Even More Writedowns Coming

Yes, we’ve turned the corner, out of the woods, always darkest before the dawn.

What — whats that you say? More writedowns? More bad loans? Yes, we know the market has correctly anticipated that.

Worse? Even worse than the market expects? How can that be? Its already in the tens of billions?

But the earnings have been posh! Its the 9th inning for heaven’s sake!

Wait — you mean to say that Bank of America’s reported write-downs of only $1.22B for ‘market disruptions’ — more than 50% lower than the $2.81B ‘market disruptions’ write-down in Q1 — wasn’t the whole story? What about Countrywide, whose results weren’t part of Bank of America’s figures?

We have a plan, you see, to keep more of the bad stuff off of our books: "Bankers who’ve been briefed by BAC officials tell The IRA that CEO Ken Lewis intends to keep the crippled thrift holding company "bankruptcy remote" by merging CFC with a new vehicle, called Red Oak Merger Corp in the merger plan, and that BAC does not intend to consolidate the entity or take full responsibility for the CFC debt."

You can do that? Buy the corporate assets, but stiff the bond holders on the debt? How does THAT work?

What about J.P. Morgan? Well, their CEO is Challenging the Validity of Reported Capital Ratios:

"James Dimon is known for being outspoken. But the J.P. Morgan Chase chief executive outdid himself last week by calling into question the legitimacy of investment banks’ newly published capital ratios.

"I challenge those numbers," Mr. Dimon said, throwing a verbal roundhouse at rivals Goldman Sachs Group, Morgan Stanley, Merrill Lynch and Lehman Brothers.

He went on to question whether the methods the investment banks used to calculate a measure of financial strength known as the Tier 1 ratio were the same as those used by commercial banks.

The investment banks were left fuming. The capital ratios Mr. Dimon was referring to, after all, were compiled under the direction of the Securities and Exchange Commission."

Which all leads us back to Fannie and Freddie.  In addition to the analyst community, they have OFHEO looking over their shoulder as well. And OFHEO does not need to pull its punches in order to garnert lucrative underwriting business from the GSEs:

Fannie Mae and Freddie Mac may need to record more writedowns after they expanded their purchases of non-guaranteed subprime and Alt-A mortgage securities just as other investors fled to safer investments, their regulator said.

The value of $217 billion of the so-called non-agency securities is falling as other financial firms write down their holdings, the Office of Federal Housing Enterprise Oversight said in its annual mortgage market report. Privately issued securities backed by subprime mortgages made up 9.2 percent of the companies’ combined portfolio, while Alt-A represented about 5.8 percent, Ofheo said.

By investing “heavily” in private-label securities in 2004 and 2005, the companies “significantly increased their exposure to fair value losses from changes in market prices,” Ofheo said. Structured investment vehicles and securities firms, battered by $452 billion in asset writedowns and credit losses, were invested in similar securities and have contributed to the price swings that may lead to more losses at Fannie Mae and Freddie Mac under generally accepted accounting principles.

“To the extent that those institutions recognize fair value losses on their private-label portfolios under GAAP, Fannie Mae and Freddie Mac may have to do so as well,” the Washington-based regulator wrote in the report.

Nothing to see hear folks, move along, move along…



A Smackdown Over Tier 1
J.P. Morgan’s CEO Challenges Validity Of Capital Ratios
WSJ July 21, 2008; Page C8

Fannie, Freddie May Record More Losses, Ofheo Says
Dawn Kopecki
Bloomberg, July 22 2008


Fear and Leverage on Wall Street: A GSE Roundtable
Wallison, O’Driscoll and Rosner
Institutional Risk Analyst, July 21, 2008   

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. John F. commented on Jul 22

    If JPM’s prime mortgages are defaulting at about the same rate as their subprimes (per their conference call), Fannie and Freddie are toast. Or should I say, we the taxpayers are toast.

  2. Ozymandias commented on Jul 22

    Turned the corner? The investing population deserves to lose all its money if it really believes that claptrap.

    The more I look at the markets and market psychology, together with all the lies, delusions and self serving propoganda, the more I realise it is a complete head f*ck. If you want to keep your sanity it’s best to stay away from it completely or else put your money in gold.

  3. JustinTheSkeptic commented on Jul 22

    “99% of the banks are ‘well captilized’,” but we still need to take unprecedented measures to save the system. Please Hank!

    Funny how now he’s saying that we need to save the housing sector, when a year and a half ago he was saying how little the housing sector mattered to our over-all economy. HOW MUCH MORE CAN WE BELIEVE????

