I watched a video of Cramer today, and he actually made sense. He said that, because of Sarbanes-Oxley, the big banks can't disclose all the writedowns. They can't tell how bad it will get - or how good - because if they're wrong, they can be held liable. So we'll just have to wait and see...
President George W. Bush will ask Congress for $99.7 billion for the Iraq and Afghanistan wars for rest of fiscal year 2007 and more than $145 billion for fiscal year 2008, a Bush administration official said on Friday.
Re: The great 2007-2008 parade of writedowns, which was hovering around the $100 billion mark already, has pushed far past that thanks to Merrill Lynchs $14.5 billion in assets lost
I'd be obliged if anyone can explain how a bank determines what to write down. As a simplistic case, let's say a bank has a pool of 100 mortgages on a group of homes where they lent $ 500,000 at 100% LTV. But even if they had to foreclose on all of them, which is highly unlikely, as many people will stay in the homes and find a way to pay, they're not worth 0. Perhaps, they're worth $ 350,000. So does the bank write off 30 % of the original amount or 100%?
Yeh, it's a bit odd. I'd say Wall St was at least 20% responsible for this mess, so let's say they take 20% of the $150bil Bush is promising that you, me and everyone else will pay out of future taxes, and make them pay the $30bil. Ya. Sure. F$%king ratbastards.
After all these massive losses how come the wall street types are still getting bonuses!
The bonuses are for the performance done LAST year (2007). Most of the financials topped around December after the sizes of bonuses were determined. I'd guess a large portion of wall streeters this year are going to be hit hard between the eyes...
Troy- Where do you get your number? Even if 20% of the loans made in 2003-07 end in forclosure, which is pretty high, and the houses sell for only 70% of LTV, that is 6 % not 30. Still high, but that puts us halfway there more or less.
Aheadofthecurve, the idea is to write the mortgages down to what people will pay for them. That is sometimes difficult because there is no market for some of these products.
Most of the losses are unrealized - meaning the house hasn't been foreclosed, and the actually losses taken.
In your example of 100 500K mortgages, only a small percentage have been foreclosed on and sold. The loss severity is probably close to 50% for those homes. Say only 2 homes have suffered losses (out of 100). The losses would 1% so far (half of the 2 homes). But if there was a market for this pool, investors would want a steep discount because the realize many more mortgages will suffer losses.
If there is a market, the bank would mark the pool down to what the market would pay - not the 1% in realized losses. If there is not market, they "mark to myth" of whatever number they feel is correct.
This remains interesting to me, I posted it earlier, but this is the writing on the wall...dudes!
Re: One possibility is that Bank of America would seek some sort of tangible regulatory "reward" for rescuing Countrywide, said analyst Nancy Bush of NAB Research in Aiken, S.C., such as having the government take some of the bad loans off its hands, or forbearance on the deposit cap that hinders Bank of America's ability to do deals. "We're in an environment in which you could really say anything can happen," she said.
These writedowns will at some point be spun into some stimulus chicanery where taxpayers will bail out corporations that bail out failing institutions.....this is on par as being as stupid as The Iraq War and The Non-Impeachment Of Bush ll
Jan Kriegel estimates total credit losses from mortgage debt may reach $900 billion in a new paper, "Minsky's Cushion of Safety: Systemic Risk & the Crisis in the U.S. Subprime Mortgage Market." (at page 20):
"There does not appear to be a transpar-
ent method of determining the prices of assets acquired by the investment
vehicles. Indeed, the notion of repricing risk can only be justified on the
presumption that current prices are undervalued, and that the market will
eventually provide correct evaluations. But if the market is not capable of
valuing these structured assets correctly, the marking to market is not the
best method by which to judge the solvency of the institution that used
them. The alternative, whereby the originating banks take the assets back
onto their balance sheets (which appears to be the solution preferred by the
larger banks involved), also confirms that there is no effective pricing
mechanism for collateralized obligations."
Shortcourage - Countrywide's low writedown number surprised me also, especially given that they've lost approximately 80 to 85% of their market capitalization this year. Bank of American has only written down 3 billion, which would suggest either BOA's purchase of Countrywide is going to put them in a world of hurt when additional write-downs are announced, or BOA recognized that Countrywide was not exposed to future write-downs and scooped them up for a song.
Not to ask simplistic questions, but what happens if a lender refuses to issue any mark downs. They just carry on and maintain that they expect the remaining 98% to work out fine. Nothing to see here... move along.
I'm just puzzled by these lenders that issue small markdown after markdown, it would seem that it would be better to save them up and make one bad news day rather than 3-4.
Anyone know what's up with Wells Fargo? How have they managed to avoid any of this mess so far?
Me | 01.18.08 - 5:03 pm | #
Wells business model seems to be to just suck its current customers dry with fees. Its why I'll never be a customer again. I also think they basically kept their same lending practices through the boom. Not sure if it was because they were smart, or becuase they were too big and slow to change.
--
For the past 20 years, with the help of Greenspan, Bankrupters and Fraudsters of New York City (BFNYC) screwed everyone and made more than trillion dollars for themselves.
Now, the payback time for the sharecroppers has come.
Pretty soon we will have the USG bail some of them out by creating some sort of 'Trust." American dopes totally forgot "In Goldman Sachs We Trust," in famous book by Galbraith, as to what these Crooks did to the general public. This time these Crooks have lot more power than in 1920s and 1930s.
Profits in my long-term puts on Bankrupters and Fraudsters keep piling up (40% realized and 60% unrealized). I never had any doubts; the only question was WHEN.
ahhh is that where "talking his book" came from....
