitively expensive for funds short protection to re-balance 2 and 2 yr old positions on 5 yr CDS deals. Thus if the predictions of rising corp and retail defaults are realized, there are many hedge funds that will simply fold, causing a cascade of losses back onto the prime brokers who are the real owners of this risk. As soon as there is the mere whiff of trouble at a given fund, the credit lines are pulled and the game is over. That's my worry.
Subprime: We Have Nothing to Fear But Forbearance [View article]
Agreed. The predictions of authors like (The Two Income Trap, Warren & Tyagi 2003) have definitely been validated. The deflation in the US economy over the next several years could be far more severe than the agriculture-led deflation of the 1930s. All of the mechanisms we have in place to avoid a repeat of that experience are inadequate to the present task.
Taking Apart Jake DeSantis' Letter [View article]
Banks Stressing the System vs. Potential Winners of the TARP Repayment Race [View article]
Good piece. You sure that the T1 capital series in the chart is correct? Tier One Risk Based Capital excludes many but not all intangibles. Are you subtracting the remaining intangibles to get tangible common? For example, Citi has $30bn in total intangibles in the lead bank. $20b is disallowed as part of T1 RBC. But there is still $10b in intangibles in T1 RBC, so I take out the remaining items.
Chris
US Bancorp: The Other Big Bank with Big Problems [View article]
Is Bank of America Actually Behind Citigroup on the Problem Bank List? [View article]
Big Banks vs. America [View article]
"street name." The beneficial holders are the millions of BCS custodial customers. ;)
Netting Derivatives: Slippery Slope Marred by Opaqueness [View article]
Then there is the correlation problem. Unlike ship sinkings and earthquakes, traditional low-beta insurance risks uncorrelated to the economy/markets (and, indeed, were a hedge to the economy/markets!!!!), CDS is high beta and thus cannot really be hedged. Even a very broad portfolio of such risks will still go to hell in a severe downturn such as we see today. CDS does not manage risk, it creates risk in vast amounts in order to generate commission income for the CDS dealer community.
That is why I believe that clearing is not really the issue when it comes to "fixing" CDS. I think we need to abandon the ISDA model, which was copied from the IR/FX template, and look at more traditional insurance type models and capital/collateral levels before CDS or its successor make sense and thus gain investor support
Kovacevich's Delayed Retirement: Bove's Criticism is Totally Off Base [View article]
I have never understood mandatory retirement rules. People like former Fed Chairman Paul Volcker or former GAO chief Chuck Bowsher are both over the mandatory retirement age for most corps, but I'd have both of them as directors of my firm tomorrow.
FDIC Won't Run Out of Money, But WaMu May Be Toast [View article]
Bottom line on WaMu: 1) how high does the loss rate go and 2) how long does it stay there. WaMu is already 2x peer in terms of loss rates w/o the rancid Providian credit card book. Add the cc book, which is around 1,000 bp of default now, and life gets real interesting. That is why I expect WaMu to be recapitalized by Uncle Sam.
Sleep well kiddies.
An Involuntary Transaction: Why BAC + CFC May Never Close [View article]
Chris
Are Countrywide Financial Bond Holders Bankruptcy Remote? [View article]
Are Countrywide Financial Bond Holders Bankruptcy Remote? [View article]
Given your view, the real question is why BAC continues to make public statements that they are not willing to stand behind the CFC debt. All that Ken Lewis need do is lay that issue to rest.
Wachovia, Clear Channel and Fair Value Madness [View article]
Questioning Bill Gross: $250 Billion in CDS Losses? [View article]
Your analysis assumes that these risks will never be realized, that is, that the CDS buyers and sellers will always be able to rebalance positions and just keep on trading net flat in terms of risk. What Floyd, myself and others are concerned about, however, is when some of the leveraged "weak hands" in the market, aka hedge funds, are forced to start consuming client funds because of an actual "net" payout on protection. Hedge funds are not insurance companies and they take premiums on CDS as income in a given period. The shift in credit spreads in LTM has made it prohibitively expensive for funds short protection to re-balance 2 and 2 yr old positions on 5 yr CDS deals. Thus if the predictions of rising corp and retail defaults are realized, there are many hedge funds that will simply fold, causing a cascade of losses back onto the prime brokers who are the real owners of this risk. As soon as there is the mere whiff of trouble at a given fund, the credit lines are pulled and the game is over. That's my worry.
rc whalen
institutionalriskanaly...
Subprime: We Have Nothing to Fear But Forbearance [View article]
De-Leveraging America [View article]