Friday, April 23, 2010

Wells Fargo mostly exists off balance sheet

Source :

Excerpt from another article explains:

from Wells Fargo's third-quarter 2008 release:

"Almost all of our off-balance sheet arrangements result from securitizations [of] home mortgage loans and other financial assets, including commercial mortgages. We normally structure loan securitizations as sales, ... This involves the transfer of financial assets to certain qualifying special-purpose entities (QSPEs) that we are not required to consolidate [on the balance sheet]."

Voltron says: They subsequently removed this note from future filings.

Voltron says: structuring loans as sales is exactly what Lehman ($50 billion) and Enron ($14 Billion) did, but this is on a much larger scale ($1,900 Billion)

Bureaucracy in India

"the only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, overcentralized, and honest bureaucracy."

America: A Banana Republic With No Bananas


let’s look at Wikipedia’s description of the four factors which make a country a banana republic.
  • Profits Privatized and Debts Socialized
  • Devalued Paper Currency
  • Politicians Use Time in Office to Maximize Their Own Gains
  • Corruption Remains Unchecked, Politicians Are Only for Show

Wednesday, April 21, 2010

Wells Earnings Released

Excerpt: The bears think Wells is more vulnerable than rivals to losses from bad loans. For instance, J.P. Morgan Chase's bad-loan reserve looks stronger, at 5.64% of loans, versus Wells's 3.22%. What's more, J.P. Morgan's reserve-to-past-due-loan ratio is 212%, more than twice Wells's 92%. Those suggest Wells would be more exposed if the economic recovery faltered. The bank's $125 billion of home-equity loans could yet show elevated losses.

Sunday, April 18, 2010

Life imitates comedy

Voltron says: The Treasury Dept. is "open to suggestions" on how to deal with bankrupt, too big to fail, mortgage giants Fannie Mae and Freddie Mac:

The Obama Administration today released questions for public comment on the future of the housing finance system, including Fannie Mae and Freddie Mac, and the overall role of the federal government in housing policy. The questions have been designed to generate input from a wide variety of constituents, including market participants, industry groups, academic experts, and consumer and community organizations. The questions will also be published in a Federal Register notice requesting public comments, and information on the process for submitting comments will be included in that notice.

"A well-functioning housing finance system is critical to the long term stability of the housing market," said Treasury Secretary Tim Geithner. "Hearing from a wide variety of perspectives as we embark on this process is an important part of establishing a more stable and sound housing finance system for the American people."

Here are the actual questions:
  1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?
  2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?
  3. Should the government approach differ across different segments of the market, and if so, how?
  4. How should the current organization of the housing finance system be improved?
  5. How should the housing finance system support sound market practices?
  6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?
  7. Do housing finance systems in other countries offer insights that can help inform US reform choices?

Here's the SNL skit (from a year ago - March 2009, right at the bottom of the stock market):

Hat tip to:

SEC charges Goldman Sachs

Voltron says: I knew years ago about the fraud and deceit in the mortgage and mortgage derivatives market but, I have to admit I was surprised that some CDOs were actually intentionally structured to fail while being marketed as Triple-A good paper. I knew that people were betting against them, but this is even worse than I ever imagined. This has all come to the surface in the last couple of weeks, and already there is an SEC action against Goldman Sachs. Simultaneously financial reform legislation is being drafted, hearings are being held and an avalanche of option arm mortgages made at the peak of the bubble are about to have interest rate resets. I think Wall St is going to start yanking on the leash . . . whenever the status quo is threatened the stock market and house prices will go down and interest rates and oil prices will go up. The government may take Goldman down, but they are not going to go quietly . . . they'll drag the economy down with them . . . and somehow profit from it.

I've adjusted my forecast (right panel of the blog). It may be time to start getting short, while you can.

Wednesday, April 14, 2010

NPR: Did WaMu's fraud lower rest of market?

Kai Ryssdal: For a long time, Washington Mutual had this catchy tagline it used in its ads to show that it could help everybody buy a home. The "power of yes," it went. As new congressional investigations show, WaMu wasn't just talking the talk. Widespread fraud let it say yes to just about everybody, which might have helped set the bar for everybody else.

