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?

Wasted Lessons from AIG

Interesting that all of the critics of the article basically ignored what the article was about, which is naked swap writing. It was not about the names of the AIG execs, my business back then, my relationship with them, nor the split adjusted price of AIG.

BTW, thanks John, et. al. I don't frequent SA comments that often.

Falling Up: The New Business Model

Kudos!

Banking Sector: Worst Is Yet to Come

viewfromnyc: some of the banks are so sick they cannot take advantage of zero interest rates. Even JPM, the most respected, has actually had declining NIM, even though the Fed has been letting them get money for free and FASB has implemented "look the other way" accounting for marking their assets.

If you look at the economic earnings of most banks, they are not earning money nearly as fast as they are losing it on stinky assets. No matter how high your margins may be for funding, if you are not making loans those margins are not going to be translated into profits. The only substantial lending done over the last year was refinances and government subsidized purchases (with the $8k tax credit), and both of those have pretty much come to an end.

Now, the reality of a deflationary environment and extreme slack in credit demand will meet the reality of extreme dearth in credit quality and the deleveraging of highly levered assets that where written at the top of a bubble. The result, crash....

Banking Sector: Worst Is Yet to Come

@ Joseph, you said:
"Our three largest banks posted superficially reassuring numbers for the second quarter. Bank of America and Citi both relied on profits to prevent posting enormous losses due to credit/asset write-downs. JP Morgan was only able to show a profit on the back of volatile proprietary trading profits. With no numbers disclosed to date that indicate the growth of problem assets has slowed we have every reason to believe that banks are using the least conservative accounting possible to mask losses."

This is what JP Morgan wants everybody to think. JPM took a loss last quarter of over a billion (unadjusted for risk), and hid it by tweaking their inputs on their MSRs (level 3 assets) to produce a profit where a loss would have occurred. Read all about it in the public excerpt on my blog: boombustblog.com/Reggi...

There a BIG surprises in all of these banks. BIG ONES! For those that subscribe to my blog, see what else JPM is hiding: boombustblog.com/Reggi...

Check those hidden surprises in Wells Fargo that go way beyond those CDS that were written by Wachovia in an attempt to sell those bogus CMBS: boombustblog.com/index...

Then there is this bank that is currently doing exactly what caused AIG to need a $183 billion bailout - selling naked swaps - your busted - boombustblog.com/index...

As for the guy above who doesn't think there is any business sense in my article because I lack optimism, I don't use optimism or pessimism in my analysis. Use of either is a recipe for failure. The only "ism" that I allow into the thought process is realism. I don't give advice, but if a bird on my should were to ask, I would strongly suggest that he take that to heart.

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...

Is JP Morgan Too Big to Survive?

Appropo, i have many an idea. To start with, we should break up the big banks and distribute their risk and portfolios. That would give true capitalism a chance to thrive as well eliminate the vast concentrations of risk that is now rife throughout the system. See boombustblog.com/Reggi...

Is JP Morgan Too Big to Survive?

If that's the case, then the name tag lot on the cartel is shrinking rapidly. The big 4 bulge brackets are now only the big two. Those banks that absorbed the other two (one is simply gone) are highly suspect and may be broken up or absorbed themselves. The biggest mistake any company can make is to believe it will survive forever. Once that mentality is adopted, its days are numbered.

Is JP Morgan Too Big to Survive?

Big Picture? Tell that to WaMu, Countrywide, Fannie, Freddie, AIG, Lehman, Bear Stearns, IndyMac, Citibank, Barings...

Cartel or not, big or not, no one is truly too big to fail

Is JP Morgan Too Big to Survive?

Thanks all. The ISDA agreements are standard contracts and agreements used in creating derivative deals. The problem is that there is truly no set standard. You can download a doc from the web and customize it as you see fit for you, your clients, and most often your year and bonus and P&L statement.

Any customization now makes it not so standardized. This part of the reason why banks are resisting a centralized clearing, formalized exchange and clearing authority. The real reason is that with the added transparency comes lower margins since it makes it harder to scalp clients and counterparties. Shhh! Don't tell anybody I informed you.

Is JP Morgan Too Big to Survive?

Thanks Robert. One has to wonder if the the ISDA netting arrangements are so effective, what was the need for $183 billion to bailout AIG, $80 billion or so to subsidize the sale of Bear, and the need to unwind at the last minute for Lehman (as per the article above). After all, the counterparty risk should have been taken care of ahead of time, right???

All I am saying is that the right and significant counterparty failure will ripple through a whole lot more than just the one bank that would have initially got stiffed. The risk of counterparty failure is not scientifically and uniformly vetted and has truly been transferred if it still sits in a tight circle of highly inter-reliant companies. I know of companies that rely on rating agency rating in a major way, and Lehman and Bear were investment grade up until the end. Think about it.