JasonC

BofA and Stating the Obvious About Bank Profits

The real story in the B of A report is they remain cash flow positive as they have throughout. They added another $2.1 billion to their loss reserves, matching the loss to the common pretty much. There was also the $1.8 billion item from writing *up* the value of debt issued by Merrill because its credit improved.

Trust me, they won't go bankrupt through an improving credit rating.

They tick over around break even until the credit loss rate turns, then they pop upward. The net cost of the entire crisis will be a dilution a bit under half, from being forced to issue lots of stock at lousy prices to maintain capital at the bottom. In return they will have Merrill and be a $2.5 trillion bank in the next up cycle.

Everyone reacting to it as some disaster is smoking something, it was a non-event report...

BofA and Stating the Obvious About Bank Profits

The Fed isn't going to lose anything buying agencies MBS securities. It is going to make somewhat more profit than it makes in treasuries.

Big Banks in Trouble: Huge Mortgage Write-Downs Seem Inevitable

The article contains the usual one-entry accounting error, confusing gross loan losses with net losses.

The IMF estimate of loan losses is a gross figure. In addition to capital raises, all net interest on all performing loans for the period is available to cover those losses.

The banking system has, to date, taken large write offs and raised large amounts of new capital, while simultaneously earning net interest on most of its loan book, recently at very high rates (because funding costs have cratered).

Fundamentally, banks are middlemen. When people do not repay their loans, savers do not earn anything on their deposits. Borrowers are charged far more than savers earn. The resulting wider spread covers loan losses. Until it does, the spread between rates charged to borrowers and rates paid to savers will widen and widen.

In fact they have already done so. Beyond subprimes, try to name a loan category for which the loss rate exceeds the rate charged on such loans. Yes, credit card loss rates around 10% are horrible and unprecedented, fine. But they are still much lower than the 13-18% rates charged on credit card loans. When funding costs are an immaterial 1-2%, that alone is enough to preserve capital (if not to earn anything).

The other usual doom mongering distortion in the article is to conflate deliquency rates with write off rates. Of course the former always run higher, frequently twice the latter.

Another way of analyzing the situation objectively is to look at cash fllow losses at banks since the crisis began. Additions to loan loss reserves and price mark downs are non-cash charges. Actual write offs of loans as irrecoverable are a different story. But those have basically been covered by net interest margin all along. Yes the banks have real losses compared to their previous accounting expectation from all of the above. But that is quite different from actual consumption of their capital. Cash flow can also forced toward a bank simply by running off its loan book.

It is really hard to run out of capital with a cash flow in your own direction of $45 billion per quarter.

Citigroup's Derivatives Reduce Bailout to a Non-Event

The article is nonsense. Read C's actual reports on its book, they disclose far more than anyone else, and the story is their net exposure is on the order of 0.5% of the gross notional numbers the hyperventilating short cites in the article. They hedge is existing risk in cash positions. C is incredibly liquid and a tank in hedging terms. It is also forcing a positive cash flow in its own direction to the tune of $45 billion per quarter - which is its market cap at these ridiculous levels. On any long term, forward basis the present price is going to work out to a PE between 2 and 3. It isn't going to fail, the authorities have made that abundantly clear. But the shark-shorts can't let go of their self-fufilling short-em-to-zero bone, and want to turn those machines back on. It isn't going to happen. Vols are back to half of the elevated levels of October and November. This too shall pass. And when it does, C is going to be an epic buy at these levels.

Citigroup: The End Draws Near

Not only is Citi not dead, it has doubled since my post.

Shorts are fighting the Fed. Don't get in a money-watering contest with the people who can print it.

Citigroup: The End Draws Near

I spent the day analyzing Citi's financial statements looking for what they were doing wrong. They aren't doing things wrong. The present sell off is irrational and unjustified.

Their loan loss reserve is bigger than the share price. Their operating cash flow is positive $45 billion per *quarter*. All of the recent losses are purely non-cash, due to filling up their loss reserves and marking to market assets declining in price but paying higher rates on their lower prices.

