Citigroup announced that it is cutting 50,000 jobs, crashed and promptly took most of the world down with it as Japan became the newest arrival to the recession household. Witness:

Most world stock markets fell Monday after Citigroup Inc. said it would cut another 53,000 jobs around the world to deal with the fallout from the financial crisis. Asian shares were steady earlier.

The latest bout of jitters were stoked by the announcement from Citigroup, which had already cut around 23,000 jobs this year. The banking giant, which lost around $20 billion last year, saw its share price 6.6 percent on the news.

Analysts said Citigroup’s job-cutting would likely be followed by many more leading companies as they grapple with the sharp global economic slowdown and that as a result it remains very difficult to call a bottom in stock markets. Japan became the latest country to enter an official recession, government figures showed Monday.

The bank staggered from its dismal third quarter earnings report on October 16, then filed a 10 Q on the 31st which stated that it was taking a $1.4B hit from credit card securitizations. After making all the appropriate gestures and statements about “managing risk,” the bank then showed the disdain for risk management that brought it to this point.

From the Citigroup 10-Q filed with the SEC on October 31st (hat tip Ray):

In the third quarters of 2008 and 2007, the Company recorded net gains (losses) from securitization of credit card receivables of ($1,443) million and $169 million, and ($1,398) million and $747 million during the first nine months of 2008 and 2007, respectively.

And Citigroup on Credit Reserves: The $2.3 billion build in North America Consumer primarily reflected a weakening of leading credit indicators, including higher delinquencies on first mortgages, unsecured personal loans, credit cards and auto loans. Reserves also increased due to trends in the U.S. macroeconomic environment, including the housing market downturn and rising unemployment rates.
…
As the environment for consumer credit continues to deteriorate, the Company has taken many actions to manage risks such as tightening underwriting criteria and reducing credit lines. However, credit card losses may continue to rise well into 2009, and it is possible that the Company’s loss rates may exceed their historical peaks.

But then, without skipping a beat, Citi joined the ranks of newly enhanced loan modification programs. These gimmicks recklessly re-leverage the home owner at the alter of temporarily continued payment streams the banks.

The re-leveraging of the US home owner has begun. It was just reported on CNBC that part of CITI’s plan was to give temporary teaser rates of 1-2% to ‘help’ borrowers avoid foreclosure. I have reported in the past that other banks are opting for this route because it costs them far less than a permanent modification involving principal reduction. But ultimately, this route will lead to lost decades in housing.

Its sad when the only way to ’save’ housing and get borrowers out of default is keep them terribly leveraged by cutting their rates to 1-2%. Exotic loans with teaser rates is what got us here in the first place!

What is also sad is 1-2% is about the rate needed to compete with the exotic loans given to everyone in the past 6 years. This emphasizes how much leverage is in the housing system. This really does nothing to save housing it just keeps housing propped by allowing the borrowers to stay terribly leveraged.

But it is not only the borrowers who are terribly leveraged. Misery loves company, and Citigroup is a miserably leveraged company.

There are plenty of slides talking about “Tier 1 Capital” and such. I never understood those ratios and don’t think they’ll be worth much in a panic situation as banks lose access to hard funding sources like consumer deposits. Using Citi’s Tier 1 Capital ratio of 10.4% would imply a leverage ratio of 100/10.4 = 9.6x.

The reality is, intangible assets like deferred tax assets should NOT be included when calculating leverage ratios…

Now consider Citigroup. It has $2.05 trillion of assets listed on its balance sheet. That includes $63 billion of “goodwill and intangibles,” worthless assets like Fannie’s DTAs. Contrast this with the company’s equity of $151 billion, which would include $25 billion from TARP. That implies a leverage ratio of 14x, not 10x as the bank would have you believe when it publishes its “Tier 1″ capital ratio. Remove goodwill and intangibles from assets and equity and you have a true leverage ratio of 23x. = ($2.05 trillion - $63 billion) / ($151 billion - $63 billion). That’s roughly the same calculation we did to get to Fannie’s true leverage ratio of 100x.

By the way, I’m giving Citi credit for the $164 billion of “other assets” on the balance sheet as well as $19 billion of assets of “discontinued operations” held for sale. These sound pretty squishy too…

And now for the scary part. Citi’s $2.05 trillion of assets are just “on-book” assets. They have $1.6 trillion of credit commitments and $1.3 trillion of “off-balance” sheet commitments to boot.

You get the idea that a hiccup can wipe out the bank’s entire equity. For a massive bank like Citigroup to have its equity a breath away from oblivion is quite unsound. Cries are getting louder in polite circles as the share price dips into single digits.

“Of the big banks, Citi is the sickest dog,” Howell said.

Of the big four U.S. banks, a group that also includes JPMorgan Chase & Co., Bank of America and Wells Fargo & Co., Citi is the only one that has not made a recent major acquisition — which analysts say is one of the few chances for growth right now. Citi is also the only big bank left that has posted four straight quarterly losses.

In a research note Monday, Buckingham Research analyst James Mitchell wrote that the “the recent bout of expense cuts can get the company’s expense levels in line with its peers.” But he added that Citigroup has much greater exposure to total risky assets, more than double its peers.

Citi is left to cut jobs, but as WaMu, Lehman Brothers and others have found, tunnel vision blinds you to the things you cannot control. For Citgroup this means revenue. Despite all the cost cutting, this company would gladly trade any dollar saved for a penny earned.

Unfortunately, the bank sold out its future earnings as the credit bubble expanded and the sun is quickly setting on Citigroup.

<>

With write-downs and losses piling up and earnings nowhere to be found, Citigroup is cleaning 50,000 jobs off the balance sheet before Christmas.  <>

2008-11-13 Loan Mod Feeding Frenzy:

Morals are of no matter when profits and survival are on the line. The feeding frenzy on mortgage borrowers and taxpayers never ends, and Citigroup has just joined the fray. <>

2008-10-16 Q3 Report:

Citigroup reported Q3 results and they were the same for the fourth straight time. Another loss!

1. Write-Downs/Charge-Offs: $83.3B + $14.2B = $83.3B
2. Cash Raised: = $36B + 25B= $61B
   
3. Level III Assets = $??
4. Loan Loss Reserves = $2.5B + $3.9B + previous > $6.1B
   

The Misery Index is > $295.2B

2008-07-16 The Graduate:

Just like a petulant school girl changing boyfriends every weekend, Wachovia is now pushing Citi out and welcoming Wells Fargo as the new honey du jour.

2008-10-02 Citi Swallows Wachovia:

Beleaguered and digging out from under the mountain of subprime debt it created, Citigroup was just force-fed a heaping helping of Wachovia’s undigested Golden West portfolio. 

2008-08-07 Citi Settles:

Citigroup has reached a settlement in the auction rate securities claim against the bank. All told, Citi will cough up $19.5B in two big chunks: $7.5B to charities and small businesses under a settlement with New York State, and then another $12B to 2600 different institutions holding instruments.

Our twin tallies, Pain and ARS-Buyback, now stand at $144.5B and $19.5B.

2008-07-29 Write downs Outed:
The big Citi soft balled its second quarter write-downs to beat the Street. Now they have to cough the remainder up in chunks before third quarter reporting.

2008-07-15 Q2 Earnings:

Citigroup reported its second quarter earnings today, but since everyone knows there are no real profits at the bank, all eyes were focused on the write-downs and distresses.

Write-downs primarily included $3.4B of sub-prime related direct exposures and another $2.4B tied to exposure to now-downgraded monoline insurers, Citigroup said. Credit costs included $4.4B in net credit losses and a $2.5B charge to build loss reserves.

So, the bank was less than spectacular, even in that department, but that is the one you don’t want to “beat the street” in.

