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Nov
17

Is Bank of America Gambling on Resurrection (or Is BoA Holding the US Hostage)?

By | Securitization-MBS

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What would you do if you were running an insolvent company? The smart thing is to bet big:  go with a high-risk/high-return strategy.  If the gamble pays off, you're solvent, and if not, well, you're already insolvent.  You're playing with the creditors' money. (And without a tort of deepening insolvency, there really isn't a clear downside for management.)  This is gambling on resurrection.  

We've seen the disastrous results of banks gambling on resurrection.  That was the S&L crisis. Rising interest rates in the late '70s decapitalized the S&Ls as the S&Ls' assets were long-term, fixed rate mortgages that paid lower rates than the S&Ls had to pay depositors.  The S&Ls, however, got a pliant Congress to agree to massive deregulation that allowed them to expand into all sorts of new business lines, like commercial real estate and race horses and junk bonds. Insolvent S&Ls went chasing high risk/high return projects.  The result was that the tab for taxpayers to fix the S&L mess was significantly greater.

Today, it looks like Bank of America is repeating the S&Ls' gamble on resurrection and using this gamble to hold the US government hostage.  

It's hard to tell if Bank of America is really insolvent--lots of assets aren't marked-to-market.  But it's telling that the market cap is around $65 billion, while the book equity is at $220 billion. The market thinks that BoA has $155 billion of bogus assets or unrecognized liabilities. If BoA isn't a zombie, it's the next thing to it.  

The smart move for BoA, then, would be to gamble on resurrection. And it seems that is exactly what BoA is doing. What's the most obvious high risk/high rewards strategy available presently? Writing CDS on European sovereign debt. Going long on Greece (or all the PIIGS). This is exactly what BoA (and other US banks) have been doing. 

Here's what's really scarry.  BoA just moved its derivatives business (where it does its CDS) from Merrill into its insured depository. BoA's immediate motivation might have been to reduce collateral requirements following itsSeptember ratings downgrade. But there's also a huge political benefit to the move.  Remember that CDS are qualified financial contracts that will come before FDIC claims. So it looks like BoA is gambling on resurrection at the expense of the US taxpayer. If things work out in Europe, BoA makes a bundle. And if not, the US taxpayer picks up the tab. 

This means that BoA has the US government over a barrell. BoA can basically tell Treasury that it had better make everything good in Europe or it will be paying the bill. By strapping a financial bomb to itself, BoA is in a position to dictate terms to the US government regarding international financial policy. The difficulty for BoA, however, is that the Administration understands that intervening to help the Europeans will probably cost them the election (never mind that we already did this when we bailed out AIG and protected its regulatory capital arbitrage swap counterparties).  

But here we are, a year after Dodd-Frank and three years after the financial crisis, and a too-big-to-fail bank is in a position to hold the US government hostage. If this doesn't underscore that too-big-to-fail is a threat not just to the US economy, but to the US political system, I'm not sure what does. 

Nov
17

Is Bank of America Gambling on Resurrection (or Is BoA Holding the US Hostage)?

By | Securitization-MBS

Leave a Comment

What would you do if you were running an insolvent company? The smart thing is to bet big:  go with a high-risk/high-return strategy.  If the gamble pays off, you're solvent, and if not, well, you're already insolvent.  You're playing with the creditors' money. (And without a tort of deepening insolvency, there really isn't a clear downside for management.)  This is gambling on resurrection.  

We've seen the disastrous results of banks gambling on resurrection.  That was the S&L crisis. Rising interest rates in the late '70s decapitalized the S&Ls as the S&Ls' assets were long-term, fixed rate mortgages that paid lower rates than the S&Ls had to pay depositors.  The S&Ls, however, got a pliant Congress to agree to massive deregulation that allowed them to expand into all sorts of new business lines, like commercial real estate and race horses and junk bonds. Insolvent S&Ls went chasing high risk/high return projects.  The result was that the tab for taxpayers to fix the S&L mess was significantly greater.

Today, it looks like Bank of America is repeating the S&Ls' gamble on resurrection and using this gamble to hold the US government hostage.  

