Reggie Middleton

The Next Step in the Bank Implosion Cycle

RonB: Just because you don't see my name on a top performing list doesn't mean I am not a top performer. How in the world you know if I outperformed Buffet over the last 10 years or not? Because you don't see me on a list???

And that broad based analysis comment doesn't make sense either. The WFC analysis is 60 some odd pages of some of the most intense scrutiny that I have ever seen on the company. Since you didn't bother (or didn't pay) to read it, how is it that you can call it broad based - or anything else for that matter?

On Goldman and CIT: No Free Lunches

"You have "literally" no idea how markets work dude"

Okay, smarty pants. Why don't you educate us on how a CDS is priced on the ABX, and exactly what the tracking error, if any, is on the actual liklihood of an event of default? What is the definition of default on the contracts written on the ABX?

You can also explain to us if there is any discrepancy and/or relationship between the actual credit default (or its probability) and the ability of the trust to pay out to avoid default.

I admit that I am a neophyte in practically all things, so my ears are open.

You say I know nothing of how markets work, but the CDS space is not truly a market, it is a space run purely by an oligarchy of broker/dealers with the Golden formula of pricing/clearing/settl... A true market has price discovery emanating for asks and bids between all members of a community, not gate keepers on Wall Street. Think stock market, housing market, bond market, currency market.

On Goldman and CIT: No Free Lunches

"How do you know the 5 banks with 97% notional aren't individually net flat? "
Let's use CIT as an example. If all 5 banks have CDS positions in CIT, and Goldman has a billion dollar CDS purchase, then in order to net, the other 5 would have to have $1billion on the other side. The problem is that it appears nearly everybody bought CDS on CIT! There are no chatterings about entities that sold more CDS than CIT has debt, now are there? There appears to be significantly more CDS written on CIT than CIT has net debt, or gross debt. This begs the question, "who is on the other side"?

An even more tantamount question is what is the credit quality of those guys who did write the CDS? If they are just a bunch of $100 million hedge funds holding several billion dollars of CDS risk, then there you go. If they are one of these 5 banks who have hegded their risk with the other 4 banks who hedged their risk with the other 3 banks who relied on those first 2 banks to hedge their risk, well then there you go!

I don't know if all 5 bank are net flat, but I doubt so very seriously. I have went through nearly all of their balance sheets, and one (I have released one bank in particular to my subscribers) have written more than a quarter of their TCE in naked CDS, just like AIG did!

If they are all net flat, then has any risk truly been transferred or are they passing the buck around a circle of 5? I can understand a circle of 50,000, but 5???

On Goldman and CIT: No Free Lunches

You comment as if you haven't read the article. The big deal is that CDS are a ponzi scheme ready to collapse. There is no cash market for price discovery, hence the dealers can literally construct pricing due to opacity. There is extreme concentration risk in derivatives in general, and CDS as a subset.

The article is about risk concentration so whether the CDS is a hedge or not, there is still a counterparty on the other side of the transaction. 5 banks hold 97% of the notional value of derivatives. I bet all 5 of those banks have CDS positions on CIT. Thus, exactly how is that risk truly hedged versus simply being shuffled around in a game of counterparty risk musical chairs.

The other big deal (although not nearly as big) is that it is not truly an economic hedge if the payout from the hedge is greater than the payout on the hedged transaction. Economically, it is a speculative position. Don't consider it a game of semantics for it creates an inverse incentive for GS when they benefit more from the collapse of underlying than they do from the repayment of the loan.

On Goldman and CIT: No Free Lunches

YES YES YES! GS has purchased CDS protection on top of the makewhole, at least according to the article. If you have some insider information, I would love to hear it.

"In the case of CIT, market players have bought more insurance than the company’s $30bn in debt. Those holders include Goldman, who purchased such a credit protection to hedge against a June 2008 rescue financing of up to $3bn to CIT, Goldman said. Goldman also held other CIT debt, although the company declined to comment on these other exposures."

Why I'm Short So Many Financials

I'm sorry, I meant Citibank - not Bear Stearns. Anyway, we shall see how this plays out. I have release strategies on my blog that detail how I apply short strategies on the financials that allow me to participate on the downisde without getting burned if the stocks rally. The SA editors require the term "short" in their disclosure policy. Let there be no mistake, though. I am thoroughly bearish on many financial companies.

Why I'm Short So Many Financials

The government is not (directly, at least) backstopping the share prices, they are backstopping some of the entities. Hey, the government backstopped Bear Stearns, was that a good short?

