vaughn

Why Banks Write Down but Don't Sell Subprime Loans

The super senior trench of CDO owned by banks is written down to 30 c on the dollar,which implied a default rate of 70% with zero recovery. Well, the zero rate recovery is not right, just look around the auction held in Ca, Arizona, or Nevada.

Knowing 30 c on the dollar for the super senior trench is artifically deflated by market forces, bank are not willing to sell. But buyers, knowing even 50 c on the dollar is good value, but cannot buy it without financing (got to leverage up at least 8 times to make enough money). All the potential buyers can do is lowballing bid. with plenty liquidity going on in the market, banks does not need to unload to get liquidity.
with the improvement of housing affordability and historic low mortgage rate for refinancing, eventually the rate of foreclosure will level off wich will then force distressed assets buyer into the market, offering a 50c on the dollar. The revival of corporate bond market, the continuing buying up agency bond by the Fed, the upcoming 1 trillion TALF program and the 275 billion foreclosure prevention program might eventually unlock the jam.

U.S. Banking Crisis: Is Nationalization the Answer?

For those who advocate nationalization to solve the so called banking crisis does not understand CDS.
The moment you announce nationalization, the default event of CDS is triggered which will immediately seize the credit market which will bring down massive bank failures around the world which will eventually bring down the USA government itself.
The 6 too big to fail banks (BAC, WFC, JPM, C,GS, MS) just cannot allow to be failed. Eventually, shorts and naked CDS speculators will come to the term and move on.

Bank Nationalization: Inevitable in Some Cases

Nationalizing of the big four will not happen for the follwoing reasons:

1. Nationalizing the big four will cause the treasury to wipe out its own preferred investment in the big four,
2. Nationalizing the big four will trigger the CDS event and cause unknown damages to other banks which may bring down massive failures in credit market,
3. No bank can absorb the assets of any one of the big four which will significantly distress the market, causing further collateral damages to the credit market and asset price which will put the US government to a massive loss of asset fencing program

Nationalization ( that is Europe term. in US, its receivership_) can only be played on the smaller banks and it has been done routinely. But for big four (BAC, WFC, JPM and C) any attempt to nationalize any one of them may bring down the whole system (lehman brother collapse almost brought down the whole system even though Paulson thought he could handle it. Lehman was only one sixth the size of Citigroup) due to cds exposure, massive loss for other banks holding sub debts of nationalized big four and complication of derivative contracts written by big four which will eventually bring down massive banks around the world which will eventually bring down the USA itself.

Now, go ahead and make my day. Nationalize the big four or even just the weakest one: C

Why Bank Nationalization Will Never Happen

Nationalization of the remaining big four (BAC, WFC, JPM and C) will not happen. The reason is simple: Treasury is not willing to shoot its own foot.

Folks, nationalization of banks means the total wipe out equity interest, including preferred.

How would you feel when treasury (oops, that's you) reported that it just suffered hundreds billion dollar loss for preferred in big four by nationalizing them, not to mention the triggering of CDS and the complication of derivative contracts written by them which will definitely bring down massive banks along with them around the world which will eventually bring down the USA itself.

Tell me, if you were Geithner or Obama, will you take the blame for lossing hundreds of billions and sinking the USA into the abyss. No, you won't, though you might say you should have done after you leave the office.

Why Bank Nationalization Will Never Happen

The total exposure of derivative is always almost misleading. Once the total exposure is netted, the net exposure is far less. And one must remember the value of derivatives is notional, not actual exposures. A 1 trillion notional exposure in interest rate derivative might have actual exposure in millions.


On Feb 16 03:16 PM phdinsuntanning wrote:

> Bond holder of JPM, MS, GS:
>
> JP Morgan Chase Bank held $91.7 trillion, in derivatives in the third
> quarter of 2007. One year later, it held only….$87.7 trillion: a
> shrinkage of $4 trillion. Now, JP Morgan’s assets are only $1.7 trillion
> in 2008, better than the $1.2 trillion they had in 2007. At least
> one financial institution is getting some benefit from the crisis
> and US government bailouts, but with a little bit of risk :). Good
> luck with MS and GS bonds

Obama Talks Himself Into - And Out of - Bank Nationalization

Obama realized nationalizing banks will bankrupt the USA itself.
The nationalization of banks means the total wipe out of equity interest, including preferred.
Take, citigroup, for example. Nationalization of Citigroup means the treasury will suffer an immediate loss of 45 billion preferred, plus a circa 250 billion guarantee loss, plus an unknown amount of loss to cover deposit insurance. Once citigroup is nationalized, no bank can absord citigroup with circa 3 trillion assets(including off balance sheet) and the assets will be distressed. Assuming a 20% haircut to dispose the assets by FDIC, that means another loss of circa 600 billion. In total, nationalizing of Citigroup alone might cost treasury circa 1 trillion losses, not to mention the triggering of CDS event and the complication of circa 40 trillion derivative contracts written by Citigroup which will definitely bring down massive bank failures around the world which will eventually bring down the USA itself.

