Bonanza36

Don't Believe the Lies: Ride the Bank Stocks Bull

Downey's (DSL) Non Performing Assets (NPA) went from 7.8% of assets to nearly 16% in six months.

There is $2BB in bad debt so far, most all in neg-am option ARMS. They have $860MM in equity and $734 MM in reserves. This gives you a Texas Ratio of 123%. Not good.

What most do not realize is that for years these banks have been booking neg-am interest on an accrual, not cash basis. For Tom Brown, let me explain that in simple terms:

Monthly neg-am interest accrues at the note rate, which was never collected. The borrower paid a lesser amount each month, and added the unpaid interest amount to the previous month's loan balance. The bank recognized the unpaid interest income as it accrued and it was booked as INCOME.

When this loan goes bad, in addition to selling the collateral for MUCH LESS than the value of the original loan amount, all the years of the previously booked income must be REVERSED on the banks income statement.

Forty percent of CFC's income was accrued, not paid, option ARM interest. Wait till that reversal gets recognized by BAC!

So you see Tom Brown and sheeple, the banks not only lose on the balance sheet, but the income statement as well. Tell me again how their margins (operating income) will bail them out of this fuster cluck.

So far all these banks have done well is play a good game of "hide the sausage", with the help of FASB who are allowing them another year to mark to market on off balance sheet items.

WB has $122 BILLION in Option ARMS on the books. Mostly in Florida and Cali. Of the loans that are still actually paying, 72% are making only the minimum payment each month. They are not even paying towards principal. When these loans hit the 110% cap in the next few years, you will see wave 2 of this mess.

disclosure: Long SKF, SRS

Don't Believe the Lies: Ride the Bank Stocks Bull

Ha ha, have you seen the swap rates? Why do we still have a TAF if the banks are healed? Why is bank borrowing at the Fed going up? Why does Wells Fargo change their definition of delinquent loans to make earnings look better? Why do banks rally ONLY on Fed intervention? Why do we need a bailout of FNM/FRE? Why is the FDIC calling back retired workers from the RTC era? Why do the banks keep raising capital with 40% dillution and tell us they do not need the capital? Why have banks written assets down 6% when the market tells us they are worth 22 cents? Why did Merrill have to finance 75% of the sale of their Senior CDO's with no recourse if they go down lower?

I could go on, but you get my point.

Sorry, I am in the mortgage capital markets and this is not over yet. Classic value trap. What evidence do you have that the banks can replace their earnings that have evaporated as their business models change to survive?

I think I will follow Roubini. Even if he is only half right, we have another 1/2 trillion in write offs to go.

Brown is a clown. He has called the bottom so many times I feel for his clients.