Thursday, December 2, 2010
Saturday, October 9, 2010
Oct 8 - CNBC Fast Money Interview with Christopher Whalen
CNBC Fast Money Interview with Christopher Whalen 
Interview begins at 7:02 of the segment
Transcription:
Fast Money
October 8, 2010
Interview with Christopher Whalen, Institutional Risk Analytics
Melissa Lee is the host.
ML: Let’s move on and talk banks a little bit. Bank of America announcing today that it will stop foreclosure proceedings in all 50 states as the housing market struggles to find its footing and the nation’s largest loan providers deal with sorting our their documents. Our next guest says a new crisis is actually on its way. Christopher Whalen, of Institutional Risk Analytics, joins us on the Fast Line.
Whales, it is great to speak with you.
CW: Hello Melissa
ML: Alright, you say the banking industry is entering a new period of crisis. Why? Because they are generating a lot of cash; I mean, in fact, JP Morgan’s Jamie Dimon just said that it’s going to generate $75 billion, I think by 2013, that’s about half of it’s market cap, what’s the problem here?
CW: Well, they say they’re generating cash based on their GAAP statements, but if you look at the presentation that I gave at AEI earlier this week, the dollar amount of net interest coming through the banks is falling. It has fallen 35% since the peak in 2007. It’s right in the FDIC quarterly for everybody to look at, okay.
The other issue is operational expense of dealing with foreclosures, what you’d call servicing, which is going through the roof. So you have declining interest income on one side of the house and you have rising non-interest expense on the other.
And my guess is, my projection for my clients, is that we’re going to see the efficiency ratio, which is the dollar cost of revenue, go up close to 100% for the large banks. That means they’re going to be bleeding cash, Melissa, they’re not going to be generating cash.
ML: Alright, so uh, this projection of $75 billion in excess capital, out the window. According to your projections, Whales then, when do the chickens come home to roost? What kind of time frame are we looking at?
CW: Well, we’re looking at, I think, the next 3 – 6 months. The reason we’re seeing foreclosure moratoria is partly because of the legal and the political issue, obviously right; but really what’s going on here is that the banks can’t handle any more foreclosures. Their servicing departments don’t have the capacity to own and operate real estate. What we need to do is create some new vehicles, REITs really, to take ownership of these properties because the banks can’t handle it. I think we’re going to end up restructuring these banks using the Dodd-Frank legislation ironically.
Joe Terranova: Hey Chris, it’s Joe. You know, listening to what you’re saying here, I’m thinking two things: number one that banks are going to continue to horde cash; number two, probably more problematic, would be that home price values themselves have another leg down, do you see that?
CW: Well, definitely. Fannie and Freddie are the biggest sellers of real estate in the United States. Fannie Mae is the biggest landscaping company in the United States, now, too, by the way. And, as I say, banks are not equipped to be owners of real property. When their assets get illiquid, they can’t lend. And the expense of… believe me, in the 90’s this was a serious problem, but where we are today, and looking at the backlog of foreclosures, the mind boggles. When you start thinking about the expense of dealing with these properties. But what’s happening is that the banks are walking away from these properties.
ML: Chris, we have to leave it there…
October 8, 2010
Interview with Christopher Whalen, Institutional Risk Analytics
Melissa Lee is the host.
ML: Let’s move on and talk banks a little bit. Bank of America announcing today that it will stop foreclosure proceedings in all 50 states as the housing market struggles to find its footing and the nation’s largest loan providers deal with sorting our their documents. Our next guest says a new crisis is actually on its way. Christopher Whalen, of Institutional Risk Analytics, joins us on the Fast Line.
Whales, it is great to speak with you.
CW: Hello Melissa
ML: Alright, you say the banking industry is entering a new period of crisis. Why? Because they are generating a lot of cash; I mean, in fact, JP Morgan’s Jamie Dimon just said that it’s going to generate $75 billion, I think by 2013, that’s about half of it’s market cap, what’s the problem here?
