Wicked Witch Friday

Well its supposed to be "Quad Witching", the expiration of all the index and commodity options and futures.

But today its "Wicked Witch" instead, and if you were a bad boy and didn't pay your taxes, its also a day when you are likely sweating bullets:

"Both men were accused of creating bogus trusts and sham offshore entities to hide some $20 billion in offshore assets owned by wealthy American clients. UBS is in talks with the Justice Department and Swiss authorities about turning over the names of up to 20,000 American clients.

Mr. Birkenfeld’s work concerned offshore undeclared assets held for wealthy Americans. In his statement of facts, he said that he and other unidentified UBS private bankers urged their American clients to destroy all offshore private banking records held in the United States; to use Swiss credit cards that could not be discovered by American tax authorities; and to falsely characterize money pulled out of Swiss accounts as loans from UBS. The entire business brought in $200 million a year in revenues to UBS."

So much for "honorable" bankers eh? 

Oh, the allegation is that this is not a "rogue employee" thing either - it was a widespread effort by UBS to flout United States tax laws.

Now now, we know that nobody would do anything like that, right?

How do these guys manage to keep their US banking charter?

More to the point, however, is that 20,000 Rich Americans have to be crapping in their pants about right now.  About all they can do is get on their horn with their lawyers and negotiate a surrender and payment - plus interest and penalties - with the IRS.  That's no guarantee they won't get indicted either, but it reduces their risk.

Trying to "go silent" is unlikely to work, as banks keep records.

This kind of thing pisses me off.  I pay my taxes every year, on time.  I don't like it but its the price of being an American.  Putting diamonds in a toothpaste tube (one of the allegations in the article above) as a means of moving money around without the government finding out about it is just plain wrong.

Then there's the Bear Hedgie Indictment.

Who ought to be crapping in their pants over this one? 

Every Wall Street Bank executive, that's who.

Why? Because what is alleged in that indictment is exactly the sort of crap that every Street Bank has been running for the last three to six months, claiming that the markets were ok, that they didn't need to raise capital, and on and on and on - and those statements turned out to be lies:

"Convictions will depend on showing that the managers "were communicating to the public they were in possession of information that conclusively demonstrates that their statements were false and that they would've known that," said Michael McGovern, a former prosecutor and partner at the New York law firm Ropes & Gray LLC."

You mean like all the lying we've seen over the last four months about "kitchen sink" quarters, not needing to raise capital and having no intention of doing so (followed three days later by doing exactly that), and quarterly results that, when the 10Q is filed, don't match the earnings release or conference call?

Yeah, that sort of lying, I'd think.

Or how about what BB&T said yesterday?

"The market extended its gains after regional bank BB&T Corp. said it expects to increase its dividend this year, countering speculation it will slash the payout."

Expects?  Based on what?  Plenty of capital to pay dividends with?  If they don't have it, should their execs be indicted?  I think so, unless they can show that there was a genuine path and means available today to do so that was thwarted by unforeseen market conditions.

If the recession doesn't lift, for example, that's not "unforeseen".  And what's "some increase"?  One penny?

This bit of mouth-moving was apparently the bank's reaction to an analyst note yesterday in which it was noted that they might even require recapitalization.

Quite the catfight there..... but should you be free to pump your stock price without a reasonable basis in reality?  Or should the standard be that your statement has to have some rational basis in fact at the time you make it, based upon actual current market conditions?

I say you should have to demonstrate a reasonable underlying set of beliefs, otherwise firms are free to lie outright, and it sure looks like there's been a lot of that going on in the financial sector in the last year.

The cute part of the Bear Hedgie deal is that this is not limited to them.

The FBI has been rounding up mortgage brokers - about 300 of them so far.  Hope springs eternal that this continues and that thousands of these scum-suckers find themselves in Federal Prison, and even better, that they "roll over" on their buddies in the business above them.

Oh, you may remember that I have made comments about all the GSEs being potential zeros, right?  A big part of that was predicated on the mortgage insurers starting to blow up, which I fully expected to start happening.