Its funny that Jan Hatzius was vilified for his comments about the mortgages/housing by everyone including people at GS but GS is the only one that made money, lots of money, during this fiasco....
CR-Thanks for your answer. So, if the banks write these down by 30 %, as Troy suggests, but only 20 of the homes actually go to foreclosure and sell for 50 % LTV, then the ultimate realized loss is only 10%. So what happens to the additional 20 % they wrote down. Does that show up as profit at some later date?
The totals given above are impressive, but don't forget the much smaller adjustments being made at small institutions around the country. They add up too.
Wells Fargo hardly put any money in mortgage-backed securities.
And they avoided the most toxic mortgages like neg-am.
They did write down $1.4 Billion to cover Home Equity lending losses, and they'll take their fair-share of consumer lending losses in the months & years to come, but they'll probably only charge off a ton of money, instead of a truly stupendeous ridiculous amount of money.
Wells Fargo has many accounting ghosts, just as Buffett has, its just a matter of DD; one place to look is book value; so many lenders, so little time!
Hope no one is upset by a history lesson this afternoon, but I found this very informative and related to writedowns and the topic I posted above concerning, "having the government take some of the bad loans off its hands, or forbearance on the deposit cap that hinders Bank of America":
To wit (delete if you must):
Introduction
The failure of Penn Square Bank, N.A. (Penn Square), Oklahoma City, Oklahoma, still
ranks as one of the Federal Deposit Insurance Corporations (FDICs) most publicized,
most difficult, and most colorful bank resolutions. Penn Square failed July 5, 1982, with
$470.4 million in deposits and $516.8 million in assets. By aggressively making large
and speculative loans, especially to the oil and gas industries, the bank had grown from
$62 million in assets in 1977 to $520 million in assets by mid-1982.1 Penn Square then
sold majority interests in those loans to other banks (in the form of loan participations),
but retained the responsibility for servicing the entire loan amount.2 At its failure, Penn
Square was servicing approximately $2 billion in loans.
From the
beginning, the bank failed to document loans properly. In addition, it based repayment
on collateral value rather than on the ability of the borrower to repay, and collateral
documentation deficiencies were common.
On July 1, 1982, at a joint meeting in Dallas, the OCC and the Federal Reserve argued
that Penn Square should be sold through a purchase and assumption (P&A) transaction
or given open bank assistance (OBA), while the FDIC argued for a payoff.
From November 1981
through October 1982, FDIC provided assistance to accomplish the mergers (and
prevent the failures) of 11 mutual savings banks that had total assets of $14.7 billion
Although they discussed OBA, the FDIC
would have had to determine Penn Square essential to its community; but with 36
other banks in Oklahoma City, the FDIC could not make that determination.13
The FDICs concerns over contingent liabilities were based on what is known as
the First Empire decision.14
The practical effect was that the depositors and general creditors were paid in full through the P&A transac-
tion, and the contingent claimants were left with less than full recovery. First Empire
Bank, New York, New York, the beneficiary of the standby letters of credit, sued the
FDIC over that issue and won. The Ninth Circuit Court held that arranging for the payment of the depositors
and general creditors without arranging for payment of the
standby letters of credit violated U.S. Code 12, section 194, which the court held to
require ratable distributions from a national bank receivership.
The FDIC
decided to use a power given to it by the Banking Act of 1933 and established a Deposit
Insurance National Bank (DINB) to pay off the insured depositors.
I'd be obliged if anyone can explain how a bank determines what to write down. - AOTC
That would make one excellent uber post if a certain ex-bank insider could find the time.
Hint, hint.
dryfly | 01.18.08 - 5:30 pm |
Boy CR, I second that. This question seems to me to be the key to the whole thing. All these sovereign funds are putting money into these banks and one presumes they've done DD before investing. So either they're idiots or doing it as part of a political deal (neither is out of the question), or they see value that WS is missing. So how much will REALIZED losses, as opposed to write-downs really be?
I can say that if I was dumb enough to lend dryfly money, I'd only write it off if he was homeless, bankrupt and told me to go F myself.
On July 5, 1982 (a holiday), shortly after 8 p.m., the OCC determined that Penn
Square was insolvent, closed the bank, and named the FDIC as receiver. Because it was
the largest payoff in history, the failure quickly attracted national attention.
FDIC Chairman William M. Isaac was quoted as saying: Well
keep the bank open 24 hours a day if necessary to meet the demand. Well be in the
bank all night long if we have to.19
... Ill never forget . . . [they were] lined up as far as you could see in
a hot July sun (90 degrees) out in the parking lot ...
The Federal Reserve announced that the depository institutions that held receiver-
ship certificates could borrow against the certificates at the Federal Reserves discount
window; the interest rate for such borrowings was 12 percent. The FDIC suggested that
the certificates should be valued at about 80 percent of face value. The Federal Reserve
agreed to lend up to 90 percent of that discounted amount.25 The U.S. Small Business
Administration (SBA) also announced that it would accept FDIC-issued receivership
certificates as collateral for loans to businesses hurt in the Penn Square failure.26
Penn Squares $2.1 billion in loan participations complicated the offset process.
Loan participants usually receive their pro rata share of any payments made by a debtor that augments the
receivership estate. The same holds true if the receiver forecloses on and liquidates the underlying collateral. Loan
participations may suffer a loss greater than they would otherwise incur, however, if the debtors or receivers exercise
their right of offset. Because the offset does not augment the receivership estate, there are no proceeds to be passed
on to the loan participants. The loan participants are therefore left with general unsecured claims against the
receivership estate for the amounts they have lost as a result of the offset. The general unsecured claims are likely
to be worth far less than the 100 cents on the dollar that direct proceeds or cash is worth.
