Dear John Thain

Some Notes and Predictions on Stress Test Results

Hi Malthus,

The short answer to your question is that any particular quarter can be profitable, and the losses show up over time.

I, basically, have no idea how loss reserves against loans work, but I've heard they are very formulaic. Basically, if the formula says you need to retain part of earnings or eat into shareholders equity to build reserves, then it flows through your accounting statements that way. The fact that institutions need more capital is essentially saying, "You might be generating profits now, but when losses are fully pushed through the balance sheet and income statement, you'll need more. Get it now!"

To be honest, I don't really think that all this finance and accounting B.S. matches all that well with the reality of these companies anyway... These firms are so complex and their positions and operations are so obfuscated, that an outsider can really only get the broad strokes.

Hope this helps (and doesn't make me look too naive!).

-DJT


On May 06 04:39 PM malthus wrote:

> My biggest question and one I would love to get the author to write
> about is.... how the heck are banks (like BofA) reporting "profits"
> if they are in need of capital infusions?
>
> In other words, shouldn't every drop of extra income go into loan
> reserves up and until they have reached their capital requirement
> *prior* to them taking profits (which are taxed, etc. whereas loan
> reserves would not be taxed).
>
> Would love you to write a blog entry about the craziness of BofA
> and Wells reporting profits and at the same time needing capital
> infusions. i.e. they did not reserve enough last quarter!

That Public Resignation Letter Offers Some Good Insight into the AIG Problem

Sorry, you're just dead wrong.

What killed Fannie and Freddie was poor risk management and too much leverage (fueled by accounting problems and a quest to juice earnings).

The C.R.A. had nothing to do with the loans that were securitized and sold by Wall St. banks... By definition, if Fannie and Freddie were in the middle of C.R.A. loans, they would have to be agency product, which has never caused a loss due to default ever (they are guarenteed by the agencies, which taxpayers have propped up, remember?).

Sorry you're so mad, but you should learn about what's really going on before you direct your anger and vent.

I have a post on this topic here: dearjohnthain.wordpres.../

-DJT


On Apr 03 04:45 PM Schwammo wrote:

> The author of this blog is an idiot who missed the point completely.
> The focus on the AIG bonuses was a ploy by Democrats to take the
> spotlight off their obscene spending (3 TRILLION vs. $150 million).
> It's even more clear now that Fannie Mae and Freddie Mac are paying
> out $210 million in bonuses. If not for the hypocracy of the actions
> of our democratic congressmen and senators these dollar amounts wouldn't
> even matter, they're drops in the bucket.
>
> We love to blame companies to invested in these subprime mortgages
> and those who made them under the nice tidy cover of "Wall street
> bad." However it competely ignores the question of why these mortgages
> were made in the first place. Do you think commercial banks just
> woke up one morning and said "gee golly I'd like to loan a bunch
> of money to people who can't afford it." They were FORCED to make
> these loans by the COMMUNITY REINVESTMENT ACT, which was the mutant
> love child of Barney Frank and the ever corrupt Chris Dodd. The
> act was passed under the CLINTON administration not W's.
>
> Once the loans were made, why shouldn't they be sold as securities
> like any other mortgage. If they were good enough that the government
> would force private companies to make them, than implicit in that
> is that they're good enough to sell as investments.
>
> We all know what happened next. Home values dropped and the investments
> failed destroying the books of the companies that invested in these
> products like AIG.
>
> But hey, we can't blame the real bad guys as they're sitting in the
> Senate and the Capitol. Plus if we attack the Community Reinvestment
> Act, we're all racists who don't believe in affordable housing for
> the poor. So instead lets put the force and majesty of our government
> against the AIG execs. We'll send uninformed and violent shock troops
> on busses to their homes, villify them endlessly, and pass ex post
> facto laws to get the money back.
>
> I know that most won't be sheding tears for the execs, I'm not either.
> But come on... how about just a little bit of intellectual honesty.

That Public Resignation Letter Offers Some Good Insight into the AIG Problem

Sorry, you're just dead wrong.

What killed Fannie and Freddie was poor risk management and too much leverage (fueled by accounting problems and a quest to juice earnings).

