Earnings Releases for the Banks with Massive Derivative and no Bailout

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In the past few days, earnings have been announced by 7 of the 9 remaining banks which have massive derivative exposure, but haven't yet been bailed out by a Central Bank, and the earnings have been horrible.

National City (NCC) #14
The lasted earnings (8K released 10/21/2008) can be found here -
http://phx.corporate-ir.net/phoenix.zhtml?c=64242&p=irol-sec

The release is 129 pages! Oh my. In an effort to protect clients' assets, I have learned how to decypher these things , as in the past 18 months I have been forced to read everything from Level III asset filings to Money Market Fund Prospectuses.

The management of National City can say what they want and try and manipulate the "market to market pricing" of vast swaths of their assets to goose their earnings higher, but here is what I see for NCC -

Market Capitalization $6.47 billion
Non-performing Assets $3.537 billion
Home Equity Lines and Loans $15.8 billion (page 75)
Total Loans $111.2 billion (these are "assets" on the books of banks)

So an equivalent of 3.2% of their loans have already been written off as total losses. If real estate prices fall a little further (highly likely), or credit cards delinquencies rise (highly likely) or they "mispriced" there assets be even a little bit (remember when Merrill Lynch sold that $30 billion bond portfolio for an effective price of 5.8 cents on the dollar a few months ago) (highly likely), then NCC will take a large enough loss to wipe out ALL of their equity and be insolvent!

Take a look at what people who had their money managed by NCC did the past quarter -

Assets under management -
Equities down -58% in the most recent quarter (page 68)
Bonds down -26% in the same quarter (page 68)

They pulled their money out. They clearly were nervous enough to move their money.

My big concern is that NCC has over $110 billion in derivative exposure (394% of what Lehman had). If National City were to go out of business (which seems like a real possibility after reading the 8K filing), then the markets would melt down yet again.

The Fed/US Treasury gets this and in my opinion will not allow National City to fail. I think NCC will either get nationalized or bought by a larger bank in the not too distant future. I have no clue whether they get bought out for a premium or a discount to the current price and personally choose to avoid all exposure to anything bank related.

US Bancorp (USB) #15
USB may another train wreck waiting to happen, with a $87.448 billion derivative portfolio.
This quarter, the delinquency rates on their loan portfolio increased markedly (pages 43 of 46).

http://media.corporate-ir.net/media_files/irol/11/117565/USB_3Q_2008_Earnings_Release_and_Supplemental_Analyst_Schedules.pdf

The one think US Bank has going for it is that their new worth is enormous ($54 billion) when compared to the other names on this list.

So USB may end up being a buyer of other banks, and not get taken over or sold at a deep discount. Again, I do not own it and have no intention of doing so. Buy it or short it at your own risk!!

Fifth Third Bank (FITB) #20
Same story as NCC, but the release is only 14 pages -

http://media.corporate-ir.net/media_files/irol/72/72735/FifthThird3Q08EarningsRelease1021.pdf

PNC Financial (PNC) #10 and BB&T (BBT) #17
Seems to be more in the camp of US Bank. I think they will be buyers and not sellers. Just a guess, but we'll see. Same disclaimer as above...

Remember, they can only by buyers if the Fed gives them big piles of money. So expect these guys to get bailed out. In Fed Speak, it will be a "injection of capital" in the form of the Fed buying preferred stock "at no risk to the taxpayer".

Keycorp (KEY) #13 and Regions Financial (RF) #16
See NCC

The 2 stragglers are Suntrust (STI) #9 and Northern Trust (NTFS) #11
In my opinion, these are coin flips are to whether they are acquirers or acquirees.
Time will tell, but we should know in the next few months who the survivors with massive derivative exposure are. Then the giant game of "Go Fish" will begin!

