Great Job BOA!

What are you talking about? Did you read the P&L? Considering the economy - in such dire straits thanks to the Lehman fiasco - not too bad at all.

Credit will get worse; it's a lagging indicator, and is correlated to unemployment, which is also a lagging indicator, and is rising. It's true that there is certainly leeway for banks in valuing certain types of assets, but loans and leases are not among them: they must be classified as nonperforming after 90 days of nonpayment.

> Considering the economy - in such dire straits thanks to the Lehman fiasco - not too bad at all.

Stock drops 24%... I think thats a pretty big indicator that its bad even given the economy... as the market expecting more.

Troubled loans went up 3x.

First, what does the stock price have to do with anything? It's not been a very good indicator of late, of the value of companies. Unless, of course, you think that BofA is worth less than the sum total of all of its minority interests, which would value its branch network, MBNA, Countrywide, and Merrill Lynch at precisely $0.

Second, the loan-loss provision is twice last year's not three times.

Third, the bank has 45% more assets than it did in 1Q2008, so the loan-loss provision should have gone up that much, anyway, even if credit quality remained unchanged. Given the state of the economy and the wretched state that Countrywide and ML were in, today's figures are not surprising.

The question is, does the bank make enough revenue to withstand the credit losses. Seems it does.

To make it clear, nyc, you're looking at nonperforming assets, which at 2.65% is not good but manageable. What you need to look at is not the balance sheet but the income statement - the provision for loan losses - and compare that figure to net charge-offs:

(Dollars in millions)...........Q1 2009.......Q4 2008.......Q1 2008

Provision for credit losses......$13,380.....$8,535........$6,010

Net Charge-offs..................6,942........5,541........2,715

That is what tells you the health of the bank - they are reserving at twice the rate of charge-offs, meaning all that's happening to the difference (which shows as a loss) is that instead of being posted to retained earnings it is posted to loan loss reserves, both of which are capital. Meaning they still have the money, it's just posted to a different line.

The next thing you have to do is compare the allowance for loan losses to nonperforming assets:

Allowance for loan and lease
losses...............................$29,048.....$23,071........$14,891

Nonperforming assets................$25,743......$18,232.......$7,827

Therefore, even if every nonperforming asset were 100% written off and there were no recoveries (which is highly unlikely), they would still have $3 billion in reserves.

It is a very strong balance sheet - when the 10Q comes out it will be possible to see a more detailed breakdown of the assets, including level 2 and level 3 structured assets, to see precisely how well reserved they are.

Now that I've showed you how to read a bank balance sheet, perhaps you'd like to revise your theory.

love how so many people seem to believe everything the banks tell them. obviously if these companies were so healthy they wouldn't need 2 trillion dollars. if goldman is doing so well why do they need to raise 5 billion dollars and dilute their current shareholders? sure their balance sheet says they are ok, but the market says they are lying. so which is it? is the model smarter then the market place? bank of america, and citibank are disasters, they are an embarrassment to capitalism.

"First, what does the stock price have to do with anything? It's not been a very good indicator of late, of the value of companies."

It doesn't say anything about the value... it says that noone agrees with you on that being a good set of numbers...

Everyone was expecting better, and BoA simply didn't deliver.

and...

"The amount of its problem loans more than tripled to $25.7 billion"

and

"But troubled loans, also known as nonperforming assets, increased to $25.7 billion from $7.8 billion a year ago."

All covered by Yahoo...

"It doesn't say anything about the value... it says that noone agrees with you on that being a good set of numbers..."

No it doesn't. It says that a stock price that recently increased 80% fell 25%. Standard when there's been a run-up in value.

"All covered by Yahoo..."

That makes me feel better. The numbers are above. Rather than referring to Yahoo, why don't you discuss what you think is wrong with the numbers taken from the financial statements?

Figures nyc can't discuss the numbers!

Steve - The key for me is "Unless, of course, you think that BofA is worth less than the sum total of all of its minority interests, which would value its branch network, MBNA, Countrywide, and Merrill Lynch at precisely $0."

