Is BOA preparing for Bankruptcy?

On Oct 19^th Reuters released an article title: “Is Bank of America preparing for a Chapter 11.” This story circulated the financial press like wild fire and although the author Christopher Whalen related some the of recent facts on how BOA had to foot over a $10 billion plus legal settlement and the recent decision of charging some customers $5 per month for using their debt card which in his opinion spurred the Occupy Wall Street movement. He does point out a recent administrative move of the bank moving all of the derivatives from Merrill Lynch subsidiary to the lead bank. Such move has drawn upon on wanted attention to the bank on the possibility of moving the risk to the Bank Holding Company at book value for the opportunity of FDIC coverage. Click here for the Bloomberg article about this.

Although many large institutions have done this move in the past, the question of timing comes to light on why now. I’m sure many investors such as Warren Buffet and the like might want to know as well. In my opinion BOA being a 2^nd largest bank by asset size in the United States I would highly doubt the FDIC would want to exposed to such a failure. However, there have been calls in place both on youtube and other social media to make a run on the bank in November 5^th and December 7^th of this year. Here is the original article from Reuters and below the 6 month stock price chart for BOA.

Source: http://www.reuters.com/article/2011/10/19/idUS200361147020111019

Time for the Fed to get their Dancing Shoes

At the upcoming meeting at Kansas City Fed's in Jackson Hole, Wyoming on August 26th – 28th, Bernanke and the Fed members announced at the same meeting in 2010 the QE2 program and many investors reacted to it by pushing down the long term bonds such as the 10yr and 30yr (see below).

However, ever since last month’s announcement of the Fed to keep rates low until 2013 investors have pushed down the 10yr and 30yr to historic lows. In 1961 the Fed put in place Operation Twist to artificially flatten the yield curve in order promote capital inflows and strengthen the dollar. However, the down fall of the program in 1961 was the duration of its intent.

Now with hopefully learning from the trails of 1961 the Fed might implement a form of QE3 by instilling another Operation Twist but with a few more enhancements. Since the intent of such a program is to instill capital inflows by more lending and tighten the short term rates the Fed might adopt to flatten out the long term rates between 10-30yr but how much lower can these yields go. Already the market currently has pushed them to historic lows and the ramifications are being felt throughout the banking sector as a refinance race has been kicked off and prepayments are inching up almost on a weekly basis.

The Federal Reserve Bank of San Francisco published a paper in Feb 2011 talking about the effects of operation twist on the last QE measure (take a look). Hopefully this week will come quick and with it a plan.

Is it true that Apple has more cash on hand than the Federal Government?

On Thursday July 28^th it became apparent and widely spoken that the innovators of the iPhone and other i products has more cash on reserve approximately, $75.88 billion than the US federal government operating balance of $73.77 billion. The government’s number is a different take from Apple’s since the operating balance of $73.77 billion represents the gap from reaching the current debt ceiling of $14.29 trillion. Apple has made huge head waves in terms of market capitalization and currently sits at number two behind Exxon Mobil at $363.25 billion. Let’s see if Apple can lend some of its cash to the government and become Uncle Sam’s bank. I highly doubt it.

http://business.financialpost.com/2011/07/28/u-s-balance-now-less-than-apple-cash/

Big loss for the US Treasury

On June 27^th the US Treasury Department announced the resignation of a top agency official; Jeffrey Goldstein, he will leave the domestic finance department at the end of July. He was overseeing the Dodd-Frank Act implementation and the chief architect of the Financial Stability Oversight Council. The reason released by the Treasury of his leave is because he wants to spend more time with his family, which is the yardstick reason many US government officials are given to resign. Goldstein, was a managing director of the World Bank and was a key person for the government’s involvement with Fannie Mae and Freddie Mac. Before he took the position of US Treasury official two years ago he had to pay at least $10.5 million to several investment partnerships according to his ethics filing. This doesn’t show a boast of confidence in the implementation and strategy for Dodd-Frank Act and the future of the US Treasury given a top official has left in such short time frame.

http://www.reuters.com/article/2011/06/28/usa-treasury-goldstein-idUSN1E75Q1ZG20110628

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aD6yvvScHUPM

Who's buying Treasuries?

Back on March 18^th 2011 I posted a chart showing that Bill Gross one of the largest bond managers of Pimco, has been dumping his Treasury holdings. This new chart shows that QE2 has been mainly funded (63%) by our very own Federal Reserve through their POMO program (see the 2^nd chart). So essentially the majority of the U.S. budget deficit is funded by central banks and with a sub 3% 10-year note who knows who else would buy bonds with the AFP reporting that the U.S. is already defaulting on their debt: http://ca.news.yahoo.com/china-ratings-house-says-us-defaulting-report-054309883.html

It seems from the 10-year breaking the 3% level that the treasury market might be pricing in some type of support for a QE3. I guess time will tell...