The Derivative Endgame

I think the end game is for the remaining 9 banks with big derivative exposure -

Suntrust
PNC
Northern Trust
Keycorp
National City
US Bank
Regions
BB&T
Fifth Third

Is for them to be taken over by the large banks to which the Central Banks of the World are giving cash -

JPMorgan/Chase/Bear Stearns
Bank of America/Merrill Lynch/LaSalle
Citibank/Smith Barney
Wells Fargo/Wachovia
HSBC
Bank of New York/Mellon
RBS/Citizens
Mitsubishi/Morgan Stanley/Union Bank
UBS/Paine Webber
Barclays/Lehman Brothers
Deutsche Bank
Credit Suisse
Goldman Sachs

I’ve spent a lot of time letting my mind wander on this topic and I think this is the Grand Strategy.

The goal of the Fed is to move all of the credit derivative exposure into a handful of banks (about a dozen). Once they get the derivatives all gathered up, they are going to sit down with the banks and start figuring out how to zero out derivative positions.

Think of it like a giant game of “Go Fish”, where everybody shows their cards – “you have a two and a three? I have a two and a three. I’ll trade you a two for your three…”

But it will be “you have risk on Bank A’s Bonds? I bought the insurance from you on Bank A’s bonds. I have risk on Bank B’s bonds because you bought the insurance on Bank B from me. I’ll trade you my insurance on Bank A for your insurance on Bank B and we can zero out the risk of both positions.”

The Fed will make up the difference to make sure that both parties have no net economic loss from the removal of derivative risk from the system. The banks are being compelled to do this, because the only way they can win is to play and get the Fed to cover your losses.

So Step One is to consolidate all the derivatives into a manageable number of banks.
Step Two is to zero out derivative losses and gains across these banks.
Step Three should go something like this –

Once the banks have removed the easy leverage in Step 2, their risk will then be in their portfolios of loans.

Think about all the loans you have. Each one may be with a different bank – 1st Mortgage, 2nd Mortgage, HELOC, Car Loan A, Car Loan B, Credit Card A, Credit Card B, Student Loan, other consumer loans…

I think Step 3 is to have the banks rip apart all the securitized debt instruments they issued and then reconstruct the credit picture for each individual (very Orwellian). These banks will trade pieces amongst one another to allow each bank to own all the debts of one person. The bank will then have the capability to go to the individual and offer them a standard rate on all their debt, which will be low enough to allow them to pay off all their debts over the next 30 years.

The people will feel like they have been saved!
The banks will make a fortune!!
The taxpayer will bankroll the whole thing and get back half or less of all the money paid in.

Actually, the taxpayer won’t get anything but a $4 trillion bill, because you know damn well that whatever money the government gets back from the banks will be spent by the government and not returned to the tax payer or used to pay down the soon to be $12 trillion National Debt.

Let’s see how it plays out, but those are my thoughts.

My guess is that we rally beginning on or about October 21st and then sell off again at some point in Early 2009. That sell off will be the point when the 9 remaining banks are taken over by The Chosen Banks. I may have to start buying banks on that last round of consolidation. We will see.

I’d love some feedback on this. Post a reply or email me at nbcharts@yahoo.com

A Bad Year for the US Taxpayer

I just did the math on all the bailouts and such, to see how much the government has spent in the last 12 months to bailout the banks and the economy and the total is about $2.036 trillion..............

Bailouts -

Bear Sterns $30 billion (we will be lucky to get back 6 cents on the dollar)
AIG $85 billion
AIG part 2 (after the swanky party) $25 billion
Freddie Mac $100 billion so far
Fannie Mae $100 billion so far (the "Bazooka")
The TARP $700 billion so far (Germany's version of the TARP is $630 billion, so to match that amount on a GDP adjusted basis, the US TARP would (may) end up costing $2.7 trillion)

Assorted Loans and Credits $631 billion
Securities "loaned" to banks (and never to be seen again) $299 billion
Stimulus Package I $165 billion

For a grand total of $2.036 trillion.

Thanks Washington and Wall Street, you done good.

Here is an explaination of how the Fed "invented" all this new money -

http://www.econbrowser.com/archives/2008/10/balance_sheet_o.html