If there is more trouble I think they can deal with it and they should have enough reserves. That being said, I think Kenny-Boy needs to ride off into the sunset.

Ken's not going anywhere. When the dust settles, these acquisitions will be shown to be brilliant, albeit expensive. Unlike C, which I still don't understand, there is much synergy among all these disparate parts.

Citi has been a mess for a long time, it's just no one paid attention to it before. I like JP and Wells more than BofA, but I think all 3 will do fine.

Hey, let's bet a shiny nickel on Kenny-Boy making it to January 1st..up for it? I think I can cobble together the scrtach if I lose. I must have a nickel somewhere in my desk....

I can cobble together a nickel. If in doubt, the outer layer of the earth's core is made of molten nickel, so we can ask petrzitz to reach down and grab us some. He should already be at arm's length. :)

w/ waverly on this one stevie. Ken's gonna go.

actually, plenty of "assets" in this world are latched to things that bring you down. Lohan has a terrible girlfriend, it "drags" her down if she gave Lohan aids, then she is less than 0. Likewise, Ken Lay's assets are and have been over-swamped by its contingent liabilities, the three way between Country, ML and BOA might have been fun, but we are all awaiting the AIDS test.

w67, Ken Lay is dead, and his company was Enron. What had contingent liabilities was AIG, not BofA. And Lohan broke up with her girlfriend.

the Keebler came out today saying the "vast majority" of banks are properly capitalized. with reassurance like that, i think we can all just forget about the 25 the FDIC has taken over thus far this year, and not worry if the "vast majority" includes Citi and BofA.

No, sam broke up with her.

stevie... you're getting slow.... I know Ken Lay is dead :)

My wife just said they are back on, and she "knows." Funny thing, for such an educated and classy lady, she does like to keep up with People :)

w67th, it's great reading for the treadmill. my daughter's been quite sick so i haven't been hitting the gym like i should.

enjoy aboutready, yep.. something's going around. I'm just feeling alittle better. I don't how you can run on treadmill, it gets so boring :)

one of mrs and my great joys is running the lower loop in CP, I always make a mad dash to beat her :)

Ah yes, Ken lay is dead, BofA had a bad 3-way and Lilo gets dinged for an ugly girlfriend who she's already broken-up with. This sounds like a Friday afternoon conversation.

steveie, cash flow cash flow cash flow... just read the Q2, Q3.... I could be wrong, but I highly doubt it :)

w67th, it's even worse. i broke my leg on the bunny slope while in college and they needed to put in a rod. my ankle and knee have been so-so ever since so i can't run. i have to do the incline (at 15 for at least 45 minutes) to get a decent workout. Right now I'm trying to "reduce" as they say, so I frequently go twice a day. I highly value OK, US, People, any crap that's around.

oddly it does feel like friday :)

ar, busted my knee awhile ago... the only thing that got it better and 98% was heavy weights and squats. I highly recommend lifting weights w/ machines first (like 6-12 months) with very slow, deliberate movements, then compound joint movements. It'll help w/ overall physique and won't "bulk" you I promise :)

i do weights, w67th. i have to be able to kick the hubby's ass.

I have wrecked my knee 3 times (twice cartilage and once ligaments) and I can definitely say you should take it easy on the squats. Riding the the bike and swimming are the best because of the low-impact involved. Only go to weights or running (a lot of punding) when you feel you can handle it. You can easily aggravate the injury without meaning to by over-extending your workout or pushing beyond what it can take. The worse the injury or the more times you injure the same knee the longer it can take to get it strong again.

Good luck with the rehab! I know how painful it is and how long it takes.

waverly, thanks. sadly, it's well beyond rehab. it's been 25 or so years, and it's just not quite right. I agree with the lunges/squats prohibition. But the machines are OK, and I can do the incline. Running, with my level of dexterity, is never going to be a good idea. One good twist and I could be down for weeks and back in rehab.

hey W67 what about the dudes that are B**ls naked when you first get to the locker room, then are still there 2 hours later and all in between....what are they working out..........?

how come nyc never addressed the numbers issue?