It's hard to tell if Bank of America is really insolvent--lots of assets aren't marked-to-market.  But it's telling that the market cap is around $65 billion, while the book equity is at $220 billion. The market thinks that BoA has $155 billion of bogus assets or unrecognized liabilities. If BoA isn't a zombie, it's the next thing to it.  

The smart move for BoA, then, would be to gamble on resurrection. And it seems that is exactly what BoA is doing. What's the most obvious high risk/high rewards strategy available presently? Writing CDS on European sovereign debt. Going long on Greece (or all the PIIGS). This is exactly what BoA (and other US banks) have been doing. 

Here's what's really scarry.  BoA just moved its derivatives business (where it does its CDS) from Merrill into its insured depository. BoA's immediate motivation might have been to reduce collateral requirements following itsSeptember ratings downgrade. But there's also a huge political benefit to the move.  Remember that CDS are qualified financial contracts that will come before FDIC claims. So it looks like BoA is gambling on resurrection at the expense of the US taxpayer. If things work out in Europe, BoA makes a bundle. And if not, the US taxpayer picks up the tab. 

This means that BoA has the US government over a barrell. BoA can basically tell Treasury that it had better make everything good in Europe or it will be paying the bill. By strapping a financial bomb to itself, BoA is in a position to dictate terms to the US government regarding international financial policy. The difficulty for BoA, however, is that the Administration understands that intervening to help the Europeans will probably cost them the election (never mind that we already did this when we bailed out AIG and protected its regulatory capital arbitrage swap counterparties).  

But here we are, a year after Dodd-Frank and three years after the financial crisis, and a too-big-to-fail bank is in a position to hold the US government hostage. If this doesn't underscore that too-big-to-fail is a threat not just to the US economy, but to the US political system, I'm not sure what does. 

Nov
17

Is Bank of America Gambling on Resurrection (or Is BoA Holding the US Hostage)?

By | Securitization-MBS

Leave a Comment

What would you do if you were running an insolvent company? The smart thing is to bet big:  go with a high-risk/high-return strategy.  If the gamble pays off, you're solvent, and if not, well, you're already insolvent.  You're playing with the creditors' money. (And without a tort of deepening insolvency, there really isn't a clear downside for management.)  This is gambling on resurrection.  

We've seen the disastrous results of banks gambling on resurrection.  That was the S&L crisis. Rising interest rates in the late '70s decapitalized the S&Ls as the S&Ls' assets were long-term, fixed rate mortgages that paid lower rates than the S&Ls had to pay depositors.  The S&Ls, however, got a pliant Congress to agree to massive deregulation that allowed them to expand into all sorts of new business lines, like commercial real estate and race horses and junk bonds. Insolvent S&Ls went chasing high risk/high return projects.  The result was that the tab for taxpayers to fix the S&L mess was significantly greater.

Today, it looks like Bank of America is repeating the S&Ls' gamble on resurrection and using this gamble to hold the US government hostage.  

It's hard to tell if Bank of America is really insolvent--lots of assets aren't marked-to-market.  But it's telling that the market cap is around $65 billion, while the book equity is at $220 billion. The market thinks that BoA has $155 billion of bogus assets or unrecognized liabilities. If BoA isn't a zombie, it's the next thing to it.  

The smart move for BoA, then, would be to gamble on resurrection. And it seems that is exactly what BoA is doing. What's the most obvious high risk/high rewards strategy available presently? Writing CDS on European sovereign debt. Going long on Greece (or all the PIIGS). This is exactly what BoA (and other US banks) have been doing. 

Here's what's really scarry.  BoA just moved its derivatives business (where it does its CDS) from Merrill into its insured depository. BoA's immediate motivation might have been to reduce collateral requirements following itsSeptember ratings downgrade. But there's also a huge political benefit to the move.  Remember that CDS are qualified financial contracts that will come before FDIC claims. So it looks like BoA is gambling on resurrection at the expense of the US taxpayer. If things work out in Europe, BoA makes a bundle. And if not, the US taxpayer picks up the tab. 

