It sounds like they did a lot of things right. What they apparently did not do, along with almost everybody else, was keep an eye on indicators that would have shown a price bubble: house price to income, house price to rents, percent of price increase per year... that sort of thing.
That last quote was the first time in a long time that I said out loud "Oh, Jesus!" with the same sort of nervous chuckle I have when I see ballplayer take a fastball right in the knobby bat.
I'd guess that the "rather not put that out there" is a Sarbanes answer. The number is so slippery that any firm answer is gonna prove wrong enough that you can be legally sorry you said it. So you say "I dunno" and then let 'em know its higher than a really high number.
Note the large concentration of land loans in Arizona with LTV of 115%. Ouch. During housing busts, land prices usually fall a great percentage than existing home prices. So many of these 115% LTV loans will probably be much higher soon.
IMHO this illustrates the fact that the equation isn't Land Prices + Construction Costs = House Prices. It's House Prices - Construction Costs = Land Prices. I know that seems obvious, but it's surprising how many people seem to think that rising land prices are the reason Houses cost so much.
but it's surprising how many people seem to think that rising land prices are the reason Houses cost so much.
?
I can count on the fingers in my feet the number of new SFH construction I've seen in the South Bay Area.
Houses certainly have a replacement cost (labor and materials) but the reason home prices are what they are is because of rising location values over the past 20 years.
Plus the speculative premium (turning consumption -- housing -- into an investment vehicle) and the scarcity premium (people are generally willing to move to a better location given the opportunity).
Eddie,
I really don't know. What I'm saying is that price is the fundamental problem here and the graphs of historical norms make that quite clear. Yet everybody played the game for fear of losing out. Now they are all losing out together.
I've always felt that one of the basics here is the system of appraisals based on comps, which allows a price bubble to ride up with full 'justification', and I have not seen anybody anywhere who really recognizes the issue.
It happened to be housing this time; it has been other things in the past. The pattern and the problem are the same and lenders ought to see a red flag there.
giacutter,
Wells did OK... but did you notice that they fudged reporting of 120 day delinquents out to 180 days to move 265 million of losses off this Q report... which put them above the new 'expected' number? Pay now or pay later. They are choosing later.
you know, my family has been deep into MI -- i have been running their texas ratio over the last few call reports:
6/30/7 -- all past due/nonaccrual: $669mm, (tangible capital + LLR - REO): $3902mm, ratio 17%
9/30/7 -- NPL $789mm, ratio 19%
12/31/7 -- NPL $1095mm, ratio 26%
3/31/8 -- NPL $1449mm, ratio 33%
i haven't seen the 6/30/8 call report, but
As of quarter end we had had $661 million in construction and development loans on nonperforming status representing 63% of our total nonperforming loans
this sounds suspiciously like nonaccruing loans jumped from $735mm to $1050mm or so just in q2. that would probably put their texas ratio around 40%.
this bank is hardly indymac. but they claim
Our commercial lending portfolio has maintained its strong credit profile
and their texas ratio is already to 40%? what happens when corporate bankruptcies start to hit?
I'm betting on a rally beginning today and lasting two weeks... bought into itb on this theory. If it works out, I will switch back to skf July 29.
Good luck.
The median price paid for a Southland home was $355,000 last month, down 4.1 percent from $370,000 in May and down 29.3 percent from $502,000 for June 2007. The peak of $505,000 was reached in March, April, May and July of last year.
"Well its been tough going. We have thrown in everything including the kitchen sink and with some coaching, we managed to make a bit of profit" [read as: I get my comp bonus].
"At this time it would be inappropraite to comment on Level III assets because they amount to fluid, throughput values recorded in various Quarters, and viewed from diverse market pricing mechanisms that for the most part we may not necessarily agree with but do accept the fact that the market determines the pricing for the items listed but not really recorded. What I can say, however, is that they look solid and safe and indeed we have housed them in a Fed faciltiy for safe keeping in exchange for paper backed by the US Government. From another perspective, I might suggest that JPM s backed by the US Government"
"Now there has been a lot of discussion on the Bear deal that was paid for by the US taxpayer. Well, understand that we have worked hard, many hours and days and weeks to make sure JPM extracts full value for the risk we have taken and expect to book an additional $29B in profits this year."
"Now, I would like to nominate Mr. Paulson to the Board - any in disagreement, fine, carried. And that concludes todays call"
The median price paid for a Southland home was $355,000 last month, down 4.1 percent from $370,000 in May and down 29.3 percent from $502,000 for June 2007. The peak of $505,000 was reached in March, April, May and July of last year.
cut the numbers in half and that could be from 1991.