The total cost to the FDIC for the resolution was $65
million, or 12.6 percent of total failed bank assets.37
The Penn Square debacle was caused by a gross dereliction of duty on the part
of the banks board of directors and management. They were able to perpetrate
their abusive practices by obtaining fundsnormally through money brokers
from banks, credit unions and S&Ls around the nation. These financial institu-
tions, which held 80 percent of the uninsured funds at Penn Square, were
motivated solely by a desire to make a fast buck.
When a merger of a failed bank is arranged, the FDIC must provide
protection to the purchaser against any contingent or off-balance sheet claims.
Penn Square had sold more than $2 billion in loan participations to other banks
and had outstanding nearly $1 billion in letters of credit. The potential
exposure to los
Where do you get your number? Even if 20% of the loans made in 2003-07 end in forclosure, which is pretty high, and the houses sell for only 70% of LTV, that is 6 % not 30. Still high, but that puts us halfway there more or less
See < a href="http://img512.imageshack.us/img512/1816/picture4bn7.png">this chart. Take 10% (min) or 30% (my max estimate) of the area under the curve from 2003-2007.
This is just a ballpark, but A LOT of the money in that blow-off peak of 2004-2006 is now in Hummers, Ford Trucks, table saws, Levitz sofas, skidoos, etc etc . . . and the lender ain't getting it back.
Now this is a novice's approach to an explaination as to why these financials are in more trouble than just the value of their write down:
As explained above, these assets aren't worth zero, and may well get written down more than they are worth, much like the value of a bond dropping even though you have no plan to sell and the dividends keep coming as scheduled. No sale=No problem.
I really think the long-term problem is their inability to charge interest for the risk they are taking. Home loan rates are at historic lows. The existance of Fannie and Freddi means they make loans based on interest rates tied to spreads rather than based upon some risk assesment. They arent charging enough to account for the fact that home prices are dropping and even high FICO scores aren't immune from job losses or underemployment.
As an analogy. Suppose several insurance companies sell life insurance to a group of nuns. Based upon risk levels they believe that $10 per nun will account for losses i.e. premature deaths. Now suppose those nuns all get shipped to Iraq. Now the risks have increased. Suppose that one company wants to reprice for that risk to say $40. But other companies don't budge. In this case, any one company who makes a move loses customers to the others. The losses mount for all until they all price risk accordingly or go BK. If only one company can take unlimited losses, then all either go out of business or take losses also.
The existance of Freddie and Fannie will drag this re-pricing of risk out longer and you won't see financials able to charge for risk until the last ones standing fall or capitulates.
In my view, the pain for financials is systemic and very very very long term.
Thanks for that bit of support, as it is a very long post, but very related to lenders with collateral problems. I find that I seldom follow blind links to stories and instead want to read related information on the fly; I did try to condense that long report and knew it would not be well regarded, but the mechanics of The Fed, FDIC and banks are well documented in past failures; it is wise to look ahead at what is now underway, so thanks for understanding my intentions!
Sort of further offtopic and more trouble:
Bank entrepreneur Bill Blanton has followed up his recent purchase of Gainesville, Ga.-based NBOG Bancorporation with the buyout of Commerce, Ga.-based nBank N.A.
Both banks ran into lending problems, and had been rumored to be on the market for months.
More than a century old, nBank started as a community bank in Commerce and now focuses on online bank services.
nBank will be combined with Blanton's latest venture, Woodstock-based First Covenant Bank, which opened last fall and runs a similar model of gathering national deposits to make local loans.
The combined bank will be run by current First Covenant CEO Henry Vick.
Average Joe-You may be right. However, when I see sovereign funds and Prince Al-Waleed who baought C when it was on its back in 1991 plunking down big bucks, it makes me wonder. After all, they've seen the books and you and I haven't.
Cramer just proposed a solution to the current credit crisis. He said the government should take over the monoline insurers and shut them down while backing their current commitments with $250 billion dollars.
I just love how TV pundits like Cramer love free markets until they blow up due to greed and stupidity, and then cry for relief from the Federal Reserve Bank or the Federal Government. This proposal is nothing short of disgraceful.
Peconic-While philosophically you are correct, let's suppose that the blow-up of these insurers causes a further 15 % drop in the market and either pushes us into recession or makes the recssion more severe. What do you think the loss in tax revenue would be? Not to mention the 150B in stimulus already proposed.
Perhaps jail time should be used to enforce moral hazard, rather than making the whole country suffer to punish some crooks.
Im through trusting the judgement of those in "the know".
Before 9-11, 100% of experts in the field of handling hijacked planes would have given you the same or similar advice. Stay calm, comply, negotiate. They were all wrong.
Before Columbine, 100% of the cops, the "experts", would have told you that in the case of a shooter in a structure, you surround, set up a perimeter, attempt to negotiate, call in swat, time is on your side. They were 100% wrong.
In both cases it wasn't that the plans and policys weren't followed, in fact they were followed to perfection, which was the problem itself. You could not have gotten the right answer by anyone in the business to handle these problems. Any "expert" opinion was exactly the wrong thing to do.
I think you have this type of situation going on in the investment world. The game has changed enough that those in the middle of it are especially handicapped at being able to asses the true problem and diagnose proper action.
