Friday, June 26, 2009

That's Incredible!

Greetings good citizen,

I’m thinking tonight’s offering falls under the category of things you see when you don’t have a gun…

As hard as it is to believe, there is a larger crisis, one much more serious than the financial problems the world is suffering at this time.

That crisis is more likely to than any other to throw our entire species into it’s own cesspool…

That crisis is the one where we can no longer trust ANY branch of the government (or the justice system) to protect the interests of the nation ahead of the interests of those who have suborned them.

You are no longer ‘voters’…you are no longer people…worse, you have never been ‘citizens’ because there is nothing in our laws that promise you the protection of society.

You are the barely necessary ‘rabble’ who are both feared and despised by our self-professed ‘betters’. Yes good citizen, if not for the ‘rabble’, our betters would be forced to do things for themselves, instantly making them ‘no better’ than we are…

Your ‘vote’ decides nothing and if you were indeed a ‘person’, you would matter, mostly because you had wealth and power which the rabble does not possess.

If you possess neither, then you obviously ‘don’t’ matter.

Not that you’ll ever hear anyone insult you like this to your face, the proof in the above statements lies in how you are treated.

Well, tonight’s piece is an example of how ‘people who matter’ are treated:

Banks Rescue Credit Card Trusts, Yet Keep Them Off Balance Sheet

America as banana republic is alive and well. Tonight's version is that anything that helps banks is permitted, official rules to the contrary.

Banks enjoyed lots of fun and profit from setting up various off balance sheet vehicles that are now coming a cropper. We saw the preview of this movie with structured investment vehicles, off balance sheet entities typically sponsored banks that borrowed heavily, usually 14 to one, and invested in medium term asset backed paper. When subprime worries got acute and the market for asset backed commercial paper dried up, the short-term funding for the SIVs could not be rolled, and the vehicles had to resort to credit lines to keep from liquidating the holdings. The issue in plain sight was that the investors in the SIVs made it clear that the banks were not going to walk from these entities without consequences.

I do not understand how these entities can be considered to be off balance sheet once the sponsor stepped in. Yes, the test is whether the sponsor is "obligated" to provide support. While from a contractual standpoint, they may not have been, but no one wanted that tested in court (if various winks and nods were found to have been commitments, that might have forced consolidation.)

We have the same issue in the fore with credit card trusts. This would seem to be a more clear-cut case than SIVs, since rating agencies 'fess up that their grades presume that banks will intervene in the event of a shortfall. As Joseph Mason and Eric Higgins wrote:

On Monday, May 11, 2009, Advanta Corp. announced that their credit-card securitization trust would go into early amortization and that they will shut down all of the accounts in the trust. What the casual observer (and most regulators) missed is that this announcement is also endemic of the problems at the heart of securitization: the “true-sale” classification from which securitizations obtain their off-balance sheet treatment.

A company like Advanta issues credit-cards through its banking subsidiary (Advanta Bank). These credit card receivables are then sold into a trust (Advanta Business Card Master Trust.) The trust then sells the cash flows from those receivables to investors. This trust is created as a truly-sold bankruptcy remote entity from Advanta Bank and Advanta Corp, allowing Advanta to treat the sale of credit-card receivables as off-balance sheet for regulatory and accounting purposes. Technically, Advanta Corp. has no liability for the assets that are sold into the trust and must not provide any recourse to the assets...

The problem with the arrangement is that it has always been a complete fiction

How can Advanta Corp. prevent early amortization without violating “true-sale” accounting? The truth is that they can’t. Providing recourse has historically been taken as implying that the receivables are assets of Advanta Corp. and should appear on their balance sheet!

Of course, the problem with implicit guarantees is that they are not legally binding. To see this consider Advanta’s May 11, 2009 announcement of the early amortization of their credit-card trust, where Advanta specifically says, “The securitization trust’s notes are obligations of the trust and not of any Advana entity.” What a difference a few days make. On April 30, 2009, management was going to save the securitization trust. On May 11, 2009, management is running away from the trust as fast as they can.
Hence, when it is expeditious, firms can ignore true sale provisions and as soon as things get rough true sale provisions protect them.

