Sunday, May 31, 2009
Friday, May 29, 2009
Thursday, May 28, 2009
future earnings that they pull out of their rear ends to satisfy new capital
reserve requirements. According to Tom Brown from bankstocks.com, this will
dilute Wells Fargo by 4%, or around $1 a share.
Wells Fargo position. One is an overly generous government bailout that
would, for some reason, bailout the common share holders. The other is
massive inflation, which we are starting to see signs of as Treasurys
collapse. I'm basically betting that Wells Fargo will crash before either
one kicks in. The banks have been trying to game the Public Private
Investment Partnership by both buying and selling toxic assets at inflated
prices and put the government on the hook for 93% of the losses. It looks
like the FDIC is not playing ball, so that avenue is closed. It will
probably take Treasury a few months to concoct another bailout, which they
will probably do over a weekend of all-nighters when Citigroup and/or Wells
Fargo are on the brink of total collapse.
will go bankrupt, because hedge funds will seize on that credit rating as an
opportunity to leverage up and buy cheap insurance on it UNTIL IT BLOWS UP
IN THEIR FACES. I'm no longer short Moody's but for what it's worth . . .
Wednesday, May 27, 2009
Monday, May 25, 2009
Saturday, May 23, 2009
In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: "We are out of money."
C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.
SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?
OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.
So we've got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it's putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.
So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit.
So, one option is just to do nothing. We say, well, it's too expensive for us to make some short-term investments in health care. We can't afford it. We've got this big deficit. Let's just keep the health care system that we've got now.
Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything...
SCULLY: When you see GM though as “Government Motors,” you're reaction?
OBAMA: Well, you know – look we are trying to help an auto industry that is going through a combination of bad decision making over many years and an unprecedented crisis or at least a crisis we haven't seen since the 1930's. And you know the economy is going to bounce back and we want to get out of the business of helping auto companies as quickly as we can. I have got more enough to do without that. In the same way that I want to get out of the business of helping banks, but we have to make some strategic decisions about strategic industries...
SCULLY: States like California in desperate financial situation, will you be forced to bail out the states?
OBAMA: No. I think that what you're seeing in states is that anytime you got a severe recession like this, as I said before, their demands on services are higher. So, they are sending more money out. At the same time, they're bringing less tax revenue in. And that's a painful adjustment, what we're going end up seeing is lot of states making very difficult choices there...
SCULLY: William Howard Taft served on the court after his presidency, would you have any interest in being on the Supreme Court?
OBAMA: You know, I am not sure that I could get through Senate confirmation...
Friday, May 22, 2009
Sunday, May 17, 2009
The most obviously worrisome part of the situation today is that the Chinese could decide that they no longer want to buy Treasury bonds. The U.S. government’s recent spending for bank bailouts and stimulus may be necessary to get the economy moving again, but it also raises the specter of eventual inflation, which would damage the value of Treasuries. If the Chinese are unnerved by this, they could instead use their cash to buy the bonds of other countries, which would cause interest rates here to jump, prolonging the recession. Wen Jiabao, China’s premier, seemed to raise this possibility in March, in remarks to reporters at the end of the annual session of China’s Parliament. “We have lent a huge amount of money to the U.S.,” Wen said. “Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” In all likelihood, this was mostly posturing. Were China to cut back sharply on its purchase of Treasury bonds, it would send the value of the bonds plummeting, hurting the Chinese, who already own hundreds of billions of dollars’ worth. Yet Wen’s comments, which made headlines around the world, did highlight an underlying truth. The relationship between the United States and China can’t continue on its current path.
...So putting the global economy onto a more sustainable path will require dealing with the imbalances between China and the United States. In the broadest terms, this will mean that Americans must consume less and that Chinese must consume more. Domestically, Obama’s economic agenda is organized around the first half of this equation. He has said that economic growth must rely less on consumer spending than it has, and he is pushing for a series of investments — in education, science, medicine and alternative energy — the fruits of which are meant to replace consumption. But those fruits won’t mature as quickly as American households are paring back. For the sake of the global economy, persuading China to consume more will be crucial, too. It will also make a big difference to China’s 1.3 billion citizens. Most are still poor enough that consumption doesn’t mean yet another Barbie or iPod; it means basic comforts, like medical care and transportation.