1. Tally for Write-Downs/Charge-Offs: $69.1B + $14.2B = $83.3B
2. Tally for cash raised: = $36B
3. Current level of Level III assets at $22.7B
4. Current level of loan loss reserves at $2.5B + $Previous
   

The Misery Index is > $144.5B

2008-07-15 Dark Profits:

Citigroup engages in the shadow accounting of credit world derivatives and dark assets held off the balance sheet. Do they think we are all blind and sitting on the STUPID bench?

2008-07-07 Crashing:

Citigroup has crashed into its fiscal second quarter 2008 earnings report just like the bank demolished the last three. As the bleeding continues, Citi is missing earnings just like every other bank. But desperate times require desperate measures, not ineffective ones.

2008-06-25 Level III:

The losses and write-down numbers for Citi are staggering, but as of March 31, 2008, you could easily lob another $22.7B on the mountain. That’s because of the FAS 157 rule requiring banks to list their level 3 or junk assets. From the banks first quarter 10Q

Citigroup’s CDO super senior subprime direct exposures,
$22.7 billion at March 31, 2008, are Level 3 assets and are
subject to valuation based on significant unobservable inputs.

If Citi were able to sell this stuff, they would have long ago. If they didn’t have to make it public they wouldn’t. But if you think these assets will recover anytime soon or at all, I have a house I want to sell you at its 2006 listing price. So our level III tally comes to a cool $22.7B.

2008-06-24 Write Downs Count of a Different Sort II:

The cost of write-downs per employee counted just went up as Citigroup chops 10% of it’s investment bankers.

2008-05-22 Write Downs Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. Here comes a write-down count of a different sort: how much in write-downs and credit losses firms have written off per wholesale banking employee.

Citi - $40.9B, 30,000 employees, $1,363,333 per employee

2008-05-21 - Leaving London:

It is probably the best, and possibly the only, thing the bank could do, but now there is one less subprime lender in the UK. In fact all the banks including Citigroup have severely limited credit flow to all borrowers. Thus spreads a contagion.

2008-05-20 - Falling:

It’s hard to say whether the real story here is the nosedive of Citi’s Falcon fund or the type of life insurance polices banks routinely purchase on directors, officers and employees. Of course, the banks own and are the beneficiaries of the policies, known as bank-owned life insurance (BOLI). In either case Citi is left wide open to possible law suits and even further write-downs.

2008-05-19 - Off Balance:

Banks are not writing down their write-downs and getting away with it. Instead they are writing them down in the balance sheet.

As for our friends in the Citi, they skipped $2B from the income by putting it to the balance sheet in a quarterly filing without telling a soul.

Citigroup Inc. subtracted $2 billion from equity for the declining value of home-loan bonds in its quarterly report to the Securities and Exchange Commission on May 2 without mentioning the deduction in the earnings statement or conference call with investors that followed.

Well we will have to see about that. We have Citi write-downs and disasters at $67.1B and we do believe that a $2B adjustment will balance things out nicely.

New distress number –drum roll– $69.1B.

2008-05-08 - Sleight of Hand:

Minyanville reports that Citigroup’s level three assets have reached 125% of shareholder equity. That is a fantastic figure considering the tens of billions the denominator has increased in the past few months, as Citi has been frantically “raising capital.”

2008-05-07 - Citi Mortgage and Citi Residential retail collapse:

And another part of Citi bites the dust as Citi Mortgage and Citi Residential are gone.

2008-04-29 - Citi Gets More Than it Wanted:

Citigroup’s self-dilutive stock sale went so well they got $1.5B more than they originally asked for.

Citi originally said Tuesday that it would raise $3 billion in a stock offering, but increased that amount by $1.5 billion after demand for the new shares exceeded its original offer. The banking giant said the offering priced at $25.27 per share, with the transaction totaling more than 178 million shares.

So they coughed up $4.5B this trip, leaving no doubt that there are more fools out there than we thought.

Goldman however was not impressed by the $4.5B raised. Perhaps the Golden Boyz are right this time — was the initial asking price a low-ball to create the illusion of an onslaught of investor demand in the ailing bank?

2008-04-29 - Citi Wants More:

Only a week after selling $6B in preferred stock, Citigroup said give me more, more, more. The largest US bank by assets said it will sell at least $3B in common stock. Short sellers will be out in force.

This brings Citigroup’s cash raised total to over $36B.

2008-04-29 - Crimes in the Citi:

The laundry list of Citigroup’s questionable dealings just got two hedge funds longer. As the bank spirals down to bankruptcy, bailout or the pink sheets, it is difficult to tell if it is doing everything it can to survive or attempting to take the rest of the world down with them.

2008-04-19 - Abysmal Earnings:

Citigroup begins 2008 the same way it finished 2007. The bank reported a worse-than-expected first quarter loss of $5.1B, but it was the monstrous write-downs totaling $15.1B that terrified investors. Even after burning over $46B of toxic trash in 2007 and giving its kitchen sink “mea culpa” in Q4, the first quarter 2008 write-down was a monster hit even by Wall Street standards. And our ever-near-a-CNBC-camera Meredith Whitney is already contemplating another dividend cut call. For the present, Citigroup’s fiscal first quarter 2008 was bad:

$6 billion in write-downs on collateralized debt obligations, $3.1 billion on leveraged loans, $1.6 billion on Alt-A mortgages, $1.5 billion on auction-rate securities, another $1.5 billion tied to downgrades of key monoline insurers, and — lastly — $212 million linked to off-balance-sheet debt coming back to haunt the bank.

In other words, there were a lot of write-downs; and many were tied to ongoing weakness in the mortgage industry.

Mish has a post summing up all the slings and spears of Citigroup’s misfortune.

So is the $15.1B the last bomb — the kitchen sink? Doubt it!

As this blog documents below, Citigroup had a near-death February weighted down by a litany of troubled subprime-related assets that are exposed to write-down risk. The write-downs won’t quit until the exposure ends, and neither will our tally, which now stands at $46.6B + $15.1B = $ 61.7B.

2008-04-09 - Seller Concessions:

And as more information comes out, we quote Mish with the anti-spin:

The deal was made in this manner specifically to muddy the waters. It appears that Citi is setting up a con game in which they may pretend they got 90 cents on the dollar when they really didn’t. That 20% indemnification clause in the sale is like a PUT option. That option has a value and it’s a huge mistake to pretend otherwise.

“Mistake” puts it lightly. We might use the term “lie”.

Bloomberg wants you to think everything will be rosy for Citigroup once the bank is able to sell $12B of loans at a loss to Apollo Management, Blackstone Group and TPG. But as long as Citigroup and friends keep lying about valuations, there will be problems down the road.

This all reminds us of the still-popular “seller concessions,” used to prop up home values (and of course Realtor and lender commissions), in the process severely damaging markets.

2008-04-08 - New Liquidity Drains Threaten Bank Lending:

To be considered a “well capitalized bank” by U.S. regulators, an institution can’t have more than 10 times its capital in risk-weighted assets. More than 99 percent of American banks qualify as well capitalized. But bond downgrades are going to throw a monkey wrench into that machine and threaten to bring it to a grinding halt.

2008-03-26 (2):

Bloomberg reports in a long article on credit lines that Citigroup has about $471B of undrawn credit line commitments (or at least, did at year-end 2007). As the article points out, this fact is much worse than it would seem in isolation, since now more than at any other time in living memory, borrowers need to draw down those credit lines.

And they are — the article headlines by noting that even Porsche and Sprint are hitting the credit lines hard.

It’s a thousand cuts for Citigroup and its uberbank brethren; you can add this to them.

2008-03-26:

Meredith Whitney at Oppenheimer expects Citigroup to write down roughly another $13B for the first quarter. Whitney earlier gained street creds by correctly predicting C would slash its dividend.