This problem is not new. A study by Higgins and Mason (Journal of Banking and Finance 2004) looked at recourse provided by credit-card issuers in the mid-1990s. Higgins and Mason found evidence of 17 instances of recourse provided over the 1991-2001 time period that were specifically announced by the parent company. These recourse events helped support 89 separate credit-card securitizations that had a combined value of $35.4 billion.

During the study period, every one of those recourse events violated regulatory rules, but were carried out with a blessing from the regulators despite having recognized the problems of implicit recourse

Since regulators have chosen to ignore implicit recourse, it has become institutionalized industry-wide. In their announcement regarding the downgrading of Advanta’s debt Fitch noted, “…early amortization would occur in the absence of intervention from Advanta within the next month. Intervention could come in the form of charge-off sales, a yield supplement account, or receivable discounting, as seen recently at other large card issuers.” Among those options, receivables discounting is specifically mentioned in the 2002 joint guidance as a prohibited recourse event that would force a parent company to take the securitized assets back on their balance sheets.

Moreover, such a statement means that Fitch – who rates asset-backed securities for a living – admits that they are, in part, basing their ratings on the expectation of implicit recourse being provided even though implicit recourse is : 1) a violation of true sale and 2) not contractually guaranteed.

Advanta was seen as a localized problem last month:

The company’s woes aren’t likely to spread to other asset- backed issuers, said JPMorgan’s [Christopher] Flanagan. Advanta’s “precarious liquidity and capital position” make the lender more vulnerable to deteriorating credit than its stronger counterparts, Flanagan said in a May 8 report.

Things look pretty different today. From the Financial Times:

Record credit card losses are pushing big US banks to come to the rescue of off-balance sheet vehicles they use to transform hundreds of billions of dollars in consumer loans into securities sold to investors.

The support provided by Citigroup, Bank of America, JPMorgan Chase and American Express underscores how the deteriorating health of the US consumer is opening new fronts in the financial crisis...

Although they are not obligated to support the pools of credit card receivables when losses mount, banks have done so to ensure investors continue to buy such securities.

The doomsday scenario facing banks is that credit card losses will rise to levels that force the vehicles to repay bondholders early.

Banks have been supporting card trusts by issuing – and then buying – bonds that would absorb the first layer of losses in the underlying loans.

This is designed to provide a protective buffer for existing bondholders.

BofA bought $8.5bn of junior debt from one of its trusts in the first quarter and put aside $750m to cover losses on the investment.

Citi bought $265m of so-called junior debt from one of its credit card trusts in October and an additional $2.3bn of junior debt from the same trust in April, according to a regulatory filing.

JPMorgan and Amex also have issued new junior debt for their credit card trusts.

In addition, JPMorgan has supported credit card bonds issued by Washington Mutual – the troubled lender bought by JPMorgan last year – by substituting its own credit card loans for WaMu’s lower quality ones.

The loss rate on the WaMu pool was 14.8 per cent in October. By comparison, a JPMorgan credit-card pool had an 8.1 per cent loss rate in May.

Can someone explain the accounting logic? Ah, silly me. It's called might makes right.

The part Yves doesn’t point at here is it is YOUR money being used to prop up these investment vehicles!

Is THIS part of ‘saving’ the Banking system? It’s obvious these investors made some bad choices but it is you that are paying for them!

Worse, these investors are being ‘made whole’ on devastatingly expensive credit card debt where the defaulting borrower was most likely paying 21 to 35% on! (One late payment baby and all of your cards shoot up to the maximum rate…which is likely what’s driving the default problem.)

As you are well aware, the markets ‘defied gravity’ yet again today as ‘investors’ once again ‘shrugged off’ other negative economic news to ‘buy in’ one again!

Retail Sector Gives Wall Street a Push

Published: June 25, 2009

Optimism about strength in the retail sector carried Wall Street higher on Thursday, even as the government reported that more workers were filing first-time jobless claims and receiving unemployment benefits.

