ERICOPOLY

Myth, What gross rental yields are you seeing in your area? Meaning, what % is annual rental income (before expenses) relative to a purchase price? I think this measurement is the most straightforward because people collectively don't use borrowed money to push up rents. All of those arguments about dual incomes, supply, demographics, etc... etc... this method strips out all that noise and just gets down to basics.

This was sort of disappointing. I started off with Westpac to see how bad they will get impacted by a falling property market, but it looks like they would get off fairly easy. Westpac has 67% of their loan portfolio in mortgages. They claim to be at risk of losing only $498m under the following stress scenario: 30% decline in house prices 10.4% unemployment rate 3% decline in interest rates 3.2% decline in annual GDP growth See page 103: http://www.westpac.com.au/docs/pdf/aw/ic/2011_UPDATED_Full_Year_Results_Presentation_and_IDP.pdf 47% average loan to value in portfolio (takes into account principle paydowns thus far) 69% average loan to value of new loans

While other data on Thursday showed that industrial output shrank for the first time in seven months in November, much of the decline came from auto production, which analysts said had been held back by temporary supply disruptions. ... The decline was led by a 0.4 percent drop in factory output, which reflected a 3.4 percent slump in motor vehicle production. Economists, however, blamed a scarcity of auto parts from flood-ravaged Thailand for the weakness. They said it also most likely weighed on production of high-technology goods, which were down sharply for a third consecutive month. ... “Inventories are lean and firms will likely need to restock after a decent holiday season. Automakers also plan healthy production increases in the first quarter,” she said. FedEx on Thursday provided a further signal the economy was gaining momentum, saying demand for residential delivery services was rising with “healthy growth” in online shopping. http://www.nytimes.com/2011/12/16/business/economy/claims-for-jobless-benefits-fall.html?partner=yahoofinance

It is self-reinforcing. The legacy card portfolio has been in a Darwinian evolution. The strong credits remain.

Okay now I'm resting easy. They don't really have to retain any earnings to get to Basel III. They can just tweak sum numbers and mail it in next quarter that they are at 9% on a fully phased in basis. So everyone is wrong -> they really won't be required to hold far more capital for a rainy day.

In 2007 BAC had a Tier 1 common ratio of 3.5%, under Basel 1. Today it's 9.17% (reported), and it will become 9+% under Basel III rules over the coming years. Going from 3.5% to zero will be like going from 9% to 6.5%. And that 6.5% would still be considered grossly overcapitalized by 2007 standards. You probably need to roughly triple the severity of the crisis to completely wipe out the Tier 1 common. WFC will reportedly be required to hold 8% under Basel III. These crises of the past 30 years simply aren't crises anymore for these banks when they hold that much capital. They're more like minor headaches. Not to sound blunt, but this means nothing. IndyMac had 8.1% Tier 1 the quarter before they failed. How did Lehman's balance sheet look before they failed? Lots of equity there! WaMu had 8.44% the quarter before they failed too. What a cushion! The point being that these banking ratios are the most gamed thing around. There is no way to predict the future but going forward, I think you'll find that any Basel III requirements are going to get (a) watered down, (b) gamed to hell and © pretty much useless. Banks will come up with creative ways to classify non-conforming assets as capital. They'll figure out ways to get the Big 4 to sign off on transactions, swaps and off-balance sheet tricks to inflate assets and hide liabilities. Now, I am not saying that banks will be bad investments, I am just saying that I think they will figure out ways to hide their risks as they always have. Ways that we can't think of in the present because they haven't even been invented yet. They will have entire teams of bankers and accountants whose sole purpose is to figure this stuff out and still take massive risks to goose their compensation. How close do you reckon WaMu comes to those numbers on a fully phased in Basel III basis? Even after BAC has already done a lot of work to shed risk they are still penalized somewhere between 200 and 300 basis points. I don't think you get any credit at all for MSRs.

