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Munger
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Allowing the banks to count stock market capitalization as capital that can be lent against never made any sense and is now coming back to haunt.

 

As stock prices collapse, banks become more insolvent by the day without any connection to the quality of their assets.  Downward spiral.  Who did the regulators and banks think they were kidding w this accounting gimmick? -- ultimately market forces always prevail.

 

Adding to some core positions but this is not the time to be "all in"  -- the only time to be "all in" is during extreme valuation disconnects for blue chip companies...we're not close to such an opportunity.  I keep hearing stock yield vs treasury yield implies tremendous buying opportunity -- doesn't take into account bond yields artificially depressed by Fed -- and again, market forces will always ultimately prevail.

 

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Allowing the banks to count stock market capitalization as capital that can be lent against never made any sense and is now coming back to haunt.

 

What do you mean?  AVS securities on bank balance sheets?  Last I checked, a bank's market cap had no bearing on its regulatory capital.

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And to state the obvious -- if the banks implode again...all bets are off.  On the positive side, we would then get an opportunity to go "all in."

 

JPM down 5%+; C down 8%+; BAC down 13%+ -- these declines are ominous given that stock market capitalization has incredulously been allow to count as bank capital.  If a self fulfilling downward spiral has begun, look out below.  And given the S&P downgrade, tough to see how a bank bailout is politically feasible.

 

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I am not a bank expert by any means but as I understand (and have read from several sources) -- stock market capitalization is counted as capital.

 

From Karl Denninger, whose tone is rough but he is usually accurate in these areas...

 

"Note that given the utter fraud of allowing a bank to count "equity value" as capital, when it cannot be spent and is subject to 10% or more swings in value in a single day, means that precipitous stock price drops like this can instantly render a bank insolvent.  We could have fixed that in 2008 and 2009 but of course that would have meant that banks would have had to actually go find capital from real people to make loans with, and that was unacceptable - so in addition to allowing them to "mark assets to fantasy" we also allow them to count as "capital" things you can't spend, thereby allowing them to generate profits from that phantom "capital" - and huge losses when the deception is revealed."

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I'm sorry but that is sheer stupidity. How the eff could a bank's market cap be part of its regulatory leverage ratio when the leverage ratio is based on the balance sheet? The market cap has nothing to do with the balance sheet...

 

The accounting shenanigans regarding banks that can be debated ad nauseum is whether banks should be required to market their assets to market even though they are long term holdings. So for example, back when the MBS market was imploding, Merrill Lynch took huge losses b/c of the firesale prices it had to market its MBS book to even though (in theory) it planned to hold their MBS securities to maturity.

 

 

 

I am not a bank expert by any means but as I understand (and have read from several sources) -- stock market capitalization is counted as capital.

 

From Karl Denninger, whose tone is rough but he is usually accurate in these areas...

 

"Note that given the utter fraud of allowing a bank to count "equity value" as capital, when it cannot be spent and is subject to 10% or more swings in value in a single day, means that precipitous stock price drops like this can instantly render a bank insolvent.  We could have fixed that in 2008 and 2009 but of course that would have meant that banks would have had to actually go find capital from real people to make loans with, and that was unacceptable - so in addition to allowing them to "mark assets to fantasy" we also allow them to count as "capital" things you can't spend, thereby allowing them to generate profits from that phantom "capital" - and huge losses when the deception is revealed."

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Denninger usually doesn't make mistakes in this regard -- does his homework.

 

Either way -- I wouldn't want to be long banks.  Anyone who believes the assets have been honestly marked must also believe in Santa Claus.  Economic growth can cure a bad balance sheet but if we're heading into a downturn, trouble ahead.

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This isn't right at all.  A bank's core capital consists of, among other things, it's shareholders' equity (i.e. book value) LESS intangibles, etc.    So basically tangible book value (I'm simplifying of course).  This is the amount from the balance sheet.  Has nothing to do with stock market value.  This is got to be one of the stupidest things I've read.  So a bank's capital ratios change on a second to second basis with the changes in the stock market? 

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Karl Denninger- bank stock analyst?  I don't think he has done any "homework" on this one.  You might consider investigating the issue yourself.

 

Kind of a red herring to premise the argument as anti-bank stock based on faulty information and then conclude you would not want to own them even if that information is false.  

