Black Saturday

Earlier this month:  a crowd waits outside an Apple store in Shanghai.

Definition of scary:  being wedged tightly in a crowd of impatient shoppers as Wal-Mart opens the door on Black Friday (or is it Black Thursday now?), especially if there is a single pallet of heavily discounted smart phones waiting inside.  You have no choice but to go with the flow, whether you want a phone or not.  Best to suit up in body armor in case some of the amazing racers start brandishing  firearms.  Best not to stumble to the floor and get trampled underfoot.  No, best to stay home.

Then there is beyond scary.  On the morning of May 30, 1896, a half-million people were gathered on the Khodynka Field on the outskirts of Moscow not to buy anything, but to accept a royal handout.  Khodynka, a military training ground, had been prepared for a festival celebrating the coronation of Nicholas II as the new Russian czar.  The common folk would be showered with gifts:  a commemorative mug (below), scarves, edibles (pryaniki, saiki, sausage), and beer.

The very first iThing.

Peasants had been arriving from the hinterlands for days to join in.  The night before they had been sleeping on the ground, drinking and singing around bonfires, or crowding about pavilions and tents, amused by bands, circus performers, gypsy entertainers, trained bears, the whole nine yards.  [cf. Harrison Salisbury, Black Night, White Snow]  By midnight, tens of thousands had begun to line up for the free stuff.  The mad rush began soon after dawn, apparently triggered by a rumor that there would not be enough free stuff to go around.

When demand exceeds supply, watch out.

1,389 dead.

Tuesday Tune-up

The Corrs, "Everybody Hurts"

Quote for the Week, January 27-February 2, 2013

Things was better when everybody live on the land.  Sure, there was tough times.  But everybody pulled along of everybody else to get through, and the feelin' you got from doing that was worth a few tough times.
--Joe Thrasher, Inuit, to Farley Mowat, author of High Latitudes

Banksters Skate, Exhibit A

From CBS News:

The smoking gun at Lehman Brothers.

Banksters Skate, Ch. 4

From PBS Frontline:

"The Untouchables"

Chapter Four:  The DOJ Dodge
[14:45]

Chapter One

Chapter Two

Chapter Three

Banksters Skate, Ch. 3

From PBS Frontline:

"The Untouchables"

Chapter Three:  Disgust on Capitol Hill
[20:56]

Chapter One

Chapter Two

Chapter Four

Banksters Skate (Ch. 2)

From PBS Frontline:

"The Untouchables"

Chapter Two:  Due(-doo) Diligence
[9:16]

Chapter One

Chapter Three

Chapter Four

Banksters Skate (Ch. 1)

From PBS Frontline:

"The Untouchables"

Chapter One:  Find 'Em, Fund 'Em

[8:44]

Chapter Two

Chapter Three

Chapter Four

Tuesday Tune-up

The Joy Formidable, "Wolf's Law"

Quote for the Week, January 20-26, 2013

Permanent war makes for permanent temporary measures.
--George Friedman

Dumpster Diving

Rooting for bank profits...

Garbage.  That's what MarketWatch called yesterday's earnings reports from Bank of America and Citigroup, serial underachievers in the financial sector.  I especially like this line:  "to suggest that these types of quarters are year-end, 'kitchen sink' quarters is an insult to sinks, kitchens, quarters, and, mostly, investors."  The complaint here is that these so-called disclosures are designed to obfuscate.  Accounting gimmickry and P.R. spin make it hard to understand how well (slash poorly) these businesses are doing.

Take Bank of America (please!), which reported a profit of $732 million for the fourth quarter of 2012. Got that?  The headline number was in the black.  Now let's start digging.  That "profit" was thanks entirely to a release from loan-loss reserves of $900 million (go here, click on Q4 Supplemental Information, then scroll down to page 44).  But why raid reserves when you are holding over $19 billion in non-performing home loans (page 42)?  Because if you don't, you're gonna show a quarterly loss, so hey, whaddya gonna do?

So back out the $900 million, but don't stop there.  We have a tax benefit of $2.636 billion in there (page 4).  Take that out, and now you have some serious red ink.   Note (also on page 4) that it would have been worse had income not included $792 million in trading account profits.  This proprietary trading is exactly what the Volker Rule is designed to limit.  Focusing just on traditional banking activity, we find that Bank of America does a poor job of it.  ZeroHedge paints this picture:

[click to enlarge]

BofA's bottom line was crushed this quarter by a provision for credit losses of $2.2 billion stemming from the company's recent settlement with Fannie Mae.  Even though the settlement disposes of over $12 billion in GSE claims, private-label and monoline claims increased by $1.56 billion in Q4 to almost $15 billion.  So what the company describes as "one-time" charges are more like over-and-over charges, as the New York Times explains here.

Busted

JPM CEO takes 50% pay cut.

2012 compensation:  only $11.5 million.

Poor baby.