Moving to an economy based more on consumption and less on exports happens to be the policy of the Chinese government, and has been since 2003. Its latest five-year economic plan, announced in 2006, was organized around the idea.
Friday, May 15, 2009
Thursday, May 14, 2009
The new Wells Fargo quarterly report paints a sad picture of the portfolio of “pick-a-pay” loans that World and Wachovia originated.
The amount owed on such loans at the end of March was $115 billion, which Wells estimates is 107 percent of the current value of the properties underlying the mortgages. Just over half the owners are paying the minimum allowed, causing their debt to rise each month.
A loan-to-value ratio of 107 percent is bad enough, but it is an average and many loans are in much worse shape. For loans in California, the average is now 120 percent, and the figure is no doubt much higher in such troubled areas as the Central Valley and the so-called Inland Empire, where nearly a third of the California loans were made. Wachovia estimated that last September the loan-to-value ratio in the Central Valley was 132 percent. Since then, the median sales price of homes in that area has fallen another 20 percent.
In all, more than 70 percent of the pick-a-pay loans are in California, Arizona or Florida, three states where prices rose the fastest during the boom and have since fallen the most. Wells says it thinks 61 percent of the loans in those three states will not be paid as required by the mortgage, in contrast to 36 percent of the loans in other states.
... Wells Fargo has written the value of the pick-a-pay portfolio down by about 20 percent, and is offering to restructure some of the loans. But many of the owners may have no reason to seek such a restructuring. It would take a big concession to lower their monthly payments, and an even larger one to get the principal value of the loan down to the current value of the house.
The result may be perverse: a prolonged foreclosure crisis, with Wells Fargo watching helplessly as the condition and value of some houses depreciate for years to come.
spending "unsustainable," warned of skyrocketing interest rates for
consumers if the U.S. continues to finance government by borrowing from
"We can't keep on just borrowing from China," Obama said at a town-hall
meeting in Rio Rancho, New Mexico, outside Albuquerque. "We have to pay
interest on that debt, and that means we are mortgaging our children's
future with more and more debt."
Holders of U.S. debt will eventually "get tired" of buying it, causing
interest rates on everything from auto loans to home mortgages to increase,
Obama said. "It will have a dampening effect on our economy."
Tuesday, May 12, 2009
Monday, May 11, 2009
New budget deficit estimate for this year is 1,840 Billion.
Sunday, May 10, 2009
However, bankers said US lenders had government assurances that they would be allowed to raise less than the $74.6bn in equity mandated by the stress tests if earnings in the next six months outstripped regulators’ forecasts. The agreement – not mentioned when the government revealed the results on Thursday – means some banks might not have to raise as much equity through share issues and asset sales as the market is expecting.
It could also increase the incentive for banks to book profits in the next two quarters.
Friday, May 8, 2009
Thursday, May 7, 2009
...investors worried that poor demand for government debt could raise the cost of capital and hamper chances of a U.S. economic recovery.
U.S. debt prices slid, sending the 30-year Treasury bond yield to its highest since November.
"The auction is big news because now it's showing that maybe the Chinese don't want our bonds. If the cost of capital for the United States becomes more expensive, then the recession is going to take that much longer to get out of," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
...The $14 billion Treasury bond auction met below-average demand from investors, who bid aggressively to force the government to pay a higher yield as it pushed ahead with plans to help finance its burgeoning budget deficit with more longer-term debt.
Full article: http://www.reuters.com/article/businessNews/idUSTRE53J1T120090507
Wednesday, May 6, 2009
Tuesday, May 5, 2009
Messrs. Buffett and Munger made clear their complete disdain for the use of higher-order mathematics in finance.
