Sunday, August 28, 2011

'Dangerous for Society'

Paul Woolley,

interviewed by Der Spiegel:

"...the markets don't function properly.
Things are spinning out of control..."


"Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn't reaching equilibrium -- it's falling into chaos....

The finance sector can -- and is -- growing until it overwhelms the economy. In good years the US finance industry cashes in on more than 40 percent of all corporate profits. In bad years they are saved by the taxpayers. The agents are doing a devilishly good job of developing innovative, complicated new products that people can't understand. It gives them the opportunity to earn excess returns and attract the best talent. While they are acting rationally, the result is a catastrophe."

Complete interview here.

Quote for the Week, August 28-Sept. 3, 2011

It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office.
--H.L. Mencken

Thursday, August 25, 2011

Loan Shark Descends on Bank of America

Berkshire Hathaway's Warren Buffett

The big news on Wall Street this morning is that gazillionaire Warren Buffett is investing $5 billion dollars in Bank of America. Like lemmings, pre-market traders are bidding up BAC's share price on the presumption that Buffett's blessing means the bottom is in. I remain on the other side of that trade and in fact view the momentary hype as one last opportunity for MainePERS to exit the stock before it crashes for good.

How quickly they forget. Just six months ago came the disclosure, through a filing with the SEC, that Buffett had sold all of his common stock in BofA by the end of 2010. It was a good thing for him that he did, as he was able to side-step a 48% slide in the stock price since January 1. Now Buffett is back for discounted merchandise. But why? The company is even more troubled now than it was on New Year's Eve, having just recorded a 20 billion-dollar hit to its balance sheet.

It turns out that it is not common stock that Buffett is buying, but preferred instead, which gives him seniority over common stockholders in the company's capital structure. Buffett will be getting a guaranteed 6% annual dividend (x $5 billion = $300 million from pre-tax profits) before common shareholders get their measly penny-a-share quarterly dividend, which is not guaranteed. As a sweetener, Buffett also gets warrants to buy up to 700 million shares of common stock at $7.14 a share at any time during the next ten years. Fully exercised, those options would give him 6.5 percent of the company.

This is a bad deal for Bank of America, which assumes a burdensome cost of capital in a zero-interest-rate environment. Management's credibility is now seriously undermined in the wake of assurances during a July 19 conference call with investment analysts that the company needed no additional capital. The usurious Buffett deal means that BofA not only needs capital, but cannot get it from public debt and equity markets. Concludes ZeroHedge: "The bank's only recourse was a private raise with a crony capitalist who is once again doubling down on the global ponzi."

Worst part is, the $5 billion is not nearly enough. The company's unmet liabilities are estimated in the tens of billions and may approach $200 billion. Buffett's intervention is like seeing a distressed swimmer being swept out to sea by a riptide and throwing him a...rubber duckie. And if Wily Warren loses his rubber duckie? No problem. Barack Obama, who worships the Oracle of Omaha, will buy him another one. Which, if that happens, will make me really mad.

It has happened before. In 2008 Buffett bought preferred stakes in both Goldman Sachs and General Electric, after which the stocks crashed 67% and 42% respectively. It took the TARP bailout to rescue Buffett's investment then. "If history repeats," notes EuroPacific Capital's Peter Schiff wryly, "it's more likely the banking stocks are about to get hammered."

The story is going around that Buffett concocted the BofA scheme while sitting in the bathtub Wednesday morning. Would it not be fitting if he ended up taking a bath on this latest flyer?

[update 08-30-11:]

David Weidner at Marketwatch explains here how the Buffett deal gouges holders of BAC common.

And John Hussman has this to say:

Warren Buffett's $5 billion investment in Bank of America preferred stock last week was essentially a defense of the old guard. Buffet observed, "It's a vote of confidence, not only in Bank of America, but also in the country." Yes - to be specific, it's a vote of confidence that the country will bail out Bank of America in any future crisis. We should all hope that Buffett's investment is successful - provided there is no future crisis - and we should equally hope that Buffett loses the entire investment otherwise.