This morning JP Morgan Chase & Co.'s Board of Directors announced that its Chairman and CEO, Jamie Dimon, would get a bonus of only $10 million for his performance in 2012.  Dimon is being held accountable for over $6 billion in losses incurred by the firm's chief investment office when it bet heavily on risky derivatives (internal report here).  The announcement comes two days after sanctions imposed on the bank by the Office of the Comptroller of the Currency and the Federal Reserve for deficiencies in its risk-management practices.  As other U.S. and British regulators are investigating the infamous "London Whale" trade, further enforcement actions may be coming.  The OCC also issued a cease-and-desist order for failure to comply with the Bank Secrecy Act.  Indeed, some suggest that Dimon deserves jail time for money-laundering.

Meanwhile, JP Morgan Chase just reported a record profit for the fourth quarter.  Adding to net income was the release of almost $900 million in loan-loss reserves.  Curiously, as page 22 of the earnings presentation (PDF) shows, the company has drawn off $5.673 billion from loan-loss reserves in the past year (boosting profits) even as the total value of non-performing loans has increased by $727 million over the same period.  So Jamie's latest bet is this:  a mending economy will cure some of these bad loans.

Page 15 shows the same shrinking interest margins observed last week with Wells Fargo (see chart below).  The company bemoans lower yields on loans, lower yields on investment securities, and "limited reinvestment opportunities," which may explain why the CIO was reaching for reward last year.  The Fed's zero interest-rate policy (ZIRP) makes it hard for an honest banker to earn a living.  Really, who can live on a measly eleven-point-five mill these days?

[click to enlarge]

Nightrider

Wells Fargo delivers for now, but visibility is poor.

When times are good, banks make out like bandits.  Every time money changes hands, the banks get a cut.  Call it wealth by a thousand cuts.  But that was then, and this is now.  Even as the Fed seeks to expand the the supply of money in the U.S. by trillions of dollars, the velocity of money has slowed.  The spending power of consumers is diminished by declining incomes; some of it is trapped in upside-down home mortgages.  The investing power of cash-flush corporations is being held in reserve, thanks to regulatory uncertainty and crumbling consumer demand.  Fewer transactions all around.  Fewer cuts.

What can an honest, self-respecting bank do to grow profits in this environment?  Wells Fargo has a short-term answer:  take share from competitors.  On Friday Wells kicked off the quarterly earnings parade for the biggest banks by announcing record net income on revenues that grew 7% year-over-year.  Not bad.  The company sported a hefty $125 billion in new mortgage originations.  75 percent of that activity involved refinancings.  Industry-wide, that's a robbing-Peter-to-pay-Paul scenario.  When most of the other mega-banks report later this week, we'll find out who Peter is.  (Bank of America, anyone?)

If you look at Wells Fargo's earnings summary (PDF), you will find worrisome signs that the company may not be able to sustain the momentum.  Net Interest Margin (NIM--see page 11) has declined from 3.91% in the first half of 2012 to 3.56% in Q4.  Lower margins mean smaller cuts.  Page 14 reveals billions in "environmentally-elevated costs," a cute euphemism for liabilities stemming from bad loans.  Page 15 shows that the $125 billion in new mortgages was actually down 10% from the prior quarter.  Finally, repurchase demands from Fannie Mae and Freddie Mac (page 20) for risky loans made between 2006 and 2008 remain stuck at roughly $2 billion, even as repurchase demands pile up for newer-vintage originations.  Wells was forced to add $841 million to its repurchase reserves in the second half of 2012.  Mop-up duty continues, with no end in sight.

ZeroHedge has a useful graphic (below) capturing the company's dilemma:  deposits (a cost center) are rising faster than loans (a profit center), a sure recipe for shrinking margins.  And if the loans go bad (can't happen, no way!), then profits will shrink as well.

[click to enlarge]

Tuesday Tune-up

Itzhak Perlman, Vivaldi's "Spring"

Click here.

Quote for the Week, January 13-19, 2013

If I'll miss anything about my career, it will be to listen to what people say you can't do, then to go and do it.
--Ray Lewis, linebacker, Baltimore Ravens

Peak Food

[11:29]

David McWilliams scribbles a Malthusian manifesto.

"If all the world's seven billion people consumed as much as the average American, it would take the resources of over five Planet Earths to sustainably support all of us."

McWilliams also takes to task the world's central banks for flooding the globe with fiat money, thereby making food "a commodity to be gambled on."

Screamliner

Grounded--not once, but twice.

The new Boeing 787 has identity issues.  On Monday, it thought it was a Chevy Volt and caught fire while parked at the gate at Boston's Logan International Airport.  The next day, while taxiing for take-off at the same airport, it decided to be the Exxon Valdez instead, spilling jet fuel on the tarmac.  The flight was immediately aborted, as Massport officials were concerned that the plane might morph into a duckboat next if it tried to clear the runway.  Boeing insists that the so-called Dreamliner is flightworthy, which it might be.  In your dreams.  Or on a tight leash, with a pre-plotted string of diversion airports along the flight path.