This special report provides an update to Fitchs special report titled Across the Board, Delinquencies Are Up, dated June 5, 2007, which reviewed mortgage insurance origination and performance trends at an earlier point in the current housing stress. This report extends that analysis of industry trends with the benefit of a further year of loan-level data.
Here's more on Wells from Housing Wire. That's a lot of HELOCs and the experience on 90% LTV loans has been, shall we say, rather disappointing for a lot of lenders:
"Seconds still lurking
Despite the optimism, a burgeoning portfolio of second-lien mortgages at Wells Fargo that had in recent weeks concerned analysts and investors hasnt gone anywhere; and, if anything, Wednesdays quarterly result also holds evidence that the credit losses in that particular portfolio have yet to fully reverberate throughout the bank.
Wells has a substantial $84 billion portfolio of home equity loans and half of those are located in hard hit states like California and Florida; of that total, it has carved out the worst $11 billion for liquidation, with rest remaining as part of its core home equity portfolio.
In the second lien portfolio set up for liquidation, the percent of loans that saw borrowers miss two or more payments rose during Q2 to 3.6 percent, up from 2.79 percent one quarter earlier. The $73 billion core home equity portfolio saw a similar rise to 1.88 percent in 60 day delinquencies, compared with 1.71 percent in Q1.
So delinquencies continued to rise during Q2; net credit losses, however, did not. Charge-offs on second liens were actually down $104 million compared with first quarter 2008 but dont let that fool you. The improvement was primarily due to a change in how the bank handles its home equity portfolio charge-offs; earlier in Q2, the bank extended its charge-off policy from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout (or to protect earnings, take your pick).
Although losses declined, the portfolio continued to deteriorate as property values search for a bottom, Michael Loughlin, the banks chief credit officer. Given the continued decline in home prices, we had more accounts move into the higher combined loan-to-value segments, which directly impacts loss levels.
As second lien borrowers see equity in their homes evaporate due to price depreciation, second liens become extremely vulnerable to loss.
Which is why this stat matters more than most: approximately $35.6 billion of Wells Fargos $84 billion in home equity loans had combined loan-to-value ratios above 90 percent, according to the second quarter report. And thats a figure based on automated value models, or AVMs, that were run in March 2008; were those AVMs run again today, its almost a sure bet that the number has gone up even further."
How much of this unusual trading today is tied to options expiry this week ?
I believe it's all due to everyone realizing that the worst is behind us (see WFC) and that we'll gradually climb out of this hole by 2020, if not later.
The trading is not "unusual". It is a bounce from way oversold. All banks were being lumped together as though every one of them will fail. I have bad news for some of you-while there will be failures, most banks will survive. With better loan quality going forward and the field cleared of the weaker competitors who drove loan quality down to zero, the stronger well-run banks will have some good years coming-not this year, perhaps not even next, but all cycles turn.
Also, do not understimate the effect of Cox reading the riot act to shorts. That was very significant news. You can bet all those double-secret short ETFs are doing some scrambling right about now.
BelieverJeff: I suspect the folks who run those ETFs are busy talking to their lawyers right now. They may be too preoccupied with subpoenas to do any of their monkey business for a while.
Also, do not understimate the effect of Cox reading the riot act to shorts. That was very significant news. You can bet all those double-secret short ETFs are doing some scrambling right about now.
I didn't think those ETF's actually shorted anything, naked or not.
The float for JPM is something like $6-7bn a quarter.
Unless HELOC defaults exploded(and if they had they'd've preannounced) so in all likelihood profit of $2bn this Q.
Luck helps, but volume * time value of money covers a lot of sins.
I'd say go long BAC & JPM and load up on shorts on almost everybody else, but for some reason I think Citi will have a less than horrfic loss and that could make for a massive short squeeze.
AheadoftheCurve: Give up - you will find no sanity here. Many of these folks are bound and determined to get their disaster movie. They've already bought their popcorn, after all.
You are absolutely correct about there being survivors. The question is not who survives but what that survivial is worth. And if you belive that there is rampant overcapacity which has inflated GDP (and everything else(), then the real question becomes determining what the future value of the loan books look like in a delveraged world. The anwser is more likley than not in keeping with the hissing delfationary sound less in the future..
AheadoftheCurve:
yeah, maybe you will get more from your short squeeze rally, but I am more entertained by hapless investors who come out and claim WFC "out of the woods" or "avoided subprime". if things were really so good, they wouldn't have to try so hard on the accounting side. thing is, WFC is still trading at 2.5x tangible book - think about that...