She’s been wrong about the extent of write-downs recently… most notably for Lehman and Goldman, but frankly, we suspect that means the banks are wrong, not Whitney.

Incidentally, Institutional Risk Analytics also has some foreboding words and analysis on Citigroup:

We hear in the risk channel that the internal situation at C is going from bad to worse as veteran Citi bankers are in near-mutiny against the new, two-headed management team imposed by regulators. Meanwhile, former CEO Chuck Prince, who is a consultant to C, is leading the discussions with regulators on behalf of the bank and is, in effect, acting as shadow chief executive of C. One insider predicts that the C annual meeting in several weeks time will be “very messy” and notes that acting Chairman Robert Rubin is nowhere to be seen.

Keep in mind that C, JPM and many other large banks are still trying to get their arms around the full dimension of the risks facing their institutions, this even as bank loan default rates remain well-below long-term averages. All of the subsidiary banks of C, for example, reported 127bp of charge offs in 2007, a full 2 SDs above peer but well below 1991 loan loss levels.

They believe Citigroup needs about three times current capital just to shore itself up against a more normal level of charge-offs. The 1991 recession was “mild” — this one won’t be.

Oh, and then there’s this: Citigroup to Pay $1.66B To Settle Enron Litigation. That can’t help the capital position right about now. However, since this is due to the last bubble, we won’t add it to our tally.

2008-03-12:

Citigroup has got caught up in the suddenly volatile municipal bond market. In what’s becoming a common event, the plunging prices of municipal bonds are forcing prime brokers to issue margin calls:

The move to inject $600m, and pledge $400m more, to shore up the funds, which had capital of $2bn and total assets of about $15bn, is another sign of Citigroup’s difficulties in dealing with the credit squeeze.

This adds another $1B to the tally.

2008-03-07:

We are warming up the calculator as Citigroup has announced more losses on the way:

Citigroup said Thursday it will reduce its mortgage assets by $45 billion over the next year and will streamline its remaining mortgage operations in an attempt to lower expenses by $200 million during the same time period.

We will have to see how the bank spreads out the writing-down. One thing for sure is that the buyers won’t be lining up around the block.

Another potential source of losses comes as the result of a somewhat desperate effort to raise cash. Forbes is reporting the bank will issue $2.5B in bonds. But because of the toxic nature of Citi’s paper they will have to underwrite most of it themselves, which could leave them holding a bag of their own unsold junk. It could easily be a large portion of the $2.5B.

We will keep our eyes open for possibly a large chunk of that $47.5B turning up in the dead pool.

2008-03-06:

The rift between reality and fantasy is widening at Citigroup and for the analysts that promote them. Six months ago, analyst Robert Olstein said:

Cititigroup Inc. won’t cut its dividend further or raise more capital and the shares may double over the next two years, investor Robert Olstein said.

That’s the dyslexic analysis; in the reciprocal period, its share value has been cut in half. Meanwhile back in the real world, actions speak louder than words and the bank

has started shedding clusters of U.S. branches in places where the bank lags far behind larger rivals.

Citi CEO had a message for employees to be ready to pack up at any time.

In a memo to Citigroup employees, Mr. Pandit wrote: “We anticipate that divesting some of our peripheral businesses will further contribute to our capital base.” He added that Citigroup remains “financially sound” despite more than $20 billion in losses last year on loans and investments.

We say about $16.6B more and counting.

2008-02-27:

A potentially bombshell revelation about Citigroup’s remaining risk exposure is tucked in this Bloomberg piece. Witness:

Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in “significant unconsolidated VIEs,” according to a Feb. 22 filing by the New York-based bank. New York-based Merrill Lynch, which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSights.

What are these VIEs and why are they a threat? The article has a brief primer:

The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. …

…

VIEs, known as special purpose vehicles before Enron Corp.’s collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.

…

Predictions for losses vary widely because banks aren’t required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

“The disclosure on VIEs is hopeless,” Azarchs said. “You have no idea of the structure or how that structure works. Until you know that you don’t know anything. It’s like every day you come into the office and another alphabet soup.”

Ah yes, these shadowy vehicles figured prominently in the Enron fraud and collapse, but its OK folks, they were renamed from “SPVs” to “VIEs.” Problem solved!

Obviously, not really. Remember how Citigroup had about $80B in SIVs? And remember how that was already disaster enough, with the “re-consolidation” of those off-balance-sheet vehicles resulting in Citigroup’s greatest earnings disaster and capitalization emergency in its history? Remember complete pieces of the company being sold off to Arab Shieks and Communist governments around the world?

Oh, great. We remember too. And, well, the company has another $320B in that kind of exposure.

Call them SIVs, SPVs, or VIEs; call them rutabagas or Flying Elvises if you want — its all the same thing: ethically fraudulent concealment of risks using off-balance-sheet vehicles to dodge regulatory capital requirements. There’s nothing new here, except the size of the numbers at stake.

We can’t wait to see the write-downs that come out of this monumental trash heap. A hint of the extent those might reach also comes from the article:

The securities in the VIEs may be worth as little as 27 cents on the dollar once they’re put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp.

That would represent a haircut of more than $230B on the VIEs. Wow.

2008-02-26:

And the beat goes on for Citigroup as it is revealed the bank is holding about $20 billion of hard-to-value trading positions. Those hard to value positions are probably level 3 assets. That means no market exists for them, i. e. they are worthless. Technically it has to be said a market can always develop for the assets and they may be sold for a huge gain, in commercial real estate that is. I expect that we will see a write-down for theses positions too.

2008-02-23:

A Telegraph write-up contains a detail we missed in our last update: Citigroup has announced a $4B exposure to the troubled bond insurance sector. So you can throw that one on the pile.

2008-02-22:

At this rate Citigroup might not make it past the weekend. It’s been two days since Meredith Whitney made her devastating revelations about the bank, and the action has already begun. Following the usual MO of announcing bad news after the market close, the bank confessed that it once again would make the rounds, hat in hand, to cover the cost to bring their hedge fund Falcon Strategies funds onto its balance sheet (hedge fund implosion profile for Falcon here). The financial media reporting of the statement goes along the lines of the Associated Press:

Citigroup Inc. earlier this week agreed to provide $500 million in credit to one of its troubled hedge funds, the bank disclosed in a regulatory filing late Friday. The Citi-managed fund, known as Falcon, was brought onto the bank’s books, which will increase the bank’s assets and liabilities by about $10 billion.

And it’s the same at Bloomberg, Reuters, Marketwatch, and WSJ. That is $10B in assets and liabilites, but which is the greater? Well let’s see

The Falcon funds, run by Citigroup’s alternative-investments group, placed highly leveraged credit-market bets in part by using exotic vehicles tied to the mortgage market. The value of those instruments plunged in the second half of 2007. At one point last year, the funds had more than $2 billion in assets under management, including investments from some major banks.

and

Within three months, Falcon Plus, which had roughly $20 million in assets, had lost 52% of its value.

Another more recent Falcon Strategies fund was said to have lost around 50% of its value in the first three months of trading. So of the$10B in assets, possibly little more than a few hundred million is in the “assets” column. And believe it or not, things could get worse for the staggering behemoth:

The banking conglomerate also warned that further deterioration in the US housing market could lead to further write-downs in its sub-prime and leveraged loan books.

Thanks for the heads up, guys. We’ll still be keeping our own count just the same, which for distress and write-downs just went up by $10B.