This means that BoA has the US government over a barrell. BoA can basically tell Treasury that it had better make everything good in Europe or it will be paying the bill. By strapping a financial bomb to itself, BoA is in a position to dictate terms to the US government regarding international financial policy. The difficulty for BoA, however, is that the Administration understands that intervening to help the Europeans will probably cost them the election (never mind that we already did this when we bailed out AIG and protected its regulatory capital arbitrage swap counterparties).  

But here we are, a year after Dodd-Frank and three years after the financial crisis, and a too-big-to-fail bank is in a position to hold the US government hostage. If this doesn't underscore that too-big-to-fail is a threat not just to the US economy, but to the US political system, I'm not sure what does. 

Aug
20

Mortgage Delinquencies Still Rising says MBA – More Americans Underwater

By | Featured, Foreclosure Defense Research, Homeowner Resources, Housing & Economic Research

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I have a lot of conversations with people about our economy, foreclosures and such… from clients to friends in business to attorneys. Everyone who’s asked me what I foresee coming I’ve told them that 2010 will be a very tough year and they better prepare now. We aren’t done yet folks… and the policies of the Obama Administration and our collective disaster we call Congress, are going to make things even worse – and very well will extend the recession quite painfully. I have told people to expect another wave of foreclosures. As long as you have no job creation and more job loss happening every day, this cycle won’t stop. It’s as simple as that.

And with that, I bring you fresh news…

Delinquencies Are Still Climbing and Threatening More Foreclosures on the Horizon, MBA Says

08/20/2009 By: Carrie Bay

More than nine percent of all mortgages in the United States are now delinquent, according to figures released Thursday by the Mortgage Bankers Association (MBA).

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to 9.24 percent of all loans outstanding at the end of the second quarter, MBA reported. The new number breaks the record set in the first quarter of this year, when 9.12 percent of the nation’s homeowners were behind on their mortgage payments.

Important to note is that the biggest jump in delinquencies last quarter came from prime fixed-rate mortgages. These seemingly low-risk loans also accounted for one in three of the nation’s foreclosure starts in Q2. A year ago they were only one in five.

Like prime, Federal Housing Administration loans are generally thought to be “safe,” but foreclosure starts among government-insured mortgages jumped to 9.1 percent last quarter – a record-high for the agency.

The states of California, Florida, Arizona, and Nevada continue to drag down the national numbers. These four had 44 percent of all the nation’s new foreclosures in Q2. Rhode Island, Georgia, and Michigan also posted foreclosure start rates above the national average. All

other states in the country fell below the national benchmark, and roughly half even saw their new foreclosure numbers decline.

But then, there’s the not-so-sunny Sunshine State. Florida has cemented itself as the worst state in the union for mortgage performance. Twelve percent of all mortgages there were somewhere in the process of foreclosure at the end of June, and another 5 percent were more than 90 days past due and about to cross that threshold. Based on MBA’s numbers, Florida has the highest foreclosure and delinquency rates in the country, and MBA’s chief economist, Jay Brinkmann, says he doesn’t expect to see a turnaround in Florida’s housing market for a long, long time.

Some fortunate regional markets are faring better and offsetting Florida’s bad numbers because the nation’s total foreclosure starts during the second quarter actually dropped slightly. Foreclosure actions were initiated on 1.36 percent of the nation’s outstanding mortgages, compared to 1.35 percent during the first three months of the year, MBA reported.

Despite the leveling off of foreclosure starts, the fact that loans 90 or more days past due continues to climb in all categories suggests an overhang of foreclosure activity and engorged inventories of repossessed homes may be looming in the coming months.

So, when is the foreclosure problem going to crest? Brinkmann, points out that unemployment is currently the primary driver behind missed mortgage payments.

The number of jobless Americans is forecast to peak in mid-2010, and Brinkmann says he expects delinquencies to top out at about the same time. But because of the lag time associated with foreclosure proceedings, he doesn’t see a break in the upward trend of foreclosures until six months later, at the close of next year.