Let me see... stevejhx vs. yahoo.

Guess who wins that one hands down... (not the guy who confuses up with down)

How come you never address the whole, uh, stock dropping 25 thing?

Yes, the stock market is wrong, you are right, just they all got it wrong.

Got it, steve.

BTW, Steve, how much does BoA stock have to drop before you call it "awesome"?

btw, Steve, you also said you put me on ignore 5 times.

Another lie?

nyc, you're on ignore from time to time, when you get more than annoying.

Still on with yahoo, ha? To let you know, I just wrote a letter to the NY Times regarding how little their columnist Andrew Ross Sorkin knows about banking and accounting.

Me or yahoo, ha? Well, I was a senior audit manager and management consultant with Price Waterhouse and a senior auditor with Bank of America for 8 years, and wrote computerized banking systems for Arthur Young & Company (now Ernst & Young) for the two years before that, so I think I know a thing or two about the topic.

What are yahoo's qualifications?

Just let us know what you think is wrong with the numbers I posted above, from BAC's financial statements.

About the stock drop - no question that it did. Markets are irrational in the short-term. The current stock price values the company at less than its minority interests (you can look that up to see what it means), meaning that its branch network, Merrill Lynch, MBNA, Countrywide franchises are, according to the stock market, worth precisely $0.

If you think that's what they're worth, say so. And base yourself on the published numbers, not on a silly - and failing - news aggregator.

As much as I disagree with steve on his real estate and economic analyses, I give him credit that he knows his stuff when it comes to bank balance sheets. I think part of the reason the stock dropped was because of Lewis' comments during the analysts call regarding future credit defaults.

> nyc, you're on ignore from time to time, when you get more than annoying

Dig, dig, dig, steve!

> Me or yahoo, ha? Well, I was a senior audit manager and management consultant with

Who doesn't understand up vs. down!

Still an easy choice for me...

" I think part of the reason the stock dropped was because of Lewis' comments during the analysts call regarding future credit defaults."

Which also supports the OP, which steve still had a substantial problem with.

nyc, the opening post said that mark-to-market was suspended. It was not.

Mark-to-market was initially instituted in the 1980's for assets held for trading, where it makes sense. There was always a form of mark-to-market for assets held to maturity; the FASB in question, however, as interpreted by auditors, required that the last trade of an asset be used as the market price.

This mandatory approach leads to many problems. First, the market for many securities is illiquid, which skews prices. Second, each of these securities is unique, so the market price for one may bear no resemblance to that of another, even if their underlying assets are similar in nature (mortgages, for instance). Third, it makes no sense to force a short-term mark-to-market if there is no intention to sell in the short-term. Discounted cash flow makes much more sense. Fourth, short-term marking-to-market exacerbates price volatility when there is no liquid market. If there is no intention to sell the loss is not immediate and (as correctly allowed under the new rules), amortizing the loss over the expected life of the asset makes much more accounting sense.

You apparently don't understand this, just as you don't understand how banks prepare financial statements. I daresay you don't know the difference between a loan-loss provision and an allowance for loan losses. You, like Andrew Ross Sorkin, likely don't understand the accounting for contingent liabilities, either.

Funny that you have yet to address my riposte to your post - by using the numbers.

Thanks, LICC.

"Citi has been a mess for a long time, it's just no one paid attention to it before. I like JP and Wells more than BofA, but I think all 3 will do fine."

Agree with JPM and WF, but not sure about BoFA. BoFa might end up like Citi with govt taking a larger stake in them to keep them alive. Wait for stress test results to come out next week.

BTW, I think markets are going to drop 6-7% from here. It's over extended in my opinion.

Yes, but steve's point was that BofA seems to have adequate reserves to handle the increase in defaults.

Not only sufficient capital, but sufficient earnings power. Retail banking is a low-cost commodity distribution business, and no one is better at it than BofA.

Unlikely that BofA will be anything like Citi, which is and (to me) always been a mess.