Fed takes on some TIPS

With the marginally dismal employment numbers and rumors flying around that housing is entering a second dip in which JPMorgan analysts revised their forecast for a housing bottom to occur sometime near mid 2011 at a peak trough decline of 34%. So with these somewhat uncertainties the Federal Reserve Bank of New York bought $1.44 billion in inflation-indexed Treasury debt today Tuesday June 7^th 2011 accounting for 19% of the dealer offered $7.77 billion in 2013-2041 Treasury Inflation Protected Securities. A significant headwind circulating the headlines around world are that energy and food prices are rising across the board due to inflation creeping in and staying around for the summer of 2011. So with this recent purchase does it mean that the Fed will continue to purchase more TIPS and continue quantitative easing measures? Here’s a simple Tip for our Fed stop spending money we don’t have. Here’s a look at the TIPS (an ETF tracked by Barclays) and the 10-year since 5/31/11’s announcement of the 9.1% unemployment rate:

What would QE3 mean for the markets?

With QE2 ending next month there is an expectation that the Fed’s balance sheet will come to a standstill at approximately $2.75 Trillion. Given the rise in the money supply and banks increasing their lending throughout QE2 the rapid expansion experienced during those months could place pressure on continue lending by banks and generate expansionary economic activity because of the decrease in the money supply. Some economists are torn between a continued QE program on the face of inflationary pressure or unemployment prospectus. The first argument has the CPI (Consumer Price Index) heading towards the lower levels of 5%, while the second item of unemployment is expected to remain 8.7% for 2011 according to the latest (May 13^th) Bloomberg survey. Whichever item provides the strongest pressure if QE3 were to be implemented (And I personally think it will) the unveiling would occur before the January 2012 presidential election kickoff season. The pressure on the Treasury market after June could fold either way but there is enough buyers both institutional and foreigners to drive the market up and keep yields low. But many factors could come into play such as China’s growth, the IMF’s (International Monetary Fund) leadership change, and the Eurozone debt crisis plus that the number 3 has been notoriously famous in government such as the 3 branches of powers (Legislative, Executive, and Judicial).

Charts from: http://mises.org/daily/5299/The-Effects-of-Freezing-the-Balance-Sheet

The US yells Bingo as the debt limit is reached.

In an announcement made early today Monday May 16, 2011, the US Treasury has stated it has reached the $14.294 Trillion debt ceiling. As a result of this recent motions the Treasury department plans to stop issuing and reinvesting in government securities into certain pension plans. These and other measures would delay the default of the US government until August 2^nd. However, Vice President Joe Biden is holding negotiations with lawmakers with some of the deficit-cutting measures that are being requested to win approval to negotiate a higher debt limit. Some of speculators are saying some of the cuts are going to be made to agriculture subsidies and federal retirement programs, anti-fraud efforts, and increased premiums for pension plans by the Pension Benefit Guaranty Corporation and the sale of wireless spectrum and government properties.

http://online.wsj.com/article/SB10001424052748703421204576325583050561022.html?mod=WSJ_hp_LEFTTopStories

When the US has reached its debt limit

As the national debt continues to increase by an average of $4.05 billion per day since September 28, 2007 even in 2009 the Obama administration noted that the deficit for fiscal year 2009 came in at a record of $1.42 trillion with a capital “T”. This was in 2009 but now the story has turned more severe as Timmy Geithner stated that the legal limit of $14.3 trillion would be reached within a few weeks from now (as of the end of April).

Although the political cards begin to play into whether to lift the debt limit, the Treasury secretary has a few options available such as borrowing money from the federal workers pension plan or paying investors their interest payments ahead of their obligations. Regardless, if the limit gets a raise the ramifications would mean higher interest rates for consumers since the bond yields will rise as investors lose more confidence in US treasuries. This stressful situation has occurred many times in the history of the US as the debt ceiling was raised six times between 1995 and 2007 but never has it been such a wide spread media publication. As the political big wigs debate on whether constricting further spending or cutting outlays while raising taxes the ones feeling the strain would be the US consumers as the cost of borrowing will eventually rise and perhaps at a frightful pace. As a final and last attempt by the US Treasury they have setup a site where the general public can donate:

https://www.pay.gov/paygov/forms/formInstance.html?nc=1271991815942&agencyFormId=23779454

Article: http://www.garp.org/news-and-publications/overview/story.aspx?newsId=27689

TIPS are Negative but have Minimum Positive Coupons, huh?