Marketplace's Alisa Roth reports.

ALISA ROTH: The stories this investigation have turned up are pretty alarming. WaMu gave bonuses for selling higher risk loans. There were also bonuses for using things like higher interest rates or extra points to over-charge clients. Employees even helped loans get processed faster by falsifying bank statements.

John Coffee is an expert on securities law and corporate governance at Columbia. He says the easiest way for a bank to increase its profitability in the short-term is to take on more risk.

JOHN COFFEE: And that can arguably produce the lemming-like race over the cliff as each institution increases its level of risk because it wants to have its profitability look at least comparable to its rivals.

He says WaMu was one of a lot of institutions in the game.

Tuesday, April 13, 2010

Jim Chanos says China has a property bubble

Excerpt: much of their GDP growth is construction -- 50 percent to 60 percent of this country’s GDP is construction. We’ve not seen that in terms of a major country I think for a long time if not at all.

And so for them to get off of stopping construction, you’ll see GDP growth go negative very quickly. That’s not going to happen, because in China it’s all about making the number.

...I’m more concerned even philosophically about the whole idea -- as we say, it’s all about the number. So in the west our economic growth is a result of decisions that you make and I make and that the market reflects via pricing, and at the end of the day we calculate all activity, and that’s our economic growth.

In China it starts with, "We are going to grow nine percent next year. Now, how do we get there?" It’s the start of the equation and the activity is the residual. And that’s ultimately philosophically the problem.

Video and Transcript:

Monday, April 12, 2010

PIMCO's Bill Gross Frantically Dumping Treasuries, Thinks US Interest Rates Will Soar

27 Million Believe Home is Underwater

Voltron says: Perception is catching up to reality

Bank Profits Dimmed by Prospect of Home-Equity Losses

Voltron says: All of Wells Fargo's profits this year could be wiped out by second mortgage losses (and yet the stock price goes up...)


Wells Fargo holds about $123.8 billion of home-equity loans, with about $103.7 billion in a junior-lien position, according to company filings. The lender has $5.3 billion in reserves set aside to cover the second-lien mortgage loans and wrote off $4.6 billion last year. Almost 2.2 percent of the second liens are more than 120 days past due, the company said in its annual report.

CreditSights said potential home-equity losses could knock $12.8 billion, or $2.47 a share, off earnings at Wells Fargo. That's more than the $10.9 billion the bank is expected to earn this year, according to the average estimate of 15 analysts surveyed by Bloomberg.


Second-lien reserves set aside by the four big banks are $100 billion to $125 billion short of what's needed in the next few years, said Joshua Rosner, an analyst at Graham Fisher & Co., an independent research firm based in New York, and co- author of a May 2007 report that said ratings companies were underestimating the risk of subprime-mortgage bonds.


"There's very little recovery for home-equity loans," -Paul Miller, FBR Capital Markets

"If banks were properly accounting for their second liens, there would be no problem with them choosing to do principal writedowns, They would already be reserved for it." - Joshua Rosner, Graham Fisher & Co.

"Banks have been saying we're close to the end, People have built that into their expectations. I don't think we're there yet." -Nancy Bush, NAB Research

"The banks are saying that they can work through it . . . it may be bigger than they are letting on." -Baylor Lancaster, CreditSights

"This is a problem that's not going away for several years," -Charles W. Scharf, JPMorgan

Some Markets Won't See Peak Home Prices Until After 2039

NYT: Interest Rates Have Nowhere to Go but Up

Sunday, April 11, 2010

NPR: Inside Job (audio)

Voltron says: Here's the link to the NPR This American Life show on Magnetar

Humor: Bet Against the American Dream (video/mp3)

Voltron says: Hilarious video and mp3 in the style of Mel Brook's musical "The Producers" from "Inside Job" on NPR's This American Life, the companion to ProPublica's article The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going,


Saturday, April 10, 2010

WSJ: Big Banks Mask Risk Levels

Excerpt from the Wall Street Journal:
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.

That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.

Voltron says: I want to know how Wells Fargo breaks out . . . anyhow Zero Hedge has a great graph summarizing the data:

Voltron says: Notice how the red dot seems to be randomly distributed within the bars then suddenly starting in Q4 2008, it is always at the bottom.