Still no answer from nyc about the numbers!

And I'm the one who doesn't know up from down!

LMAO.

> nyc, the opening post said that mark-to-market was suspended. It was not.

Don't cherry pick steve... you're completely ignoring the first paragraph of your post...

> Still no answer from nyc about the numbers!

And you tried to call ME annoying.

Dude, I addressed it several times... read better. Sorry, I still don't trust you. I've seen your lousy rent/buy analysis (nobody agreed with you on that one), I've seen you confuse up with down and "is" with "is not".

You just don't have any credibility with me.

Want me to express that in a mathematical formula?

Not to mention you repeatedly lying about ignoring me!

Sorry, steve, 0 credibility with me.

I read my first post - what specifically do you find wrong with it? If you think BAC is worth no more than the total of its minority interests - valuing the branch network, Merrill, MBNA, Countrywide at $0 - then say so. Then you will agree that the market has properly valued the bank.

I happen to disagree.

Where have you addressed the numbers I posted, beyond some obscure reference to Yahoo?

Nowhere.

Yes: I want you to express it in a mathematical formula.

"I've seen your lousy rent/buy analysis (nobody agreed with you on that one)"

It's not mine. I got it from economists. That "no one" on an anonymous board agrees with me (which is untrue) does not faze me: what I have said is borne out by theory and historical fact.

Those, then, must also have 0 credibility with you.

Yahoo obscure. Guy on internet who claims up is down is a "real" source.

Keep digging.

Same guy makes something else up that 100 other people document errors with, and he says imaginary economists agree with him (of course, no source). And, multiple sources actually linked to disagree with him.

Keep digging, Steve... I could use some more laughs today.

(and still ignoring me, I see).

""But troubled loans, also known as nonperforming assets, increased to $25.7 billion from $7.8 billion a year ago."

All covered by Yahoo..."

I don't see any link to yahoo provided by you or anyone else. That makes the reference "obscure."

"that 100 other people document errors with, and he says imaginary economists agree with him (of course, no source)"

No, actually, I've given every source every time.

And no one showed me any source linked to anything that disagreed with me.

So, nyc - care to provide us with the yahoo "reference"? Care to take on my analysis of the financial statements? Discuss with me mark-to-market accounting?

http://news.yahoo.com/s/ap/20090420/ap_on_bi_ge/earns_bank_of_america;_ylt=ApMnK27w0KjLcEiMaYvUqR7Zn414

"But troubled loans, also known as nonperforming assets, increased to $25.7 billion from $7.8 billion a year ago"

Obscure... LMAO.

> No, actually, I've given every source every time.

suuuuuure.....

Keep digging steve, please...

nyc at it again (countdown to the personal attacks in his response begins...now!). Steve, totally agree with you here - I don't know why it's hard to understand that a stock may be undervalued - it does happen. I'm guessing you've started building a position in BAC?

Hey, what would a thread be without the hall monitor hypocrite?!?!?

Starts complaining about insults while starting his own!

bjw at it again.... (and again)

hey guys excuse me while I step over this pile of manure....

Yo! Mchale, yes one has to wonder about those naked guys :)

Break it up guys, just wait 2 qtrs... the truth will be told in the CF stmt... trust me, it's like arguing over is the NYC RE mkt going to crash.... you just need to add some time to the equation and viola! the TRUTH.

W67 LOL!!! you crack me up........ Hey let's play pretend again!!
Dealbook
Bank Profits Appear Out of Thin Air

Article Tools Sponsored By
By ANDREW ROSS SORKIN
Published: April 20, 2009

This is starting to feel like amateur hour for aspiring magicians.

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.

Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.

“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”

But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.

The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.

This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.

The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.

But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.

The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.

And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.

"Obscure... LMAO."

I said the reference to yahoo was obscure, as you didn't give it until now. BTW it's an AP article, not a yahoo article.