Yet, this is worst than the bears were predicting last year soooo
where do you want to put your money on bulls that have been consistently too optimistic or bears that have been consistently too optimistic.
So far no pessimist has been proven wrong on the downside. But boy or boy the optimists have been.
As the guys on wall street say, don't fight the trend.
I get my Devil's Food Cookies and milk for this one.
Popcorn is nice, but milk and cookies are comfort food for watching the end of the world as we know it.
If ever there was a sell signal Bove apparently out raising his target price and eps. Funny how WFC meets the number. All those investors cheering are getting it taken out of their back pocket on deposit rates. hopefully they all own the stock as of yesterday close, then their "adj" APR might approach something like fleecing...
A couple of weeks ago I attended a conference in Vegas focused on buying distressed real estate. Most of the buyers as the conference were frustrated by their inability to close any deals with the banks as the bid and ask were so far apart. Here is a bit of what I wrote in a summnation of the information I picked up.
"Builder lots are selling for improvement cost or less. Basically, the land is free. There is no debt available and the volume of transactions is approaching zero."
I am familiar with M&I's land lending operation in Phoenix. Just to make a bad story worse, a lot of their inventory is raw land not improved land. The best prices I have seen on a recent purchase by a large Southern California developer that has a decades long, upscale project was for about $17,000 an acre. Roughly what you would pay for agricultural acreage. The land he bought is in the Estrella mountains with elevations and views.
M&I is odd on bankrate. It seems to have no deposits. So where can you see a valid balance sheet? What I would want to know is the Texas Ratio" and that, as I understand it, is the % of non=performing loans compared to equity+loan loss reserves.
It's the best entertaiment to be found since George Carlin died. And it takes so little to rile them up.
Honestly, it is fun isn't it? The best part will be watching them scatter once the disaster movie's plot starts straying from the way they think it should go.
You are correct ahead, a very small number of banks will go under, and that clears the deadwood, as all downturns should. There are a couple of bad quarters left, and those that can weather this will be very, very strong afterwards. Also, the RE market will bottom out, and that will remove a lot of uncertainty. And I keep saying that oil is going to drop in time for the election. So look to October/November for signs of life. Until then, don't get caught in the rinse cycle.
I really don't think that they were that conservative. When all of the Sturm und Drang is over, a lot of people are going to be scratching their heads over why a mid-sized Wisconsin bank took outsized risks in Florida, Arizona and California.
Here in Chicago, a lot of Corus stakeholders are wondering the same thing.
So where can you see a valid balance sheet? What I would want to know is the Texas Ratio" and that, as I understand it, is the % of non=performing loans compared to equity+loan loss reserves.
take the balance sheet items as reported quarterly to the FFIEC.
and that basically is the texas ratio -- all past due and nonaccrual loans, over the sum of tangible capital (that is, not including goodwill) and loan loss reserves. i further deduct REO from the denominator, as the stuff won't help them much -- a small figure for MI anyway. i've heard that variation called the "california ratio".
You are correct ahead, a very small number of banks will go under, and that clears the deadwood, as all downturns should. There are a couple of bad quarters left, and those that can weather this will be very, very strong afterwards. Also, the RE market will bottom out, and that will remove a lot of uncertainty. And I keep saying that oil is going to drop in time for the election. So look to October/November for signs of life. Until then, don't get caught in the rinse cycle.
it's fair to poke fun at the doomsters party that sometimes is the comments here, ipod et al, but i personally see many too many sanguine forecasts re: house prices. the whole kit may be misrepresented by the ABX, of course, but is a nationwide decline of 40% really unthinkable? it would merely be mean reversion plus a modicum of overshoot -- not even to previous deep recesses of valuations like price-income. the damage that kind of reversion will wreak will affect more than a handful of banks.
i do expect that large banks will be able to ignore mark-to-market with regulatory approval, receive some central bank recapitalization and trundle along a la japanese banks of the 1990s or american banks post-1982. but there will be failures, i'd wager, in the hundreds -- maybe 10% of the 7000+ american banks?
You've got Fannie and Freddie on the brink of failure
and you might dial your timeframe back as they're not anywhere near failure. that was explained rather well in another thread, and people pointed out what the real issues were. And it wasn't failure.
And this is why we're disparaging the comments here. It seems everyone just either repeats bullsh1t, or talks sh1t without thinking about it. Go get their financials and read. Then look up "run-off mode" and then think about "loss of the ability to write 60% of the mortgage market" if they go into runoff mode. If you put all that together, you'll understand what the issue actually is. And it isn't failure.