Wednesday, August 24, 2011

Bank of America Swaps Go Through the Roof

[click to enlarge]

Quick primer:

A credit default swap (CDS) is insurance bought by a lender to protect against a loan default. Say the CDS buyer is holding some sketchy corporate debt issued by a distressed company such as, oh, let's just pick one out of a hat, Bank of America! If said company goes down, the CDS holder can "swap" the defaulted bonds for their face value in cash. The price of the CDS is called the "spread." The higher the spread, the greater the perceived likelihood that a default will take place.

Earlier this morning Bank of America's five-year CDS spread, which has been steadily rising over the past several weeks, suddenly blew wider by another 25% (see chart above). Ominous for unprotected lenders. And shareholders.

If MainePERS portfolio managers have not dumped the stock by now, you may be seeing them soon at a pharmacy near you. Will there be meds enough for BAC's collapse?

From Yves Smith at

"We are now seeing the downside to extend and pretend. Years of regulatory forbearance mean that investors know the marks on the balance sheet of a beast like Bank of America (and frankly all the other big banks) have a ton of air in them. And now that the economy is looking seriously wobbly and the odds of son of Credit Anstalt are well above zero, it means big banks are at real risk of getting seriously whacked in a major stress event. Worse, with Dodd Frank (supposedly) barring bailouts and Tea Partiers on an anti-bank, anti-Fed, anti-spending warpath, it might not be so easy for the authorities to rescue a big bank if a run started (not that I’m advocating a rescue, mind you, I’m looking at this from the vantage of a bank shareholder)....

Now normally, investors accept the unknowability of bank equity because they have some faith in the system. Does anyone have any confidence in the system now? Financial regulators have shown themselves to be incompetent and/or badly captured by banks. Earth to base: letting off bank management easy is bad for investors in the long run. Being an investor in an overly risky bank looks swell until it suddenly isn’t."

Complete commentary viewable here.

Monday, August 22, 2011

(B)ungee (A)ction (C)ontinues

Bank of America's stock price (4-day chart)
[click to enlarge]

So THAT'S what the ticker symbol stands for!

And now for the 4-year chart:

Down 88% and not done yet.

Same As the Old Boss

by David Bromwich

"The record shows impressive continuities between the two administrations, and nowhere more than in the policy of “force projection” in the Arab world. With one war half-ended in Iraq, but another doubled in size and stretching across borders in Afghanistan; with an expanded program of drone killings and black-ops assassinations,the latter glorified in special ceremonies of thanksgiving (as they never were under Bush); with the number of prisoners at Guantanamo having decreased, but some now slated for permanent detention; with the repeated invocation of “state secrets” to protect the government from charges of war crimes; with the Patriot Act renewed and its most dubious provisions left intact -- the Bush-Obama presidency has sufficient self-coherence to be considered a historical entity with a life of its own."

Complete article viewable here.

Sunday, August 21, 2011

Quote for the Week, August 21-27, 2011

I don't want to achieve immortality through my work. I want to achieve it through not dying.
--Woody Allen

Tuesday, August 16, 2011

You're Outta Here!

BofA CEO Brian Moynihan gives Canadian cards the thumb.

Bank of America announced yesterday the sale of its MBNA-branded Canadian credit-card portfolio to TD Bank Group for $8.5 billion. This is the latest in a series of divestitures as the firm exits its entire international credit-card business. It must have been a painful decision for BofA's CEO, Brian Moynihan. Credit-card lending has been a relative bright spot for the company, which has suffered staggering losses in recent quarters. But regulators must be satisfied, and the move will help the company comply with enhanced capital requirements being phased in over the remainder of the decade.

Investors are running, not walking, from Bank of America. Recent filings with the SEC have revealed that two of the world's best-known hedge-fund managers, David Tepper and John Paulson, shed substantial stakes in BofA during the second quarter. Tepper's Appaloosa Management L.P. sold 7.2 million shares in Q2, this after ditching 8 million shares in Q1. The 10 million shares remaining are less than a third of what Tepper held at the beginning of 2010. Paulson's axe was even heavier. He sold 63.2 million shares in Q2, or more than half of what he held when the quarter began. That is some serious dumpage.