No one doubts that bad loans increased. But so did the size of the bank's balance sheet, and so did provisions and allowances, and the still made money. That has been and is my point, demonstrated with numbers, that you have yet to address.

mchale, that's one of the two Ross Sorkin articles that I complained to the Times about - he doesn't know jack about finance, I don't know how they let him write this nonsense:

a) "the disappearing month of December didn’t quite disappear"

That's so stupid. They converted from an investment bank to a commercial bank, and therefore they changed their fiscal year. What happens in those cases is special financial statements are issued for the transitional period, and subsequent periods are reported on the new fiscal year basis.

b) "that’s sort of like saying you’re richer because the value of your home has dropped"

Absolutely not. In fact, the exact opposite. The bank's bonds are obligations - liabilities - a house is an asset. It is, then, akin to having part of your mortgage written off.

c) "Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them"

Because the accounting rules were rightly changed to more accurately reflect the reality of illiquid assets which are to be held to maturity.

d) “If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit"

You're right - an operating profit. That is the manufacturing equivalent of subtracting the cost of goods sold from total sales revenue. But it excludes everything else on the income statement.

e) "And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more."

That comment is not even worth discussion - if ARS doesn't know the difference between common and preferred stock, then why does he have his job. Preferred stock is just that - it receives preference in the distribution of assets in case of liquidation. Common stock has no preference; stockholders are the last ones paid, if at all. It makes a huge, huge difference.

This is standard mark-to-market accounting, for a liquid asset. If Ross Sorkin expects banks to mark-to-market for illiquid assets, why would he not expect them to mark-to-market for liquid liabilities?

"This is standard mark-to-market accounting, for a liquid asset. If Ross Sorkin expects banks to mark-to-market for illiquid assets, why would he not expect them to mark-to-market for liquid liabilities?"

Oops! Sorry. That goes under point b).

Bad editor. Bad editor.

Hmmm. Nothing further from nyc?!

stevejhx, "First, what does the stock price have to do with anything? It's not been a very good indicator of late, of the value of companies. Unless, of course, you think that BofA is worth less than the sum total of all of its minority interests, which would value its branch network, MBNA, Countrywide, and Merrill Lynch at precisely $0."

Did you account for the debt at the company? If they have a lot of debt, then the stock price will be more volatile. And there would be value of MBNA, Countrywide, etc, but it would all be to the debtholders and nothing left over for the stockholders.

stevejhx, "To make it clear, nyc, you're looking at nonperforming assets, which at 2.65% is not good but manageable. What you need to look at is not the balance sheet but the income statement - the provision for loan losses - and compare that figure to net charge-offs:"

How do you ignore a bank balance sheet?

"Unlike C, which I still don't understand,"

What is your area of expertise?

stevejhx, "I can cobble together a nickel."

Just translate one word.

nyc10022, "Hey, what would a thread be without the hall monitor hypocrite?!?!?"

Why is the hall monitor your favorite insult?

Was your mom a teacher?

Stevejhx, "that's one of the two Ross Sorkin articles that I complained to the Times about"

Recall when stevejhx complained about Jim Cramer being negative on the air. Then the next day Cramer wasn't on the air. Steve took credit. Except that day that Cramer was off the air was the Jewish high holiday of Yom Kippur.

see: http://www.streeteasy.com/nyc/talk/discussion/5481-write-to-cnbc?comment_id=69177

stevejhx
about 6 months ago
ignore this person
report abuse I hope people are watching and/or listening to CNBC today - the tone has changed, even after a day as dismal as today. They haven't said "depression," they've barely said "fear." They're reporting rather than panicking - the good news and the bad. They're focusing on putting things into perspective, even when they're bad, and discussing fundamentals.

All that is good and fair reporting. My complaint was the gloom-and-doom-how-much-lower-is-it-going-to-go subtext they've been bombarding us with.

And they preempted Cramer tonight.

You're welcome.

urnfna
about 6 months ago
ignore this person
report abuse idiot, Cramer was off for Yom Kippur.

Cramer answered to God, not to stevejhx

What an ego.

Klonipin....hey you got any cause you will need it after reading this?

Big bank profits are bogus! Massive public deception!

by Martin D. Weiss, Ph.D. 04-20-09
Martin D. Weiss, Ph.D.