Unless, of course, you're an equity holder, then youre f^cked, as they say in French. And you're f^cked anyhow because you can kiss your dividend goodbye and you're about to be diluted.
thanks gaius for the reference. I calculated that M&I has about 5.750 billion in equity and loan loss reserves vs. 1.4 billion in loans gone sour. So it is still viable. Have I got my figures right?
M&I has been in the AZ market for 20 years or so when they aquired Thunderbird bank, so you'd have thought there was some institutonal memory of how the mania goes.
I'm certainly not qualified to assess the solvency of Fannie & Freddie. There are smart folks claiming both sides of that argument.
However, when their stock heads towards zero, as it has, and the Administration asks for authority from Congress to support their financial position with gobs of public money, well....what conclusion do you draw from that?
Does that not suggest to you that they are in a tenuous position, possibly on the brink of failure? I'm especially skeptical when the folks arguing that they are strong are the ones that have little credibility as of late.
My concern would be how do the banks recapitalize and or make money? Over the past couple of decades there has been an never ending expansion of credit in the US. UBS had a great chart entitled "Credit Intensity in US GDP" which showed how expanding credit went from a 1 to 1 ratio in 1957 to a 2 to 1 ratio in 1982 when financial earnings really took off to a 5 to 1 ratio during the housing boom.
Well those days are over. Banks can't loan much against non existant equity neither can they extend more and more
credit further and further down the income ladder. One blogger terms it 'peak credit' and there is a lot of truth to that. So even those banks
that do not become insolvent over the next year will face an entirely different lending environment than they have ever faced before.
The typical haircut on a commercial C&D loan is going to be about 25%. The typical haircut on a residential (incl. condos) C&D loan is going to be around 50%. If you lend at 80% LTC (or 70% completed LTV) then you'll probably end up selling it for 35% (original) LTV, which is the price where the property should cash flow for an investor. So, if you assume a 30% default rate and a 35% blended loss rate on those defaults then you end up with a loss rate of about 10% on the whole C&D portfolio. But this should get dragged out over a couple of years... not pretty.
Answer: M&I was for years a well managed, well diversified safe bank holding company. A widows and orphans stock. A few years ago they turned over the keys to new management and all of the sudden they are a derivatives house with low quality assets. It is hard to believe. If they fail...who is safe?
Hangtown: M&I is in the news for two reasons. First, it IS a very conservative lender (ignore 'cynical' above) which rarely makes mistakes. So when they DO have a quarterly loss, it is news. Second, they are viewed as an acquisition target. A lot of people are interested in what M&I does, or does not do.
That'll leave a mark.
Wow, he doesn't even want to say how bad the C&D haircut is. Not good..
Ouch!
Get that resume dusted off!
@You know, I would rather not put that out there.
That sounds worse than putting it in.
This cant be good news, can it?
It sounds like they did a lot of things right. What they apparently did not do, along with almost everybody else, was keep an eye on indicators that would have shown a price bubble: house price to income, house price to rents, percent of price increase per year... that sort of thing.
Would that C&D include commercial development or is that just loans for home builders?
"You know, I would rather not put that out there. I would tell you that the C & D haircut is going to be higher than the 27%."
:-0
The FDIC is gonna be busy.
Cheers,
That last quote was the first time in a long time that I said out loud "Oh, Jesus!" with the same sort of nervous chuckle I have when I see ballplayer take a fastball right in the knobby bat.
Wally, who would be your model bank for keeping an eye on indicators?
I'd guess that the "rather not put that out there" is a Sarbanes answer. The number is so slippery that any firm answer is gonna prove wrong enough that you can be legally sorry you said it. So you say "I dunno" and then let 'em know its higher than a really high number.
Note the large concentration of land loans in Arizona with LTV of 115%. Ouch. During housing busts, land prices usually fall a great percentage than existing home prices. So many of these 115% LTV loans will probably be much higher soon.
IMHO this illustrates the fact that the equation isn't Land Prices + Construction Costs = House Prices. It's House Prices - Construction Costs = Land Prices. I know that seems obvious, but it's surprising how many people seem to think that rising land prices are the reason Houses cost so much.
Sounds like a bottom is forming.
Wells Fargo did ok.
but it's surprising how many people seem to think that rising land prices are the reason Houses cost so much.
?
I can count on the fingers in my feet the number of new SFH construction I've seen in the South Bay Area.
Houses certainly have a replacement cost (labor and materials) but the reason home prices are what they are is because of rising location values over the past 20 years.
Plus the speculative premium (turning consumption -- housing -- into an investment vehicle) and the scarcity premium (people are generally willing to move to a better location given the opportunity).