Am I missing something, or aren't we (effectively) guaranteed future writedowns? Specifically what I am thinking is that the commercial real estate appears to a) be in big trouble, and b) be shot through with all the same lax lending standards, and complex derivative action as home lending has been. And it seems to me, since commercial loans individually can be quite a bit bigger than individual home loans, if even a few go bust we could have just as significant a problem. I'm thinking of Macklowe -- if that loan goes into default isn't it likely that some bank somewhere is going to have to take a writedown. The bigger picture is commercial projects generally. In my area (outer northern va) we have seen an explosion in mini-shopping centers in just the last 2 years. One example is the new Whole Foods. I was in there on thurs at 8pm, it's atleast 6000 sg. ft maybe more, and there were about 15 people in it, maybe 25 tops. 3-1 ratio between employees and customers at the checkout lines. I'm thinking that the rent on that brand new space is quite high (the whole shopping center just went in). If we have a slowdown are people really going to be shopping at the most expensive grocery store in town, or will they go down the street to Shoppers? If so, and those guys don't make the rent, and the property owner doesn't make the payment... isn't that more write downs for some bank somewhere?
My favorite quote is from Einstein, which amounts to, the fact that you cant solve a problem on the same level it was created.
The models and risk management simply were all wrong and they failed to predict, or better yet, they all collectively failed to acknowledge the reality of everyone in the finance business abusing fiduciary relationships and making sure risk structures had a basis for reality! This collective group of hogs all ate from the same trough and pigged down as much greedy collusion and corruption as they could swallow and now they want your help!
I'd be obliged if anyone can explain how a bank determines what to write down.
My non-insider understanding.
Banks follow rules laid out by the FASB (Financial Accounting Standards Board) - www.fasb.org.
FAS 115 allows banks to hold assets in one of three categories: held-to-maturity, available-for-sale, and trading.
The held-to-maturity is the only category that is held at cost, instead of fair market value on the books. If those assets become "other-than-temporarily" impaired, then the FASB requires that banks no longer hold the investments on their books at cost but instead write them down to fair value.
The FASB considers an investment impaired anytime the fair value falls below cost. Seems simple, and it's detailed in FAS-151-1:
But, the problem is that it may not always be easy to determine fair value. Many bank investments are completely unique and there may be no market to "mark-to-market".
In some cases, the FASB allows banks to estimate the value of investments by looking at similar securities. Recently, the FASB has put new standards in place to tighten up the rules and put more emphasis on objective instead of subjective inputs. This is detailed in (FAS-157).
For those securities where that isn't practical the FASB requires that banks look for change in circumstances in its investee. So, for example, a credit downgrade of GM would potentially trigger a write-down of all banks who've loaned money to GM.
Oh, and write-down does not mean write-off. GM still is on the hook for the money until it either goes bankrupt or pays back the loan at maturity.
At that point, the loan either becomes a total or partial write-off (depending on the recovery) or is paid off at par (and the past write-down is irrelevant).
Kicker- Thanks for the explanation. I'm a bit dense and not sure I grasp it completely. To go back to this pool of 100 $500,000 mortgages (cost $ 50 mil). So let's say 5 have stopped paying, and now the asset is impaired, Do we write it down to 95 %? Or do we say, maybe 15 more won't pay and write it down to 80 %? Or do we write it down to 0?
In any case, at some point we will foreclose, sell the houses and end up with something (let's say 50 cents on the . So that money comes back on the balance sheet, right? So it's possible the ultimate realized loss is < the write-down, no? Or more, if we wrote it down to 80 %, but 50 mortgages went into default.
I'm just a simple scientist, but in science we try to avoid guessing and wait until we actually know the results of the experiment before concluding.
is there an tanta post explaining how servicers front the cash to the security holders?
isn't that a good way to predict the future performance relative to the rmbs? look at countrywide paying us this for three months while they get squat.
To go back to this pool of 100 $500,000 mortgages (cost $ 50 mil). So let's say 5 have stopped paying, and now the asset is impaired, Do we write it down to 95 %? Or do we say, maybe 15 more won't pay and write it down to 80 %? Or do we write it down to 0?
In this case, it would be pretty simple. The impairment is based on the fair value of the real-estate backing the mortgages at the time the bank determines that foreclosure if probable (FASB 114).
It's more complicated when the pool of loans represents a tranch of a CDO and the fair value has to be calculated based on expected future cash flows. In that case, the foreclosure rates of the pool, the attach and detach points of junior tranches, and expected recovery rates all come into play.
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I watched a video of Cramer today, and he actually made sense. He said that, because of Sarbanes-Oxley, the big banks can't disclose all the writedowns. They can't tell how bad it will get - or how good - because if they're wrong, they can be held liable. So we'll just have to wait and see...
President George W. Bush will ask Congress for $99.7 billion for the Iraq and Afghanistan wars for rest of fiscal year 2007 and more than $145 billion for fiscal year 2008, a Bush administration official said on Friday.
Re: The great 2007-2008 parade of writedowns, which was hovering around the $100 billion mark already, has pushed far past that thanks to Merrill Lynchs $14.5 billion in assets lost
DH
It's kind of funny to see Countrywide down there at the bottom of the list with $1B in writedowns. Do ya think that might change this year?
I'd be obliged if anyone can explain how a bank determines what to write down. As a simplistic case, let's say a bank has a pool of 100 mortgages on a group of homes where they lent $ 500,000 at 100% LTV. But even if they had to foreclose on all of them, which is highly unlikely, as many people will stay in the homes and find a way to pay, they're not worth 0. Perhaps, they're worth $ 350,000. So does the bank write off 30 % of the original amount or 100%?
Well, not even 6 months into it--wait til a year is out, it'll be 10 times worse.
And, no bond insurers have sunk yet.
After all these massive losses how come the wall street types are still getting bonuses! Apparently bonuses are down only 5% per a CNN story.