A big bank CEO on a mission to deceive the public doesn’t have to tell outright lies. He can con people just as easily by using “perfectly legal” tricks, shams, and accounting ruses.

First, I’ll give you the big-picture facts. Then, I’ll show you how big U.S. banks are painting lipstick on some of the fattest pigs ever raised.

Six of America’s Largest
Banks at Risk of Failure

As we have written here so often … as we documented in our recent white paper … as we showed in our presentation to the National Press Club … and as we explained again with new data in our follow-up press conference, the nation’s banking troubles are many times more severe than the authorities are admitting.

First, look at the megabanks: The authorities SAY that all of the 14 largest banks have earned a “passing” grade in their just-completed “stress tests.” But just six months ago, the authorities swore that, without a massive injection of taxpayer funds, those same banks would suffer a fatal meltdown.

Was the bad-debt disease magically cured? Did the economy miraculously turn around? Not quite. In fact, we have overwhelming evidence that the condition of the nation’s banks has deteriorated massively since then.

How can our trusted authorities be so blatantly deceptive and still keep their jobs? Perhaps you should ask Fed Chairman Ben Bernanke. Not long ago, for example, he declared that the total losses from the debt crisis would not exceed $100 billion, while conveying the hope that most of those losses could be soon written off. Also around that time, the International Monetary Fund (IMF) estimated the losses would be $1 trillion, with only a small percentage written off.

The IMF’s latest estimate: $4 trillion in losses, with only one-third of those written off so far. Bernanke’s error factor: He was 4,000 percent off the mark, in a world where 50 percent errors can be lethal.

Meanwhile, based on fourth quarter Fed data, we find that, among the nation’s megabanks, six are at risk of failure in our opinion (seven if you count Wachovia and Wells Fargo as separate institutions).

* JPMorgan Chase is the nation’s largest, with $1.7 trillion in assets in its primary banking unit. It’s massively exposed to defaults by its trading partners in derivatives — to the tune of 382 percent (almost four times) its risk-based capital. Plus, since it holds HALF of ALL the derivatives in the U.S. banking industry, JPMorgan is at ground zero in the debt crisis.

Major U.S. Banks Overexposed to Default Risk

* Citibank is the nation’s third largest, with assets of $1.2 trillion in its main banking unit. Its total credit exposure to derivatives is a bit lower than Morgan’s, at 278 percent, but still extremely high. Plus, it has other troubles, especially the surging default rates in its sprawling global portfolio of credit cards and other consumer loans. (More on these in a moment.)

* Wells Fargo and Wachovia now make up the nation’s fourth largest bank with combined assets of $1.17 trillion. But in the fourth quarter, they still reported separately, which is illuminating: Even without Wachovia’s troubled assets, TheStreet.com Ratings has downgraded Wells Fargo to a D+. Wachovia, meanwhile, got a D. This tells you that Wells Fargo wasn’t exactly the best merger partner, unless you believe in some bizarre math wherein adding two negatives somehow gives you a positive result.

* SunTrust, with $185 billion in assets, is getting hit hard by the collapse in the commercial real estate. Its Financial Strength Rating is D+.

* HSBC Bank USA has massive credit exposure to derivatives that’s even greater than Morgan’s: 550 percent of risk-based capital. We’re not looking at its larger foreign operations. But the U.S. numbers are ugly enough, meriting a rating of D+.

* Goldman Sachs, which reported for the first time as a commercial bank in the fourth quarter, seems to be taking the biggest risks of all in derivatives. Its total credit exposure is 1,056 percent of capital. Bottom line: It debuts as a bank with a rating of D, on par with Wachovia.

Regional banks: Banking regulators have been largely mute regarding major regional banks. But several are also at risk of failure, including Compass Bank (Alabama), Fifth Third (Michigan), Huntington (Ohio), and E*Trade Bank (Virginia). Primary reason: Massive losses in commercial real estate loans.