So who was on the other side bidding? Why, MainePERS, of course, scooping up 63,358 shares during the same three months. They must know something that the rest of us do not.

[update 08-21-11:]

Christopher Whalen suggests that Bank of America should be headed toward receivership. Owners of the company's common stock would be at the bottom of the food chain in any subsequent workout. The conversion of debt to equity would severely dilute shareholders:

"Once the FDIC is in control of BAC, the process will then proceed like a typical bankruptcy, with the operating units continuing to do business in the normal course. For consumers and business customers, the situation at BAC will be mostly the same. But for investors and especially creditors, the situation will be far from normal.

In a Dodd-Frank resolution, the creditors of BAC will have an opportunity to file claims, much as with any failed bank. Unlike a bankruptcy, however, the FDIC will make all depositors of the subsidiary banks whole before considering claims of creditors of the parent, a significant difference investors ought to consider. Most important, however, will be the process of converting debt to equity in the restructured BAC, providing the resources to absorb losses, fund continuing operations and restructure."

[update 08-23-11:]

Henry Blodget estimates that Bank of America will need to raise at least $100 billion, and perhaps as much as $200 billion, of new capital to survive. If true, existing shareholders will get hosed. With a water cannon. Memo to MainePERS: an umbrella will do no good.

Monday, August 15, 2011

Grief To Those Who Deserve It

"Two One-Way Lanes on the Road to Ruin"

by John Hussman, Ph.D.


"Presently, we should not judge policy actions by their ability to punish saving, indiscriminately promote spending, relieve fear by making bad debt whole, or promote credit for its own sake. Instead, we should judge each policy action by its ability to reallocate resources toward productive uses, and to accelerate the restructuring of hopelessly bad debt that was carelessly extended in the first place. Many "standard" elements of economic policy can be crafted toward these ends, including infrastructure spending, R&D credits, unemployment compensation, funding of NIH and other basic research, and so on. Restructuring mortgage debt by using Treasury to administer, but not subsidize, property appreciation rights would also be helpful. By contrast, it is disastrously misguided to defend holders of bad debt, to distort financial markets, and to obstruct rather than facilitate the restructuring of excessive debt burdens.

...[the nation's economic] policies operate primarily for the benefit of banks and bondholders who made reckless and unproductive loans. To use Schumpeter's words, our public policy now operates 'in their interest and for their purposes.' It is the insistence of policy makers on making these bad loans whole, instead of restructuring the obligations, that is at the heart of our prolonged economic slump.

Undoubtedly, borrowers are also responsible for the losses, but it is always the lender and the investor who is responsible for judging the risk and character of the businesses and individuals to whom they extend credit. As Schumpeter noted 'The entrepreneur is never the risk bearer. The one who gives credit comes to grief if the undertaking fails.' When investors and lenders stop being mindful of risk, believing that somebody else will bail out the loss, the misallocation of resources does violence to the entire economic system."

Entire commentary viewable here.

Sunday, August 14, 2011

Quote for the Week, August 14-20, 2011

Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.
--Karl Marx, 1867

Monday, August 8, 2011

Bank(ruptcy) of America

From ZeroHedge:

Bank of America Defaults Risk Soars To Highest Since June 2009,

Jumps By 10% Overnight

posted here.

Also in the news this morning, AIG is suing Bank of America for $10 billion. Bank of America's stock is off another 7+% in pre-market trading. Reminder: Maine state employees and taxpayers are invested to the tune of 2.6 million shares.

Scroll down for more on the BofA disaster.

[update, noon:]

Here Comes TARP 2:

Bank Of America Implodes, At $6.87,

BAC CDS Up 20% To 260 bps As Bankruptcy Contemplated

More at ZeroHedge.

[update, 4 p.m.:]

BAC gaps down,
MainePERS loses another $4.3 M.

