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  • The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets 5 comments
    Aug 28, 2009 2:29 AM | about stocks: PNC, WFC, UBFO

    The following is the joke that is not funny, currently playing out in a country very near you. Please read "The Doo Doo 32, revisited" and "The FDIC as a catalyst, or the new Doo Doo 32!" to bring you up to speed on my opinion of the banks. "Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets" offers some empirical data to back up these articles, then move on the banking comedy currently 

    being played out in the courts. Let me warn you upfront, this post is packed with both poignant opinion (not eveybody is going to like it) and well researched, empirical fact about failed and failing banks.
    Aug. 27 (Bloomberg ) -- The Federal Reserve argued yesterday that identifying the financial institutions that benefited from its emergency loans would harm the companies and render the central bank’s planned appeal of a court ruling moot. This is abject nonsense. What hurts banks is what ultimately hurts banking product consumers, and that is the secrecy, fraud, and mispresentation that has been the recent changes in accounting rules that allow banks to outright lie about the trouble their assets are in. What hurts the banks are the myriad secrets kept from the public, primarily the ones concerning the heatlh of the banks in the first place. I will start (by the end of this blog post) revealing those banks that are either about to be shut down by the FDIC or very well should be (thus I strongly suggest you read this lengthy, yet informative missive). Why should the people have to rely on a blogger for the true state of their financial institutions and at the same time have to actually sue those who are supposed to be safeguarding us against financial failure. If the banks are insolvent, they should be wound down, not protected in a multi-trillion dollar shroud of secrecy and taxpayer monies. If they are solvent, then there is noting to hide. Bernanke et. al. and the other members of the Central Banking establishment are not the only ones in this country that can count! The bad part about it is, many of these banks who are swimming in trashy assets will probably end up failing anyway, despite the many hundreds of billions of dollars thrown at them and the illegal (as the judge below made clear) shrouds of secrecy surrounding their repetitive bailouts. Read this article and the rest of the doo doo series, I will start informing you of who is already insolvent, putting creditors at risk, and who probably received the Fed assistance. That is, until I am silenced by the government. To make matters worse, the share prices of these companies have skyrocketed, nearly all of them - despite the fact that their is little to negative equity in them.


    The Fed’s board of governors asked Manhattan Chief U.S. District Judge Loretta Preska to delay enforcement of her Aug. 24 decision that the identities of borrowers in 11 lending programs must be made public by Aug. 31. The central bank wants Preska to stay her order until the U.S. Court of Appeals in New York can hear the case.

    “The immediate release of these documents will destroy the board’s claims of exemption and right of appellate review,” the motion said. “The institutions whose names and information would be disclosed will also suffer irreparable harm.”Just so we are clear here. The truth sill cause irreparable harm, but concealment and lies will benefit the public????!!!!

    The Fed’s “ability to effectively manage the current, and any future, financial crisis” would be impaired, according to the motion. It said “significant harms” could befall the U.S. economy as well.

    The central bank didn’t say when it would file its appeal.

    Fed lawyer Kit Wheatley told Preska in a conference call today that she did not know how long it would take for the Fed board to search the New York Fed for records.

    “We really don’t know what’s in New York,” Wheatley said. “We don’t control the system of record-keeping in New York.”Wait a minute, If they don't know what's in NY, then how do they know what they don't know will cause "irreparable harm" to you know who since they are refusing to tell anybody who that is? Oh, okay. It is all becoming clearer now! 

    The Standard

    The Fed’s lawyer went on to say that she did not know what records would fall under a “delegated function,” which would be a task assigned to the New York Fed.

    Preska interrupted Wheatley, saying that “Ms. Wheatley, I held that’s not the standard. You didn’t search under the regulation. You’re supposed to search under the regulation.”

    Preska scheduled another conference call for 2:30 p.m. today to discuss the schedule for a search of the New York Fed.

    “Nobody is going to deny you your right to an appeal,” Preska said on the call, “We’re going to do it expeditiously, not in a piecemeal fashion and hand it all off to the Second Circuit.”

    The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under the emergency programs, saying disclosure might set off a run by depositors and unsettle shareholders. 

    Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 under the Freedom of Information Act on behalf of its Bloomberg News unit.

    Public Interest

    “Our argument is that the public interest in disclosure outweighs the banks’ interest in secrecy,” said Thomas Golden, a lawyer with New York-based Willkie Farr & Gallagher LLP who represents Bloomberg.

    Preska’s Aug. 24 ruling rejected the Fed’s argument that the records should remain private because they are trade secrets and would scare customers into pulling their deposits. Being insolvent is now a trade secret! I need to run that one the next time I get in financial trouble.

    .... The Clearing House Association LLC, an industry-owned group in New York that processes payments between banks, filed a declaration that accompanied the request for a stay... “Experience in the banking industry has shown that when customers and market participants hear negative rumors about a bank, negative consequences inevitably flow,” Norman Nelson, vice president and general counsel for the group, said in the document. “Our members have accessed the discount window with the understanding that the Fed will not disclose information about their borrowing, especially their identity.”