Regarding complex calculations used to value purchases, Mr Buffet said: "If you need to use a computer or a calculator to make the calculation, you shouldn't buy it."
Said Mr. Munger: "Some of the worst business decisions I've ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you, but it doesn't. They teach that in business schools because, well, they've got to [teach] something."
Mr. Buffett said: "If you stand up in front of a business class and say a bird in the hand is worth two in the bush, you won't get tenure....Higher mathematics my be dangerous and lead you down pathways that are better left untrod."
Monday, May 4, 2009
Wells, despite its emergence as one of the survivors of the U.S. banking crisis, may be among the most capital deficient, some analysts said Monday. Keefe, Bruyette & Woods said Wells may need as much as $50 billion; SNL Financial said Wells will need $66.3 billion if it wants to maintain a tangible common equity ratio of 3%. Tangible common equity is one measure of a bank's capital strength.
What worries some analysts is the risk Wells assumed with its recent purchase of troubled Charlotte, N.C.-based Wachovia Corp. Wells is now heavily exposed to commercial real estate, another weakening sector of the U.S. economy, and future earnings may come under pressure if Wells looks to reduce certain balance sheet items largely inherited from Wachovia, such as $6 billion in commercial mortgage securitizations and $137 billion of exposure to credit default swaps.
"Did they buy more of this risk than they anticipated?" said analyst Fred Cannon of Keefe, Bruyette & Woods.
Mr. Cannon, who predicts Wells will need $50 billion as a result of the stress test, said Wells could raise $25 billion by converting preferred shares held by the government into common stock. But he expects the bank instead to raise the money through "alternatives sources."
Investor Warren Buffett, a big Wells holder, is among those critical of the stress test process, saying on Sunday that regulators were judging loss expectations too broadly. He is among those who could take a financial hit if Wells is diluted by an infusion of tangible common equity.
"To the cynical mind, he is talking his books," Mr. Cannon said.
full article: http://online.wsj.com/article/SB124145769583784015.html
Sunday, May 3, 2009
Indeed, as much as 80% of the fraud during the boom was "induced by the lenders," who either encouraged people to lie on loan applications or actively altered documents to make them more likely to be approved, says Black.
How extensive was the fraud?
"There was the appearance of fraud or misrepresentation in almost every file," Fitch Investors declared in late 2007 after reviewing non-performing sub-prime MBS (the same stuff they, S&P and Moody's rated triple-A).
Saturday, May 2, 2009
"Wells Fargo will be a lot better off in a couple of years than if none of this had happened," Buffett said at Berkshire's annual meeting. Noting that Wells Fargo shares fell below $9 each this year -- they bottomed at $7.80 on March 5 -- he added that at that lowered price, "If I had put all my net worth in one stock, that would be the stock."
... he warned that efforts such as the Treasury's $700 billion Troubled Asset Relief Program and the $787 billion fiscal stimulus plan passed this year by Congress will have to be paid for, one way or another.
And with political leaders showing little inclination to raise taxes, one sure way to pay for excess spending is to inflate the value of the currency, Buffett said. The biggest losers in a surge of inflation, he added, would include holders of bonds and other fixed-income assets.
"I haven't had my taxes raised," said Buffett, who has run Berkshire for more than four decades. "My guess is the ultimate price will be paid by a shrinkage of the value of the dollar."
The billionaire investor made the comments Saturday morning at the annual meeting of Berkshire Hathaway shareholders.
It also has a loan book heavily exposed to stressed housing markets. As a result, the government-projected losses could be bigger than the market's expecting. What's more, it only has a small amount of private preferreds -- around $6 billion compared with the government's $25 billion -- to convert to common.
Wells's stock is up a lot, so it could try issuing common shares to private investors if necessary. But if Wells Fargo is deemed to need more capital and markets don't play along, the government may need to convert its preferreds into a common equity stake.
Full article: http://online.wsj.com/article/SB124121769431578709.html