Sunday, August 7, 2011

U.S. Loses an 'A'

U.S. Treasury bonds: triple-A no more

"America Makes the Cut:
So What Happens Next?"

Brandon Smith,


"Ratings agencies were not alone in the creation of the derivatives bubble. The private Federal Reserve artificially lowered interest rates and flooded the markets with cheap fiat. International banks used this fast money to create the easy mortgage groundswell and the derivatives poison that was fed it into the system. Ratings agencies went along with the scam and graded the worthless securities as AAA. The federal government and the SEC allowed all of this to take place by purposely ignoring the crime and refusing to apply existing regulations in investigating the fraud.

The Bottom line? You CANNOT create an economic crisis like the one we face today without collusion between big business, government, regulatory bodies, and ratings agencies. The Obama Administration is well aware of this, and the attacks on S&P are nothing more than a show. S&P is not to blame for the downgrade this past weekend. They are ALL to blame."

Complete article viewable here.

Quote for the Week, August 7-13, 2011

It is when power is wedded to chronic fear that it becomes formidable.
--Eric Hoffer

Thursday, August 4, 2011

Ticket To Ride

Bank of America stock sinks to a new 52-week low.
[graph from ZeroHedge]

MainePERS beneficiaries took a piggyBAC ride down today, along with all other pensioners long the stock market. The Dow was down 500 points, or over 4%. Bank of America's common stock slid even faster, off over 7%.

Let's do the math, shall we? MainePERS holds 2.6 million shares (after adding to its stake in Q2). Multiply that times 73 cents per share, today's price chop. That gives us $1.9 million lost since 9:30 this morning. Gone. Vaporized.

And we pay the portfolio managers how much?

[update 08-05-11:]

Another day, another $1.7 million. Look (out) below:

BAC, 3-month chart

The nosedive comes after the company's latest 10-Q filing with the Securities & Exchange Commission late yesterday. If you click on the link, you will find over 200 pages, most of it repetitive boilerplate. Of particular interest is management's discussion of future risks to the company and, by extension, to investors (yeah, YOU, MainePERS), risks that were neither eliminated by prior settlements nor fully provisioned in the company's Q2 financial disclosure. Some choice nuggets:

  • The company's experience with the GSEs (e.g. Fannie Mae, Freddie Mac) "continues to evolve," which, fully and precisely translated, means they have our nuts in a vise and they are tightening. "The recent FNMA announcement regarding mortgage insurance rescissions, cancellations and claim denials could result in increased repurchase requests from FNMA that exceed the repurchase requests contemplated by the estimated liability" [emphasis added]. The company's exposure? "It is not possible to reasonably estimate..." yada-yada. In other words, the sky's the limit. Page 179.
  • Non-GSE exposure keeps growing as well. "We currently estimate that the range of possible loss related to non-GSE representations and warranties could be up to $5 billion over existing accruals at June 30, 2011." At least they put a number to this one, subject of course to later revision. Page 219.
  • The so-called BNY Mellon settlement for $8.5 billion announced at the end of June is not a done deal. Court approval is still pending, and some of the parties want out. Or want more. "The Corporation's future representations and warranties losses could be substantially different than existing accruals...and consequently could have a materially adverse effect..." etc. etc. [company's emphasis]. Page 220.
  • I especially like this one: "A downgrade in the U.S. Government's sovereign credit rating...could result in risks to the Corporation...[and] could impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding...[Such action] could result in a significant adverse impact to the Corporation" [company's emphasis]. Right on cue, Standard & Poor's tonight downgraded its triple-A rating for U.S. debt to AA+ and attached a negative outlook warning of further cuts. First time in history. The cost of banking business just went up. Page 221.
  • Market risk in the mortgage sector: "For each one percent change in home prices, the liability for representations and warranties on unsettled GSE originations is estimated to be impacted by $125 million based on projected collateral losses and defect rates." Home prices are still declining. So the company's liability keeps on growing. Page 123.

Bottom line: hold the stock at your own risk.