The C.R.A. had nothing to do with the loans that were securitized and sold by Wall St. banks... By definition, if Fannie and Freddie were in the middle of C.R.A. loans, they would have to be agency product, which has never caused a loss due to default ever (they are guarenteed by the agencies, which taxpayers have propped up, remember?).

Sorry you're so mad, but you should learn about what's really going on before you direct your anger and vent.

I have a post on this topic here: dearjohnthain.wordpres.../

-DJT


On Apr 03 04:45 PM Schwammo wrote:

> The author of this blog is an idiot who missed the point completely.
> The focus on the AIG bonuses was a ploy by Democrats to take the
> spotlight off their obscene spending (3 TRILLION vs. $150 million).
> It's even more clear now that Fannie Mae and Freddie Mac are paying
> out $210 million in bonuses. If not for the hypocracy of the actions
> of our democratic congressmen and senators these dollar amounts wouldn't
> even matter, they're drops in the bucket.
>
> We love to blame companies to invested in these subprime mortgages
> and those who made them under the nice tidy cover of "Wall street
> bad." However it competely ignores the question of why these mortgages
> were made in the first place. Do you think commercial banks just
> woke up one morning and said "gee golly I'd like to loan a bunch
> of money to people who can't afford it." They were FORCED to make
> these loans by the COMMUNITY REINVESTMENT ACT, which was the mutant
> love child of Barney Frank and the ever corrupt Chris Dodd. The
> act was passed under the CLINTON administration not W's.
>
> Once the loans were made, why shouldn't they be sold as securities
> like any other mortgage. If they were good enough that the government
> would force private companies to make them, than implicit in that
> is that they're good enough to sell as investments.
>
> We all know what happened next. Home values dropped and the investments
> failed destroying the books of the companies that invested in these
> products like AIG.
>
> But hey, we can't blame the real bad guys as they're sitting in the
> Senate and the Capitol. Plus if we attack the Community Reinvestment
> Act, we're all racists who don't believe in affordable housing for
> the poor. So instead lets put the force and majesty of our government
> against the AIG execs. We'll send uninformed and violent shock troops
> on busses to their homes, villify them endlessly, and pass ex post
> facto laws to get the money back.
>
> I know that most won't be sheding tears for the execs, I'm not either.
> But come on... how about just a little bit of intellectual honesty.

CNBC's Specious Reporting on the Housing Plan

To all those making a point about principal reductions, let me direct you to this...

From the Whitehouse website (www.whitehouse.gov/blo.../):

--------------

* Will refinancing reduce the amount that I owe on my loan?

No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

-----------------

Can a lender reduce the principal amount? If they own the loan, sure. Does this legislation do anything to affect that right? Or compel them to do so? No.

As for knowing about Rick Santelli and CNBC, let me be unequivocal and unambiguous about this: The reporting on CNBC is completely surface. Having sat on a bulge bracket institution's trading floor for years I pity anyone who defines knowing Rick Santelli as either necessary or sufficient for being informed. The only thing CNBC is good for is hearing rumors about corporate actions such as mergers, layoffs, management changes, etc.

If you rely on CNBC for trading, being informed about the market, or understanding the real issues in finance, then I can't help you. One needs to read primary documents, do their own research, and get a breadth of opinions before they can be considered informed. As a matter of fact, if you consider watching CNBC informed, then please call me when you want to do a trade--I'll take the other side gladly.

Some commenters refer to Fannie and Freddie as having started this problem. They have missed the boat missed the boat. I refer you to my previous writing on the matter -- (dearjohnthain.wordpres.../).

As for open outcry, please stop carrying water for this antiquated system. Yes, I know there are electronic methods for trading that exist next to the pits. However, claiming open outcry has value versus electronic trading is a farce. It might be true only because of limitations put on electronic trading by those who have a stake in open outcry systems. Most equity option exchanges are electronic -- algorithms price the illiquid securities and those markets function just fine.

Big CMBS Loans Near Default; CMBX Soars, REITs Tank

My mistake, JPMCC 08-C2 *is* in Series 5. The source I went to wasn't authoritative and that's my error. It is, however, not necessary for my first point.

