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Monday, January 31, 2011

Global Sovereign Risk: The Top 10 Most Risky Debtor Nations (Lists) *January 2011 Month End Review*

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Sovereign Risk


Global Sovereign Risk: Top 10 Most Risky Debtor Nations
* January 2011 Month End Review *

Below is a comparison of and the changes to the Top 10 Most Risky Debtor Nations from The 4th Quarter 2010 CMA Global Sovereign Debt Credit Risk Report (December 31, 2010) to the recent CMA Sovereign Risk Monitor (January 31, 2011). This is a snapshot, the market for collateral default swaps (CDS), on which the lists are based, can be volatile and the Top 10 list can change quickly. Civil and military events, government statements and activity, and credit rating agency actions can change the Top 10 list instantly.


Top 10 Most Risky Nations

The Top Ten Most Risky Sovereign Debt (January 31, 2011) The CMA "Sovereign Risk Monitor" listed the following ten nations as having the highest risk of default:
1    Venezuela
2    Pakistan
3    Greece
4    Ireland
5    Argentina
6    Portugal
7    Ukraine
8    Dubai/Emirate of
9    Egypt
10  Vietnam


The Top Ten Most Risky Sovereign Debt (December 31, 2010) The CMA "Global Sovereign Credit Risk Report: 4th Quarter 2010" listed the following ten nations as having the highest risk of default:
1    Greece
2    Venezuela
3    Ireland
4    Portugal
5    Argentina
6    Ukraine
7    Spain
8    Dubai/Emirate of
9    Hungary
10  Iraq


Changes in and Comments about the Top 10 from December 31, 2010 to January 31, 2011
Pakistan enters Top 10 as #2 on seeking assistance in restructuring foreign debt
Egypt enters Top 10 as #9 on the recent uprising and civil discontent
Vietnam enters Top 10 as #10 on concerns about additional borrowing and Moody's comments
Spain drops out of Top 10
Hungary drops out of Top 10
Iraq drops out of Top 10




About CMA and the CMA Global Sovereign Debt Credit Risk Report 

CMA, the world’s leading source of independent, accurate OTC credit market data, has unrivalled access to information about what is actually happening in the CDS markets. It combines this unmatched breadth and depth of pricing data with market-leading technology to deliver clear and valuable information to financial institutions around the world. The CMA ranks sovereign default risk by CPD (Cumulative Probability of Default). "CPD quantifies the probability of a country being unable to honour its debt obligations over a given period of time period. For Sovereign CDS, this typically includes the probability of a restructuring of debt."


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Links
CMA: Credit Market Analysis (CMA)
* Data Courtesy of CMA *


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Friday, January 28, 2011

Bank Failure Friday: FDIC Seizes 4 Banks (Charts) *2011 YTD: Failures 11, Cost $1.19 billion*

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2010 bank failures were 157, 2009 bank failures were 140


Bank Failure Friday: FDIC Seizes 4 Banks

The FDIC closed 4 banks on Friday, January 28, 2011 to increase the 2011 total to 11. Annual charts of USA bank seizures, FDIC Deposit Insurance Fund Cost for Failed Banks, and the FDIC problem bank list are below. States where banks have been closed in 2011 are: Arizona 1, Colorado 2, Florida 1, Georgia 2, New Mexico 1, North Carolina 1, Oklahoma 1, South Carolina 1, Wisconsin 1.

Total assets of the 4 closed banks were $3,381,500,000 ($3.3815 billion), based on the September 30, 2010 call report (regulatory financial statements). All but FirsTier Bank were merged via purchase and assumption agreements into other banks. The FDIC took direct control of FirsTier Bank.

Overall, First Community Bank was by far the largest with $2.31B in total assets. FirsTier Bank was next largest, a large community bank, with $781.5M in total assets. The First State Bank ($43.5M) and Evergreen State Bank ($246.5M) were smaller community banks.

The estimated cost to the FDIC Deposit Insurance Fund for the 4 bank closures this week was $545.5 million. The 2011 YTD total cost is now $1.19 billion. (See chart below).

#8 The First State Bank, Camargo, OK
* Bank 7, Oklahoma City, Oklahoma, to assume all of the deposits
* As of September 30, 2010, The First State Bank had approximately $43.5 million in total assets
Bank 7 agreed to purchase essentially all of the assets.
* The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $20.1 million

#9 Evergreen State Bank, Stoughton, WI
* McFarland State Bank, McFarland, Wisconsin, to assume all of the deposits
* As of September 30, 2010, Evergreen State Bank had approximately $246.5 million in total assets
* McFarland State Bank agreed to purchase essentially all of the assets
* The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $22.8 million

#10 FirsTier Bank, Louisville, CO
* No other bank assumed the deposits
* FDIC created the Deposit Insurance National Bank of Louisville (DINB), which will remain open until February 28, 2011, to allow depositors access to their insured deposits and time to open accounts at other insured institutions.
* As of September 30, 2010, FirsTier Bank had $781.5 million in total assets
* The FDIC as receiver will retain all the assets from FirsTier Bank for later disposition
* The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $242.6 million

#11 First Community Bank, Taos, NM
* U.S. Bank, National Association, Minneapolis, Minnesota, to assume all of the deposits
* As of September 30, 2010, First Community Bank had approximately $2.31 billion in total assets
* U.S. Bank, National Association agreed to purchase essentially all of the assets.
* The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $260.0 million

The next FDIC bank closings, if any, will most likely be announced on Friday, February 4.