Soon, senator Dodd will shut up, upon realizing the gravity of the situation. Treasury (that means you) will be better off for just sitting up tight and collect big and fat dividends while doing something else to bring a housing floor and waiting for time to solve the crisis on its own.

The rumor of nationalization can only benefit shorts and media seeking ratings. All others will lose out.

Preview from Europe: Fresh Fears of Bank Nationalization

Let us challenge Senator Dudd (pun intended) to nationalize the big four (BAC, WFC, JPM and C) and to realize circa 200 billion preferred loss for the treasury (sorry, that's u), not to mention the nationalization will also trigger CDS and complicate the circa 150 trillion derivative contracts written by big four which will definitely cause the chain events of bank failures around the world which will eventually bring down the USA itself.

Let us agree what the nationalization of banks means: It means the total wipe out of equity interest, including preferred.

Treasury will not nationalize banks which received Tarp preferred investment. Remember, those banks are deemed good banks or too big to fail banks.

Longs will soon realize the nationalization cannot and will not be used by treasury to deal with banks with Tarp preferred.

U.S. Rejects Nationalization of Citi and BAC

The nationalization of banks which received Tarp preferred money will be nightmare for treasury.
Let us agree what the nationalization of bank means: it means the total wipe out of equity interest, including preferred.
Take citigroup, for example. Treasury holds 45 billion preferred in Citigroup. By nationalizing Citigroup, the treasury (oops, that's you) will suffer an immediate loss of 45 billion, not to mention the nationalization will trigger CDS event and complicate the 40 trillion derivative contracts written by Citigroup which will definitely bring down massive bank failures around the world which will eventually bring down the US government itself.

How do you feel when treasury reports that treasury (oops, that's you again) just suffered an loss of 45 billion in preferred, plus circa 250 billion loss in guarantee of Citigroup's assets, plus circa 600 billion loss in insuring deposit (assuming 20% haircut of Citigroup's assets of 3 trillion, including off balance sheet assets) for a grand total of circa 1 trillion? Won't you be mad? I guess not cause we might not survive the resulting chaos.

Will Banks Be Nationalized?

who will benefit from naturalization? The shorts, all others are losers, especially the government, given its preferred stock holdings and guarantees of assets. In Citigroup case alone, the government will suffer an immediate loss of 45 billion preferred, plus a circa 250 billion guarantee loss, plus the loss to cover deposit insurance, well, may another 250-500 billion loss. The naturalization of Citigroup will cause another chain reaction of loss to other banks, due to their holding of Citigroup's bank note, which will cause more banks to fail, eventually to bring down everything else, including the US government itself. when that happens, even shorts who benefit from the fallout of spreading naturalization rumor will also suffer when the society they live in is at total chaos.

The NPV Test: A Line in the Sand on March 4

Moral hazards? Just look at what happened after the collapse of Lehman brothers, the 4th largest investment at that time, almost shut down the global finance system. Look at what the Fed did to bend forward and backward to prevent the naturalization of AIG, taking a major equity ownership while protecting all debts of AIG. The collapse of citigroup will definitely do what lehman had failed to do, the total collapse of the world finance system and with it, the USA itself. For that reason, citigroup will not be naturalized (US will suffer an immediate loss of 45 billionplus circa 250 billion guarantee loss and will cause other banks who own sub-debt of citigroup to fail all over the world which will definitely blow back to USA)

The took over of GSEs by treasury caused significant loss to banks holding preferred of GSEs which put lots of regional banks into distress, an unintended consequence which treasury will do everything to avoid.

Whereever there is a test, there is a way to pass the test. So many variables in the model, so many assumptions and so much bureaucracy involved are designed to ensure all major banks will pass the test. Even the Citigroup will pass the test. count on it.