In 2007 BAC had a Tier 1 common ratio of 3.5%, under Basel 1. Today it's 9.17% (reported), and it will become 9+% under Basel III rules over the coming years. Going from 3.5% to zero will be like going from 9% to 6.5%. And that 6.5% would still be considered grossly overcapitalized by 2007 standards. You probably need to roughly triple the severity of the crisis to completely wipe out the Tier 1 common. WFC will reportedly be required to hold 8% under Basel III. These crises of the past 30 years simply aren't crises anymore for these banks when they hold that much capital. They're more like minor headaches.

I was just figuring that if long term returns in the stock market are going to be 7%, then it seems odd for banks to be priced for 10% returns if so much of the risk to common shareholders has been mitigated by these Basel III rules.

You borrow at x and lend at y. The Fed is desperately trying to drive Y into the ground. Currently the spread between x and y is tight. That's bad for business.

Downside -> 40% of notional. Upside is twice that -- hedged though. I have $5 strike BAC puts for example. I wrote puts on other companies to finance the BAC puts. Some of my BAC is unhedged, but I wanted to make that upside exposure bigger so I did, but then spread the downside risk around. Here's a funny fact. So far here are BofA's losses to common shareholders: 2008 earned $2.5b 2009 lost $2.2b (but they paid about $7b in preferred interest costs to the government) 2010 lost $3.6b 2011 lost $3b (estimated) That's a cumulative loss across this entire crisis of only $4.3b if you exclude the government's loan. Imagine, all this real estate collapse and only $4.3b loss without the government's "help". True, they will take more losses in the future but it's manageable against the earnings. Without the bailout: $4.3b loss. With the bailout: $11.3b loss Then regulators panicked and made them dilute the crap out of shareholders. That's where the real losses came from. Next time around, they'll be carrying around all that extra capital so it won't come to that. (yes I realize that's just the reported "realized" losses, and GAAP ones at that... but spreading losses over several years is just fine with me. They're still losses and get taken eventually).

The Basel III requirements for BAC (and others) are such that it will be nearly impossible to blow it up in the future. Lower mix of risky assets coupled with massive Tier 1 capital levels more than 2x what was previously required. Future financial panics will just never be the same (unless they loosen the requirements again). The markets valued BAC at 10x earnings in the past -- and in those days the balance sheet was far riskier. Tier 1 capital requirements have more than doubled, and you have those risk weighting deductions for some types of assets. Adjusted for risk, shouldn't it trade at a richer valuation in the future? Maybe 12x or 13x? These banks will be viewed as extremely conservative. A financial panic hasn't yet come along that could wipe out a bank with such a structure.

We could get a huge lift though just getting back to natural demand growth in housing and autos. Huge compressed spring there.

In 1984 I was 11 years old and we were taking a family vacation to Europe. I believe it was on a ferry from England to Sweden that my parents thought they'd teach me a lesson about games of chance. Being in international waters, gambling was legal without age limit. So they agreed to let me play the slot machines while they were still finishing their lunch in the dining room. About 5 minutes later I came back with my t-shirt bulging with coins. I had hit a 100:1 payout. A star is born. Fast forward 22 years and I'm explaining to them the payout on the successful FFH call options trade. So much for teaching me a lesson.

We have chickens, they lay about 8 eggs a day. My 3 yr old collects the eggs and takes them into preschool to sell to the teacher & assistants. He saves it in a tin can and buys toys with the money, personally handing the money over the counter. Today he's getting a "gun that shoots missiles" (it's one of those little Nerf guns).

The cool thing is that it not only takes pressure off the debt service ratio, but it also drives the debt down at a faster pace. 25% of the loan is paid off in 11 years at 4% fixed interest rate. 16% of the loan is paid off in 11 years at 7% fixed interest rate. Refinancing speeds up consumer deleveraging even though discretionary spending can rise at the same time.

Nope. Real estate declines are hard to ignore, and that's deflation right before my eyes.

