Sunday, May 31, 2009

The Fed is lost in the sauce

It's Science....

Voltron says: There is some new academic research supporting my new strategy.

Mortgage convexity behind the fall in treasurys?

Voltron says: according to a recent article in Barron's, the recent drop in treasury prices is due to banks selling a trillion dollars worth of treasurys they were using to hedge mortgage pre-payment risk. In typical Barron's style they declare that this adjustment is over (so there is no way to profit from this information at this point). I think that the treasurys used as hedges were also sold as mortgages defaulted. This is due to resume shortly and continue for the next couple of years. Even more reason to be short TLT...

Thursday, May 28, 2009

New Fed rules hurt Wells Fargo

Voltron says: The Fed has decided that banks cannot use made up estimates of
future earnings that they pull out of their rear ends to satisfy new capital
reserve requirements. According to Tom Brown from, this will
dilute Wells Fargo by 4%, or around $1 a share.

PPIP is dead and so is Wells Fargo

Voltron says: There are two things I worry about with respect to my short
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.

Greenlight's Einhorn says shorting Moody's

Voltron says: Triple-A credit rating have become a GUARANTEE that a company
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 . . .

Saturday, May 23, 2009

The Dollar is losing value

Obama: "We are out of money."

Voltron says: Top story on right now.

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...


Sunday, May 17, 2009

Will China still bankroll us?


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

Roubini: Chinese renminbi will replace the dollar

"While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear."

Credit cards crapping out

Voltron says: Wells Fargo has 10% default rates

Ratings agency Fitch may downgrade the credit rating of Wells Fargo

Voltron says: Wells Fargo can book a profit when their credit rating is downgraded due to creative accounting.

Thursday, May 14, 2009

Wells Fargo is a basket case

Voltron says: Remember, Wells Fargo is primarily a California bank . . . right in the heart of the housing meltdown.


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.

Obama Says U.S. Long-Term Debt Load 'Unsustainable'

May 14 (Bloomberg) -- President Barack Obama, calling current deficit
spending "unsustainable," warned of skyrocketing interest rates for
consumers if the U.S. continues to finance government by borrowing from
other countries.

"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

Nation Ready To Be Lied To About Economy Again

Wells Fargo: The Feds Got It Wrong

Voltron says: Wells has burned it's bridges and can't ask Feds for more

Paul Krugman Says Rapid Recovery 'Extremely Unlikely'

Wells Fargo: worst of breed

Voltron says: Official stress test loss estimates for Wells Fargo are almost as large as the "Big 3" Chase, Citi and BofA even though they are almost twice as large.

Meredith Whitney (video)

Voltron says: Meredith Whitnley says to short retailers and stay neutral on bank stocks because they will "manufacture" false earnings.

Monday, May 11, 2009

Government Printing Money

Voltron says: top story right now on drudgereport

New budget deficit estimate for this year is 1,840 Billion.

Sunday, May 10, 2009

Wells Fargo expects earnings to fill deficit

Voltron says: expect Wells Fargo to continue lying and bullshitting

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.

Accounting tricks boost bank profits

excerpt: Wells Fargo saw its non-performing assets as a percentage of total assets jump by 40 percent over the previous quarter, yet it only increased its reserves by 5 percent. So even though more of its loans are past due or face foreclosure, it isn't setting aside significantly more cash to deal with potential losses.

Stress test results (video)

Sorry about the commercial. It's worth it.

Friday, May 8, 2009

China increased gold stash 75% since 2003

excerpt: At the recent G-20 London meetings, China called for a new international monetary order with a gold link. This was followed by the sudden disclosure that China had used part of its huge gold output to boost its own reserves by some 600 metric tons, a 75% increase in total holdings since 2003. In his first hundred days in office, President Obama's administration has injected nearly $40 billion each day into U.S. economy. Given the inflationary impact that such a torrent of new cash will spark, it is logical that the Chinese hedge their $1 trillion dollar position with a more reliable store of value.

Thursday, May 7, 2009

Weak treasury auction


...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:

US Political Risk

Voltron says: If the US has adopted Zimbabwe's monetary policy and is on the road to adopting their legal system why would you expect a different outcome?

Obama bets it all on red

Voltron (in Vegas) says: the top headline on right now is "Obama bets it all on red".

Tuesday, May 5, 2009

Berkshire did it without computer models

Voltron says: hat tip to g-man

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."

The Fed cannot control long term interest rates

Monday, May 4, 2009

WSJ: Wells Fargo May Need Capital

Voltron says: Wells Fargo is worse off than I thought!


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:

Short Weels Fargo

Voltron says: I expected WFC to get a boost . . . boy did it ever. Awesome opportunity to short.

Inflation Nation

" country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation."

Resurgence of short selling interest in banks

Sunday, May 3, 2009

U.S. death spiral of debt

"It would appear, quietly and with deference and politeness, that China has canceled America's credit card,"

It really was that bad

Excerpt: Though the FBI warned of an "epidemic" of mortgage fraud in 2004, they subsequently made a "strategic alliance" with the Mortgage Bankers Association, which [former S&L scandal investigator William] Black calls the "trade association of perps."

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

Warren Buffett talkin' his book

Voltron says: Expect Wells Fargo to get a temporary boost from this crap. Good entry point for a short position. By my estimate Wells Fargo is bankrupt three and a half times over.

"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."

Warren Buffett warns inflation is on the horizon


... 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.

WSJ on Wells Fargo stress test

Excerpt: So where might the negative surprises come? A bank may have to raise far more common stock than the market is expecting. Wells Fargo has lower ratios than most peers, when looking at both Tier 1 capital and [Tangible Common Equity].

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: