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
Bloomberg, July 22 2008
Fear and Leverage on Wall Street: A GSE Roundtable
Wallison, O’Driscoll and Rosner
Institutional Risk Analyst, July 21, 2008