Not only was the aircraft grounded, but so was Boeing's stock:

Boeing's share price (5-day chart).

So far it has been a tough week for Boeing's CEO, James McNerney (below), and it's only Wednesday.  If this keeps up, Nerns will do in Chicago what his Yale classmate, Howard Dean (then a candidate for U.S. President), did in Iowa nine years ago:

Scream.

Who knows?  Maybe the Dreamliner will inspire a new idiom:  Yeah right, I'll believe that when 787s fly.

[update, 01-16-13--]

Scream on.  The FAA has just grounded all U.S.-registered Boeing 787 Dreamliners, issuing "an emergency airworthiness directive (AD) to address a potential battery fire risk."  The directive follows an aborted flight in Japan earlier today.  Deployment of emergency chutes (below) is never a good sign.

Tuesday Tune-up

The Proclaimers, "I'm Gonna Be (500 Miles)"

Breaking: BofA Settles with Fannie Mae

Small investor speed-dials his broker: "Dump my BAC!"

Within the past hour has come the announcement that Bank of America has reached a settlement of $11.6 billion with Fannie Mae for a bouquet of abusive practices in the home-mortgage industry.  More than half of that sum will go toward buying back residential mortgages sold to the government-sponsored enterprise (GSE) between 2000 and 2008.  BofA will refund the original purchase prices (which exceed current fair value) plus accrued interest.  There will be additional cash payments to Fannie totaling nearly $5 billion in compensatory fees.  The bank expects a hit of $2.7 billion to pre-tax earnings for Q4.

This would actually be good news for the company if this were the end of it.  But there is more exposure for Bank of America, one of 14 lenders now negotiating with the Office of the Comptroller of the Currency for a settlement of claims arising from foreclosure abuses and botched loan modifications (an announcement on the so-called "robo-signing" scandal is expected any day, with an expected price tag of $10 billion split among all parties).  Even with Fannie out of the way, BofA must confront a long line of ticked-off mortgage insurers.  As of September 30, 2012, the company had $16.3 billion reserved for future pay-outs.  ZeroHedge suggests that that will not be enough, as outstanding claims are in the tens of billions of dollars:

"[W]hile the additional [representations and warranties] provision may be $2.5 billion for just one Fannie, look for the final number to be far greater when all other exposures are settled, which include private labels, Freddie, second-lien monolines as well as whole loans."

[update, 11 a.m.--]

Just in.  Federal regulators have settled with ten banks for $8.5 billion over the above-mentioned foreclosure abuses.  The jury is still out on four other banks.  Bank of America is one of the ten to settle.  (Federal Reserve announcement here.)  Yves Smith at NakedCapitalism.com calls the settlement another "ritualized sellout."

Go here for a report on Bank of America's shrinking business model.

Bait and Switch 101

Matt Taibbi's latest:

"Secret and Lies of the Bailout"

Rolling Stone

[excerpt:]

"[T]he government has turned the entire financial system into a kind of vast confidence game – a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will step in to prevent losses. Clearly, a government that's already in debt over its eyes for the next million years does not have enough capital on hand to rescue every Citigroup or Regions Bank in the land should they all go bust tomorrow. But the market is behaving as if Daddy will step in to once again pay the rent the next time any or all of these kids sets the couch on fire and skips out on his security deposit. Just like an actual Ponzi scheme, it works only as long as they don't have to make good on all the promises they've made. They're building an economy based not on real accounting and real numbers, but on belief."

Complete article here.

Mr. King Goes to Washington

Thumbnail of Maine's new Senator
with NBC's Tom Brokaw

Quote for the Week, January 6-12, 2013

Religion is no longer able to guarantee the governments that the people will remain peaceful; the Rothschild system of loans can perform the task much better.
--Heinrich Heine

What's My Line?

Used car salesman or a mega-bank CEO?
(And, um, which finger is that?)

The Atlantic is out with a cover story about the lack of transparency at Wall Street biggest banks.  When the system finally crashes, don't say that you were not warned.

[excerpt:]

"[A]s trust diminishes, the likelihood of another crisis grows larger.  The next big storm might blow the weakened house down.  Elite investors—those who move markets and control the flow of money—will flee, out of worry that the roof will collapse.  The less they trust the banks, the faster and more decisively they will beat that path—disinvesting, freezing bank credit, and weakening the structure even more.  In this way, fear becomes reality, and troubles that might once have been weathered become existential."

"What's Inside America's Banks?"

Want more?  This Bloomberg piece reports that JP Morgan Chase (the bank headed by the dude pictured above) may be sanctioned for blowing off regulators by withholding information regarding one of its illustrious clients, Bernie Madoff.  Yes, that Bernie Madoff (dude pictured below).

Or how about this one detailing how the banks defeat and defuse regulatory reviews of their own shady lending practices?

Tuesday Tune-up

Rachel Platten, "1,000 Ships"