Eddie,
I really don't know. What I'm saying is that price is the fundamental problem here and the graphs of historical norms make that quite clear. Yet everybody played the game for fear of losing out. Now they are all losing out together.
I've always felt that one of the basics here is the system of appraisals based on comps, which allows a price bubble to ride up with full 'justification', and I have not seen anybody anywhere who really recognizes the issue.
It happened to be housing this time; it has been other things in the past. The pattern and the problem are the same and lenders ought to see a red flag there.
giacutter,
Wells did OK... but did you notice that they fudged reporting of 120 day delinquents out to 180 days to move 265 million of losses off this Q report... which put them above the new 'expected' number? Pay now or pay later. They are choosing later.
you know, my family has been deep into MI -- i have been running their texas ratio over the last few call reports:
6/30/7 -- all past due/nonaccrual: $669mm, (tangible capital + LLR - REO): $3902mm, ratio 17%
9/30/7 -- NPL $789mm, ratio 19%
12/31/7 -- NPL $1095mm, ratio 26%
3/31/8 -- NPL $1449mm, ratio 33%
i haven't seen the 6/30/8 call report, but
As of quarter end we had had $661 million in construction and development loans on nonperforming status representing 63% of our total nonperforming loans
this sounds suspiciously like nonaccruing loans jumped from $735mm to $1050mm or so just in q2. that would probably put their texas ratio around 40%.
this bank is hardly indymac. but they claim
Our commercial lending portfolio has maintained its strong credit profile
and their texas ratio is already to 40%? what happens when corporate bankruptcies start to hit?
Bucky lives!
"Wells Fargo did ok"
JPM tomorrow. If they come in in-line the markets should scream, with the FHA housing bailout coming at the end of the week.
My BAC calls from earlier this week look strong. I may cut that position in half for insurance against a JPM miss...
go badgers, ac!
With regard to conventional mortgages, we have noted deterioration as individuals are feeling increased economic stress.
Very calm and matter of fact. Do you think when he gets back to the office he just says,"Oh shit, oh shit, oh shit. We are sooooo screwed."
I'm sorry to say that the house of cards has collapsed and is taking down the bank of cards along with it. Big trouble. BIG TROUBLE.
I'm betting on a rally beginning today and lasting two weeks... bought into itb on this theory. If it works out, I will switch back to skf July 29.
Good luck.
So Cal home sales report is out:
Southland home sales still ultra-low; median price slips again
Eeek!
The median price paid for a Southland home was $355,000 last month, down 4.1 percent from $370,000 in May and down 29.3 percent from $502,000 for June 2007. The peak of $505,000 was reached in March, April, May and July of last year.
JPM tomorrow
Lets run the script:
"Well its been tough going. We have thrown in everything including the kitchen sink and with some coaching, we managed to make a bit of profit" [read as: I get my comp bonus].
"At this time it would be inappropraite to comment on Level III assets because they amount to fluid, throughput values recorded in various Quarters, and viewed from diverse market pricing mechanisms that for the most part we may not necessarily agree with but do accept the fact that the market determines the pricing for the items listed but not really recorded. What I can say, however, is that they look solid and safe and indeed we have housed them in a Fed faciltiy for safe keeping in exchange for paper backed by the US Government. From another perspective, I might suggest that JPM s backed by the US Government"
"Now there has been a lot of discussion on the Bear deal that was paid for by the US taxpayer. Well, understand that we have worked hard, many hours and days and weeks to make sure JPM extracts full value for the risk we have taken and expect to book an additional $29B in profits this year."
"Now, I would like to nominate Mr. Paulson to the Board - any in disagreement, fine, carried. And that concludes todays call"
How much of this unusual trading today is tied to options expiry this week ?
The median price paid for a Southland home was $355,000 last month, down 4.1 percent from $370,000 in May and down 29.3 percent from $502,000 for June 2007. The peak of $505,000 was reached in March, April, May and July of last year.
cut the numbers in half and that could be from 1991.
OT from Fitch:
This special report provides an update to Fitchs special report titled Across the Board, Delinquencies Are Up, dated June 5, 2007, which reviewed mortgage insurance origination and performance trends at an earlier point in the current housing stress. This report extends that analysis of industry trends with the benefit of a further year of loan-level data.
http://fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=393252§or_flag=3&marketsector=2&detail=
Here's more on Wells from Housing Wire. That's a lot of HELOCs and the experience on 90% LTV loans has been, shall we say, rather disappointing for a lot of lenders:
"Seconds still lurking
Despite the optimism, a burgeoning portfolio of second-lien mortgages at Wells Fargo that had in recent weeks concerned analysts and investors hasnt gone anywhere; and, if anything, Wednesdays quarterly result also holds evidence that the credit losses in that particular portfolio have yet to fully reverberate throughout the bank.