New York regulator Dinello talking about a bailout....what shape does everyone think that will take? and will it clot the bleeding on the IB's?
If my estimate of 30% of the net mortgage lending of 2003-2006 going to total loss, we are . . . ONE-TENTH of the way through this.
As it stands now, we are quickly chasing in nominal terms the scale of the S&L crisis.
Anyone know what's up with Wells Fargo? How have they managed to avoid any of this mess so far?
We are coming to explode your financial institutions. We will destroy your banks.
Yeh, it's a bit odd. I'd say Wall St was at least 20% responsible for this mess, so let's say they take 20% of the $150bil Bush is promising that you, me and everyone else will pay out of future taxes, and make them pay the $30bil. Ya. Sure. F$%king ratbastards.
The bonuses are for the performance done LAST year (2007). Most of the financials topped around December after the sizes of bonuses were determined. I'd guess a large portion of wall streeters this year are going to be hit hard between the eyes...
Troy- Where do you get your number? Even if 20% of the loans made in 2003-07 end in forclosure, which is pretty high, and the houses sell for only 70% of LTV, that is 6 % not 30. Still high, but that puts us halfway there more or less.
Nice tally, CR. Thanks!
OT -- someone expects 'fun' on Monday: they bought 12MM shares of SDS right before close.
SDS: Basic Chart for PT ULTRSHRT SP500 PS - Yahoo! Finance
Aheadofthecurve, the idea is to write the mortgages down to what people will pay for them. That is sometimes difficult because there is no market for some of these products.
Most of the losses are unrealized - meaning the house hasn't been foreclosed, and the actually losses taken.
In your example of 100 500K mortgages, only a small percentage have been foreclosed on and sold. The loss severity is probably close to 50% for those homes. Say only 2 homes have suffered losses (out of 100). The losses would 1% so far (half of the 2 homes). But if there was a market for this pool, investors would want a steep discount because the realize many more mortgages will suffer losses.
If there is a market, the bank would mark the pool down to what the market would pay - not the 1% in realized losses. If there is not market, they "mark to myth" of whatever number they feel is correct.
Best Wishes.
This remains interesting to me, I posted it earlier, but this is the writing on the wall...dudes!
Re: One possibility is that Bank of America would seek some sort of tangible regulatory "reward" for rescuing Countrywide, said analyst Nancy Bush of NAB Research in Aiken, S.C., such as having the government take some of the bad loans off its hands, or forbearance on the deposit cap that hinders Bank of America's ability to do deals. "We're in an environment in which you could really say anything can happen," she said.
DH
Jan Kriegel estimates total credit losses from mortgage debt may reach $900 billion in a new paper, "Minsky's Cushion of Safety: Systemic Risk & the Crisis in the U.S. Subprime Mortgage Market." (at page 20):
:: Levy Economics Institute of Bard College ::
He reaches an interesting conclusion:
"There does not appear to be a transpar-
ent method of determining the prices of assets acquired by the investment
vehicles. Indeed, the notion of repricing risk can only be justified on the
presumption that current prices are undervalued, and that the market will
eventually provide correct evaluations. But if the market is not capable of
valuing these structured assets correctly, the marking to market is not the
best method by which to judge the solvency of the institution that used
them. The alternative, whereby the originating banks take the assets back
onto their balance sheets (which appears to be the solution preferred by the
larger banks involved), also confirms that there is no effective pricing
mechanism for collateralized obligations."
WaMu sold a lot of loans, but if what they've got left is all good, I'm the queen of Romania (as Dorothy Parker said).
OT -- that 12MM SDS bet has a 'notional value' of $800MM.
Shortcourage - Countrywide's low writedown number surprised me also, especially given that they've lost approximately 80 to 85% of their market capitalization this year. Bank of American has only written down 3 billion, which would suggest either BOA's purchase of Countrywide is going to put them in a world of hurt when additional write-downs are announced, or BOA recognized that Countrywide was not exposed to future write-downs and scooped them up for a song.
CR,
Not to ask simplistic questions, but what happens if a lender refuses to issue any mark downs. They just carry on and maintain that they expect the remaining 98% to work out fine. Nothing to see here... move along.
I'm just puzzled by these lenders that issue small markdown after markdown, it would seem that it would be better to save them up and make one bad news day rather than 3-4.
Anyone know what's up with Wells Fargo? How have they managed to avoid any of this mess so far?
Me | 01.18.08 - 5:03 pm | #
Wells business model seems to be to just suck its current customers dry with fees. Its why I'll never be a customer again. I also think they basically kept their same lending practices through the boom. Not sure if it was because they were smart, or becuase they were too big and slow to change.
I'm the queen of Romania (as Dorothy Parker said).
Dorothy Parker!!! Not the same Dorothy Parker immortalized on cocktail napkins at 'The Continental'...
"I just love a martini;
but two at the most.
Three I'm under the table;
four I'm under the host." - DP
--
For the past 20 years, with the help of Greenspan, Bankrupters and Fraudsters of New York City (BFNYC) screwed everyone and made more than trillion dollars for themselves.
Now, the payback time for the sharecroppers has come.
Pretty soon we will have the USG bail some of them out by creating some sort of 'Trust." American dopes totally forgot "In Goldman Sachs We Trust," in famous book by Galbraith, as to what these Crooks did to the general public. This time these Crooks have lot more power than in 1920s and 1930s.
Profits in my long-term puts on Bankrupters and Fraudsters keep piling up (40% realized and 60% unrealized). I never had any doubts; the only question was WHEN.
Jas
ahhh is that where "talking his book" came from....
