Monday, October 25, 2010

Doing the Math

[click to enlarge]

Regular readers of this blog know that I am no fan of the banksters on Wall Street. They are the ones who securitized subslime mortgage loans (worth hundreds of billions of dollars in face value) and sold them to inattentive investors, thereby fueling a housing bubble and stunting the productive economy. Despite this malfeasance, they were bailed out by Congress in 2008 with direct injections of taxpayers' money. They benefited further when they were allowed to offload toxic assets onto the Federal Reserve's balance sheet. Investors, assured by such machinations that the banks had backup, plowed even more money into the sector by buying up new stock issued by the banks.

I have said all along that such investments are risky, and I have been taking the other side of that trade (explained here). The banks, facing declining revenues, have been generating "profits" by drawing down their loan-loss reserves even as loan delinquencies accelerate. To make matters worse, they may have to buy back tens of billions in subslime securities because of faulty documentation. Write-downs and write-offs will follow. The banks are insolvent; once investors figure this out, there will be a rush to the exits.

Bringing investors into the light is Branch Hill Capital, which has compiled a Power Point about to go viral. The slide show picks on Bank of America (as have I, many times--try that Search bar above), but could have selected any one of the Too Big To Fail banks. Branch Hill's advice? Go long the monoline insurers, go short the banks.

There. I just made your week.

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