Last week, Thursday April 21^st the Treasury Department sold an astonishing $14 Billion of 5-year Treasury Inflation Protected Securities at a yield of negative 0.18%. But since the government has place a minimum floor yield of 0.125% resulting in a yield gap between regular 5-year Treasury and the 5-year TIPS to be approximately 2.35% supporting the expectation that higher inflation is in cards. So with TIPS potentially paying higher yields as inflation fears increase the usual payoff comes as the 0.125% as is added to the CPI index. Below is a chart of the Barclays TIPS bond Fund index compared to the % gain of the S&P500.

http://www.marketwatch.com/story/treasurys-rise-before-unusual-tips-auction-2011-04-21?link=MW_home_latest_news

Are we on the Brink of Rising Rates

At the Commerce Street Capital LLC annual bank conference in Las Colinas, Texas on April 8^th the take away message was that banks need to evaluate their potential interest rate risk on their balance sheets. The bank’s CEO, Dory Wiley stated that since the sustained period of low interest rates many banks have become more liability sensitive thus squeezing deposit margins and shifting banks to shorten their durations of their portfolios. This type of activity if overdone can expose banks to income losses if rates rise.

As one solution presented were for banks to consider setting caps on loans to avoid borrowers becoming distressed when rates rise, as borrowers’ nature is to be liability sensitive. In Fact approximately 6.80%, or 445, of the 6,540 commercial banks in the U.S. were asset sensitive at Dec. 31, 2010, compared to 13.13%, or 820, of the 6,245 commercial banks in the U.S. at Dec. 31, 2006 as presented by Mr. Wiley. Although the hope for many institutions is that loan demand returns especially when the rates begin to rise but not as fast the 350 bps increased which this occurred after the last credit cycle in 1994.

http://www.snl.com/InteractiveX/article.aspx?ID=12605506

Why so low 3 and 6 month Treasury

The effects of the Dodd-Frank Act are beginning to have repercussions in the Treasuries market as U.S. banks began to hoard Treasury bonds thus putting a strain on the repo market. This strain was present on Friday April 8^th and Monday April 11 when the 6-month T-Bill touched an all time record low yield of 11 bps and the 3-month T-Bill touched a 13-month low yield of 3 bps.

This Treasury desert amounted to about $40 billion on Friday raising the anxiety level for future higher borrowing costs for money market funds and their respective investors. The rule was implemented by the FDIC on April 1^st and forced many large banks to refrain from lending out their Treasury Holdings thus eliminating bank arbitrage opportunities thanks to the plentiful Treasury bond supply constraint collateral from the Fed’s $600 billion bond buying program.

Before April 1^st banks would typically lend out their Treasury holdings in the overnight Treasury repo market and take those proceeds and leave them at the Fed which paid them some interest on the reserves. Some large banks would also borrow funds from GSE’s such as Fannie Mae or Freddie Mac in the Fed-Funds market and park them in the Fed to earn a little higher spread. Although, these unintended consequences seem to be short term while markets become accustom to the rule, this past week’s yield lows had some effects in profitability for large money market funds around the world.

http://www.reuters.com/article/2011/04/05/markets-money-idUSN0512901520110405

The FOMC likes firm foots in their minutes.

At the March 15^th FOMC meeting stated that the recovery is gaining strength and they plan to adhere to their $75 Billion in Long-Term Treasury bonds each month through June 2011. The chart below shows the Fed’s balance sheet composition over the past four years and although the minutes mention a tapering effect taking place in the purchase of Treasury securities the obvious effect is shown by the treasury yield curve steepening.

Although the Fed officials admit in continuing downside risk in the US housing market and the ramifications of the European fiscal adjustments their chosen word for economic growth is their belief in a “firmer footing.” The committee also expects economic conditions including low rates of resource utilization, subdued inflation trends and stable inflation expectations, to warrant exceptionally low levels for the federal funds rate for an extended period.

My concern is when the Fed planes their exist strategy, how do they plan to tackle the obvious inflation and unemployment situation. Just remember that even when the US was in an obvious recession back in Feb 2008 Uncle Ben stated that he doesn’t foresee any recession and that it’s simply a correction in the markets.

http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20110315.pdf

Risk Retention and its Disassembling Consequence

With the idiosyncrasy and instability in financial economic markets, the long-awaited proposal of the Dodd-Frank Act’s risk retention requirement was released on March 29^th with the SEC acting on it on March 30^th. This proposal pays attention to the mortgage securitization and exempted classes of loans referred to as the “Qualified Residential Mortgages” or QRMs.