See the graph page 10 of JPMorgan's presentation: Consumer deleveraging largely driven by charge-offs http://files.shareholder.com/downloads/ONE/1550254602x0x515337/85746b44-384f-4eab-8c22-498b7d509acf/BAAB%20Conference%20Presentation%20Final_11.4.11.pdf

What do you mean? Don't charge offs decrease the health of balance sheets by reducing assets relative to liabilities? Maybe you meant defaults and debt to equity conversion? I'm thinking about how BAC and their peers are collectively paying down the debts of consumers courtesy of positive yet weakened bank earnings. Yet the health of the bank balance sheets are improving at the same time. The banks are like consumer debt paper shredders. Just look at the credit card charge-off rates over the past 3 years. You have had chargeoff rates go at high as 10%, but the historical norm is more like 5%. So that's rapid deleveraging, courtesy of would-be bank earnings. Yet the banks can absolutely afford to do it. Capital ratios have been building at the same time. Okay, I see what you're saying, but I would characterize that as defaults and forced haircuts on consumer debt, as opposed to willing deb reductions, and only partially the reason for our accelerated private sector deleveraging. Japan had a MAXIMUM unemployment rate of 5.5% and did not have non-recourse real estate lending. Can you imagine how slow our consumer debt deleveraging would be coming along if everyone was still employed and we couldn't walk from our mortgages? The putbacks are just more of the same -- bank paper shredder. And no, it's not voluntary on the banks behalf. Yet I am still grateful. The non-recourse lending may have encouraged recklessness, but that's water under the bridge. From here on out, it's a wonderful thing as the cleansing process is happening much faster. Instead of somebody stuck paying a massive mortgage, they walk. The banks have a few years of depressed earnings and we're done.

What do you mean? Don't charge offs decrease the health of balance sheets by reducing assets relative to liabilities? Maybe you meant defaults and debt to equity conversion? I'm thinking about how BAC and their peers are collectively paying down the debts of consumers courtesy of positive yet weakened bank earnings. Yet the health of the bank balance sheets are improving at the same time. The banks are like consumer debt paper shredders. Just look at the credit card charge-off rates over the past 3 years. You have had chargeoff rates go at high as 10%, but the historical norm is more like 5%. So that's rapid deleveraging, courtesy of would-be bank earnings. Yet the banks can absolutely afford to do it. Capital ratios have been building at the same time.

In order to regain their financial health and credit ratings, households and businesses are forced to repair their balance sheets by increasing savings or paying down debt. This time it's mostly chargeoffs in the US that's driving it, not "savings or paying down debt".

Even if we were to cut emissions by 50% below 1990-levels by 2050—an extremely unrealistic scenario—the difference in temperature would be less than 0.2 degrees Fahrenheit in 2050. At that pace it becomes a 20 degree increase after 50 lifetimes strung end to end (assuming one lives 80 years). I'm betting all the political conservatives would find that very significant had somebody done that to us over the past 4,000 years.

Let's say Klarman's actions eventually force a trial decision that is "multiples of the original settlement". First: How long until that decision? Second: Assuming the bank then tries to take Countrywide into bankruptcy, no doubt a whole new trial will need to take place to contest the bankruptcy. How long from today until they would eventually have to pay up if the court rules that Countrywide was not property "ring fenced"?

Does he address the rising acidity of the oceans? http://en.wikipedia.org/wiki/Ocean_acidification Thomas Lovejoy, former chief biodiversity advisor to the World Bank, has suggested that "the acidity of the oceans will more than double in the next 40 years. This rate is 100 times faster than any changes in ocean acidity in the last 20 million years, making it unlikely that marine life can somehow adapt to the changes."[20]

Then on top of that add in the costs of sequestration.

Today it costs $6.50 per watt for installed residential rooftop solar (without a subsidy). GE thinks the price will come down to $3 per watt by 2015 (without a subsidy). http://www.cleanenergyauthority.com/solar-energy-news/ge-working-to-cut-installed-cost-of-rooftop-solar-to-4-a-watt-103111/