It is:

"June 19 (Bloomberg) -- Triad Guaranty Inc. became the first mortgage insurer to stop selling new policies after the collapse of talks with Lightyear Capital LLC to form a new company with Triad employees. The insurer plunged 40 percent in Nasdaq Stock Market trading.

The decision to halt sales was prompted in part by Freddie Mac's suspension of the company as an approved insurer, Winston- Salem, North Carolina-based Triad said today in a statement. Freddie Mac, the second-largest buyer of U.S. home loans, refused an appeal of that decision, the company said."

This sounds like Freddie "covered their own ass." 

Nothing could be further from the truth.  In fact they're refusing to take more risk, but the existing risk they took from these people is still there.

The good news is that Triad is a relatively small fry in the game. 

The bad news is the bigger fish, Radian, MGIC, and PMI are likely not far behind these guys. I believe they are all in significant capital trouble, and there is no assurance that they will be able to pull their fat out of the fire any better than Triad did.

The reason this threatens the GSEs is that a good part of their credit book is "safe" as a consequence of these guarantees - that is, for any loan that was originated over 80% LTV there is theoretically supposed to be mortgage insurance to guarantee that the principal will get paid if there is a default.

The problem with this theory is that if the insurer goes bankrupt you're screwed, as now the underlying credit quality becomes exposed. 

Sound familiar?

It should, because its the same problem that is hitting the monolines and CDOs.

The entire GSE house of cards is swaying in a freshening breeze; one good puff and......

Psst - you know that fraud putback stuff I was talking about last spring?  Look for it coming from a pissed-off bond investor near you...... that's gonna start ramping soon.

The chainsaw catchers who went after these deals "early" - the Wilbur Ross' of the world - are in deep doo-doo.  They are taking it long and hard, having been unable to do any sort of real due diligence, or, in some cases, still operating in the early 00's world where you could take a deal with a cursory look and a handshake!  It will be very interesting to see how many of those "early" folks come back with lawyers and try to unwind their deals via lawsuit, claiming they were misled (at best.)

Oh, and Dicky Bove?  You're not going to believe this:

June 20 (Reuters) - Ladenburg Thalmann analyst Richard Bove widened his 2008 loss estimate for Citigroup Inc and cut his price target on the stock, after the largest U.S. bank said it could have substantial subprime write-downs in the second quarter.

Bove widened his 2008 loss estimate for the company to 36 cents a share from 19 cents and lowered his price target on the stock to $25 from $31.

But I thought it was a "generational buy" Dick?  That we were going to see a 5-bagger?  Now "C" is back below the close on the day you made your call, and if I bought then, I'd be underwater.

As you know my response to your original call was this:

So no, I didn't buy "C".  What I should have done (but didn't) was short the spike you induced.  Ah well, missed opportunities, but the laughing kitty is still good, right?

MBIA and Ambac lost their last AAA ratings yesterday when Moody's stripped them.  That's that.  The ugly here is that this is likely to trigger somewhere between 70 and 200 billion more in writedowns and/or forced asset sales.  This, of course, has not been reserved for by the banks:

"The downgrades end more than seven months of speculation about whether the bond insurers would keep their top ratings at all three firms. Five of seven companies lost their top ratings as projections for losses on securities backed by home loans surged and confidence in the companies collapsed, causing municipalities to shun their insurance. The downgrades span more than $2 trillion of debt sold by issuers ranging from school districts and sewer authorities to Wall Street firms."

That's gonna leave a mark (on your balance sheet!)

The true ugly hits if these downgrades continue and sends the insurers below investment grade.  Such a downgrade threatens to bankrupt virtually any bank that holds covered assets, as the impact would be a reserve requirement that jumps to more than 100 times what it is for AAA paper.  This, obviously, isn't going to be allowed to happen - banks will unload this paper now rather than take the risk of instantaneous insolvency.

I believe that continued downgrades to below investment grade (if these firms survive at all) are inevitable - as such, it is my view that this is a storm that cannot be avoided, and those who have made investment decisions believing that the "credit crunch" was in the 7th or 8th inning are going to be destroyed.