2008-02-22:

If we had to pick which big bank would fail first, then we’d take Citi. In this interview Meredith Whitney, Oppenheimer & Co’s banking analyst, reveals the under-capitalized structure of Citigroup and additional write-downs of up to $70B. Here is how she sums it up:

Citi now has earnings problems, they have balance sheet constraints, they have further CDO writedowns, they have exposure to the monolines and they have the single largest concentration of exposure to high LTV [Loan To Value] mortgages.

Let’s take a look at each of these in turn:

• balance sheet constraint ——-:from $6 to $12 billion under reserve
• further CDO writedowns——-:over $29B of ABS/CDO exposure
• exposure to the monolines—–:up to $70B
• exposure to high LTV——— :over $50 billion

Excluding balance sheet constraints we get $149B in exposure, up $38B from our previous sum of $111B.

There is also a great lesson in here that actions do in fact speak louder than words. Hear ye:

Banks aren’t lending so businesses can’t grow, manufactures can’t invest, and this is a systemic issue because banks are still in denial. If these assets were truly marked to market banks would be indifferent to whether they hold them or sold them. Obviously they are not indifferent. The fact they are holding it means they have some hope that these assets will recover.

2008-02-20:

In addition to subprime lending it seems that some banks gorged themselves on a leverage buyout binge as well. From the WSJ:

The investment banks look to have put a lot on the line for relatively little payoff. Citigroup, for instance, earned only $856 million in fees from private-equity firms in 2007, even though the bank underwrote leveraged loans totaling $114.3 billion and still holds $43 billion in exposure. Oppenheimer analyst Meredith Whitney estimates Citigroup’s leveraged loan write-downs would be about $2.5 billion at the range implied by the 6% decline in the leveraged-loan focused Markit LCDX index since the fourth quarter.

If your keeping count (and we are, don’t worry) thats another $2.5B written down to the bottom line. New total write-downs including LBs come to $26.6B. For the remaining subprime related exposures, add $43B to the previously recorded $68B for a grand total of $111B.

2008-01-31

Citigroup recently reported fourth quarter 2007 net losses of $9.8B on the back of massive subprime-related write-downs. This has been bested only by UBS’s recent losses, but Citigroup’s gross write-downs and exposure are much larger.

Breaking the figures out, according to the company’s earnings report, they took a $6B write-down in the third quarter, followed by a whopping $18.1B in the fourth. This brings the year’s total to $24.1B (so far counted).

The company began “subprime reckoning season” in late 2007 with nearly $80B in off-balance-sheet SIVs and conduits tainted by subprime. They apparently decided it would be better to own up to the impact of these vehicles and brought them back onto their balance sheet in late December. This torpedoed prospects for the Treasury’s “M-LEC” SIV bailout fund in the process. Good riddance!

Citigroup successfully sold off some of the assets from these funds, contributing to the large fourth quarter net loss figure. According to the fourth quarter report, they reckon just over $29B of subprime ABS/CDO exposure remains, as well as $8B in RMBS, and about $30B in direct subprime lending.

We also have a figure of $1.7B for exposure to insurer ACA.

The total net exposure would then be about $68B for these items.

As of yet we do not have data on other forms of shaky mortgage loan exposure (Alt-A, Pay Option, etc.).

Morals are of no matter when profits and survival are on the line. The feeding frenzy on mortgage borrowers and taxpayers never ends, and Bank of America has just joined the fray.  <>

2008-10-07 Option Arms Settelment:

Bank of America has agreed to settle claims regarding risky option adjustable-rate mortgages loans originated by Countrywide Financial. The deal, which will cover nearly 400,000 borrowers, will apply to borrowers who took out loans with adjustable or fixed interest rates as well as those with option adjustable-rates serviced by Countrywide.

2008-10-06 Q3 confession:

Bank of America finally started to tell some truth if only because in the face of a 68% profit dive and halving of the dividend it can be denied no longer. The bank couldn’t even play the beat the Street by a penny scam as it held its hand out for $10 billion in the face of $4.36 billion, and jump in loan loss reserves of $2 billion.

Start with the old total $51.3B: Add

1. Write-Downs/Charge-Offs: $4.36B
2. Cash Raised: $0B + $10B = $10B
3. Level III Assets: $?.?B
4. Loan Loss Reserves: $6.45B up from $5.83 billion in the second quarter 2008.

We now sum all the distresses to get Bank of America’s current Misery Index > $72.05B

2008-08-14 options ARMs Explode:

Bank of America got rocked by a $24B big one dropped on them by Countrywide’s option ARM time bomb. If they still think they are going to flip a profit on Countrywide this year, then someone over there needs therapy. <>

2008-07-21 Level With Me for Q2:

Bank of America reported second quarter 2008 results that excluded $2.3B in losses and $3.7B in credit-related write-downs stemming from its merger with CountryWide. The bank reported that its net income fell 41 percent to $3.41B, down from $5.76B a year ago. Write-downs also fell substantially:

The corporate and investment bank earned $1.75 billion, a 3.2 percent increase from a year earlier. Writedowns on securities fell to $645 million from $1.47 billion in the first quarter.

So the bank is reporting second quarter write-downs of $645M due to CDOs and $575M to investment banking, totaling $1.2B in write-downs sans CounrtyWide for the quarter.

So the write down tally excluding CounrtyWide is $4.4B + 1.2B = $5.6B.

We are unaware of any capital raised in Q2 $0.0

According to the company’s May 2008 10Q, total level 3 assets are currently $39.7B

Let’s keep in mind that Bank of America tripled its loan loss provisions to nearly $6B.

Bank of Americas Misery Index is $5.6B+ $0 + $39.7B + $6B = $51.3B

2008-07-08 Level III With Me:

Bank of America, bloated with toxic assets of its own, will soon be reporting earnings with the added boulder of CountryWide around it’s neck. It will be interesting to see how the bank reports the extra baggage. All we know that according to the company’s May 2008 10Q, total level 3 assets equaled $39.7B with total level 3 liabilities at $11.4B for a net total of $31.4B of level 3 assets on the books. <>

2008-07-01 Done Deal:

Bank of America, you own it now. For better or worse, Countrywide’s problems are yours:

Ken Lewis, BofA’s boss (pictured above), has admitted that things are worse than expected. But he insists the bank left plenty of room for error and that the deal remains “compelling”. It has a cushion of around $13 billion: the difference between the purchase price and Countrywide’s tangible book value. It remains confident losses will be within sight of that number. If so, it will get the franchise for a song and not have to raise more equity (on Countrywide’s account, at least).

2008-05-28 Thrown overboard:

The wedding hasn’t even happened and already the honeymoon is over, as Bank of America has thrown a top Countrywide exec overboard.

2008-05-22 Write Downs Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. But here comes a write-down count of a different sort: how much in write-downs and credit losses firms have taken per wholesale banking employee.

Bank of America - $14.8B, 20,000 employees, $740,000 per employee

2008-05-18 - Too Much Too Late:

Bank of America is in a full-blown crisis of it’s own making, but too much is being done too late. First, they stopped making the loans they never should have made and now they are drawing in the HELOCs that never should have been sent out.

2008-05-05 - Shotgun Wedding:

Bank of America just announced that the bailout wedding to Countrywide is still on.

2008-05-02 - Unsettling:

In case you didn’t know, the buyout of Countrywide by Bank of America was designed to bail out to Mozilo and Friends, not to help the badly-swindled Countrywide debt holders. The plan is going off quite smoothly.

2008-04-30 - Weighed Down Countrywide:

Bank of America’s ever burgeoning buyout of Countrywide is weighing it down. The deal was probably intended to insure that the continuous stream of mortgage payments flowed uninterrupted to the CDOs and SIVs of Wall Street’s Ponzi pool. The result is that $40B of troubled mortgages must now be dealt with.

2008-04-21 - Melt-Down:

Just as Bank of America is saddled with Countrywide, the bank reported its third straight quarterly profit decline, a 77% hyper-decline. The hit was on write-downs to subprime mortgage-backed CDO’s, and loan loss reserves. What else?

Results included $1.31 billion of trading losses compared with income of $1.66 billion a year earlier. This was driven primarily by $1.47 billion in write-downs of collateralized debt obligations, a security often backed by subprime mortgage loans, and $439 million for loans to fund leveraged buyouts. Trading losses were $5.15 billion in the fourth quarter of 2007.

Bank of America said the $3.3 billion increase in reserves was part of a $4.78 billion increase in provisions, to $6.01 billion, “due to rising credit costs — particularly in the home equity, small business and homebuilder portfolios.”

Net charge-offs, loans it doesn’t think are collectable, jumped to $2.72 billion.

The new total including write-downs and net charge offs comes to $1.47B + $2.72B = $4.39B, but there is another running total mounting up:

The world’s biggest banks and brokerages have disclosed $288 billion of writedowns and credit losses since June because of collapsing prices in U.S. mortgage markets. They’ve raised more than $160 billion to replenish capital, with Bank of America tapping public investors for at least $13 billion after writedowns and credit losses that totaled at least $8.2 billion before today, according to data compiled by Bloomberg.

And still this ailing bank remains dangerously exposed to further subprime write-downs.

But the bank still has a lot of the toxic stuff left on its books, which could require it to put away even more capital. It still has over $13.4 billion in leveraged loans, nearly $12 billion in mortgage-backed securities, and nearly $9 billion in CDO’s left on its books. Those may need to be written down further if the economy flounders.

Gee I wonder what would make the economy do that?

2008-04-20- Decimated Earnings Result in Continued Liquidity Drains:

When Bank of America reports tomorrow morning, it is expected to show $5.44B in fourth-quarter trading losses. We will be on the lookout for $2B more in write-downs to subprime mortgages.

Bank of America’s profit tumbled 95 percent in the 2007 fourth quarter, in part because the bank was forced to write off $2 billion in bad loans.

2008-04-08- New Liquidity Drains Threaten Bank Lending:

To be considered a “well capitalized bank” by U.S. regulators, an institution can’t have more than 10 times its capital in risk-weighted assets. More than 99 percent of American banks qualify as well capitalized. But bond downgrades are going to threaten to bring that machine to a grinding halt.

2008-03-26:

Bloomberg reports in a long article on credit lines that Bank of America has about $406B of undrawn credit line commitments (or at least, did at year-end 2007). They are second only to Citigroup, which weighs in at a hefty $471B. Anyway, this is much worse a fact than it would seem in isolation, since now more than at any other time in living memory, borrowers need to draw down those credit lines (which is the main point of the article).

2008-02-21:

The world’s largest banks have unveiled write-downs and credit losses of at least $195B since the beggining of 2007, and next week Bank of America will reportedly take provisions to drop another $6.5B on the pile:

Bank of America Corp., the second biggest U.S. bank by assets, may take a record $6.5 billion provision in the first quarter to cover possible future losses in its home equity and mortgage portfolios, Punk Ziegel and Co. analyst Richard Bove wrote.

2008-02-21:

On top of getting saddled with Countrywide, the paltry $12B of estimated leveraged loan write-downs would probably not keep senior management of the bank up at night, so we will watch it for you.

2008-31-01:

Bank of America is in the thick of the present financial turmoil. In the company’s fourth quarter 2007 results released Jan. 22, the bank’s income plummetted 95% on the various write-downs and ratcheting-up of loss reserves. Quoting from the linked article:

Trading-account losses totaled $5.44 billion in the latest quarter. In the same period in 2006, trading-account gains were $460 million.

Provision expenses increased $1.74 billion in the latest quarter, largely because of a $1.33 billion addition to BofA’s reserve for credit losses. BofA’s provision for credit losses was $3.31 billion, up from $1.57 billion in the fourth quarter of 2006.

Write-downs on collateralized debt obligations totaled $5.28 billion in the latest quarter, which BofA says reduced its trading profit by $4.5 billion and other income by about $750 million.

For the full year, BofA earned $14.98 billion, or $3.30 per diluted share last year. That’s down from earnings of $21.13 billion, or $4.59 per diluted share, in 2006.

For the record, subprime-related write-downs at BofA were about $1.8B in the third quarter, and fourth-quarter guidance was for about $3.9B in further write-downs. Clearly, the bank “blew past” that level, much to the dismay of shareholders.

Remaining exposure (as per estimates prior to Q4) is about $16B for subprime CDOs, $2.8B in MBS, and $17.3B in direct subprime lending. That is not chump change, and certainly does not leave us bullish on the stock.

Other factors additionally sully our view on the retail mega-bank. Famously, they have agreed to buy Countrywide, but the deal has not been consummated and resistance remains from shareholders and consumer groups. Countrywide also failed to return to profitability in fourth quarter 2007, dashing the projections of CEO Angelo Mozilo (who would never lie to boost his company’s stock, of course).

Assuming the deal goes through, Bank of America will find themselves the proud owners of about $90B in questionable loans, including about $30B in Pay Option ARMs (most of which borrowers are making only the minimum payments on). The rest is a mix of second lien loans. And then there are creative new forms of off-balance-sheet liability popping up in HELOC securitization, as HousingWire reports:

Buried in Countrywide’s $831 million fourth quarter write-down of residual interests, Moody’s said, was a $704 million charge related to “rapid amortization” on home equity line securitizations:

.. in those situations where losses on the loans in the securitization result in claims on the insurance policies supporting the securitization above a certain threshold or duration, the priority of payment shifts. In this situation Countrywide is reimbursed after the trust note holders, insurance providers and other parties to the securitization receive the cashflows to which they are entitled. This is referred to as rapid amortization.

The charge of $704 million represents a liability for losses on estimated advances Countrywide could be required to make on securitizations that have entered or are expected to enter rapid amortization status.

Oh, and by the way, Countrywide self-insured some unknown percentage of its mortgages with a product called “TAMI” (Tax-Advantaged Mortgage Insurance). This product allegedly (we’re not sure if this bore out in reality) shielded borrowers from some or all of the impact of PMI (normally needed when borrowers don’t have at least 20% down), generated increased commissions for brokers, and gave Countrywide more revenues to pocket. A win-win-win!

But it looks like the means of achieving all this was rather shady: they nominally eliminated PMI in favor of a higher loan APR (which is normally tax-deductible for the borrower), then essentially provided IOUs to themselves, thereby effectuating “insurance” on these loans.

One question apparently not examined very seriously when this scheme was hatched was what the impact would be to Countrywide if that insurance were to actually be needed (in the case where, normally, a third-party PMI company would provide payouts). So we wouldn’t be surprised to see “surprise” write-downs related to this product in the near future (if anyone has further details on the company’s TAMI-related exposure, please let us know).

We’re not sure why Bank of America would want all this exposure, but CEO Ken Lewis did say they did the “mother of all due diligences” on this deal, so perhaps they know something we don’t. To us, it looks an awful lot like the company’s chieftans are letting visions of world domination get the better of their good judgment. Maybe they’ll find something in the above they can use to invoke the $160M cancellation clause on the deal (that’s a freebie, guys)!

In terms of job impact, BofA laid off about 3,000 people last year (around 500 of which were from corporate and investment banking). 650 more jobs were cut on Jan. 15, 2008 (mostly related to structured products), and 20 or so analysts were let go around Jan. 24. More details here.

The great new and improved big plan to save the housing sector involves giving 40-year terms, adding balances to the end of the loan and offering teaser rates. IT WAS THESE EXACT PRACTICES THAT GOT US HERE IN THE FIRST PLACE! They were called ‘interest only’ and ‘Pay Option ARMs’.