  4. Juhuti commented on Jul 22

    Looks like Paulson is trying to guide Congress’ decision on the FNM/FRE package. There are some in Congress who are against giving the US Treasury more power. Paulson, Bernanke and Cox will all be putting their influence out there to try and get it passed. Dimon figures that if the commercial banks have to come clean then so should the investment banks.

  5. John commented on Jul 22

    Lewis’ little maneuver at BAC sounds far too clever by half if true. I can’t see him getting away with this but stranger things have happened.

  6. Winston Munn commented on Jul 22

    “All we are asking for is a level playing field…a level 3 playing field.” – Unnamed bank spokesman

  7. larster commented on Jul 22

    Who owns the CFC debt? The legal costs of stiffing the CFC debt holders would be substantial and costly to BAC. Also, why would they take over CFC w/o having this issue resolved? Seems strange to me.

  8. bobo7874 commented on Jul 22


    Supposedly, BAC can legally buy corporate assets from CFC without exposing itself to liability or having to disgorge the assets, provided BAC pays a fair market value purchase price in cash (or certain other assets, but not including stock in BAC or affiliates). As I recall, BAC intended to set the purchase price it paid for the servicing business high enough to make it very difficult for hungry lawyers to try to challenge it, which doesn’t mean they won’t try anyway.

    Supposedly, the theory behind allowing purchases for fair value is that the creditors are no worse off afterward than they were before.

  9. HCF commented on Jul 22

    “CEO Ken Lewis intends to keep the crippled thrift holding company “bankruptcy remote” by merging CFC with a new vehicle, called Red Oak Merger Corp in the merger plan, and that BAC does not intend to consolidate the entity or take full responsibility for the CFC debt.”

    I guess space shuttle astronauts can extract drinking water from human waste, so I guess stranger things than what BAC is doing could happen. Of course, we as taxpayers will be left with the giant dried out turd.

    Can’t they at least let us short the hell out of this market? Oh yeah, I forgot, it’s our fault as speculators/short-sellers/[fill in the buzz word] that created this mess, not over-leveraged, under-capitalized, poorly run financial institutions themselves.

    – HCF

  10. Greg0658 commented on Jul 22

    USA Financial Industry – the perfect skimming engine.

    Come back to autopilot and sanity.

    1> Mortgages cant repackage out of the originating bank or S&L

    2> remove ability to short & long

    3> orderly delete hedge funds

    Basically … Invest in a company or a nation’s currency … probably isn’t a living in itself, so make a company or marry money

  11. Greg0658 commented on Jul 22

    thanks CNBC – forgot another big one
    4> only allowed to bid on commodity you can receive or ship out

  12. Basilisc commented on Jul 22

    Wait a sec – you mean the GSEs were buying subprime and alt-A MBS – even though they were prohibited from buying subprime and alt-A mortgages directly? And all throughout 07 and early 08 we were being reassured that the subprime mess wouldn’t hit the GSEs because, after all, they weren’t involved with subprime??

    Unlike some others, I’m OK with the govt guaranteeing Freddie and Fannie’s debt, as part of a policy of promoting the functioning of the mortgage markets, as long as that comes with some strict, transparent conditions on what they can and can’t do. And condition number one, I would have thought, was that THEY CAN’T USE MY GUARANTEE TO BUY RISKY JUNK.

    And they didn’t. They just bought MBS based on the risky junk.

    Isn’t this a fraud on the public of pretty massive proportions?

  13. Dr. Kenneth Noisewater commented on Jul 22

    So.. How does the government bail out just the conforming mortgages while getting rid of (and not being on the hook for) the junk? Consolidate the mortgages into one company, shove all the junk in the other, and have that appendix go bankrupt? Sleight of hand + lawmakers = policy…

  14. Deflationeesta commented on Jul 22

    “provided BAC pays a fair market value purchase price in cash”

    lets put this to a stress test:

    I bought a car three years ago and BAC provided a $48,000 loan.

    The car is currently worth $24,000 but the loan is valued at $36,000.

    Given this I should be able to call BAC and have my loan reduced to fair value when I pay it off this Friday and the lender should be happy to take the (partial) loss.

  15. bdg123 commented on Jul 22

    I knew this cycle would end badly but seeing some of this horse shit is really amazing. BAC is flirting with the edge of reality and this new scheme is no doubt the work of its corporate attorneys. If they don’t back Countrywide debt, it will be a disaster for them. They made a massive mistake by stepping in to buy Countrywide when they did. Now they are putting lipstick on the pig. Sure is purty.

    What’s that phrase that has become so famous over the last few years? “You break it, you own it” In a time where there is a crisis in leadership, I wish that man was running for President. Integrity and leadership are two things this country needs in spades at this very moment.

Posted Under