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Standard &
Poor announced in late May it has cut or might cut debt ratings on $34
billion of securities tied to Alt-A mortgages, whose type issued in 2007 have
a default rate to 6.64% for 90
days late as of end April. Massive S&P downgrades might soon force Wall
Street firms to move up to $5000 billion of assets from off-balance sheet
locations back onto their books. The bank sector has so far seen very little
in bank failures, compared to past cycles.
The Texas Ratio
is calculated by dividing non-performing loans at a bank, including those 90
days delinquent, by their tangible equity capital plus money set aside for
future loan losses. Using this ratio, IndyMac
Bancorp, Sterling Financial, Corus Bankshares,
Imperial Capital Bancorp, and GMAC Bank are all on the verge of busts. Look
for these banks to possibly lead the list of failures, each with unique
vulnerabilities.
Many of the
regional and other private banks scattered across the United States
are in deep trouble. The Federal Deposit Insurance Corp (FDIC) has declared
76 banks as official ‘Troubled’ in a rise from the 50 declared
with similar status at the end of year 2006. Joining the breakdown of the big
banking stock index BKX breakdown in progress is the breakdown of the
regional bank stock index RKH. It has fallen below the pennant pause pattern. The word CONTAGION comes to mind,
the nightmare for USFed officials. The worst lies
directly ahead for banks and stated losses. All propaganda will be unmasked
very soon. Panic might set in within a few months time.
The big banks
have begun to set up private resolution business segments, entrusted
with the duty to liquidate credit related assets. This trend appears to be an
attempt to circumvent regulators, to avoid proper accounting, and to prevent
a cascading decline of valuations in disclosed bond markets. JPMorgan hired Blackrock to manage the $30 billion raid on Bear Stearns.
Merrill Lynch has also set up a private resolution business segment,
according to an internal memo. They seek to reduce their $1000 billion book
of assets. They had $6.6 billion in asset backed CDO bonds at the end of
March. UBS has created a new distressed asset fund under Blackrock
management, again another private resolution business segment. UBS
conducted an ugly circular deal, where they sold basically to themselves $22
billion worth of impaired bonds for 68 cents on the dollar value.
Special Purpose
Entities, Structured Investment Vehicles, and now Variable Interest Entities
(VIE) constitute the shell game for insolvent giant banks avoiding honest
balance sheet reporting. CreditSights estimates
that impaired mortgage related assets of up to $784 billion remain in VIEs are scattered across major Wall Street and money center banks. The potential additional losses related to VIEs could reach $88 billion, they estimate. Goldman
Sachs recently admitted they are holding $11.1 billion in VIEs.
Citigroup has a whopping $320 billion in VIEs that
are off-balance sheet still.
Standard &
Poor just downgraded MBIA and Ambac, the major bond
insurers. Last month Fitch downgraded them. This could
provide the ultimate push for the banks to move damaged assets on their
balance sheets. An avalanche of bank writeoffs
looms. The insurers are dead! Municipal bonds are another matter altogether.
Delays by banks on credit asset portfolio writedowns, create risks
maybe greater in the Untied States today than they were in Japan in the
1990s. The next process with involve heavy stock dilution much like
shampooing: lather, rinse, repeat, then write down, raise capital, repeat.
Lehman Brothers
stock has massive option puts, especially at strikes that would only pay off
if LEH completely imploded, with some even that expire in June, an identical
situation to Bear Stearns just three months ago. Lehman Brothers is poised to
be killed. The Credit Default Swap
for Lehman Brothers corporate bonds has jumped from 130 at end April to 240
at end May and to 275 in
early June. In 1Q2008, Lehman recently admitted a mere $200 million in losses
from the oversized $6.5 billion portfolio of subprime
securities on its balance sheet. Consider that a quarter of their total
securities bear junk status. Lehman executive comments made public do not
match reality. The time has come to punish, err, to impose proper value.
The USFed portfolio of resources is limited. The USFed is in possession of $800 billion in assets. It has
relinquished at least $300 billion in USTreasurys
so far for damaged mortgage bonds. It has extended over $140 billion in
credit.
UBS, the Union
Bank of Switzerland, is a prime highlighted candidate for imminent failure
and declared bankruptcy. The bank still is plagued by rather
substantial continued debt exposure, despite heavy writedowns
already. They have $45 billion in US mortgage assets, $8.6 billion
in leverage financial commitments like Collateralized Debt Obligations, and
$10.4 billion in US student loans. Rumors have
swirled that Barclays of London is considering an acquisition of either
Lehman Brothers or UBS. The US-UK tag team of banking fascists
take their turns.
Countrywide
might lose its acquiring suitor in Bank of America, which could quickly force
its bankruptcy. The implication is that the credit market will realize that
the financial scheiss storm is nowhere ended. Some
call the last couple months ‘the eye of the hurricane’
appropriately. They originated almost 20% of the US mortgages in recent years. Countrywide
could produce the largest bankruptcy of a bank in US history. Ripple effects
could be enormous and cause
contagion across the banking industry.
In April 73,880
homeowners with privately insured mortgages fell more than 60 days late on
payments, compared with 39,584 who got back on track, according to their
report. The lower 54% so-called ‘Cure Ratio’ among defaulted mortgages last month compares with 80% in
April 2007 and 87% in March. The foreclosure process is not abating.
The Standard
& Poor Case Shiller composite index of 20
metropolitan areas showed prices of existing homes fell 2.2% in March,
accelerating to worse than a scary 20% annualized decline. The National Assn
of Realtors reports the 1Q2008 single family home price to be 14.1% lower
than Q1 of last year. Home values provide the collateral basis for the
majority of bank assets.
The precious
metal mining stock index HUI does not show anywhere near as much volatility
as the gold and silver prices. The triple leg down in the precious metal
price charts contrasts with a double leg down for the HUI in correction this
spring. The necessary event for systemic conditions to be favorable
to gold, silver, and their mining stocks is the creation and operation of the
New Resolution Trust Corp for mortgages. Until then, banks are just playing
shell games, shifting bonds among themselves to and from the USFed. Some draining might be taking place by the USFed in open market actions in the rebalance of their
own portfolios. The New RTC would enable the USFed
to have another Clydesdale horse pulling the GOLDEN beer wagon, one from the USGovt breed. That would constitute the mammoth monetary
inflation. To date all profligate money creation has been hogged by the money
center banks and investment banks on Wall Street. However,
the US Congress is a pack of cowards on the matter. They refuse to make the
tough decisions on the New RTC until the November presidential elections. Until
then, housing declines further. Households will retrench as they endure dire
straits, then fail. Until then, bank mortgage bonds and portfolios crumble
further. They will retrench until they seize then fail. Until then, money creation funnel to Manhattan
at the further expense of the USEconomy and US
Middle Class. They will enjoy the counterfeit fiesta first, despite being the
most culpable for the excesses tied to lax lending and fraudulent loan packaging. When the second big horse
is fitted for the harness, we will have the powerful pair ready to drive all
things precious. We are witnessing a foundation built for gold. We might be
witnessing a calculated plan to subjugate the Middle Class and centralize
power in a historical manner.
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Jim
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