CW: Well, they say they’re generating cash based on their GAAP statements, but if you look at the presentation that I gave at AEI earlier this week, the dollar amount of net interest coming through the banks is falling. It has fallen 35% since the peak in 2007. It’s right in the FDIC quarterly for everybody to look at, okay.
The other issue is operational expense of dealing with foreclosures, what you’d call servicing, which is going through the roof. So you have declining interest income on one side of the house and you have rising non-interest expense on the other.
And my guess is, my projection for my clients, is that we’re going to see the efficiency ratio, which is the dollar cost of revenue, go up close to 100% for the large banks. That means they’re going to be bleeding cash, Melissa, they’re not going to be generating cash.
ML: Alright, so uh, this projection of $75 billion in excess capital, out the window. According to your projections, Whales then, when do the chickens come home to roost? What kind of time frame are we looking at?
CW: Well, we’re looking at, I think, the next 3 – 6 months. The reason we’re seeing foreclosure moratoria is partly because of the legal and the political issue, obviously right; but really what’s going on here is that the banks can’t handle any more foreclosures. Their servicing departments don’t have the capacity to own and operate real estate. What we need to do is create some new vehicles, REITs really, to take ownership of these properties because the banks can’t handle it. I think we’re going to end up restructuring these banks using the Dodd-Frank legislation ironically.
Joe Terranova: Hey Chris, it’s Joe. You know, listening to what you’re saying here, I’m thinking two things: number one that banks are going to continue to horde cash; number two, probably more problematic, would be that home price values themselves have another leg down, do you see that?
CW: Well, definitely. Fannie and Freddie are the biggest sellers of real estate in the United States. Fannie Mae is the biggest landscaping company in the United States, now, too, by the way. And, as I say, banks are not equipped to be owners of real property. When their assets get illiquid, they can’t lend. And the expense of… believe me, in the 90’s this was a serious problem, but where we are today, and looking at the backlog of foreclosures, the mind boggles. When you start thinking about the expense of dealing with these properties. But what’s happening is that the banks are walking away from these properties.
ML: Chris, we have to leave it there…
AEI Slideshow Presentation: Here
Sunday, May 23, 2010
Fannie Mae/Treasury Spread Stabilizes at Higher Level
As of May 21, 2010: Fannie Mae 30 Day Commitment/10 Yr Treasury Spread: 1.18777
Notes: The spread is still historically very low, however, in the wake of the discontinuance to the Federal Reserves MBS Purchase Program on March 31, 2010, the spread has been rising persistently, from a low of 0.85006 on March 24, 2010 (one week before the official ending of the program) to the current spread of 1.18777, on May 21, 2010.
I expect this spread to continue significantly higher throughout the year.
Spread History: 12/03/2007 to 05/21/2010
Spread Average: 1.655390178
2 Std Dev: 0.944344144
U.S. Treasury Issuance May 2010 - $191 Billion
Total New Issuance of 2 Yr, 3 Yr, 5 Yr, 7Yr, 10 Yr, 30 Yr Treasuries for May 2010: $191 B
Total New Treasury Issuances Jan. '09 to May '10 (2 Yr. - 30 Yr Maturitues): $3.023 Trillion
Total New Treasury Issuances Jan. '09 to May '10 (2 Yr. - 30 Yr Maturitues): $3.023 Trillion
Breakdown by Maturity:
Jan '09 To May '10 Treasury Issuances:
Thursday, May 6, 2010
Fannie Mae 30 Yr/10 Yr Treasury Spreads Widening
The recent Greek debt crisis may be doing wonders for the 10 Yr Treasury yields, but it's having very little effect on Fannie Mae 30 Yr mortgage rates. As a result, the spread is widening significantly, to the highest spread level this year.
Tuesday, May 4, 2010
USDA Loan Activity
A very interesting chart from the USDA Rural Development (Washington) website on annual loan activity for the USDA Rural Development loan program. In the absence of subprime lending, the 100% LTV (102% including funding fee) program is simply exploding.
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