ERICOPOLY

Aswath is UCLA educated, so he must be correct. How do I start a shareholder lawsuit against Citigroup? :D Here is what Citi says: Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012 See page 23 http://www.citigroup.com/citi/fin/data/p111020a.pdf Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost. In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand. I'm interested in hearing about the value of Mike Mayo. Apparently he was a bull on Lehman in 2007. Is that accurate? From what I can find, he accuses Citigroup of overstating their DTA by $10b. Yeah, he talked about his being slow to downgrade Lehman as the worst mistake of his career. He continued to believe the BS they were feeding him, until he finally caught them in a lie. Then, he quickly put out a sell on them as they were near the brink, and that may have been the straw that broke the camel's back and pushed them over into their death slide. “If you tell a lie big enough and keep repeating it, people will eventually come to believe it." - Joseph Goebbels Is Citigroup telling a huge whopper of a lie? According to Mayo Citigroup is overstating the DTA by $10b. In doing so, they report Tier 1 ratio at 11.7% under Basel I. Mike Mayo thinks this is fraud. What is the motive in this fraud? What if they only reported 10% under Basel I? The horrors, the horrors. Look, they are reporting a number higher than most of their rivals even if you DISALLOW that $10b in DTA. I didn't mean to discredit him for Lehman -- everybody makes a mistake. Citigroup no longer lets him participate on conference calls. I've read those old transcripts with Mayo asking questions and they indeed seemed disruptive in tone -- some sort of axe to grind. I understand that he's been against Citigroup since 2001 or so, and that's fine given how Citigroup ended up -- however the new management probably doesn't appreciate being painted with the same brush given the changes they instituted. Mayo is biting at their ankles, or so it sounds to me. $10b of DTAs means sh*t to Citigroup. They are reporting Basel I Tier 1 ratio of 11.7%. Why make a lie that you don't need to make? Why indeed? Getting shut out of conference calls was the least of what happened to him. He and his family were put under nearly constant surveillance. Nothing in any way threatening, of course. Just intense staring from a proper distance. If you want more details on CITI, see my reply to ONYX. How far back did that happen? What do you make of the following report that Mayo is not as negative on Citi and in fact expects them to earn 1% ROA? He was given a private meeting with Pandit and Gerspach after being shut out for two years. http://www.cnbc.com/id/39501351/Halftime_Can_Mike_Mayo_s_Big_Citi_Meeting_Lift_Bank_Stocks

Now I'll say something skeptical: One year ago we could make reasoned estimates that they would have R&W exposure in excess of their reserves at the time. Then all of a sudden they increase the reserve by $14b in one quarter. The same could happen with their litigation reserve -- it could be some relatively small percentage only to grow by several multiples in a single (future) quarter.

Aswath is UCLA educated, so he must be correct. How do I start a shareholder lawsuit against Citigroup? :D Here is what Citi says: Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012 See page 23 http://www.citigroup.com/citi/fin/data/p111020a.pdf Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost. In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand. I'm interested in hearing about the value of Mike Mayo. Apparently he was a bull on Lehman in 2007. Is that accurate? From what I can find, he accuses Citigroup of overstating their DTA by $10b. Yeah, he talked about his being slow to downgrade Lehman as the worst mistake of his career. He continued to believe the BS they were feeding him, until he finally caught them in a lie. Then, he quickly put out a sell on them as they were near the brink, and that may have been the straw that broke the camel's back and pushed them over into their death slide. “If you tell a lie big enough and keep repeating it, people will eventually come to believe it." - Joseph Goebbels Is Citigroup telling a huge whopper of a lie? According to Mayo Citigroup is overstating the DTA by $10b. In doing so, they report Tier 1 ratio at 11.7% under Basel I. Mike Mayo thinks this is fraud. What is the motive in this fraud? What if they only reported 10% under Basel I? The horrors, the horrors. Look, they are reporting a number higher than most of their rivals even if you DISALLOW that $10b in DTA. I didn't mean to discredit him for Lehman -- everybody makes a mistake. Citigroup no longer lets him participate on conference calls. I've read those old transcripts with Mayo asking questions and they indeed seemed disruptive in tone -- some sort of axe to grind. I understand that he's been against Citigroup since 2001 or so, and that's fine given how Citigroup ended up -- however the new management probably doesn't appreciate being painted with the same brush given the changes they instituted. Mayo is biting at their ankles, or so it sounds to me. $10b of DTAs means sh*t to Citigroup. They are reporting Basel I Tier 1 ratio of 11.7%. Why make a lie that you don't need to make?