The proposal states that for a loan to qualify for GSE backing the borrower must make at least a 20% down payment or at least 25% of the mortgage is to be refinance or 30% if it’s a cash-out refinance. The big change with the proposal is that loans with a federal guarantee such as from FHA, Fannie or Freddie backing are exempt from risk retention during their conservatorship.

So what does this mean? Down the future it could make it more difficult for private securitization of competitors thus impacting the ability of prospective borrowers to get approved and most importantly making the road longer and challenging to unwind the federal support of the GSEs housing finance support. Here is the proposal link:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110329a1.pdf

What’s all the probing about?

On March 15^th a London’s Financial Times report came out that regulators in the U.S, U.K, and Japan suspected that big banks have conspired to manipulate the LIBOR benchmark rates between 2006 and 2008. One of the suspected banks involved, UBS has received a subpoena from the U.S. SEC, the CFTC, and the US Department of Justice. The investigation went as further to say that a breach in the “Chinese wall” rules privacy could be at fault. Chinese wall in this instance is the information barrier within a firm to separate and isolate persons who make investment decisions from person who are privy to undisclosed material information which can influence those decisions.

This breach questions Barclays Bank improper influence on its daily submissions to the daily Libor survey. These daily rate surveys are submitted by 16 of the most powerful banks in the world and account for $10 Trillion of loans and $350 Trillion of interest-rate derivatives globally. So if improper actions are to found this could cause a mess of legal disputes between lenders and borrowers in the future. In the mean time here are the rates of Libor from 2006.

http://www.marketwatch.com/story/barclays-reportedly-a-focus-of-libor-probe-2011-03-25?link=kiosk

Is another financial crisis in the works?

A well respected bank CEO Robert Wilmers of M&T Bank Corp. stated to that “there are powerful combination factors that have significant risks to the long-term health of the American economy.” Occurring to the interview Robert blamed much of his position on how regulators and lawmakers have failed to determine risky trading and size distinguishing between large and small banks. My favorite quote of the interview was his statement of categorizing bank sizes and risk “as the same species as traditional commercial banks is akin to describing dinosaurs as simple reptiles.” So with these higher costs being pushed down to customers eventually taking the burn of the past financial crisis and the bail- out cost will Americans be restricted to the overall capitalistic consequences of poor and slow lawmakers and regulators. Who knows but in the mean time read more about the Garp article with Mr. Wilmers here: http://www.garp.org/news-and-publications/overview/story.aspx?newsId=25855

This week in Treasuries and Tsunamis

With the stock market increase within the past six months I originally thought equanimity was coming to the financial markets however with the recent March 11th 9.0 magnitude Japanese earthquake and tsunamis we have word that the G-7 intervened to halt the extraordinary rise in the yen. In wondered how our Treasuries would behave to the news. Below I grabbed a screen shot from yahoo finance of the 10 year T-Note and things weren’t looking great starting the week.

Then, I took an excerpt from Barry Ritholtz’s blog (http://www.ritholtz.com/blog/) whom I visit every day and noticed he posted a note about how the largest Bond manager Bill Gross dumped some a lot of his treasury holdings and asked my who has actually bought the treasuries as of recently. Well take a look for yourself:

Banking Agencies to Vote on Risk Retention & Service Standards

On FDIC’s March 15^th meeting one of the items to be voted on is the risk-retention standards for future qualifying residential mortgage loans. The agreement, details an approval to require potentially new homeowners to place 20 percent or more of a down payment as well as full documented income and restriction on how much payments could adjust by. The agreement also calls for a requirement for a lender to describe how they would handle second mortgage delinquency. Servicers would also be require to offer loss mitigation when a borrower’s home value equity is worth more than its foreclosure value. I’ll be attentive to the results and detail its effect for future residential mortgage lending.

http://www.aba.com/news/WP3#top

Kiss our Card Rewards Goodbye

So with the recent Dodd Frank Bill regarding interchange and credit cards, a recent 2011 bank survey conducted by the American Bankers Association (ABA) showed that 81% of banks are interested in the proposal to cut debit card reward programs tied with their interest in increasing current checking account maintenance fees. At the end of the day banks are looking at interesting ways to recapture the lost fee income during the past regulations passed.

Savvy Little ATM Skimming Thieves

ATM skimming is not a new phenomena among bank fraud but this newly discovered method is. When I worked in retail banking the idea of providing limited access to bank customers to the ATM front lobby area during afterhours seemed like a great idea to provide security. I would feel much safer in the confides of an ATM room with me. Myself, and I withdrawing or depositing into an ATM. Well, this sense of security has just been broken.