This ‘new’ program is nothing new at all. It is simply an aggregation of a bunch of stuff brought forth previously that just makes everyone renters. The government’s new plan of reducing rates, extending terms and allowing negative amortization is being done primarily to keep borrowers from walking and renting by competing with rentals.

This plan does not solve the problem - that home owners are hopelessly underwater and over-leveraged to their home. They can’t sell or refi. In turn, they are making a wise financial decision and walking away. Negative equity cuts across all loan types and borrower demographics.

Sooner or later, house prices will to collapse. All the king’s horses and all the king’s men cannot stop it. In fact, all the world’s kings couldn’t stop it either. These new programs are swimming upstream in a river of subprime sludge. Witness:

The re-leveraging of the US home owner has begun. It was just reported on CNBC that part of CITI’s plan was to give temporary teaser rates of 1-2% to ‘help’ borrowers avoid foreclosure. I have reported in the past that other banks are opting for this route because it costs them far less than a permanent modification involving principal reduction. But ultimately, this route will lead to lost decades in housing.

Its sad when the only way to ’save’ housing and get borrowers out of default is keep them terribly leveraged by cutting their rates to 1-2%. Exotic loans with teaser rates is what got us here in the first place!

What is also sad is 1-2% is about the rate needed to compete with the exotic loans given to everyone in the past 6 years. This emphasizes how much leverage is in the housing system. This really does nothing to save housing it just keeps housing propped by allowing the borrowers to stay terribly leveraged.

To date, four banks have joined the new program. Most recently, Citigroup penned its signature to the list:

Citi becomes the fourth major bank to garner press for a pronouncement of mass modifications, and an associated freeze in foreclosures. The FDIC kicked off the loan modification party in August by announcing a plan to refinance troubled homeowners into “affordable” mortgages at IndyMac Federal Bank; Bank of America Corp. (BAC: 17.10 +0.59%), saddled with legal pressure tied to its Countrywide unit, later announced its own $8.4 billion loan modification program/settlement in early October, which is also expected to target 400,000 borrowers. Just last week, JP Morgan Chase & Co. (JPM: 37.19 +7.58%) launched an aggressive loan modification plan estimated to impact roughly $70 billion in mortgages

Similar programs motivated by legislation have shown tepid success slowing down foreclosure rates in California, but they cannot solve the foreclosure crisis.

Foreclosure sales in California dropped a sharp 39.1 percent between September and October, according to a report released by ForeclosureRadar late Wednesday. The drop, however, has largely been ascribed to recent legislation in the state that is effectively stalling most foreclosures amid new borrower notice requirements.

“It would be a mistake to conclude declines in foreclosure activity indicate an end to the foreclosure crisis,” said ForeclosureRadar CEO Sean O’Toole, echoing comments made by many industry observers in recent weeks amid falling foreclosure statistics within the state. But O’Toole also suggested that lenders themselves may be slowing the foreclosure roll within the state, as they look to modify more loans.

And if you believe the lenders are truly concerned about stemming the foreclosure crisis, then you’re just along for the ride they want to take you on.

“While lenders now appear to be embracing the concept of foreclosure moratoriums and loan modifications, neither typically address the core issue of negative equity,” O’Toole said. “Most loan modifications focus on lowering payments to affordable levels by using unsustainably low interest rates, not unlike the ‘teaser rates’ that many have blamed for the current crisis.”

In the end, it comes full circle. Greed led to teaser rates and option ARMs, which led to a credit crisis, to desperation, back to teaser rates and to option ARMs.

<>

Morals are of no matter when profit and survival are on the line. The feeding frenzy on mortgage borrowers and taxpayers never ends, and JP Morgan has just joined the fray. <>

2008-08-25 Fannie & Freddie Bite:

Now we know the real reason Treasury Secretary Hank Paulson engaged in such a full sprint to prop up Fannie and Freddie before the Olympics. It wasn’t just to save the Chinese. Let’s take a look:

JP Morgan Chase estimated that its holdings of Fannie Mae and Freddie Mac preferred stock lost about half of their value the third quarter now underway, according to a regulatory filing with the Securities and Exchange Commission. JP Morgan says it owns preferred shares of Fannie and Freddie with a $1.2 billion par value that has been written down by $600 million.

It’s nice to see that Paulson is still in business taking care of his buddies on Wall Street. The Street certainly takes care of its own, but so far all the kings men can do little but catch a falling knife. Since the write-down has already been taken according to a regulatory filing, we’ll add $600M to JP Morgan’s total pain, bringing it to $20.1B.

2008-08-15 Morgan Settles:

JP Morgan will buy back $3B of peddled junk and pay a fine $25M for dumping without license. It’s the kind of thing that happens every day, and you don’t feel bad about it unless you get caught. JP Morgan feels bad.

JPMorgan agreed to buy back $3 billion of debt and pay a $25 million fine.

Regulators say brokerages misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash. Much of the $330 billion market has been frozen since February, when brokerages abandoned their traditional role as buyers of last resort.

Our twin tallies for Pain and ARS-Buyback now stand at $19.5B and $3B.

2008-08-12 Falling Faster:

It wasn’t JP Morgan that took down Bear Stearns. Rather it was the credit crunch, and now that same merciless disaster follows Morgan’s every move. In just two months, the bank has already exceeded its second quarter write-down total.

JPMorgan Chase & Co. had its biggest decline in six years after reporting a $1.5 billion loss on mortgage-backed assets in less than two months.

Could it be that the credit crisis offers no reprieve, not even to those whose CEOs squat at the Federal Reserve Board meetings? <>

2008-07-23 More Misleading:

JP Morgan took $1.1B of write-downs due mainly to mortgages and leveraged buyout loans gone sour. The company reported earnings of over $2B in the second quarter, along with a sundry of write-downs and distresses which included a $1.25 billion increase in loan loss provisions. Using the company’s numbers of $1.1B as a low ball estimate of write-downs taken for its fiscal second quarter 2008, let’s do some math.

1. Tally for Write-Downs/Charge-Offs: $9.9B + $1.1B = $11.0B
2. Tally for cash raised: = $0.0
3. Current level of Level III assets at $6.0 B
4. Current level of loan loss reserves at $1.25 B + $1.25B = $2.5 B
   

Adding 1.-4. we get the Misery Index = $19.5 B

2008-06-23 Is Morgan in Trouble Again?:

JP Morgan devoured Bear Stearns in March, and was then spurned by Washington Mutual. Now the bank is making another high profile move, this time to acquire Wachovia.

2008-05-22 Write-Down Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. But here comes a write-down count of a different sort: how much in write-downs and credit losses firms have written off per wholesale banking employee.

JPMorgan Chase - $9.8B, 25,000 employees, $392,000 per employee

2008-05-21 - Leaving London:

It is probability the best thing, maybe the only thing, JP Morgan can do, but now there is one less subprime lender in the UK. In fact, all the banks including JP Morgan have severely limited credit flow to all borrowers. Thus spreads a contagion.

2008-04-17: On The Sly

At its earnings release, JP Morgan CEO Jamie Dimon said the credit crisis is almost over, but then did something to make it seem like it’s just got off the ground. Like a politician seeking bribes, Dimon went with hat in hand in an attempt to collect $6B. Maybe it’s just for a rainy day? We are not making this up. As for the earnings reported, they included $2.6B in first quarter write-downs:

The New York-based bank set aside $4.42 billion for loan losses and took about $2.6 billion in write-downs tied to mortgages, loans to fund corporate buyouts and tight credit markets. Its allowance for credit losses rose $2.52 billion from the end of 2007 to $12.6 billion.