Its funny that Jan Hatzius was vilified for his comments about the mortgages/housing by everyone including people at GS but GS is the only one that made money, lots of money, during this fiasco....
CR-Thanks for your answer. So, if the banks write these down by 30 %, as Troy suggests, but only 20 of the homes actually go to foreclosure and sell for 50 % LTV, then the ultimate realized loss is only 10%. So what happens to the additional 20 % they wrote down. Does that show up as profit at some later date?
I'd be obliged if anyone can explain how a bank determines what to write down. - AOTC
That would make one excellent uber post if a certain ex-bank insider could find the time.
Hint, hint.
"Excuse my dust"
What Dorothy Parker wanted on her gravestone.
Could be a hedge, not a bet. There's a lot of structured products out there that guarantee a minimum return, even if the S&P tanks.
The totals given above are impressive, but don't forget the much smaller adjustments being made at small institutions around the country. They add up too.
More useful chart would be % of write downs vs. total assets.
Wells Fargo hardly put any money in mortgage-backed securities.
And they avoided the most toxic mortgages like neg-am.
They did write down $1.4 Billion to cover Home Equity lending losses, and they'll take their fair-share of consumer lending losses in the months & years to come, but they'll probably only charge off a ton of money, instead of a truly stupendeous ridiculous amount of money.
Aw, rich, I want conspiracy and tide-has-turned-time-to-short theories and prognostications!
Wells Fargo has many accounting ghosts, just as Buffett has, its just a matter of DD; one place to look is book value; so many lenders, so little time!
Hope no one is upset by a history lesson this afternoon, but I found this very informative and related to writedowns and the topic I posted above concerning, "having the government take some of the bad loans off its hands, or forbearance on the deposit cap that hinders Bank of America":
To wit (delete if you must):
Introduction
The failure of Penn Square Bank, N.A. (Penn Square), Oklahoma City, Oklahoma, still
ranks as one of the Federal Deposit Insurance Corporations (FDICs) most publicized,
most difficult, and most colorful bank resolutions. Penn Square failed July 5, 1982, with
$470.4 million in deposits and $516.8 million in assets. By aggressively making large
and speculative loans, especially to the oil and gas industries, the bank had grown from
$62 million in assets in 1977 to $520 million in assets by mid-1982.1 Penn Square then
sold majority interests in those loans to other banks (in the form of loan participations),
but retained the responsibility for servicing the entire loan amount.2 At its failure, Penn
Square was servicing approximately $2 billion in loans.
http://www.fdic.gov/bank/historical/managing/history2-03.pdf
From the
beginning, the bank failed to document loans properly. In addition, it based repayment
on collateral value rather than on the ability of the borrower to repay, and collateral
documentation deficiencies were common.
On July 1, 1982, at a joint meeting in Dallas, the OCC and the Federal Reserve argued
that Penn Square should be sold through a purchase and assumption (P&A) transaction
or given open bank assistance (OBA), while the FDIC argued for a payoff.
From November 1981
through October 1982, FDIC provided assistance to accomplish the mergers (and
prevent the failures) of 11 mutual savings banks that had total assets of $14.7 billion
Although they discussed OBA, the FDIC
would have had to determine Penn Square essential to its community; but with 36
other banks in Oklahoma City, the FDIC could not make that determination.13
The FDICs concerns over contingent liabilities were based on what is known as
the First Empire decision.14
The practical effect was that the depositors and general creditors were paid in full through the P&A transac-
tion, and the contingent claimants were left with less than full recovery. First Empire
Bank, New York, New York, the beneficiary of the standby letters of credit, sued the
FDIC over that issue and won. The Ninth Circuit Court held that arranging for the payment of the depositors
and general creditors without arranging for payment of the
standby letters of credit violated U.S. Code 12, section 194, which the court held to
require ratable distributions from a national bank receivership.
The FDIC
decided to use a power given to it by the Banking Act of 1933 and established a Deposit
Insurance National Bank (DINB) to pay off the insured depositors.
On July 5, 1982 (a holiday
I'd be obliged if anyone can explain how a bank determines what to write down. - AOTC
That would make one excellent uber post if a certain ex-bank insider could find the time.
Hint, hint.
dryfly | 01.18.08 - 5:30 pm |
Boy CR, I second that. This question seems to me to be the key to the whole thing. All these sovereign funds are putting money into these banks and one presumes they've done DD before investing. So either they're idiots or doing it as part of a political deal (neither is out of the question), or they see value that WS is missing. So how much will REALIZED losses, as opposed to write-downs really be?
I can say that if I was dumb enough to lend dryfly money, I'd only write it off if he was homeless, bankrupt and told me to go F myself.
cont.. (sorry)
On July 5, 1982 (a holiday), shortly after 8 p.m., the OCC determined that Penn
Square was insolvent, closed the bank, and named the FDIC as receiver. Because it was
the largest payoff in history, the failure quickly attracted national attention.
FDIC Chairman William M. Isaac was quoted as saying: Well
keep the bank open 24 hours a day if necessary to meet the demand. Well be in the
bank all night long if we have to.19
... Ill never forget . . . [they were] lined up as far as you could see in
a hot July sun (90 degrees) out in the parking lot ...