Analysts said that investors were also covering some short positions — bets that shares will go down — and rethinking some of the recent pessimism that has pulled major indexes down by about 5 percent in the last two weeks. [The real ‘news flash’ here is the baseless assertion that investors actually ‘think’!]

“I think we were oversold based on the news, and so maybe we’re getting back to that equilibrium,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price. “We’re still coming out of this recession. There are some indications that things aren’t so bad.” [Although you may notice he doesn’t mention any of them…]

The forecasts of a continuing economic contraction have prompted some investors to question whether the market’s swift rise since March was too much, too soon. On Monday, stocks slumped 3 percent, the most since April, and many analysts said that it appeared that the rally was losing momentum.

But investors shelved those concerns on Thursday.

In the last hour of trading, the Dow Jones industrial average was up 146 points or 1.7 percent. The broader Standard & Poor’s 500-stock index was also 1.7 percent higher, and the technology-heavy Nasdaq was up 1.6 percent. [The Dow closed up 172 points today and was at 181 points when first checked the numbers in the early afternoon.]

Retail stocks surged as better-than-expected earnings at Bed, Bath and Beyond and a merger between Fashion Barn and Tween Brands heartened expectations about the consumer sector’s resilience. [Sales are ‘up’ at Bed, Bath & Beyond? This couldn’t possibly be related to the plague of bedbugs or other types of lice sweeping the nation…and the merger? What’s so ‘surprising’ about this attempt to ‘consolidate’ market share between two struggling retailers? How the hell do you get ‘resilient consumers out of that? Oh yeah, investors have already proven (repeatedly) they’re not too bright!]

The recession is culling winners from losers, analysts said. While some stores like Linens ‘n Things and Circuit City have shut down or declared bankruptcy, their troubles have created opportunities for rivals like Best Buy, which was up 3.5 percent, and Bed, Bath and Beyond, which rose nearly 10 percent.

Shares of energy producers rose as the price of crude oil rose $1.41, to $70.09 a barrel. [How the hell does that ad up to ‘good’ news? Increases in the price of energy affect the price of EVERYTHING, which is definitely not a good thing when the consumer is ‘tapped out’!]

And financial companies were slightly higher as the Federal Reserve chairman,Ben S. Bernanke, denied accusations that he had exerted improper pressure on Bank of America to complete its purchase of Merrill Lynch. In a tense hearing on Capitol Hill, Mr. Bernanke said he had never threatened to replace management at Bank of America if they pulled out of the deal. [Which leaves the rest of us parsing the difference between a ‘threat’ and a ‘promise’…]

The hearing offered some high drama as traders covered their positions and aligned their portfolios ahead of the end of the second quarter. [Like the pundits say, today’s action was for the most part a ‘short-squeeze’, it was the ‘tail’ wagging the dog. There is no ‘good’ reason to buy stock as conditions aren’t improving…so they come up with ‘lame’ stories like this one, which further destroys what little credibility they have left.]

“It’s short-covering on a quiet day, and everyone’s watching Bernanke,” said Sal Arnuk, co-head of equity trading at Themis Trading, referring to Mr. Bernanke’s testimony.

While rising unemployment still threatens to increase foreclosures, pare spending and pitch the economy deeper into recession, the disappointing numbers released Thursday did little to dampen investor sentiment. [because most of the buying was being done by the big trading desks themselves on their own behalf…using YOUR money!]

The Labor Department reported that initial claims for unemployment insurance rose 15,000 last week to a seasonally adjusted 627,000, and that the total number of people receiving unemployment bounced back after dropping for the first time in months.

Yow, look at those ‘rebounding’ unemployment figures! Retailers will be rolling in cash once more people lose what little income they had!

What’s truly ‘perverse’ is that ‘downsizing’ improves the bottom lines of the employers that engage in it. So ‘technically’, they have more money (even if they are eviscerating their customer base!)

As I pointed out at the beginning of tonight’s offering, the more they ‘play games’ like this, the less ‘credibility’ they have, adding fuel to a burgeoning movement for change, real change…change we can’t get from politicians.

Thanks for letting me inside your head,


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