Wells has a substantial $84 billion portfolio of home equity loans and half of those are located in hard hit states like California and Florida; of that total, it has carved out the worst $11 billion for liquidation, with rest remaining as part of its core home equity portfolio.
In the second lien portfolio set up for liquidation, the percent of loans that saw borrowers miss two or more payments rose during Q2 to 3.6 percent, up from 2.79 percent one quarter earlier. The $73 billion core home equity portfolio saw a similar rise to 1.88 percent in 60 day delinquencies, compared with 1.71 percent in Q1.
So delinquencies continued to rise during Q2; net credit losses, however, did not. Charge-offs on second liens were actually down $104 million compared with first quarter 2008 but dont let that fool you. The improvement was primarily due to a change in how the bank handles its home equity portfolio charge-offs; earlier in Q2, the bank extended its charge-off policy from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout (or to protect earnings, take your pick).
Although losses declined, the portfolio continued to deteriorate as property values search for a bottom, Michael Loughlin, the banks chief credit officer. Given the continued decline in home prices, we had more accounts move into the higher combined loan-to-value segments, which directly impacts loss levels.
As second lien borrowers see equity in their homes evaporate due to price depreciation, second liens become extremely vulnerable to loss.
Which is why this stat matters more than most: approximately $35.6 billion of Wells Fargos $84 billion in home equity loans had combined loan-to-value ratios above 90 percent, according to the second quarter report. And thats a figure based on automated value models, or AVMs, that were run in March 2008; were those AVMs run again today, its almost a sure bet that the number has gone up even further."
Puts for sale!! Puts for sale!! Everybody come get your Puts.
How much of this unusual trading today is tied to options expiry this week ?
I believe it's all due to everyone realizing that the worst is behind us (see WFC) and that we'll gradually climb out of this hole by 2020, if not later.
Anyone see today as a buy opp for SKF? Or would it be better to wait till EOM?
The trading is not "unusual". It is a bounce from way oversold. All banks were being lumped together as though every one of them will fail. I have bad news for some of you-while there will be failures, most banks will survive. With better loan quality going forward and the field cleared of the weaker competitors who drove loan quality down to zero, the stronger well-run banks will have some good years coming-not this year, perhaps not even next, but all cycles turn.
Also, do not understimate the effect of Cox reading the riot act to shorts. That was very significant news. You can bet all those double-secret short ETFs are doing some scrambling right about now.
BelieverJeff: I suspect the folks who run those ETFs are busy talking to their lawyers right now. They may be too preoccupied with subpoenas to do any of their monkey business for a while.
Also, do not understimate the effect of Cox reading the riot act to shorts. That was very significant news. You can bet all those double-secret short ETFs are doing some scrambling right about now.
I didn't think those ETF's actually shorted anything, naked or not.
The float for JPM is something like $6-7bn a quarter.
Unless HELOC defaults exploded(and if they had they'd've preannounced) so in all likelihood profit of $2bn this Q.
Luck helps, but volume * time value of money covers a lot of sins.
I'd say go long BAC & JPM and load up on shorts on almost everybody else, but for some reason I think Citi will have a less than horrfic loss and that could make for a massive short squeeze.
I have bad news for some of you-while there will be failures, most banks will survive.
I think you have that backwards, most banks will fail, but there will be survivors.
The Republicans in Congress are showing some spine, we're seeing opposition to Paulson's "Blank Check Bailout."
House GOP Leaders Call for Hearings on Treasury’s Proposed Rescue of Freddie Mac & Fannie Mae | Republican Leader John Boehner
Euphoria based on bad news that isn't horrible news? Yeah....that 'splains it.
AheadoftheCurve: Give up - you will find no sanity here. Many of these folks are bound and determined to get their disaster movie. They've already bought their popcorn, after all.
MoM- But I enjoy disrupting their pity party. It's the best entertaiment to be found since George Carlin died. And it takes so little to rile them up.
giacutter writes: " Wells Fargo did ok"
Yet they would rather not "put out there" the estimates for house price decline that they base their mortgage related asset valuation on. Why ?