Now thieves are rigging the card access swipe device outside these doors with a skimmer device. The attackers then place a hidden camera just above the key pad and record the PIN of the customer. These thieves return hours or days later and like a movie editor play back the video’s to match up the card number and pin numbers of the suspect customer. This discovery was unlatched after a California police officers discovered the scheme in July 2009. Click the link below to learn more about these savvy skimming thieves. Word of advice always cover your pin entry hand or fingers.

http://krebsonsecurity.com/2011/01/atm-skimmers-that-never-touch-the-atm/

Why Incentivizing Non U.S. EMV Merchants could hold the U.S. Back

The EMV (Europay, Mastercard and Visa) the global standard of integrated circuit cards provides Incentives but for merchants outside of the United States. So what is the U.S. doing to promote enhanced cryptographic securities towards dynamic data authentication? According to Eduardo Perez, CFA and head of Visa’s global payment system security, the U.S. is looking into more future technologies such as contactless and mobile payment systems. So the dulling hand involves political stakeholders to determine encryption rights while determine the flexibility. So does this mean we in the U.S. are going to run in a physical dollar less society? Click here to learn more about EMV

http://www.bankinfosecurity.com/articles.php?art_id=3351

http://www.bankinfosecurity.com/podcasts.php?podcastID=933

http://en.wikipedia.org/wiki/EMV

Dodd-Frank and the FDICs bank executive pay structure update

So last month I briefly wrote about the FDICs discussing the regulation of bank executive pay structures. This issue, known as section 956 of the Dodd-Frank Act while still pending approval by different federal members; FFIEC, SEC, and FHA aims to require any depository institutions with assets greater than $1 billion to file an annual report that details the structure of their incentive compensation plans. While institutions over $50 billion have to provide policies for their executives as well as any individuals who have to ability to expose the institution to possible losses related to the size, capital, and/or overall risk tolerance. Along with these restrictions the rule is requiring that at least 50% of the incentive-based pay be deferred for at least three years. So as a stockholder of several financial institutions I’ll be looking forward to their annual reports depicting the new rule if passed. Click here to read more about this regulation.

http://regreformtracker.aba.com/2011/02/fdic-issues-exec-comp-rules-for.html?utm_source=regreformtracker&utm_medium=ABA+Dodd-Frank+Tracker

Banks are on Cloud Nine

Banks are beginning to tinkle with the idea of cloud computing however water treading like a marine in formation. Because of the uncertainties of data breach and security vulnerabilities banks are turning to vendors for best practices. Such an environment was completed by Bank of Oklahoma during their sales management implementation for its banking, wealth management, and operational group. The arrangement with the outside sales vendor Salesforce.com allows the bank to develop its own customized dashboards allowing for quick delegation of new opportunities, trends and metrics across the bank’s employees. Follow the link to learn more about this topic:

http://www.bai.org/BANKINGSTRATEGIES/operations-and-technology/technology-and-information/head-in-the-clouds-feet-on-the-ground?utm_source=BSO_Daily_020211&utm_medium=email&utm_campaign=BSO_Daily_Enewsletter&utm_content=BAIfeature

The Reminisces of Marked to Market

FASB recently approved plans to proceed with an accounting model whereby loans and debt securities that are held as “customer financing activities of a bank” to be recorded at amortized costs in response to the massive opposition of bankers and investors. However, question still remain as what will be the ultimate impact to the bank’s financial statements. For example currently classified securities as HTM (held to maturity) could be subject to MTM (mark to market) and determining the exact definition of “customer financing activities” is still up to FASB to decide. So it deals with managing credit risk rather than ALM (asset liability management) topic but what do they in the event of a deep dive on valuation while managing the credit? This line in the sand needs to be addresses clearly by FASB and I’m sure they will. Follow the link to learn more about this topic:

http://www.aba.com/Press+Room/051409MTMLettertoCongress.htm

Is FASB & IASB too late to deliver their New Impairment Punch?

Both FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) requested input on their new common impairment model that is based on recording “expected losses” as opposed to the current “incurred losses.” However, this approach only applies to loans evaluated within a portfolio rather than individually. The results could be a double whammy on banks as banks should expect significantly higher ALLL (allowances for loan and lease losses) in addition to the BASEL III higher capital requirements thus meaning little lending capacity. Follow the link to learn more about what the American Bankers Association has posted:

http://www.aba.com/Industry+Issues/IASB_FASIssues.htm

Revamping Bank Executive Pay Courtesy of the FDIC

On January 13th the FDIC stated that they will meet to discuss regulations surrounding executive pay structure to prohibit incentive-based payment arrangements which encourages inappropriate risks for financial firms with more than $1 billion in assets.

http://online.wsj.com/article/SB10001424052748703889204576077932819112712.html?mod=googlenews_wsj