Smaller banks: On its “Problem List,” the FDIC reports only 252 institutions with assets of $159 billion. In contrast, our list of at-risk institutions includes 1,816 banks and thrifts with $4.67 trillion in assets. That’s seven times the number of institutions and 29 times more assets at risk than the FDIC admits.

What Explains the Huge Gap Between
Official Declarations and Our Analysis?

We all use essentially the same data. And conceptually, the analytical approach is also similar.

The primary difference is that the regulators have an agenda: Instead of protecting the people from bank failures, they’re trying harder than ever to protect failed banks from the people. Specifically …

* They have forever hidden the names of the banks on the FDIC’s “Problem List,” making it almost impossible for average consumers to get prior warnings of troubles.

* They have never disclosed their own official ratings of the banks — the CAMELS ratings — making it difficult for the public to find safe institutions they can trust.

* They have religiously underestimated — or understated — the depth and breadth of the debt crisis.

* And as I explained a moment ago, they have rigged their recent stress tests to give passing grades to all of the nation’s 14 largest banks, sending the false signal that even the most dangerous among them are somehow “safe.”

Legal Cover-Ups, Flim-Flam and Sham
In the Big Bank’s “Glowing”
First-Quarter Earnings Reports

Wall Street is aglow with the latest “better-than-expected” earnings reports by major banks. But take one look below the surface, and you’ll see three of the most egregious accounting gimmicks in recent history.

Gimmick #1. Toxic asset cover-up. In their infinite wisdom, global banking regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices. Like magic, the bad assets are suddenly worth more, as hundreds of billions in losses are defined away.

Gimmick #2. Reserve flim-flam. Every quarter, banks are required to estimate their losses and decide how much to set aside in loss reserves. If they deliberately guess too much in one quarter and too little in the next, they can shove all their bad earnings into earlier P&Ls and make future P&Ls look rosy by comparison.

Gimmick #3. The great debt sham. Consider this scenario: A financially distressed real estate developer owes the bank $4 million. His revenues have plunged. He’s lost a fortune in his properties. And he’s on the brink of bankruptcy.

Therefore, in the secondary market, traders recognize that loans like his are worth, say, only half their face value, or about $2 million. So far, a very common situation, right?

But now imagine this: He walks into the bank one morning and claims that he really owes only $2 million. Why? Because, in theory, he says, he could buy back his own loan for that price, thereby reducing his debt in half.

In practice, of course, that’s a pipedream. If he actually had the cash to buy back his own loans on the market, then he wouldn’t be financially distressed in the first place. And if he weren’t financially distressed, his loans wouldn’t be selling on the market for half price.

The reality is that he can’t buy back his own debt and never will. And even if he could someday, he will still be on the hook for the full $4 million unless and until he files for bankruptcy and the bankruptcy judge decides otherwise.

That’s why the government would never let real estate developers — or hardly anyone else, for that matter — mark down the debts on their books and still stay in business. But guess what? The government lets banks do precisely that!

It’s the ultimate double standard: The banks get away with inflating their toxic assets. But at the same time, they’re allowed to mark to market their own debts, which happen to be trading at huge discounts on the open market precisely because of their toxic assets.

Accountants call it a “credit value adjustment.” I call it cheating.

Finding all of this hard to believe? Then consider …

How Citigroup Mobilized ALL THREE of These
Gimmicks to Create One of the Greatest Accounting
Shams of All Time in Its First-Quarter Earnings Report

I’m outraged. But I’m glad to see that someone besides us is speaking out:

* Meredith Whitney, one of the few no-nonsense analysts in the industry, says that the banks’ latest reports are, in essence, “a great whitewash.”

* Jack T. Ciesielski, publisher of an accounting advisory service, calls it “junk income.”

* And Saturday’s New York Times, picking up from their research, lays out precisely how Citigroup has transformed a massive loss into what appears to be a fat profit …

First, Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of the bad assets on its books, it was able to beef up its after-tax profits by $413 million.

Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of its bad-debt losses into last year’s fourth quarter and (b) greatly understating its likely losses in the first quarter, the bank legally rigged its books to look like it had made major improvements. Even assuming no further deterioration in its loan portfolio, I estimate this gimmick alone bloated profits by at least another $1 billion.

Third, Citigroup went all out with the Great Debt Sham, marking down its own debt and creating an additional $2.7 billion in purely bogus profits from this maneuver alone.

So here’s Citigroup’s true math for the first quarter:

So-called “profit”

$1.6 billion
Gimmick #1

$0.4 billion
Gimmick #2

$1.0 billion
Gimmick #3

$2.7 billion
Total gimmicks

$4.1 billion



Actual result:

$2.5 billion LOSS!

And all this despite the fact that Citigroup’s loan portfolios actually deteriorated further in the first quarter. Based on its Q1 2009 Quarterly Financial Data Supplement, we find that:

1. Net credit losses in Citi’s global credit card business surged from $1.67 billion at year-end 2008 to $1.94 billion by March 31. And compared to March 2008, they surged by a whopping 56 percent! (Page 9 of its data supplement.)

2. Foretelling future credit card losses, the delinquency rate (90+ days past due) on those credit cards jumped from 2.62 percent at year-end to 3.16 percent on March 31 (page 10).

3. Credit losses on consumer banking operations jumped from $3.442 billion on December 31 to $3.786 billion on March 31. And compared to the year-earlier period, they surged 66 percent (page 12).

By almost every measure, Citigroup’s first-quarter numbers are worse than they were just three months earlier and far worse than they were 12 months before.

My forecast: Citigroup’s effort last week to twist this into an “improvement” will go down in history as one of the greatest banking deceptions of all time.

But Citigroup is not the only one. Nearly all other major banks are suffering similar surges in their credit losses and delinquency rates. Nearly all are using at least one of the same gimmicks to bloat their first-quarter profits. And every single one is destined to see massive new losses, driving their shares to new lows and the banking system as a whole into a far more severe crisis.

Bottom line: Rather than the private-public partnership the government has called for to address the nation’s banking woes, we see little more than private-public collusion to hide the truth from the public, paper over the problems and, ultimately, sink the banks into an even deeper hole.

My Recommendations

In my book, The Ultimate Depression Survival Guide, I give you very detailed, step-by-step instructions on what to do immediately. Here’s a quick summary:

Step 1. Get away from risky stocks. Use the recent stock market rally as a selling opportunity — your second chance to get out of danger before it’s too late.

Step 2. Get out of sinking real estate. If there’s a temporary improvement in the market, grab it to sell the properties you’ve been wanting to sell all along.

Step 3. Raise as much cash as you possibly can — not only by selling stocks and real estate, but also by cutting expenses and selling other things you own.

Step 4. Make sure you keep your cash in one of the safe banks on the list we provide on the book’s resource page. Or better yet, follow my instructions on how to buy Treasury bills. They’re safer than any bank, with no limit on the Treasury’s direct guarantee.

Step 5. For assets you cannot sell, buy protection using exchange-traded funds that are designed to go UP when stocks fall. The more the market goes down, the more you make; and those profits can offset any losses you suffer in the stocks or real estate that you cannot sell.

Step 6. Later, get ready for the big bottom in nearly all markets. That’s when you should be able to lock in relatively safe interest rates of 10 percent or more for years to come … buy shares in our country’s best companies for pennies on the dollar … buy a dream home in a great location that’s practically being given away.

mchale, why do you publish things containing lines such as, "In my book, The Ultimate Depression Survival Guide"?

"Cramer answered to God, not to stevejhx"

Oh, please!

And where is nyc, to answer the numbers?!

"In my book, The Ultimate Depression Survival Guide, I give you very detailed, step-by-step instructions on what to do immediately."

Hahaha!!!

"Raise as much cash as you possibly can — not only by selling stocks and real estate, but also by cutting expenses and selling other things you own."

Raise cash by cutting expenses. GREAT ADVICE!

Have a garage sale!

"For assets you cannot sell, buy protection using exchange-traded funds."

WTF?