-DJT


On Nov 19 09:14 AM Dear John Thain wrote:

> Hi,
>
> First, I find nearly no evidence for your linkage between REIT stocks
> and two (technically three) loans in CMBS deals. I also don't even
> know how exposed CMBX Series 5 is to these loans since the deal you
> mention, JPMCC 08-C2, isn't in series 5.
>
> Second, you misunderstand DSCR since you erroneously cite it as a
> percentage when it is a multiple (the DSCR is 1.25x, not 1.25%).
>
>
> Third, you don't seem to understand the CMBS market when it comes
> to underwriting since over a 1.20x DSCR is considered standard and
> very safe.
>
> Lastly, it is entire meaningless to cite IO percentages of a CMBS
> pool. I'm not sure you know this, but loans backing CMBS deals, unlike
> similar residential deals, are generally 10/30's ... This means that
> they are 10 year loans that follow a 30 year amortization schedule
> and require a balloon payment (payment in full) after 10 years (unusual
> because the loan isn't fully amortizing).
>
> Please check your facts before drawing conclusions. Sorry..
>
> -DJT

Big CMBS Loans Near Default; CMBX Soars, REITs Tank

Hi,

First, I find nearly no evidence for your linkage between REIT stocks and two (technically three) loans in CMBS deals. I also don't even know how exposed CMBX Series 5 is to these loans since the deal you mention, JPMCC 08-C2, isn't in series 5.

Second, you misunderstand DSCR since you erroneously cite it as a percentage when it is a multiple (the DSCR is 1.25x, not 1.25%).

Third, you don't seem to understand the CMBS market when it comes to underwriting since over a 1.20x DSCR is considered standard and very safe.

Lastly, it is entire meaningless to cite IO percentages of a CMBS pool. I'm not sure you know this, but loans backing CMBS deals, unlike similar residential deals, are generally 10/30's ... This means that they are 10 year loans that follow a 30 year amortization schedule and require a balloon payment (payment in full) after 10 years (unusual because the loan isn't fully amortizing).

Please check your facts before drawing conclusions. Sorry..

-DJT

Debating the Lehman Collapse

I think many of the comments miss the point. The point here is that if the low share price is the reason to force an otherwise solvent company to do a deal, or for the rating agencies to downgrade, or for any other number of things, and the share price is because of "rumors" or other things that aren't true, then that's bad. If Lehman is solvent then something should be done to tell the market that. The Fed should have an interest in ensuring stability if it isn't at the cost of lying or causing a moral hazard.

Short sellers don't enter into my thinking, although they are a natural source of rumors. Sometimes it's just something more interesting than nothing getting caught in the echo chamber--talking heads need something to say, CNBC needs to fill it's airwaves. Paulson and Geithner (sp?) should just go on T.V., say they have examined Lehman's books, and say that they stand ready to fund any requests LEH might make of the Fed via their collateralized lending programs. This would stabilize the market, Lehman, and stop a completely unnecessary fire sale. After Lehman there is nothing to stop the other firms from falling prey--especially if Lehman didn't need to sell itself.

-DJT

Calling a Bottom: It's Time To Party

All,

Everyone should calm down and realize that I haven't called a bottom. Go to my original post, the title was: "Bold Statement: Time to Start Partying" ... Meant to be a bit sarcastic. SeekingAlpha re-wrote the headline, as they usually do. I'm just saying that we've turned a corner, most of the uncertainty and irrationality in the markets has been taken out. So, if it gets *much* worse, then I'm wrong. If another firm blows up, sending the market into a tizzy, I'm wrong. Otherwise, if volatility comes down, investor confidence returns, etc. then I'm not totally wrong. Low bar, eh? Wish I would have seen this sooner to set the record straight.

-DJT

Disclosure from Financials? I Call B.S.

JasonC:

Actually, Merrill wasn't a big S.I.V. player--their writedowns were all from inventory they were unable to securitize when the market turned. As for Citi, the majority of their writedowns have come form inventory in their C.D.O. business, a vast minority of the writedowns were from S.I.V.'s. The issue with S.I.V.'s was, first and foremost, one of capital and consolidation.

-DJT