Time to Buy Bank Stocks

I am not so sure it is time to buy, but certainly it is not time to short, given the risk/reward profile (for example, short BOA , the maximum profit is less than 5, assuming BOA goes to zero, which is extremely unlikely, just look at Fannie and Freddie, still trading close to 1)

Rememeber, banks must mark to market on those securitized CDO, which most banks already mark down to 30 c on the dollar on the super senior tranche (that assume a 70% default with zero recovery. well, the foreclosed property could not be valued at zero. it must worth something)

for those mortgages not securitized, the banks are working it out through various means which mean it will take long time to recognize loss, giving banks enough time to offset those loss with the zero rate funding cost and almost zero rate deposit cost.

for banks with deep depository basis, such as BOA, WFC, USB, they shall be fine. Not so sure about Citigroup which does not have deep depository basis comapred to BOA, etc.,

An Alternate Solution to the 'Bad Bank' Problem

I have a better alternative of providing $2.5 trillion without costing a cent to the taxpayers.

Granting a 5 million temporary investment based immigrant visa to applicants who agree to invest $500,000 to buy houses anywhere in the USA. That is the applicants must agree to buy $500,000 worth of house and hold the house for a peiod of 5 years . 5 million multipled by half a million equals $2.5 trillion which will absord at least 10 million housing units assuming the medium price of 250k.

The mere announcement of this plan is sufficiently enough to put a floor on the housing market.

The problem in this plan: Can the US still attract upper-middle class immigrants from other countries given the trouble the world is in?

Bank Reprivatization After Paulson

Just like greed, the fear now reaches the extreme level.

given the fact that banks had written down the super senior of abs/cdo to 30s cents on the dollar, that means the mark to market market assumes 70% default rate with zero recovery. Obviously, the zero rate recovery could not be right, indicates the value was distorted by fear.

Bank of America Corporation Q4 2008 Earnings Call Transcript

Merill had the contract obligation to pay out "bonus", a devise designed to tie up key employees for at least a year.

My guess is that had BoA chosen (if BoA had the power to do so) to pay out the merill bonus after the merger, then the $4 billion would be treated as BOA expenses and enlarged the quarterly loss for 1Q 2009. Let Merill pay out in 2008 and BOA would effectively record the $4 billion in goodwill, which can be amortized over certain period (20years?).

The bottom line is: Contract is contract and the so called bonus must be paid out by merill. Let merill do it will reduce the complexity of political consequence and can certainly help to simplify accounting treatments for BOA. That seems to me amounts to one stone for two birds. Ken Lewis, anyway, cannot block the payment. It might be better off let John Thain handled it and took the consequence of it while reducing the expense for 1q 2009 of BOA.


On Feb 07 12:44 PM WSeeley wrote:

> If Mr. Lewis is as committed to restoring the U.S. economy as he
> claims in this press conference, then why did he acquiesce in paying
> $4 billion in bonuses to Merrill Lynch personnel (now a Bank of America
> subsidiary), while BOA only earned $4 billion in 2008 and ML lost
> $27 billion? As a BOA shareholder who has seen his $50,000 investment
> shrink to $5,000 (90% loss), I am appalled by this reckless decision.
> Mr. Lewis should be fired.

The Geithner / Obama Plan Will Fail

Fear, Uncertainty and Doubt (FUD) was explored to the extreme by vultures and shorts.

The worst case scenario for housing market is that 50% foreclosure rate with 50% recovery rate. The 50% recovery rate is well established if one just look into the auction result from auction house in the states like California, Arizona or Nevada. So, the worst case scenario will produce a 25% loss in housing. But one must also note that such loss will not happen all at one, rather such loss will happen during the full cycle of the housing, that is from 2005 to 2012, or 8 years. The current market price of senior cds-abs indicates a loss of 70% which is obviously not going to happen over the cycle of this housing market.

The banks are now earning a huge spread of 5%-18% thanks to zero rate fund rate and almost zero deposit interest. One might argue that credit loss for consumer loan is increasing which will hurt banks. But given the fact that the savings rate has jumped to 3.6% and is expected to go higher in 2009, the consumer revolving credit loan will soon start coming down big time which means the charge off for consumer loans will soon peak.

Vultures and shorts time had passed. Now, the risk/reward profile is working against vultures and shorts, soon market will realize that the total loss for the housing market will not exceed 25% during this cycle of housing (8 years), not 70% loss currently explored by shorts and vultures.