Aswath is UCLA educated, so he must be correct. How do I start a shareholder lawsuit against Citigroup? :D Here is what Citi says: Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012 See page 23 http://www.citigroup.com/citi/fin/data/p111020a.pdf Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost. In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand. I'm interested in hearing about the value of Mike Mayo. Apparently he was a bull on Lehman in 2007. Is that accurate? From what I can find, he accuses Citigroup of overstating their DTA by $10b.

Aswath is UCLA educated, so he must be correct. How do I start a shareholder lawsuit against Citigroup? :D Here is what Citi says: Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012 See page 23 http://www.citigroup.com/citi/fin/data/p111020a.pdf

onyx1, Do you suppose they held back on setting up a reseve for the MBS securities reps&warranties until they had a form of "price discovery" via the $8.5b settlement with the BNY Mellon trusts? Then once they had that settlement inked they were obligated to put up a reserve for 100% of their estimated MBS securities liabilities with the assumption that their entire liability could be settled on similar terms?

If you do that with a large number of companies, I'd think you'd still do well over time. I think that's how Walter Schloss did it.

This is a terrrific presentation. The presenter believes Australia is heading down the long road of debt deflation -> going Japanese. He sees that an inevitable decline in consumer debt will stick a fork in the housing market. He bases his theories on the back of Hyman Minsky's thinking. "Debt And Australian Housing" http://www.debtdeflation.com/blogs/2011/03/20/mortgage-finance-association-of-australia-talk/ At the 15:10 mark he addresses "responsible lending" in Australia At the 24:00 mark he addresses the "population growth" argument.

It's funny you posted that -- I was reading it yesterday after I noticed that Westpac uses Genworth for mortgage insurance. Genworth says: "Strong demand drives prices" I wonder: "Why aren't rents driven up in unison by strong demand" Genworth says: "Borrower recourse". I say: "This puts you on even terms with Florida's rules". Genworth says: "Mortgage interest not tax deductable" I say: "No property tax in Australia"

Myth, What gross rental yields are you seeing in your area? Meaning, what % is annual rental income (before expenses) relative to a purchase price? I think this measurement is the most straightforward because people collectively don't use borrowed money to push up rents. All of those arguments about dual incomes, supply, demographics, etc... etc... this method strips out all that noise and just gets down to basics.

This was sort of disappointing. I started off with Westpac to see how bad they will get impacted by a falling property market, but it looks like they would get off fairly easy. Westpac has 67% of their loan portfolio in mortgages. They claim to be at risk of losing only $498m under the following stress scenario: 30% decline in house prices 10.4% unemployment rate 3% decline in interest rates 3.2% decline in annual GDP growth See page 103: http://www.westpac.com.au/docs/pdf/aw/ic/2011_UPDATED_Full_Year_Results_Presentation_and_IDP.pdf 47% average loan to value in portfolio (takes into account principle paydowns thus far) 69% average loan to value of new loans

While other data on Thursday showed that industrial output shrank for the first time in seven months in November, much of the decline came from auto production, which analysts said had been held back by temporary supply disruptions. ... The decline was led by a 0.4 percent drop in factory output, which reflected a 3.4 percent slump in motor vehicle production. Economists, however, blamed a scarcity of auto parts from flood-ravaged Thailand for the weakness. They said it also most likely weighed on production of high-technology goods, which were down sharply for a third consecutive month. ... “Inventories are lean and firms will likely need to restock after a decent holiday season. Automakers also plan healthy production increases in the first quarter,” she said. FedEx on Thursday provided a further signal the economy was gaining momentum, saying demand for residential delivery services was rising with “healthy growth” in online shopping. http://www.nytimes.com/2011/12/16/business/economy/claims-for-jobless-benefits-fall.html?partner=yahoofinance

What about Aus? 10% of loans. When I read what folks like Steve Keen http://www.debtdeflation.com/blogs/ says then that 10% might turn out to be pretty big. What do you make of it? Australia is 10% of the $126.4 billion portfolio. The portfolio is 30% mortgage. So you are talking maybe 30% of $12.6 billion exposed to Aussie real estate mortgages. $4b or so approximately. If 10% default with recovery of 50%, we're looking at a loss of $200m.

