Philip Gvinter

Who Should Have Skin in the Game?

Yup totally agree. This is why I said that the rating agency should be paid with a piece of the security rated rather than cash. This would quickly re-align their interest and encourage them to do due diligence on the securities they rate.


On Jun 22 09:57 PM Kid Dynamite wrote:

> philip - in my opinion, if we're going to fault anyone, it's the
> ratings agencies, who were guilty of gross negligence - not the "middle
> men" - the securitizers who brought together lenders and borrowers
> who were each driven by greed.
>
> i was comparing the realtor to the wall street firm selling the securitized
> product...
>
> i think we are basically agreeing with each other

Who Should Have Skin in the Game?

Well I think that there is a big difference between a realtor and the rating agencies. The rating agencies are more akin to an appraiser. The appraiser provides a document showing the current value in the area and area trends. He has a duty to perform the work honestly and to do due diligence on his sources. In the case of the appraiser that just means to cite where he got his data. In the case of the rating agencies there was no due diligence. Blaming the realtor is like blaming the trading desk. I don't believe in that but I do believe in holding the rating agencies to a slightly higher set of standards. They should have been required to review the underwriting standards for the pools of loans. They in fact did do this they admitted that they had erred in their ratings after the portfolios began to deteriorate.


On Jun 22 02:00 PM Kid Dynamite wrote:

> blaming the middle man would be like blaming your realtor when you
> buy a house that goes down in value... i just don't think like that.
>
>
> the problem is that the people buying all these toxic assets let
> their own greed cloud their due diligence... buyers (of assets,
> MBS, etc) need to be responsible for their decisions!
>
> more on this here:
>
> fridayinvegas.blogspot...

Tier 1 Capital Ratios of Large U.S. Banks

Tier 1 is also subject to risk weights assigned to assets. As we are clearly seeing during this credit crisis these weights are oftentimes not appropriately set and these risks are not properly measured. The retained earnings are also subject to manipulation. One easy trick is to use a decline in the market value of a bank's debt as income (Morgan Stanley did this at the beginning of the year)

Who Should Have Skin in the Game?

I have to agree with Ned and Biomedlives. The very concept of a middle man with no skin in the game is a part of the problem here. This would not apply to banks and lenders who got caught holding the bag on several months of inventory of in some off balance sheet SIVs but would totally apply to GS, MS and originators like AHM and New Century. When one feels that he is in a position of limitless profit and zero risk than one is encouraged to do unethical things. We cannot allow this to continue. The very existence of such middle men is what breaks markets. Furthermore the difference between underwriting an IPO and selling MBS is that the underwriting of the IPO carries certain representations and levels of due diligence which are outsourced to the rating agencies or simply not performed in the MBS creation process.

The best idea I saw here was to compensate the rating agencies by paying their fees with par value sections of the debt securities that they rate rather than with cash. I get the feeling that a much higher level of due diligence on the part of the rating agencies would immediately become the norm.

Tier 1 Capital Ratios of Large U.S. Banks

Two problems here.

1. The Tier 1 ratio does not include massive off balance sheet liabilities which can account for as much as 75% of some banks' assets.

2. Tier 1 ratios can be (and in my opinion are) manipulated by including intangible assets such as good will as well as retained earnings to boost said ratios.

A much better measure of bank health is tangible common equity. The banks above have very low TCE ratios.

Rating the Top 12 U.S. Banks - From Hidden Gems to Zombies

$15B - $11B = $4B. $4B + $35B = $39B. So instead of buying WFC at a 40 P/E they pay the low low price of a 2- p/e when industry average is 12. In a good market. They overpaid and will get buried by the losses from the Golden West portfolio as well as WB's home equity and construction loans. Also keep in mind that WFC was one of the biggest buyers of high FICO but otherwise sloppily underwritten Jumbo loans which were really ALT-As. These loans were mostly stated income and done at near conforming rates in 2006 and 2007 way past the peak of property values. I do not think that WFC are anywhere near as conservative as their reputation suggests. They also had a substantial subprime wholesale mortgage operation and there have to be some reps and warrants from those loans leading to some serious losses.


On Feb 20 12:01 PM 360877 wrote:

> You forget that Wells Fargo also got a $11B tax write off. The effect
> on their balance sheet was zero. Wells Fargo will continue to post
> a profit through 2009. Kovasavich and Stumpf run a tight ship and
> are very conservative in their approach. This message runs strong
> throughout the company.
>
>
> On Feb 19 09:31 PM Philip Gvinter wrote:

Rating the Top 12 U.S. Banks - From Hidden Gems to Zombies

Wells paid $15B and agreed to absorb losses. This is a bad deal for Wells if the losses taken are significantly greater than the future revenue that the purchase will generate. For example if they have to take an additional $35B of losses the total purchase price would be $50B. This would mean that they must somehow turn what they bought into more than $50B. This can come from future earnings or the sale of the assets they got as part of the deal. I do not see how Wachovia's operations can be expected to earn anything near what they used to given the demise of the free for all mentality in the securitization markets which drove a large percentage of those earnings. My estimates are that Wachovia's operations are capable of producing the kind of earnings that a bank of similar size was able to produce around 2001 or 2002. That would be about a 50% haircut from the peak achieved in 2005 and 2006. At that rate it would take WFC over 25 years to recoup their investment. To me that represents too low of a yield on the investment.

Rating the Top 12 U.S. Banks - From Hidden Gems to Zombies

I have to disagree strongly on USB. They were a very active subprime lender in the wholesale market and continued to do subprime loans all the way into Q2 2008. At that point there was no secondary market for the subprime loans as the securitization process had locked out subprime during the summer of 2007 and ALT-A by fall 2007. This means that a substantial portion of their subprime originations which were done by third party brokers are in their own loan portfolio. I would also be willing to guess that the same decision making process and lack of appropriate risk management which lead to making subprime portfolio loans also probably lead to other credit policy mistakes. One very telling thing that set the initial red flags off for me was when management repeatedly talked about growth at the expense of weaker competitors during Q1 and Q2 08. This growth was most likely fueled by what turned out to be overly risky deals which looked much better before the reality of what was upon us truly made itself obvious to everyone. To its credit USB has avoided the ill conceived mergers like BAC-CFC, BAC-ML, WB-Golden West, WFC-WB, or even to some degree JPM-WM, JPM-BSC and PNC-NCC. At the same time I have a feeling that their loan portfolio has much more hidden risk than is currently assumed and that management stayed in certain niche lending markets far too long.

BoA Cuts Off Countrywide ARMs to Save Body of Mortgages

The problem with taking this approach is that it essentially requires capitulation. Eliminating the neg-am would involve losing the majority of the interest accrued on the loan over the first two or three years, and because these loans were most popular in FL, NV, CA and a few other overheated markets the principal reduction is somewhere in the neighborhood of 20% or more. This is a HUGE hit to take and requires the institution to essentially predict a default rate of >12% on the portfolio in order for the alternative to seem economical. At that point the FDIC has to step in because an institution that is overweight these kinds of loans is insolvent.

BofA, Lehman, AIG: The New Financial Realities

WM and WB with their massive Option ARM holdings should be the next two in line.

What's the BofA / Merrill Synergy?

Ken Lewis seems hell bent on becoming the next G. Kennedy Thomson his former cross town rival. CFC was a cheaper version of the Golden West deal but this MER purchase at a crazy premium to current market price should ultimately be his downfall.