The markets will NOT settle until the numbers are on the table. "Talking" wont do it. I do not know why anyone would still think otherwise.
http://www.bloomberg.com/avp/avp.htm?N=av&T=Meredith%20Whitney%20Sees%20%60Significant'%20Bank%20Writedowns&clipSRC=mms://media2.bloomberg.com/cache/vLq4nYeIDiYw.asf
Aheadofthecurve writes
You are absolutely correct about there being survivors. The question is not who survives but what that survivial is worth. And if you belive that there is rampant overcapacity which has inflated GDP (and everything else(), then the real question becomes determining what the future value of the loan books look like in a delveraged world. The anwser is more likley than not in keeping with the hissing delfationary sound less in the future..
AheadoftheCurve:
yeah, maybe you will get more from your short squeeze rally, but I am more entertained by hapless investors who come out and claim WFC "out of the woods" or "avoided subprime". if things were really so good, they wouldn't have to try so hard on the accounting side. thing is, WFC is still trading at 2.5x tangible book - think about that...
Yet, this is worst than the bears were predicting last year soooo
where do you want to put your money on bulls that have been consistently too optimistic or bears that have been consistently too optimistic.
So far no pessimist has been proven wrong on the downside. But boy or boy the optimists have been.
As the guys on wall street say, don't fight the trend.
I get my Devil's Food Cookies and milk for this one.
Popcorn is nice, but milk and cookies are comfort food for watching the end of the world as we know it.
If ever there was a sell signal Bove apparently out raising his target price and eps. Funny how WFC meets the number. All those investors cheering are getting it taken out of their back pocket on deposit rates. hopefully they all own the stock as of yesterday close, then their "adj" APR might approach something like fleecing...
As for valuation, lets say that again 2.5x TBV
A couple of weeks ago I attended a conference in Vegas focused on buying distressed real estate. Most of the buyers as the conference were frustrated by their inability to close any deals with the banks as the bid and ask were so far apart. Here is a bit of what I wrote in a summnation of the information I picked up.
"Builder lots are selling for improvement cost or less. Basically, the land is free. There is no debt available and the volume of transactions is approaching zero."
If you want to see the entire article, here is the link, METROPOLITAN | Property Management & Real Estate Investments.
I am familiar with M&I's land lending operation in Phoenix. Just to make a bad story worse, a lot of their inventory is raw land not improved land. The best prices I have seen on a recent purchase by a large Southern California developer that has a decades long, upscale project was for about $17,000 an acre. Roughly what you would pay for agricultural acreage. The land he bought is in the Estrella mountains with elevations and views.
Very helpful, thanks Tom.
M&I is odd on bankrate. It seems to have no deposits. So where can you see a valid balance sheet? What I would want to know is the Texas Ratio" and that, as I understand it, is the % of non=performing loans compared to equity+loan loss reserves.
It's the best entertaiment to be found since George Carlin died. And it takes so little to rile them up.
Honestly, it is fun isn't it? The best part will be watching them scatter once the disaster movie's plot starts straying from the way they think it should go.
You are correct ahead, a very small number of banks will go under, and that clears the deadwood, as all downturns should. There are a couple of bad quarters left, and those that can weather this will be very, very strong afterwards. Also, the RE market will bottom out, and that will remove a lot of uncertainty. And I keep saying that oil is going to drop in time for the election. So look to October/November for signs of life. Until then, don't get caught in the rinse cycle.
I wonder if the Wells results and subsequent trumpeting by the press of the results as 'strong' sets them up as the odds-on forced suitor for IndyMac?
I really don't think that they were that conservative. When all of the Sturm und Drang is over, a lot of people are going to be scratching their heads over why a mid-sized Wisconsin bank took outsized risks in Florida, Arizona and California.
Here in Chicago, a lot of Corus stakeholders are wondering the same thing.
ipodius, aheadofthecurve, and MOM:
You've got Fannie and Freddie on the brink of failure, and you're laughing at the folks here for being over-dramatic about the current situation?
I suggest you move your historic timeframe back a ways when figuring how bad this MIGHT get.
So where can you see a valid balance sheet? What I would want to know is the Texas Ratio" and that, as I understand it, is the % of non=performing loans compared to equity+loan loss reserves.
take the balance sheet items as reported quarterly to the FFIEC.
and that basically is the texas ratio -- all past due and nonaccrual loans, over the sum of tangible capital (that is, not including goodwill) and loan loss reserves. i further deduct REO from the denominator, as the stuff won't help them much -- a small figure for MI anyway. i've heard that variation called the "california ratio".