    Members of the Clearing House are ABN Amro Holding NV, Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc.Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase Inc., UBS AG, U.S. Bancorp and Wells Fargo & Co. I have rich research on quite a few of these guys. See Wells Fargo & Co focused post "Fact, Fiction, Farce and Lies! What happened to the Bank Bears?"and the very real potential for a $100 billion dollars of economic losses coming out of Wells Fargo, all conveniently hidden by entities such as the "clearinghouse" and the Fed. The actual declaration can be downloaded here: pdf Clearinghouse_declaration 27/08/2009,23:05 183.30 Kb, and features some comedic content of its own. Let's take a look see.

    The Clearing House submits this declaration because the Court's Order threatens to impair the ability of our members to access emergency funds through the New York Fed's Discount Window without suffering the severe competitive harm that public disclosure of their identity will cause.

    Our members have accessed the New York Fed's Discount Window with the understanding that the Fed will not publicly disclose information about their borrowing, especially their identity. Industry experience, including very recent and searing experience, has shown that negative rumors about a bank's financial condition - even completely unfounded rumors - have caused competitive harm, including bank runs and failures. Okay, let's parse this message accurately, shall we? Truth and transparency runs the risk of "negative rumors" that threaten "bank runs and failures" while secrecy, concealment and innuendo (thre preferred method of handling banking insolvency, it appears) is what the Fed and the "Clearing House" recommends to perpetuate the strength of, and confidence in, the banking system?????!!!!!

    Furthermore, how in the hell can anybody consider a rumor to be unfounded if it is based on a fact or truth. Now, by not revealing who needed help, rumors will be unfounded, but I suspect that these entities are much less concerned with how founded a rumors is than how damaging the truth and facts are. What say you, my loyal reader?

    The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

    And while Bernanke et. al. and the "Clearing House" attempt to use secrecy to prevent rumors about who needed trillions of dollars of bailout funds for allegedely healthy banks, another arm of our government looks like it may need a bailout of its own, due of course, to those healthy banks that are suspect to bank runs if the truth were to be known...

    FDIC List of Problem U.S. Banks Rises to 416, Putting Reserve Fund at Risk

    The U.S. added 111 lenders to its list of “problem banks,” a jump that suggests rising bank failures may force the Federal Deposit Insurance Corp. to deplete a reserve fund that shrank 40 percent this year.

    A total of 416 banks with combined assets of $299.8 billion failed the FDIC’s grading system for asset quality, liquidity and earnings in the second quarter, the most since June 1994, the Washington-based FDIC said in a report today. Regulators didn’t identify companies deemed “problem” banks.

    The U.S. has taken over 81 banks this year, including Guaranty Financial Group Inc. in Texas and Colonial BancGroup Inc. in Alabama, amid the worst financial crisis since the Great Depression. The surge forced regulators to charge banks an emergency fee to raise $5.6 billion for its insurance fund, which fell to $10.4 billion as of June 30 from $13 billion in the previous quarter, the agency said. The total was the lowest since the savings-and-loan crisis in 1993...

    An $11.6 billion increase in loss provisions for bank failures caused the decline in the reserve fund, the FDIC said. If the fund is drained, the FDIC has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010...

    Bair said the number of problem banks and failures will remain elevated as banks and thrifts continue to clean up their balance sheets. “For now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry’s bottom line,” she said. Bair should really share this thinking with Bernanke. Afterall, it is necessary to clean up the balance sheet, not simply loan trillions of dollars against it then change the accounting rules so banks can pretend the losses do not exist. There appears to be a divergent approach to a solution between these two.

    FDIC-insured banks reported a net loss of $3.7 billion in the second quarter, compared with a $5.5 billion gain in the first quarter. The quarterly loss, the second the industry has reported in 18 years, was driven by increased expenses for bad loans, the FDIC said. Funds set aside by banks to cover loan losses rose to $66.9 billion in the second quarter from $60.9 billion in the first quarter.


    More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival, according to data compiled by Bloomberg. Most likely due to all of those "Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets".

    The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp.Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Of course they are. I warned of these banks risk of failure a year and a half ago with my Doo Doo 32 missive. Many of those banks no longer exist, while others are showing up in Bloomberg articles a year or so later as being at risk, yet financially sound by regulatory standards. I am warning again of a new set of bank failures. I suggest you take heed. Do not be lulled into a false sense of complacency merely because stock prices are rising. The guys who trade these stock prices higher are not the ones responsible for making payments on the poorly underwritten loan products that are driving these banks under. As a matter of fact, the secrecy and fraudulent concealment of fact has a direct correlation to share prices. This is why the "Clearing House" does not want the truth to be revealed.