Their cost of funds is 3% and they have pushed out the average maturity of their debt to 7 years. They can get through the next year without selling a single dollar of debt. They are earning over 6% on their book, for an interest margin over 3% - and their funding costs are falling, not rising. Yes, distress in the aftermarket has sent their bond yields to 10%, but the Fed has sent their short funding costs in the other direction and it is a bigger portion, since they don't have to refinance debts at the higher rates.

Frankly, they could instead restore the magical tangible book everyone worries about by buying in their own debts at 75 cents on the dollar, out of free cash. Or their stock, come to that. All of it, in about 6 weeks.

When a company could take itself private without exterior financing and fairly be worth 11 figures after doing so, Mr. Market's brains have left the building.

Is Citigroup Failing?

Bear speculation in Citi is brainless and just that. It is no more an indication of underlying anything than $147 oil was an indication that oil was about to run out. Citi has operating cash flow of $45 billion per quarter, positive, in the worst financial environment in our lifetimes. It is simply calling in debt by allowing loans to run off, forcing an epic cash flow in its own favor, and using it to retire debt. It isn't going to go bankrupt doing this. It is going to satisfy creditors and improve liquidity, to any degree anyone wants.

When they decide they are safe enough, they aren't going to need to ask anyone's permission on earth. They can just buy the rest of the common and go private out of 3 month's cash flow, and thumb their noses at the short sellers and CDS speculators all day, every day.

Citi's Desperate Straits

Another idiot call from the resident perma-bear.

Citi had operating cash flow of plus $45 billion last quarter.

It repaid $28 billion in debt and grew cash $18 billion.

The shrink by loan run-off strategy they are pursuing it working just fine, and is forcing epic cash flows in their own direction. Main street may not enjoy the fallout that can cause for final demand, but there is no way you go bust raking in $180 billion a year in cash.

Robbing Peter to Pay Paul: More on Wachovia / Citi

WB bonds were yielding 230% on Friday. The hand was forced, it wasn't a steal or a fix, Wachovia would have failed in days. All you owners of the shares, sorry, but somebody has to buy the bonds when they are dumped or a bank is toast.

My Proposal for Improving Lending Between Banks

There is no such thing as a sound financial asset at a 1000% rate of discount. You arrogant fools are destroying western civilization, and will go with it.

What is Hank Paulson Thinking?

Smarty Pants - because nuking the bondholders in the Wa Mu liquidation sent every bank bond into free fall, and directly led to the failure of Wachovia, with National City a few steps behind it.

If you shut down the bond market for financial stocks, the UST or the Fed gets to provide all capital for all US banks.

As for the original author's comments, what plan? It failed, it is gone. It was too slow anyway, Wachovia was going to die on a time scale of days - rates on its notes hit 230% on Friday and closed at over 90%, with some longer bonds priced at 30 cents on the dollar.

The Fed is now the ball game. They added $630 billion today *before* seeing the plan was going to fail. So now we get to do via the money supply what we should have done through securities markets, except it will take 5 times the size, just to stem the panic from this decision.

People think they have all sorts of options to schuck the cost off on others. They don't. There are only two options - you pay a sizeable chunk willingly, or every drop of blood in you will be squeeze out unwillingly by merciless deflation.

Disclosure from Financials? I Call B.S.

Actually he said he couldn't find the figures for owned CDO exposure or totals for things like bonds puttable back to this or that issuing bank. Which are disclosed, he just didn't know where to look for them, and they are hard to gather at present.

Accounting and disclosure won't ever eliminate the importance of exeutives on top of things and honest with investors, nor the role of analysts in determining earnings quality and the like. But they aren't garbage. Before they had their present form, companies routinely robbed public shareholders outright, in a hundred ways. Read the 1932 edition of Graham if you need any wake up on that score.