You are correct ahead, a very small number of banks will go under, and that clears the deadwood, as all downturns should. There are a couple of bad quarters left, and those that can weather this will be very, very strong afterwards. Also, the RE market will bottom out, and that will remove a lot of uncertainty. And I keep saying that oil is going to drop in time for the election. So look to October/November for signs of life. Until then, don't get caught in the rinse cycle.
it's fair to poke fun at the doomsters party that sometimes is the comments here, ipod et al, but i personally see many too many sanguine forecasts re: house prices. the whole kit may be misrepresented by the ABX, of course, but is a nationwide decline of 40% really unthinkable? it would merely be mean reversion plus a modicum of overshoot -- not even to previous deep recesses of valuations like price-income. the damage that kind of reversion will wreak will affect more than a handful of banks.
i do expect that large banks will be able to ignore mark-to-market with regulatory approval, receive some central bank recapitalization and trundle along a la japanese banks of the 1990s or american banks post-1982. but there will be failures, i'd wager, in the hundreds -- maybe 10% of the 7000+ american banks?
You've got Fannie and Freddie on the brink of failure
and you might dial your timeframe back as they're not anywhere near failure. that was explained rather well in another thread, and people pointed out what the real issues were. And it wasn't failure.
And this is why we're disparaging the comments here. It seems everyone just either repeats bullsh1t, or talks sh1t without thinking about it. Go get their financials and read. Then look up "run-off mode" and then think about "loss of the ability to write 60% of the mortgage market" if they go into runoff mode. If you put all that together, you'll understand what the issue actually is. And it isn't failure.
Unless, of course, you're an equity holder, then youre f^cked, as they say in French. And you're f^cked anyhow because you can kiss your dividend goodbye and you're about to be diluted.
thanks gaius for the reference. I calculated that M&I has about 5.750 billion in equity and loan loss reserves vs. 1.4 billion in loans gone sour. So it is still viable. Have I got my figures right?
Tom,
Nice stuff.
M&I has been in the AZ market for 20 years or so when they aquired Thunderbird bank, so you'd have thought there was some institutonal memory of how the mania goes.
ipodius,
I'm certainly not qualified to assess the solvency of Fannie & Freddie. There are smart folks claiming both sides of that argument.
However, when their stock heads towards zero, as it has, and the Administration asks for authority from Congress to support their financial position with gobs of public money, well....what conclusion do you draw from that?
Does that not suggest to you that they are in a tenuous position, possibly on the brink of failure? I'm especially skeptical when the folks arguing that they are strong are the ones that have little credibility as of late.
My concern would be how do the banks recapitalize and or make money? Over the past couple of decades there has been an never ending expansion of credit in the US. UBS had a great chart entitled "Credit Intensity in US GDP" which showed how expanding credit went from a 1 to 1 ratio in 1957 to a 2 to 1 ratio in 1982 when financial earnings really took off to a 5 to 1 ratio during the housing boom.
Well those days are over. Banks can't loan much against non existant equity neither can they extend more and more
credit further and further down the income ladder. One blogger terms it 'peak credit' and there is a lot of truth to that. So even those banks
that do not become insolvent over the next year will face an entirely different lending environment than they have ever faced before.
Aheadofthecurve writes:
"Also, do not understimate the effect of Cox reading the riot act to shorts. That was very significant news."
1- see on Proshares.com the description of Ultrashorts (SKF in this example) holdings : derivatives
ProShares ETFs - UltraShort Financials - SKF - Daily Holdings
2- The "riot act on shorts" is just another non issue (inconsequential). The markets need both sides, always will.
The typical haircut on a commercial C&D loan is going to be about 25%. The typical haircut on a residential (incl. condos) C&D loan is going to be around 50%. If you lend at 80% LTC (or 70% completed LTV) then you'll probably end up selling it for 35% (original) LTV, which is the price where the property should cash flow for an investor. So, if you assume a 30% default rate and a 35% blended loss rate on those defaults then you end up with a loss rate of about 10% on the whole C&D portfolio. But this should get dragged out over a couple of years... not pretty.
Question? Of all the problem banks in the U.S., why is M&I popping up on the radar screens.
Answer: M&I was for years a well managed, well diversified safe bank holding company. A widows and orphans stock. A few years ago they turned over the keys to new management and all of the sudden they are a derivatives house with low quality assets. It is hard to believe. If they fail...who is safe?
Hangtown: M&I is in the news for two reasons. First, it IS a very conservative lender (ignore 'cynical' above) which rarely makes mistakes. So when they DO have a quarterly loss, it is news. Second, they are viewed as an acquisition target. A lot of people are interested in what M&I does, or does not do.
While M&I may not have been doing "subprime" loans....they did do a lot of Stated Jumbo loans with ficos down to 620......Tell me that's not subprime.