I was just looking at page 10 of their Q3 presentation tonight (http://www.citigroup.com/citi/fin/data/p111017a.pdf?ieNocache=799). The slide breaks down their Asia consumer loans -- 40% mortgages. Interesting (to me) is that their largest Asia markets are Korea, Singapore, and Hong Kong. Apparently loan-to-value ratios for mortgages are capped by regulations at these levels: Korea 60% Singapore 80% Hong Kong 50%-70% Mortgages in these markets are full recourse. The thing that struck me as funny is this bias that I get from the media that all things emerging markets are inherently risky. I don't believe we have any regulations whatsoever on LTVs in the USA, let alone Korea's 60%.

It is self-reinforcing. The legacy card portfolio has been in a Darwinian evolution. The strong credits remain.

This article cites Keefe, Bruyette, Woods stating that BofA is now at about 6.25% on a fully phased in Basel III basis. (before counting the effect of Q4 earnings). http://blogs.wsj.com/marketbeat/2011/11/22/bank-of-america-stock-price-nears-two-year-low-on-story-of-spat-with-regulators/?KEYWORDS=Bank+of+America I can't find the document, but in one of the presentations or transcripts I saw BofA state that a loan book in runoff will give them another 100bps by 2015. So that would bring it up to 7.25% Elsewhere I saw Moynihan state that about $18b is 100bps. Somewhere between now and 2019 (hopefully sooner) they need to retain ~$36b. They can probably achieve this over the next 24 months if things continue to bump along in the economy. They have those tax losses to monetize so I think $36b in two years is reasonable as that is only $18b a year before taxes. So that's about the next 2 years of earnings down the drain. Or maybe ~1.5 years of peak earnings power at 1% ROA. Then there are the legal challenges. I don't know how that plays out of course, but... $15b to the FHFA MBS securities lawsuit filed in September (estimate is not from reliable sourse -- it came from TylerDurden so likely too high if anything) $10b to AIG $50b to shareholders suing over Merrill Lynch acquisition that's $75 billion thus far, for another 3 years or so of earnings if paid in full (seems pretty unlikely). But perhaps it's settled for as much as 1/2 of that, or say 1.5 years of pre-tax earnings. So anyways, I come to about 3-4 years of earnings to flush down the drain just building capital and paying off lawsuits. Maybe 4-5 years if they wind up paying another $20-25b to settle with Seth Klarman's gang. Or perhaps they'll get more than that. Maybe they get $40b and it's 5-6 years. Anyhow, if you think it's worth 10x earnings of $2 per share yet will suck up 5 years of earnings then it's only a $12 stock (so you get 10% a year as it rises over 5 years to $20). Then you take that $12 and discount it yet again to account for the fact that better companies like WFC do not trade at their peak earnings power either. Then add more of a discount for the CDS counterparty headline risk out of Europe etc... So buying it here at roughly $5 could be worth 4x upside in 5 years time if those nightmarish legal bills come in as I described and if they are at 1% ROA by then and trading for 10x earnings. Sorry if you had to read all of that. What I'm doing here is trying to compare the discounting going on between BAC to C. C might be worth $60 or so at 1% ROA, yet trades at $26. Absent a Europe blowup that could theoretically wipe out common stock value of either bank or both of them, Citi will be returning earnings sooner. They can double their book value over the next 5 years given that they are farther along in Basel III progress and can start buying back shares next year (for 1/2 of book no less) and paying dividends which of course can be used to buy more shares (same impact as stock buybacks except for taxes). So I don't know. C may be just as cheap as BAC when you account for the impact of how many years of BAC's earnings may be sequestered. Then again, maybe BAC strings out the lawsuits and puts Countrywide into bankruptcy 5 years from now. Or perhaps they settle with shareholders for only $10b and Klarman's gang is stuck with just $8.5b. Then AIG is tossed out for being "sophisticated" investors or the FHFA settles for only $5b. The market is seemingly thinking the legal bills will be about the size I mentioned, or at least that's what they might be discounting the stock to account for the risk of it being that large.

Okay now I'm resting easy. They don't really have to retain any earnings to get to Basel III. They can just tweak sum numbers and mail it in next quarter that they are at 9% on a fully phased in basis. So everyone is wrong -> they really won't be required to hold far more capital for a rainy day.

