Friday, February 27, 2009
Four times slaughtering a dead horse
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I've found people will simply not believe positive stories, even positive facts about bank income statements at this point in time, yet negative statements, say "the whole of the American banking system is insolvent" are deemed credulous with no evidence provided.
Maybe the feedback is a contrarian purchase signal?
Keep at it. Your analysis is spot on. People are getting so hooked on bad news that they view positive outlooks as disenfranchisement.
John, if you feel that the maimed horse just has entirely too much life in it, it could be useful to break out a few bank balance sheets to show the components of recurrent income from its different operations over time.
If they saw how the losses in the dragging components of the company (trading, derivatives, etc.) would still be significantly covered by the rising revenues in regular lending if given the necessary time.
You could roughly simulate 8-12Qs of a balance sheet without too much trouble I would think. If not, I'm not a bank analyst, but I am a fiscal policy analyst ;) and would be interested to give it a whack. However, I don't think I'd have the time to do this for another week (traveling). But, you could even produce an incidence of simulations, run through them and see what the results are.
Sure, resurrection will come at one point. When? Not clear. Which the legal entities will be that rise after Armageddon, we do not know. At least, I do not.
We are at the junction of finance and politics. The outcome will depend on both. Get the politics wrong, and your financial assessment is meaningless.
There will be huge profits to be made over time, for sure. But to me, there are still to many unknowns.
It is true that in times when lending is constricted, margins improve. I hate using this phrase but is it different this time?? Here are some of my issues which I hope you can address:
1. Everyone is becoming a bank, that can't be good for deposit pricing as it makes it more competitive. Look at what GMAC is offering.
2. Administration is trying to push mortgage rates to 4.5%. Again hurting margins. I know mortgages aren't the only category out there and banks can also chase yield by going to the secondary market at the expense of economic growth.
3. FDIC just released their 4Q banking profile and stated margins are at a 20 year low of 3.34%.
I think your increase in NII is only happening at large, perceived to be quality banks.
Nobody believed the negative stories before the crisis whatever the merits. Now nobody believes the positive stories. Par for the course.
if you really want to see something interesting, go look at Fannie's 4Q report.
the media is focused on the headline loss, but the reality is that revenue exploded in 2H 08. The NIM widened substantially and g-fees went through the roof.
2yrs ago, cash revenue (nim+g fee) was running at an $11B annual rate. in 2H 08, it was running at a $20B annual rate. and rising. cash operating expenses are about $3B per year. so they have $17B of pre-tax pre provision income to deal with the problems.
and, as an added bonus much of the loss in the 2H is the negative mark on their interest rate swaption. this is the primary instrument they use to keep their duration gap within +/- 6mos. this negative mark is offset by the rising value of their on balance sheet retained portfolio that is held to maturity and thus not reflected in GAAP financials. the negative mark on the swaption will accrete back into the NIM over the next 4.5yrs (duration of retained portfolio), thereby reversing roughly $16B of negative marks taken in CY08.
and wait - it gets better. another $20B of losses this year were attributable to the write down of the deferred tax asset. the accountants wouldn't let them keep the DTA on the books when they are being run as a non-profit for the foreseeable future. again, though, this is a non-cash charge that doesn't necessarily reflect economic reality.
how big are the losses, you ask? check out fannie's 10-K supplement. they provide cumulative default curves by vintage year for their entire book. it appears the 06/07 books are tracking to 4-7% cum defaults. that's roughly $70B of defaulted balances. at an average severity of 60% that's $42B of cum losses, or 2.5 years of pre tax pre provision income.
maybe we can better understand now why paulson and bernanke were keen to nationalize. the last thing in the world they wanted was a shareholder owned duopoly exercising its pricing power in a tight credit environment.
and maybe, just maybe, that's why the financials sold off so aggressively after these guys moved on the GSE's. it was the first sign that the politicians were going to "force" financial institutions to be run in the public interest through the recession.
wouldn't it be ironic if it turns out that in their ill conceived efforts to "stabilize" the economy, bernanke, paulson, geithner and lockhart triggered the very depression they hoped to avoid.
history will not look kindly on any of these public officials
Surely, a new, safe bank, unencumbered by past losses, could compete for deposits against BOA even in this environment. Right now, there is no incentive for a depositor to leave more than the minimal amount of cash needed to cover monthly costs in BOA, as they are offering basically no interest. Absent government interference, how can BOA and the other zombie banks expect to hold onto their cheap deposits long enough to cover their losses?
now I could be wrong since I have not done the requisite research and analysis on BOFA's numbers, but it was my understanding that BOFA was in the best financial shape until Ken Lewis got drunk with power and embarked on a fools errand of empire building by acquiring Countrywide and Merrill.
Therefore, although BOFA's net income is growing at a healthy rate, its liabilities-both seen and unseen, have increased by a factor many times greater than the rate of BOFA's net income growth.
Not only have the liabilities grown astronomically, the liabilities in question are of the "toxic/hard to value/level 3" brand, which the bank cannot sell to the market for liquidity without taking a huge writedown which leaves BOFA hopelessly insolvent, without a Govt bailout/backstop.
Anon's last post is wrong. BofA did not consolidate Merrill until 9 January.
Countrywide is small.
Revenue will be up very sharply again this quarter.
But that will be in part Merrill.
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