      As promised, I will start releasing data on truly insolvent banks, and banks that are close to insolvency. My subscribers (click here to subscribe) get first crack at the list, but I will offer them to the public after a lag. Since it is so aggregious that the government actually feels they should conceal the health of the banking system from the public, I will release some of it up front (the data that can be benefited from an investment perspective is subscriber only). Since I have already shared the loss potential of Wells Fargo, a very large bank, earlier in the blog post - the cat is out of the bag on this one. In case you missed it, here it is again: "Fact, Fiction, Farce and Lies! What happened to the Bank Bears?". PNC Bank is not what I would consider the strongest bank in the world either, see PNC plus CRE = Doo Doo hitting the Fan.There are quite a few other banks trading as high as $45 dollars that just ain't worth it.

    These are large banks though. There is significant risk in smaller, lesser known banks as well. I have screened almost 1,000 publicly traded banks to cull the weak ones into a new Doo Doo list. Trust me, there is more to choose from than one may think. In an attempt to recreate a new list of banks that are at extreme risk of failure, and have publicly traded shares available for shorting, we have screened nearly 1,000 publicly traded prospects for strength, asset quality and solvency. We then shortlisted 25 banks, and of the 25 banks shortlisted we further analyzed the banks in each bucket of risk used to create the list (loan performance and quality, securities inventory depreciation, income and operations). Of the 16 banks in the 1st category we had selected 8 banks with the largest negative cushion to loan losses and had compared them by culling out data from their latest FDIC call report and have performed a trend analysis (for the last four quarters). In aggregate we had short-listed 4 banks in the 1st category, just the first pass! We have dozens more banks to go (subscribers may download this shortlist here: Doo Doo shortlist - August 27, 2009 Doo Doo shortlist - August 27, 2009 2009-08-28 01:07:22 191.05 Kb).

    Take United Security Bancshares (UBFO US Equity) as an example. This bank has weak fundamentals but it is trading at $5.1 making it extremely risky to short. Despite that, it has negative equity from my perspective, hence is not even worth the $5 that it is trading at. I have another bank whose summary is available in the subscriber's download section whose negative equity situation is twice as bad - nearly 200% negative - that I feel is even more worthless. My assumption is that the FDIC will be taking that one, and quite likely this one as well, down soon. Hey, it is now FDIC Friday, the day might even be today. Who knows. Well, back to United Security Bancshares:

    • About 64% of the loan portfolio is real estate related, with an extreme concentration in commercial real estate. Non accrual loans and 90 days past due loans amounts to 87.6% of the tangible equity. High NPAs result in negative cushion (excess of NPL+90 days due over reserve) of 62.9% of equity. Texas ratio is the highest among the analyzed set at 103.9% and shortfall from Eyles Test (liquidity available to fund loan losses) is 69.8% of the tangible equity.
    • NPAs as % of loan are 15.2% and as % of tangible equity are 129.6% (this screams insolvency to me!)
    • Adjusted leverage is 11.4x.
    • The bank is trading at Price to tangible book value of 1.0x

     I will probably post more on this bank soon, that is if it is not taken under by the FDIC this weekend. Speaking of whom, I expect the FDIC to step to all of the banks, or at least most of them, that I have on my new Doo Doo list.

    Other links around the web from the MSM and Blogs: 


    Related Articles/Posts
    Disclaimer: I either have, or plan to, acquire bearish positions on all companies above that I have expressed a bearish perspective on.
    Stocks: PNC, WFC, UBFO
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Comments (5)
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  • PainfullyAware
    , contributor
    Comments (1086) | Send Message
    Excellent Reggie Middelton !!!


    In Dire Times The Truth Is Dangerous.


    Thank You For The "Dose Of Reality".


    Safety Is A Function Of Awareness. It is good to know you are more aware than most.
    28 Aug 2009, 03:53 AM Reply Like
  • Reggie Middleton
    , contributor
    Comments (268) | Send Message
    Author’s reply » Thanks. You know, I am absolutely flabbergasted that this content is not more popular on SA. Well, I guess to each their own.
    28 Aug 2009, 08:35 AM Reply Like
  • Between The Numbers
    , contributor
    Comments (152) | Send Message
    I don't know why the idea of the Fed secretly loaning billions of dollars does not cause more outrage. And the argument against transparency seems to be the exact opposite of common sense ("telling you who is weak and needs money will make lies and unfounded rumors swirl that perfectly solvent banks are in fact weak."). Shelia Blair needs to use some FDIC authority and audit the recipients and then disclose the info if the Fed won't budge.
    28 Aug 2009, 05:39 PM Reply Like
  • Former Bank Examiner
    , contributor
    Comment (1) | Send Message
    Brother -- you are pretty much right on the money! I was an OCC bank examiner for 10 years and a State bank examiner 5 years before that... Taught their national credit school for a number of years... What's coming is far worse than the S&L crisis ---- unless the banks can magically rebuild capital in a short amount of time---- which I don't think is possible. Thanks for posting TRUTH! You have another new dedicated reader
    1 Sep 2009, 11:38 PM Reply Like
  • richardcavessa
    , contributor
    Comments (259) | Send Message
    right on regi, unfortunatly the ones with the money, make the rules.....
    3 Feb 2010, 07:55 PM Reply Like
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