The Federal Reserve announced that the depository institutions that held receiver-
ship certificates could borrow against the certificates at the Federal Reserves discount
window; the interest rate for such borrowings was 12 percent. The FDIC suggested that
the certificates should be valued at about 80 percent of face value. The Federal Reserve
agreed to lend up to 90 percent of that discounted amount.25 The U.S. Small Business
Administration (SBA) also announced that it would accept FDIC-issued receivership
certificates as collateral for loans to businesses hurt in the Penn Square failure.26
Penn Squares $2.1 billion in loan participations complicated the offset process.
receivership estate. The same holds true if the receiver forecloses on and liquidates the underlying collateral. Loan
participations may suffer a loss greater than they would otherwise incur, however, if the debtors or receivers exercise
their right of offset. Because the offset does not augment the receivership estate, there are no proceeds to be passed
on to the loan participants. The loan participants are therefore left with general unsecured claims against the
receivership estate for the amounts they have lost as a result of the offset. The general unsecured claims are likely
to be worth far less than the 100 cents on the dollar that direct proceeds or cash is worth.
The total cost to the FDIC for the resolution was $65
million, or 12.6 percent of total failed bank assets.37
The Penn Square debacle was caused by a gross dereliction of duty on the part
of the banks board of directors and management. They were able to perpetrate
their abusive practices by obtaining fundsnormally through money brokers
from banks, credit unions and S&Ls around the nation. These financial institu-
tions, which held 80 percent of the uninsured funds at Penn Square, were
motivated solely by a desire to make a fast buck.
When a merger of a failed bank is arranged, the FDIC must provide
protection to the purchaser against any contingent or off-balance sheet claims.
Penn Square had sold more than $2 billion in loan participations to other banks
and had outstanding nearly $1 billion in letters of credit. The potential
exposure to los
I can say that if I was dumb enough to lend dryfly money, I'd only write it off if he was homeless, bankrupt and told me to go F myself.
All of those last three could happen at anytime.
Where do you get your number? Even if 20% of the loans made in 2003-07 end in forclosure, which is pretty high, and the houses sell for only 70% of LTV, that is 6 % not 30. Still high, but that puts us halfway there more or less
See < a href="http://img512.imageshack.us/img512/1816/picture4bn7.png">this chart. Take 10% (min) or 30% (my max estimate) of the area under the curve from 2003-2007.
This is just a ballpark, but A LOT of the money in that blow-off peak of 2004-2006 is now in Hummers, Ford Trucks, table saws, Levitz sofas, skidoos, etc etc . . . and the lender ain't getting it back.
Anonymous,
1) You're not introducing your posts
2) Your posts are long
3) We're not sure who you are
1 + 2 + 3 = we are annoyed with your posts and we have much less of a reason to read them.
this chart for the HTML handicapped like me
Now this is a novice's approach to an explaination as to why these financials are in more trouble than just the value of their write down:
As explained above, these assets aren't worth zero, and may well get written down more than they are worth, much like the value of a bond dropping even though you have no plan to sell and the dividends keep coming as scheduled. No sale=No problem.
I really think the long-term problem is their inability to charge interest for the risk they are taking. Home loan rates are at historic lows. The existance of Fannie and Freddi means they make loans based on interest rates tied to spreads rather than based upon some risk assesment. They arent charging enough to account for the fact that home prices are dropping and even high FICO scores aren't immune from job losses or underemployment.
As an analogy. Suppose several insurance companies sell life insurance to a group of nuns. Based upon risk levels they believe that $10 per nun will account for losses i.e. premature deaths. Now suppose those nuns all get shipped to Iraq. Now the risks have increased. Suppose that one company wants to reprice for that risk to say $40. But other companies don't budge. In this case, any one company who makes a move loses customers to the others. The losses mount for all until they all price risk accordingly or go BK. If only one company can take unlimited losses, then all either go out of business or take losses also.
The existance of Freddie and Fannie will drag this re-pricing of risk out longer and you won't see financials able to charge for risk until the last ones standing fall or capitulates.
In my view, the pain for financials is systemic and very very very long term.
troy--
disagree with your comment re: anonymous. the story of Penn Square is a good historical precedent for what may happen with the monolines.
sorry troy; I meant probert.
SWF,
Thanks for that bit of support, as it is a very long post, but very related to lenders with collateral problems. I find that I seldom follow blind links to stories and instead want to read related information on the fly; I did try to condense that long report and knew it would not be well regarded, but the mechanics of The Fed, FDIC and banks are well documented in past failures; it is wise to look ahead at what is now underway, so thanks for understanding my intentions!
Sort of further offtopic and more trouble:
Bank entrepreneur Bill Blanton has followed up his recent purchase of Gainesville, Ga.-based NBOG Bancorporation with the buyout of Commerce, Ga.-based nBank N.A.
Both banks ran into lending problems, and had been rumored to be on the market for months.
More than a century old, nBank started as a community bank in Commerce and now focuses on online bank services.
nBank will be combined with Blanton's latest venture, Woodstock-based First Covenant Bank, which opened last fall and runs a similar model of gathering national deposits to make local loans.
The combined bank will be run by current First Covenant CEO Henry Vick.
Average Joe-You may be right. However, when I see sovereign funds and Prince Al-Waleed who baought C when it was on its back in 1991 plunking down big bucks, it makes me wonder. After all, they've seen the books and you and I haven't.
Cramer just proposed a solution to the current credit crisis. He said the government should take over the monoline insurers and shut them down while backing their current commitments with $250 billion dollars.
I just love how TV pundits like Cramer love free markets until they blow up due to greed and stupidity, and then cry for relief from the Federal Reserve Bank or the Federal Government. This proposal is nothing short of disgraceful.
re: Cramer's proposal
privatize gains
socialize losses
Peconic-While philosophically you are correct, let's suppose that the blow-up of these insurers causes a further 15 % drop in the market and either pushes us into recession or makes the recssion more severe. What do you think the loss in tax revenue would be? Not to mention the 150B in stimulus already proposed.