 

There are good banks and bad banks, just like any other public company sector, with the difference being the inherent leverage that the banking industry carries.

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Karl Denninger- bank stock analyst?  I don't think he has done any "homework" on this one.  You might consider investigating the issue yourself.

 

Kind of a red herring to premise the argument as anti-bank stock based on faulty information and then conclude you would not want to own them even if that information is false.  

 

There are good banks and bad banks, just like any other public company sector, with the difference being the inherent leverage that the banking industry carries.

 

The more I think about the fact that Denninger, whoever he is, posted this (the original argument, not the post I am quoting which I agree with), the angrier it makes me.  Isn't this what this board is always getting pissed at the shorts for?  That is, bad info put out there to cause a drop in a stock's price?  Well, let's see the same outrage here.  This is not only bad info, it's stupid info.  It couldn't be more wrong and the fact that people are acting on it is worse.  Then to say that even if true it doesn't make any difference?  Nice way of thinking.

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The more I think about the fact that Denninger, whoever he is, posted this (the original argument, not the post I am quoting which I agree with), the angrier it makes me.  Isn't this what this board is always getting pissed at the shorts for?  That is, bad info put out there to cause a drop in a stock's price?  Well, let's see the same outrage here.  This is not only bad info, it's stupid info.  It couldn't be more wrong and the fact that people are acting on it is worse.  Then to say that even if true it doesn't make any difference?  Nice way of thinking.

 

Well, looks like my last personal bastion of Fox News-free zones (this board) has been breached. Weeeee.

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cayale -- I have no position long or short in any banks.  And my opinion has zero influence on bank stocks.  So no need to make this personal.  I'm just passing along relevant information.  Denninger typically doesn't make a mistake in this regard.  And you should obviously act as you see fit.

 

Personally -- I wouldn't go near the TBTF banks...no way no how.  There are better opportunities.  And not worth my time to try to figure out the unknowable -- i.e. the quality of TBTF balance sheets.  Anyone who thinks they have any special insight into the TBTF balance sheets is sadly misguided -- all may turn out well, but an investment at this point is nothing more than speculation and don't kid yourself otherwise.

 

I was bearish on banks when Tepper pumped on CNCB and have not changed my view since -- working out ok for me.

 

 

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The more I think about the fact that Denninger, whoever he is, posted this (the original argument, not the post I am quoting which I agree with), the angrier it makes me.  Isn't this what this board is always getting pissed at the shorts for?  That is, bad info put out there to cause a drop in a stock's price?  Well, let's see the same outrage here.  This is not only bad info, it's stupid info.  It couldn't be more wrong and the fact that people are acting on it is worse.  Then to say that even if true it doesn't make any difference?  Nice way of thinking.

 

Well, looks like my last personal bastion of Fox News-free zones (this board) has been breached. Weeeee.

 

Huh?  I agreed with you.  And I don't give a shit about Fox News.

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Let me clarify:

 

Kraven, I agree with you.  I was remarking on the original poster's post.  If you look at a Karl Denninger bio, you will see what I mean.  It was supporting your argument, not opposing it.

 

Munger, it is not personal.  Karl Denninger is no authority on banks.  He appears to be a political operative.  I have no quibble with your sentiment toward banks.  They make me nervous, too, but not for the reason you stated as your premise to not own banks.  Blind faith is often misplaced.

 

I own a couple of mutual thrift conversions and some USB; small part of the portfolio.  Though I know these big banks are scrubbed clean (relatively clean, anyway), I struggle with purchasing them because of the inherent leverage, the loss of earning power given escalating capital requirements and the sense that even if they are asset sensitive, I cannot help but feel rising rates would damage their business (specifically their loan books).  WFC is the one of most interest to me.

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In the spirit of continuing the information flow -- Denninger got questioned on his blog in the same manner that some have here...his response is in quotes. 

 

 

 

"Rick: The problem is not the equity value "per-se", its the implication that you can raise more capital, and whether the so-called "capital" you have actually exists or has it dissipated?"

 

"The problem with the paid-in capital is that there's an implicit assumption (since you use this as part of the capital base) that you can go get more if you need to.

 

Well, you can't in a situation like this, because the price is collapsing. So now what? You get hit for the entire amount of the judgment demanded in the equity valuation when the suit is filed and now if you lose you're utterly ****ed as you can't issue into a market that values your stock in the toilet.