In 2007 BAC had a Tier 1 common ratio of 3.5%, under Basel 1. Today it's 9.17% (reported), and it will become 9+% under Basel III rules over the coming years. Going from 3.5% to zero will be like going from 9% to 6.5%. And that 6.5% would still be considered grossly overcapitalized by 2007 standards. You probably need to roughly triple the severity of the crisis to completely wipe out the Tier 1 common. WFC will reportedly be required to hold 8% under Basel III. These crises of the past 30 years simply aren't crises anymore for these banks when they hold that much capital. They're more like minor headaches. Not to sound blunt, but this means nothing. IndyMac had 8.1% Tier 1 the quarter before they failed. How did Lehman's balance sheet look before they failed? Lots of equity there! WaMu had 8.44% the quarter before they failed too. What a cushion! The point being that these banking ratios are the most gamed thing around. There is no way to predict the future but going forward, I think you'll find that any Basel III requirements are going to get (a) watered down, (b) gamed to hell and © pretty much useless. Banks will come up with creative ways to classify non-conforming assets as capital. They'll figure out ways to get the Big 4 to sign off on transactions, swaps and off-balance sheet tricks to inflate assets and hide liabilities. Now, I am not saying that banks will be bad investments, I am just saying that I think they will figure out ways to hide their risks as they always have. Ways that we can't think of in the present because they haven't even been invented yet. They will have entire teams of bankers and accountants whose sole purpose is to figure this stuff out and still take massive risks to goose their compensation. How close do you reckon WaMu comes to those numbers on a fully phased in Basel III basis? Even after BAC has already done a lot of work to shed risk they are still penalized somewhere between 200 and 300 basis points. I don't think you get any credit at all for MSRs.

In 2007 BAC had a Tier 1 common ratio of 3.5%, under Basel 1. Today it's 9.17% (reported), and it will become 9+% under Basel III rules over the coming years. Going from 3.5% to zero will be like going from 9% to 6.5%. And that 6.5% would still be considered grossly overcapitalized by 2007 standards. You probably need to roughly triple the severity of the crisis to completely wipe out the Tier 1 common. WFC will reportedly be required to hold 8% under Basel III. These crises of the past 30 years simply aren't crises anymore for these banks when they hold that much capital. They're more like minor headaches.

I was just figuring that if long term returns in the stock market are going to be 7%, then it seems odd for banks to be priced for 10% returns if so much of the risk to common shareholders has been mitigated by these Basel III rules.

You borrow at x and lend at y. The Fed is desperately trying to drive Y into the ground. Currently the spread between x and y is tight. That's bad for business.

Downside -> 40% of notional. Upside is twice that -- hedged though. I have $5 strike BAC puts for example. I wrote puts on other companies to finance the BAC puts. Some of my BAC is unhedged, but I wanted to make that upside exposure bigger so I did, but then spread the downside risk around. Here's a funny fact. So far here are BofA's losses to common shareholders: 2008 earned $2.5b 2009 lost $2.2b (but they paid about $7b in preferred interest costs to the government) 2010 lost $3.6b 2011 lost $3b (estimated) That's a cumulative loss across this entire crisis of only $4.3b if you exclude the government's loan. Imagine, all this real estate collapse and only $4.3b loss without the government's "help". True, they will take more losses in the future but it's manageable against the earnings. Without the bailout: $4.3b loss. With the bailout: $11.3b loss Then regulators panicked and made them dilute the crap out of shareholders. That's where the real losses came from. Next time around, they'll be carrying around all that extra capital so it won't come to that. (yes I realize that's just the reported "realized" losses, and GAAP ones at that... but spreading losses over several years is just fine with me. They're still losses and get taken eventually).

The Basel III requirements for BAC (and others) are such that it will be nearly impossible to blow it up in the future. Lower mix of risky assets coupled with massive Tier 1 capital levels more than 2x what was previously required. Future financial panics will just never be the same (unless they loosen the requirements again). The markets valued BAC at 10x earnings in the past -- and in those days the balance sheet was far riskier. Tier 1 capital requirements have more than doubled, and you have those risk weighting deductions for some types of assets. Adjusted for risk, shouldn't it trade at a richer valuation in the future? Maybe 12x or 13x? These banks will be viewed as extremely conservative. A financial panic hasn't yet come along that could wipe out a bank with such a structure.

We could get a huge lift though just getting back to natural demand growth in housing and autos. Huge compressed spring there.

In 1984 I was 11 years old and we were taking a family vacation to Europe. I believe it was on a ferry from England to Sweden that my parents thought they'd teach me a lesson about games of chance. Being in international waters, gambling was legal without age limit. So they agreed to let me play the slot machines while they were still finishing their lunch in the dining room. About 5 minutes later I came back with my t-shirt bulging with coins. I had hit a 100:1 payout. A star is born. Fast forward 22 years and I'm explaining to them the payout on the successful FFH call options trade. So much for teaching me a lesson.