The company also set aside $1.1B in the first quarter for future home equity loan defaults, up by $395M from the fourth quarter of last year. Counting the loan loss provisions as a distress, we get

$3.7B + $5.1B +$1.1B = $9.9B

2008-04-16: JP Morgan Earnings Cut in Half

Don’t look now, but JP Morgan just gobbled up another $5.1B in write-downs.

JPMorgan Chase & Co., the third- biggest U.S. bank, said profit fell 50 percent after $5.1 billion of writedowns and provisions linked to subprime mortgages, bad home-equity loans and financing for leveraged buyouts.

Thats almost double the prior $3.7B to which we add.

$3.7B + $5.1B = $8.8B

2008-04-15 : Bear Stearns Pukes as Earnings Fall 79%

JP Morgan may have a bit of indigestion after swallowing whole Bear Stearns and its rotting balance sheet.

2008-04-13 : Leader of the Pack?

It may be that JP Morgan is sprinting to catch Goldman Sachs as the leader of the Wall Street pack. If they catch up, things will play out the old fashion way: buyouts. One thing is certain: Morgan has already surpassed Barclay’s in one important measure.

2008-03-26 (2):

Don’t look now, but Bloomberg reports in a long article on credit lines that JP Morgan has about $251B of undrawn credit line commitments (or at least, they did at year-end 2007). This is much worse a fact than it would seem in isolation, since now more than at any other time in living memory, borrowers need to draw down those credit lines (which is the main point of the article).

2008-03-26:

In “Grim Outlook for JP Morgan,” Yves Smith picks up a thread from Institutional Risk Analytics and discusses how JP Morgan is hardly bulletproof, despite their role as would-be savior of Bear Stearns and presumably of the financial economy by extension:

JPM is far from a financially strong institution. It has the highest gearing of any of the three large US banks (and remember, that includes the CDO-laden, walking wounded Citigroup) and by their measures, also has the highest level of economic risk per their metrics. JPM’s chickens have not yet come home to roost because its book is heavily weighed toward corporate business, and those problems are coming to the fore later….

Although IRA does not say so explicitly, the reasoning appears to be that the Fed pushed Bear into JPM’s arms as a way to shore up JPM. If asking a firm to take on a $13 trillion derivatives book, of which only $2 trillion is exchange traded, is a favor, I’d hate to see what punishment looks like.

Smith goes on to compare the current implicit consolidation strategy with a “martingale” gambling strategy. That’s nearly as bright as it sounds. God help us all.

Some more, quoted directly from IRA:

To understand the grim outlook for JPM, start the analysis with derivatives. Because of its huge market share in all manner of OTC derivatives, JPM represents a “super sample” of overall OTC market risk. In terms of total size vs the bank’s balance sheet, JPM’s derivatives book is more than 7 standard deviations above the large bank peer group.

Because of this huge OTC derivatives book, the $1.6 trillion asset bank can tolerate just a 15bp realized loss across its aggregate derivatives position before losing the equivalent of its regulatory Risk Based Capital (RBC). And much like the GSEs, JPM’s positions are too big to hedge - despite what Mr. Dimon may say to the contrary about laying off his bank’s risk. And note that we have not even mentioned subprime assets yet.

…

At the end of 2007, JPM aggregated 97bp of gross loan charge offs, 1.25 SDs above peer, and produced a Loss Given Default of 85%, likewise well above peer. The Exposure at Default calculated by the IRA Bank Monitor using data from the FDIC was 202%, more than 2 SDs above peer.

With Bear Stearns included, JP Morgan now has a $90T (yes, that is Trillion with a “T”) book of derivatives. Only $2T of Bear’s $13T were exchange-traded.

2008-02-20:

The beat goes on.

JP Morgan Chase was the bookrunner for $217B of US leveraged loans last year, has $26.4B of exposure to show for it, and came away with $1.3B in fees. But JP Morgan would have had to write down $1.5B of its leveraged loans if they had fallen at the same rate as the market.

We will have to see how much they write down and when or if they sweep it off their balance sheet in some shady accounting trick.

2008-02-04

JP Morgan has written down very little so far: $1.3B in the fourth quarter, and $2.4B in the third (due to subprime). However the money center bank still managed to turn a profit of almost $3B, leaving its stock to hold out better than most of its competitors (though most are rallying thanks to aggressive Fed rate cuts — which as we all know will solve all of the problems documented on this site!).

But according to pre-fourth quarter Deutsche Bank data, JP Morgan still has about $12B of subprime loans on its books, and $6.8B of subprime CDOs. They may also have considerable exposure to otherwise risky non-subprime mortgage loans (and other sorts of consumer loans). One area in specific is home equity loans, which falter as market values drop (per the article linked above):

Dimon and his team have underestimated the losses on the bank’s $95 billion portfolio of home equity loans.

Late last year, Dimon said home equity losses would be $250 million to $270 million per quarter over the next several quarters. On Wednesday during a conference call, the company said the losses could be $100 million more per quarter than its earlier forecast.

Home-equity losses also contributed to the 38 percent decline in fourth-quarter profit at Wells Fargo & Co, the first decline in more than six years.

Wow! That $95B is a huge source of write-down risk.

This certainly will not be helped by the trends of a recession (prime borrowers losing their jobs or failing to get raises and becoming unable to pay), inflation and people simply walking away from their homes when they are underwater. Home equity loans, as second liens, quickly become worthless in depreciating markets combined with short-sale or foreclosure situations.

We’d wager that the write-downs JP Morgan has taken so far will be dwarfed by the ones they take on these and other shaky consumer loans still on their books.

Bradford & Bingley did not demutualise, which is what the British call going public, until December 2000. Just eight short years later, with the credit crisis casting a pall over the European economy, the company was nationalized on Monday, September 29, 2008.

Mortgage lender Bradford & Bingley confirmed Monday it is to become the second bank nationalized by the British government since the financial crisis began.

In a deal hammered out with Spanish bank Santander, B&B was being taken into public ownership after uncertainty over its future prompted savers to withdraw “tens of millions of pounds.”

British Finance Minister Alistair Darling said B&B assets were sold to Santander’s Abbey division for just over £600 million pounds, or about $1.1 billion.

So, over the course of one weekend, more than 150 years of toil and profit were rolled up into a tidy little package, but to find the beginning of the end we must go back to the beginning of the new century and credit bubble.

It was then that chief executive Christopher Rodrigues rid the company of pomposity and the bank paid more than £1,000 for Stan Laurel’s bowler, which went on display at the head office.

The purchase was a witty, if expensive, nod to its corporate logo: two City gents sporting pinstripes and bowlers. The fictional Mr Bradford and Mr Bingley, appeared on television adverts for the bank from the 1970s, exuding an air of conservative financial solidity – underlying B&B’s position as Britain’s second biggest building society, founded in 1851 to build a better future for the people of northern mill towns.

But it was the new CEO Steven Crawshaw, who put the the company on the road to ruin by personally overseeing the demutualization even though it was resisted.

At the time the move was strongly resisted by many on the lender’s board of directors, including Rodrigues himself, but it was pushed for by many of its members. He argued it could continue to expand while remaining free from the stock exchange.

But the promise of a windfall of at least £1,000 was too much for many of its members. Customers received a minimum of 250 free shares at the flotation price of 247p when the shares started trading in 2000.

It was Mr Rodrigues’ successor Steven Crawshaw that was responsible for changing the nature of those customers.

Apparently, if Crawshaw couldn’t change the nature of those customers, then £1,000 and 250 free shares at 247p piece certainly could.

Thus the demutualization transformed the building society into a British Countrywide Financial where reckless leveraging and disregard for future consequences could dominate.

Traditionally, building societies relied on their savers to fund their mortgage business. For each £1 deposited, they would lend out £1 and make a profit on charging more to their borrowers than they offered to their savers.