Disclosure from Financials? I Call B.S.

Um, besides the 10-Ks of the banks themselves, all of the SIVs have to file. The details are in them.

The reason you'd find it difficult to find more is they are spread over multiple filings, and you couldn't wade through them all and assemble the picture, unless you are a stock analyst or a CFA doing it full time, pretty much.

But suppose all the filings are machine readable, as the new tagged stuff the SEC is talking about, ought to be. Now someone writes a program to find all the securitization filings Citi is a party to, and grab specific numbers out of tagged fields from all of them, and dump them into a spreadsheet. In 10 seconds.

Machine readable disclosure will help. Not saying it is a substitute for sane finance by the bankers themselves, but it will help.

Citigroup: Doing Well, Despite What the Media Says

The commenters are mindless parrots acting as a press clippings service for bears. The article is spot on. A 16% interest rate covers a multitude of financial sins, and card companies aren't going to actually lose money doing so in the corporeal world. Might they occasionally make less lending at 16% with money borrowed at 3%, than they hoped initially? Sure. Call that a mark to market "loss" if you like. Who cares? So you make a 6% spread instead of a 10% spread. It is still positive and huge.

Analyst: Commercial Banks Are Undervalued [Housing Tracker]

Um, everyone knows that banks will lose money on some mortgages. The question is, can anyone do math?

No, they aren't nefariously delaying loss recognition, they just don't have the processing capacity to deal with so many loan workouts at once. That is why they are hiring everyone they can and paying them to perform workouts for them.

The rate of loans going into default on prime credits has increased to all of 2.5%. The spread on prime credits is 2.5% over their cost of capital. If they recovered nothing they'd still break even with spread that wide. They aren't recovering nothing.

The problems all stem from (1) prime mortgages written at tiny spreads and the rates lock in via derivatives at the time or (2) deadbeat mortgages with default rates well into double digits - 10-15% on alt-As and 35% on junk paper - where the spreads didn't cover that rate of default.

How much does a bank lose on a default? They expected something like 20% counting workout costs, but the reality these days is more like 50%, and if costs are high enough or resale hard enough, it can go still higher. But there is some recovery, of course. They get houses that aren't worth zero.

The math of it is, spread times 1 minus default rate (that is the profitable part) minus default rate times (100 minus recovery rate) - that being the loss part. With the spread part being per year and the rest causing loan exit and so being one-off.

Take prime mortgages at a 3% spread (e.g. 3% funding cost via CDs or whatever, and 6% mortgage rate), and a 2.5% failure rate (triple the long run average, but seen right now). They earn on the good ones .975 * 3% = 2.925% of total book size. Suppose the losses on prime loans run 50% when they default, then that is 1.25% of loan book, and the net is positive 1.675%. Push the recovery rate down to 30% and the losses rise to 1.75% of loan book, and they are still ahead 1.175%. Prime loans even in distress conditions, pay. The distress conditions cause low short rates on the funding side and thus keep the spread wide, and that is more than enough to cover even steep losses on the modest portion of prime loans that default.

But consider a subprime with a spread 3% higher (higher loan rate) thus 6% overall, but with a 35% default rate. The good portion of the subprime book earns 0.65 * 6% or 3.9% of total amount written. But the bad portion at 50% recoveries costs 17.5%. That still won't lead to 80% losses, only 13.6% losses. If the recoveries are only 30% it leads to 20% losses on the written book. The much steeper writedowns being taken on such loans reflect the banks conservatively projecting that they are going to be that bad every year over their expected lives of five years or so. By which time 90% of the loans will have defaulted and the book will have evaporated.

Loans to deadbeats don't pay, even at moderately higher spreads. They made them in the expectation that the losses on non-performing loans would be moderate, moderate enough that the spreads on the performing portion could cover them. That was false.

But it won't make loans on prime credits losers at wide spreads. It isn't the losses on non performers that matter, it is the spread on performers and how many perform.

FWIW...