Many a layman has a much, much too rosy outlook for the financials. I strongly suggest one takes a much closer look at that their balance sheets and prospects. Japan unconditionally backstopped their banks in the '80's after it let its credit and real estate bubble blow and pop, and of all of those banks backstopped, I can only find one that has survived intact, and it appears to have survived in name only.

Why I'm Short So Many Financials

I forgot to mention in the post above, that the point of the article has nothing to do with shorting financials. The point is that the systemic risk posed by the biggest banks in this country just got riskier after all we have been through. The banks are bigger, the risks are more concentrated, and apparently the political will to do something about it has effectively been stymied by the ever-so-effective Wall Street lobbying machine.

Why I'm Short So Many Financials

Shorting financials are risky due to the explicit and implicit complicity in the government's hiding these bank's true liabilities and financial weaknesses, not to mention the multi-trillion dollar support system that was set up for the larger banks. That being said,these liabilities and weaknesses have been hidden, NOT cured, thus still must come home to roost at some time.

Much of the big banks earnings that I have analyzed are illusory. GS skips a bad quarter to produce a winning Q1. They get a regulatory exception for their VaR reporting to mask the extreme increase in risk necessary to produce the trading profits that have masked weak business lines in nearly every other franchise that they had - and VaR still shot up dramatically. JPM took an economic loss last quarter, yet for some reason nobody seems to have taken notice.

Yes, the banks are making money due to ZIRP and government subsidies, but if you mark assets realistically, they are losing on thier legacy assets even faster.

More importantly, the money that the banks with brokerage/IB arms are making is primarily non-interest income. They are not making money conducting traditional bank business, they are making money pursuing activities that caused the collapse in the first place: speculative trading,

As stated in the article above, the small and medium banks should be up in arms and increase their lobbying pressure, for they are subsidizing GSs risk activities through their FDIC fees, yet when it is time to get bailed out GS gets well over $50 billion of direct and indirect support while lenders such as CIT and/or Indymac get shown the door.

The Coming Consequences of Banking Fraud

Petition to congress to break up the banks: www.sendmyvote.com/pet...

Market Manipulation by the 'Big Boys'?

@ John,
thanks. Send me an email through my site when you get the chance. I would like to know more about what you do. You seem like a very bright guy!

As Bank Industry Analysts Lose Jobs, Serious Blogs Take the Forefront

Contact Customer Support, they'll get you in - boombustblog.com/compo.../

The 'Doo Doo 32': Receipt of the TARP

I'm glad you like my work :-)

Another Big Bank Failure: More Likely Than Not to Occur

I can vouch for Mr. Mortgage, who truly knows his mortgages. He warned on Lehman, as I did, at the beginning of 2008 by detailing the quality (or lack thereof) of their inventory in full detail - as granular as sampling the individual terms of mortgages written.

I suggest you look at his early youtube stuff.

Another Big Bank Failure: More Likely Than Not to Occur

I see the well mannered, polite crowd still frequents the SA boards. I luv y'all too.

As a commenter inferred earlier, your criticisms will hold much more weight if delivered with just the slightest modicum of professionalism.

Now, for those that want more detail, or believe that I don't do any "real" research, I suggest you look at the original article which has links to some of the Goldman and Morgan research (look in the green sidebar to the right) - boombustblog.com/index...

For those who need freebies, I release the original Goldman Research for free - boombustblog.com/image... since it is now obsolete.

I shorted Morgan Stanley and Bear Stearns in January, and Goldman in May while many of sheeple were still of the mindset that these "namebrands" can do no wrong. I'll let you do the math.

I'm going to break with tradition here and be a little more forthcoming with my results. My blog's research model looks to be finishing the year over 100% in the black - and that is a static research model. See boombustblog.com/index...

My proprietary trading account (which is dynamic) should be finishing the year at a multiple in excess of 3 or 4 times that, and would have been considerably more save a nasty drawdown that I decided to suffer through from last month. I am open to all comments and criticisms, but I happen to be fairly pleased with my results (though I am rather pissed at myself for a few expensive trading errors), and so are the 3,000 or so subscribers to my blog.

I welcome all the naysayers to come by the blog and try out the sample research and opinions. I have covered roughly 74 stocks to achieve these triple digit returns, and the formal reports are roughly 20 pages in length. There are literally thousands of pages of research which should be more than enough detail to satisfy the "nerd" in all of us.