But B&B, like many aggressive de-mutalised building societies turned to the international money markets to allow it to lend ever greater sums of money. It now has £22 billion of savers’ deposits but nearly double that in mortgages – £41 billion.

B&B was so keen to increase the number of mortgages it owned, that it hoovered up “specialist” loans from rivals, buying up its Kensington mortgage company as recently as last year, when some commentators were already starting to warn the UK housing market was unsustainable.

But the bubble burst faster than it expanded and Bradford & Bingley launched a £400M rights issue which was not well subscribed. This left much of the issue with underwriters, and when TPG Capital, who had previously agreed to take a 23 percent stake in the company, withdrew their support, B&B was finally doomed.

The Cutting of 350 jobs was not nearly enough to save the company, and so with options and time running out, the British government moved in and nationalized the bank.

In the aftermath, the financial media fretted over who would keep the bowler hat. Witness the outrage we must call reporting:

“The bowler hat is used for general products, mortgages and investments, so it covers both sides of the business,” says Ms Ramage, of Alexander Ramage Associates.

What it’s now worth is not clear. “It’s almost impossible to put a value on it because it’s tied up so implicitly with the assets of the business. At some point an accountant will have to sit down and say what’s it’s worth.”

How about the price of dinner for former employees searching for the breadline? Witness again:

FURIOUS critics hit out last night as the Government gambled the equivalent of £1322 for every UK taxpayer on nationalising the Bradford & Bingley.

A statement will be issued to the Stock Exchange today on Gordon Brown’s rescue plans amid fears for the UK financial system.

But there was growing anger from taxpayers’ groups and shareholders that the Government will take responsibility for “toxic debts” among the bank’s £40billion mortgage book. If property prices continue to fall and repossessions rise, taxpayers will have to pick up the bill.

It’s safe to assume that property prices will continue to fall and repossessions will rise. It’s a safe bet that taxpayers will have to pick up the bill.

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The Security Pacific Bank of Los Angeles was closed Friday by regulators, the 19th bank in the nation seized this year.

Security Pacific, with $561.1 million in assets and $450.1 million in deposits, was shut by the Federal Deposit Insurance Corporation. The agency said the Pacific Western Bank was named receiver. The failed bank’s four offices will open Monday as branches of Pacific Western.

Pacific Western will buy $51.8 million of assets, with the F.D.I.C. retaining the rest for later disposition. Security Pacific is the third California bank to close this year after IndyMac and First Heritage Bank.

You can read the FDIC press release at the official web page.

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Regulators have now closed 18 banks this year, with the Texas Department of Savings and Mortgage Lending shutting down Houston-based Franklin Bank and naming the Federal Deposit Insurance Corporation (FDIC) as Receiver

The Federal Deposit Insurance Corp. was appointed receiver of Franklin Bank, which had $5.1 billion in assets and $3.7 billion in deposits as of Sept. 30. The agency said depositors of Franklin Bank will continue to have full access to their deposits, which will continue to be insured by the FDIC.

You can read the FDIC press release at the official web page.

The FDIC said customers’ access to their money will not be interrupted over the weekend:

The FDIC said all of the bank’s deposits will be assumed by Prosperity Bank of El Campo, Texas. Its 46 offices will reopen as branches of Prosperity Bank with their normal business hours, including those that open on Saturday.

More information is available at the FDIC web page.

Franklin Bank was controlled by former Solomon Brothers Inc. vice chairman, Lewis Ranieri,

Ranieri said in December 2006 at an industry conference that investors in mortgage-backed bonds had no idea of the risks they were taking. He later predicted again that defaults on subprime mortgages in the U.S. would be worse than analysts estimated.

He was right. I would love to hear what he’s thinking now, but:

Ranieri’s assistant said he wasn’t available for comment.

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Fifth Third Bancorp posted a second consecutive quarterly loss as homebuilders and developers fell behind on loans and the value of the Ohio bank’s stakes in Fannie Mae and Freddie Mac deteriorated.

Fifth Third Chief Executive Office Kevin Kabat said:

“We are not immune to disruptions in the capital markets and weakening economic conditions” “Higher credit costs once again drove bottom-line results that no one here is satisfied with.”

The quarter included pretax charges of $51 million on Fifth Third’s Fannie and Freddie stakes, $45 million tied to Visa Inc.’s settlement with Discover Financial Services and $27 million for costs of bank-owned life insurance policies.

So the charge-offs and write-downs spread out among the Fannie/Freddie situation, the Visa-Discover settlement and employee insurance plans to the tune of $123M. Still, no CEO could say anything to drive the point home quite like a glimpse of the bank’s loan-loss reserves. Witness:

Fifth Third set aside $941 million for loan and lease losses, up from $139 million a year earlier. Net charge-offs quadrupled to $463 million.

In June it raised $1.1 billion of capital, slashed its dividend 66 percent, and set plans to raise another $1 billion through asset sales.

However:

Chief Executive Kevin Kabat said the bank was evaluating whether to participate in U.S. Treasury Secretary Henry Paulson’s plan to inject $250 billion into the banking system. “We would also expect to reevaluate our plans and activities with respect to pursuing a current sale of non-core assets as part of our capital plan,” he said.

We can safely say the bank has evaluated participating in the $700B rape and plunder of the American taxpayer. Now they are just evaluating how to sanitize the participation.

Some bank has to survive the credit crisis, and with the way things are going, it may as well be Fifth Third.  Forget about the third quarter losses and write-downs; the $2.1B in new capital trumps $941M for the loan-loss buildup and $243M in write-downs. While we’re at it, remember that Cleveland-based competitor National City has oh-so-conveniently imploded.

From where it currently sits, all Fifth Third has to do is stay alive by performing the appropriate favors and collecting tax payers’ cash until the credit crunch burns itself out.

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The French bank last month agreed to take control of Fortis in Belgium and Luxembourg for 14.5 billion euros to gain 3.3 million retail clients and become the biggest lender by deposits in the 15 countries sharing the euro

but now the bank is showing that it’s not immune:

B N Paribas France’s largest bank, had equity-derivatives losses that brought revenue at the securities unit to “below zero” last month, Chief Financial Officer Philippe Bordenave said.

The losses came in a “period of extreme turbulence” and “unprecedented” volatility, Bordenave said today on a call with analysts. They resulted from “lots of different situations across the board” and weren’t related to Volkswagen AG, he said.

The bank blamed the blowup of its securities unit on the collapse of Lehman Brothers and the major Icelandic banks, as well as the impact of ratings agencies downgrading monoliners. The bank said that contributed to the $1.42B loss in write-downs, and the charge for provisions exploded as a result.

Overall, provisions for risky loans soared to 1.99 billion euros ($2.56 billion) from 462 million euros, the bank said, almost triple the 700 million-euro estimate of analysts.

The investment banking division also set aside 462 million euros tied to debt backed by U.S. bond insurers, and 83 million euros for risks linked to Iceland’s banks.

France has agreed to subscribe to €2.55B in subordinated debt issued by BNP Paribas:

Despite the weighty increase in provisions, the need for government assistance, and the deepening credit crisis, BNP Paribas is one of the rare players in its sector to post an actual profit for the quarter.

The financial crisis cost BNP Paribas about 1.7 billion euros in provisions and asset writedowns in the third quarter, excluding 123 million euros of gains from its own debt, the bank said. Like Paris-based Societe Generale SA, Prot, 57, decided not to use new accounting rules that are less stringent on markdowns.

That profit was 56% decline representing a cut in net income to 901 million euros ($1.17 billion) from 2.03 billion euros a year earlier. if that seems unimpressive, then there are lot of banks willing to settle for one just like it.