The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going

Voltron says: A lengthy ProPublica article (to be featured on NPR's This American Life tomorrow) details how a hedge fund named Magnetar "sponsored" the creation of mortgage pools by purchasing the riskiest parts that were rapidly becoming unwanted in the markets, in order to keep the mortgage pipeline going and also use the money to fund large bets against the rest of the mortgage pool. The deal was also described in Yves Smith's book "Econned". Morgan Stanley lost $9 Billion by doing the opposite (funding bets on low rated debt by selling insurance against lots of high rated debt - right before it all went bad) according to Michael Lewis' book "The Big Short"

Magnetar solved a conundrum of those who bet against the market. An investor might be confident that things are heading south, but not know when. While the investor waits, it costs money to keep the bet going. Many a short seller has run out of cash at the gates of a big payday.

...Even today, bankers and managers speak with awe at the elegance of the Magnetar Trade. Others have become famous for betting big against the housing market. But they had taken enormous risks. Meanwhile, Magnetar had created a largely self-funding bet against the market.


Full article:

More Gold Hanky Panky

Voltron says: A trio of articles from Zero Hedge about gold ETFs, worthless paper and empty vaults.

Has The iShares Gold ETF (IAU) Been Covertly Depleted Of 90% Of Its Physical Holdings, With Banks Like JPM And Goldman Pocketing The Actual Gold?

The Latest Gold Fraud Bombshell: Canada's Only Bullion Bank Gold Vault Is Practically Empty

Got Gold? Why Owning GLD Can Be Hazardous To Your Wealth

Thursday, April 8, 2010

Bank of America to Increase Foreclosure Rate by 600% in 2010

Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010

Credit Sights: "Wells Fargo is particularly vulnerable"

Total home equity exposure at banks is pretty big. Amherst Securities has said commercial banks hold approximately $767 billion of the total $1.05 trillion of second mortgages outstanding, with the Big 4 holding over $400 billion alone.

But the key issue is what portion of these are at risk of writedowns. Most vulnerable are loans (or portions thereof) that are no longer backed by property. That is, the price of the underlying home has fallen below the balance on the loan. In banker shorthand: “loan-to-value” (LTV) is greater than 100%.

These are in peril because home equity loans are frequently structured with big principal payments on the back end, so even though many borrowers are currently making payments they’d need to stump up an awful lot of cash to pay off the balance. Unless housing miraculously recovers and they can sell or refinance at a price that will pay back all their debt, well, expect a spike in walk-aways…

CreditSights takes a stab at the potential writedown for the Big 4 banks and finds that Wells Fargo is particularly vulnerable.

Fannie Mae National Housing Survey

Voltron says: people still think it's a good time to buy, even though they realize home prices don't go up forever.

Full report here:

Tuesday, April 6, 2010

Houses still overpriced?

Voltron says: we're still 22% above the historical average.

Hat tip to Michael David White of New Observations

Wells Fargo are liars

Voltron says: says Wells Fargo's Audit Integrity Accounting and Governance Risk (AGR) rating is in the bottom 1 percentile.

hat tip to Dollar$

Foreclosures Are Rising - CNBC

Moody's Downgrades $6B of Wells Fargo-Issued Jumbo RMBS

Voltron says: doesn't say how far they were downgraded

Monday, April 5, 2010

Diana Olick: Let the Short Sales Begin

"I'm also starting to hear rumblings among the number crunchers that the wave of foreclosures we keep hearing about is about to hit with a thunderous roar."

Sunday, April 4, 2010

Rick Bookstaber: The next crash


... guess where we have a market that is (1) leveraged and opaque, that is (2) very big and tied to the credit markets; and is (3) viewed by investors as being diversifiable by holding a geographically broad-based portfolio; with (4) huge portfolios where assets and liabilities are apparently matched; and with (5) questionable analysis by rating agencies; and where (6) there are many entities, entities that may not approach default with business-like dispatch, and that have already mortgaged sources of revenue that are thought to support their liabilities?

Answer: The municipal market.

If we've bottomed . . .

Voltron says: Looks like 18 months to go. If you try and pick bottoms, you just end up with smelly fingers.