Perhaps jail time should be used to enforce moral hazard, rather than making the whole country suffer to punish some crooks.
Im through trusting the judgement of those in "the know".
Before 9-11, 100% of experts in the field of handling hijacked planes would have given you the same or similar advice. Stay calm, comply, negotiate. They were all wrong.
Before Columbine, 100% of the cops, the "experts", would have told you that in the case of a shooter in a structure, you surround, set up a perimeter, attempt to negotiate, call in swat, time is on your side. They were 100% wrong.
In both cases it wasn't that the plans and policys weren't followed, in fact they were followed to perfection, which was the problem itself. You could not have gotten the right answer by anyone in the business to handle these problems. Any "expert" opinion was exactly the wrong thing to do.
I think you have this type of situation going on in the investment world. The game has changed enough that those in the middle of it are especially handicapped at being able to asses the true problem and diagnose proper action.
Am I missing something, or aren't we (effectively) guaranteed future writedowns? Specifically what I am thinking is that the commercial real estate appears to a) be in big trouble, and b) be shot through with all the same lax lending standards, and complex derivative action as home lending has been. And it seems to me, since commercial loans individually can be quite a bit bigger than individual home loans, if even a few go bust we could have just as significant a problem. I'm thinking of Macklowe -- if that loan goes into default isn't it likely that some bank somewhere is going to have to take a writedown. The bigger picture is commercial projects generally. In my area (outer northern va) we have seen an explosion in mini-shopping centers in just the last 2 years. One example is the new Whole Foods. I was in there on thurs at 8pm, it's atleast 6000 sg. ft maybe more, and there were about 15 people in it, maybe 25 tops. 3-1 ratio between employees and customers at the checkout lines. I'm thinking that the rent on that brand new space is quite high (the whole shopping center just went in). If we have a slowdown are people really going to be shopping at the most expensive grocery store in town, or will they go down the street to Shoppers? If so, and those guys don't make the rent, and the property owner doesn't make the payment... isn't that more write downs for some bank somewhere?
Average Joe,
My favorite quote is from Einstein, which amounts to, the fact that you cant solve a problem on the same level it was created.
The models and risk management simply were all wrong and they failed to predict, or better yet, they all collectively failed to acknowledge the reality of everyone in the finance business abusing fiduciary relationships and making sure risk structures had a basis for reality! This collective group of hogs all ate from the same trough and pigged down as much greedy collusion and corruption as they could swallow and now they want your help!
DH on afternoon coffee patrol
I'd be obliged if anyone can explain how a bank determines what to write down.
My non-insider understanding.
Banks follow rules laid out by the FASB (Financial Accounting Standards Board) - www.fasb.org.
FAS 115 allows banks to hold assets in one of three categories: held-to-maturity, available-for-sale, and trading.
The held-to-maturity is the only category that is held at cost, instead of fair market value on the books. If those assets become "other-than-temporarily" impaired, then the FASB requires that banks no longer hold the investments on their books at cost but instead write them down to fair value.
The FASB considers an investment impaired anytime the fair value falls below cost. Seems simple, and it's detailed in FAS-151-1:
http://www.fasb.org/fasb_staff_positions/fsp_fas115-1&fas124-1.pdf
But, the problem is that it may not always be easy to determine fair value. Many bank investments are completely unique and there may be no market to "mark-to-market".
In some cases, the FASB allows banks to estimate the value of investments by looking at similar securities. Recently, the FASB has put new standards in place to tighten up the rules and put more emphasis on objective instead of subjective inputs. This is detailed in (FAS-157).
FASB: Financial Accounting Standards Board
For those securities where that isn't practical the FASB requires that banks look for change in circumstances in its investee. So, for example, a credit downgrade of GM would potentially trigger a write-down of all banks who've loaned money to GM.
Oh, and write-down does not mean write-off. GM still is on the hook for the money until it either goes bankrupt or pays back the loan at maturity.
At that point, the loan either becomes a total or partial write-off (depending on the recovery) or is paid off at par (and the past write-down is irrelevant).
Kicker- Thanks for the explanation. I'm a bit dense and not sure I grasp it completely. To go back to this pool of 100 $500,000 mortgages (cost $ 50 mil). So let's say 5 have stopped paying, and now the asset is impaired, Do we write it down to 95 %? Or do we say, maybe 15 more won't pay and write it down to 80 %? Or do we write it down to 0?
In any case, at some point we will foreclose, sell the houses and end up with something (let's say 50 cents on the
. So that money comes back on the balance sheet, right? So it's possible the ultimate realized loss is < the write-down, no? Or more, if we wrote it down to 80 %, but 50 mortgages went into default.
I'm just a simple scientist, but in science we try to avoid guessing and wait until we actually know the results of the experiment before concluding.
is there an tanta post explaining how servicers front the cash to the security holders?
isn't that a good way to predict the future performance relative to the rmbs? look at countrywide paying us this for three months while they get squat.
i'm kinda confused about the whole thing.
To go back to this pool of 100 $500,000 mortgages (cost $ 50 mil). So let's say 5 have stopped paying, and now the asset is impaired, Do we write it down to 95 %? Or do we say, maybe 15 more won't pay and write it down to 80 %? Or do we write it down to 0?
In this case, it would be pretty simple. The impairment is based on the fair value of the real-estate backing the mortgages at the time the bank determines that foreclosure if probable (FASB 114).
It's more complicated when the pool of loans represents a tranch of a CDO and the fair value has to be calculated based on expected future cash flows. In that case, the foreclosure rates of the pool, the attach and detach points of junior tranches, and expected recovery rates all come into play.
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