 

Preventing "recycling" of reserves stops this ****. If you have a "one dollar of capital" requirement then this can't happen, since every dollar of unsecured lending has to be secured with a dollar of capital from either paid-in capital (sale of capital stock), retained earnings or sale of bonds. Since there's no "recycling" of unsecured lending you cannot get into a cascade failure scenario where the depositors lose their funds - worst case is that the investors lose their money (including the bond buyers.)"

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Let me clarify:

 

Kraven, I agree with you.  I was remarking on the original poster's post.  If you look at a Karl Denninger bio, you will see what I mean.  It was supporting your argument, not opposing it.

 

Munger, it is not personal.  Karl Denninger is no authority on banks.  He appears to be a political operative.  I have no quibble with your sentiment toward banks.  They make me nervous, too, but not for the reason you stated as your premise to not own banks.  Blind faith is often misplaced.

 

I own a couple of mutual thrift conversions and some USB; small part of the portfolio.  Though I know these big banks are scrubbed clean (relatively clean, anyway), I struggle with purchasing them because of the inherent leverage, the loss of earning power given escalating capital requirements and the sense that even if they are asset sensitive, I cannot help but feel rising rates would damage their business (specifically their loan books).  WFC is the one of most interest to me.

 

Sorry.  Thought you were talking to me.

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In the spirit of continuing the information flow -- Denninger got questioned on his blog in the same manner that some have here...his response is in quotes. 

 

 

 

"Rick: The problem is not the equity value "per-se", its the implication that you can raise more capital, and whether the so-called "capital" you have actually exists or has it dissipated?"

 

"The problem with the paid-in capital is that there's an implicit assumption (since you use this as part of the capital base) that you can go get more if you need to.

 

Well, you can't in a situation like this, because the price is collapsing. So now what? You get hit for the entire amount of the judgment demanded in the equity valuation when the suit is filed and now if you lose you're utterly ****ed as you can't issue into a market that values your stock in the toilet.

 

Preventing "recycling" of reserves stops this ****. If you have a "one dollar of capital" requirement then this can't happen, since every dollar of unsecured lending has to be secured with a dollar of capital from either paid-in capital (sale of capital stock), retained earnings or sale of bonds. Since there's no "recycling" of unsecured lending you cannot get into a cascade failure scenario where the depositors lose their funds - worst case is that the investors lose their money (including the bond buyers.)"

 

If it's possible at all, his response is worse than his original assertion.  I won't respond to his points one by one since that would be a waste of time.  As Cayale said, he is clearly no authority on banks.  This is a "feelings" or emotional argument.  Stock markets go down, people are mad at banks, thus banks are bad.

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Denninger usually doesn't make mistakes in this regard -- does his homework.

 

Either way -- I wouldn't want to be long banks.  Anyone who believes the assets have been honestly marked must also believe in Santa Claus.  Economic growth can cure a bad balance sheet but if we're heading into a downturn, trouble ahead.

 

If you don't even know what constitutes bank capital, are you really qualified to make any pronouncements on banks? The real Munger emphasizes the importance of knowing the limits of one's circle of competence...

 

A quick look at a bank's 10-Q or 10-K will tell you that market capitalization has nothing to do with a bank's capital. It is weak to say "Karl Denninger usually knows what he is talking about" when you can check the financials directly yourself. Here's a breakdown from Citi's latest 10-Q, for instance:

 

Tier 1 Common

 

Citigroup common stockholders' equity $176,052

Less: Net unrealized losses on securities available-for-sale, net of tax (603)

Less: Accumulated net losses on cash flow hedges, net of tax (2,567 )

Less: Pension liability adjustment, net of tax (4,065)

Less: Cumulative effect included in fair value of financial liabilities attributable to the change in own credit worthiness, net of tax 243

Less: Disallowed deferred tax assets 35,392

Less: Intangible assets:

Goodwill 26,621

Other disallowed intangible assets 5,023

Other (649 )

 

Total Tier 1 Common $ 115,359

 

Qualifying perpetual preferred stock $312

Qualifying mandatorily redeemable securities of subsidiary trusts $15,949

Qualifying noncontrolling interests $965

Other $1,875

 

Total Tier 1 Capital $134,460

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