USA Failed Banks by Year

Bank failures and therefore FDIC seizure of banks, dramatically increased in 2009 and 2010 - a 2-year total of 297 compared to 0 in both 2005 and 2006. As noted below regarding total problem banks, bank failures in 2011 are expected to continue at a high rate and be 100+. The chart below is the actual data from 2005 through 2010. Bank failures for 2011 are estimated by extrapolating 2011 actual closures based on a 52-week year. Actual 2011 bank failures will be included on the chart later this year as the closures accumulate to a higher level.
Year, Total Bank Failures
2005: 0
2006: 0
2007: 3
2008: 25
2009: 140
2010: 157
2011: 11 actual, 143 estimated




FDIC Deposit Insurance Fund Cost of Failed Banks

Failed banks and the seizure by the FDIC cost money. The seized banks' deposits are usually assumed by another bank as are most of the assets. However, not all assets of the failed bank have value (usually the worst performing loans, non-performing loans, repossessions, and foreclosures). The FDIC may enter into a loss-share agreement with another bank to manage the questionable assets or take direct possession of the assets and attempt to dispose of them. Upon seizure of a bank, the FDIC estimates the loss to the Deposit Insurance Fund. The Deposit Insurance Fund is normally funded by the banking community through FDIC assessments to each FDIC insured bank based on insured deposits, plus special assessments. Below is a chart of the estimates by the FDIC of costs (losses) incurred upon seizure of banks in 2011. The chart is by week for 2011 and shows the accumulated losses as the year goes along.




FDIC Problem Banks by Year

The FDIC problem bank list continues to rise, actually skyrocket, although the total assets of these banks has leveled off. From the year-ends 2005 through 2009, the total problem banks were 52, 50, 76, 252, and 702, respectively. Now at 9/30/2010 the total is an astronomical 860. The total assets of the problem banks from the year-ends 2005 through 2009 were $7B, $8B, $22B, $159B, and $403B, respectively. The total assets of the current (9/30/2010) 860 problem banks is $379B, indicating most of these are small to medium community banks. Chart data, from YE 2005 through the QE September 30, 2010, is:
Date, Total Problem Banks
12/31/2005: 52
12/31/2006: 50
12/31/2007: 76
12/31/2008: 252
12/31/2009: 702
9/30/2010: 860




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Federal Reserve: USA Economic Recovery Is Continuing (GDP Chart) *Insufficient for significant improvement in labor market*

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Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.


Federal Reserve: USA Economic Recovery Is Continuing

USA Economy The Federal Open Market Committee issued a statement on Wednesday, January 26, after a two day meeting on monetary policy (at the bottom of this page). Overall the FOMC slightly revised their overall statement to, "the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions". This is a slight change from the December statement: "economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment". The FOMC repeated the November 3 and December 14 statement, "Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow."

From "Modest" to "Slow" to "Insufficient" The Federal Reserve previously, for months, utilized the wording and theme of "modest" and "moderate" regarding economic activity, recovery, and growth. In November, this was changed to "slow": slow pace of recovery in output, slow pace of recovery in employment, disappointingly slow progress in FOMC objectives. In December and January, economic activity, recovery, and growth is "insufficient". As always, the FOMC statement is carefully worded.

Quantitative Easing aka Monetizing the Debt The FOMC reiterated from November, "To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November." Further, the FOMC repeated from November, "the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011." Quantitative easing, or QE2, the second round of monetizing the debt, will continue. The Federal Reserve had previously utilized quantitative easing during the depths of the Great Recession - and those amounts are still on the Fed balance sheet. The Fed balance sheet will continue to expand its balance sheet further. 

Indirect Quantitative Easing In the August 10, 2010 statement, the FOMC began an indirect form of quantitative easing by, "reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature." This was quantitative easing without increasing the Fed's balance sheet. The FOMC affirmed this policy in the November 3 and December 14 statements, "the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings."

Zero Interest Rate Environment for an Extended Period The FOMC continues to "maintain the target range for the federal funds rate at 0 to 1/4 percent" and expects "exceptionally low levels of the federal funds rate for an extended period."


Here's the Fed's Problem - Inadequate USA GDP Growth

USA GDP % by Quarter (Chart) The chart below is the annualized percentage change of the GDP (seasonally adjusted at annual rate) from the preceding quarter (QoQ), the most common GDP measure. As can be seen, there was a negative dip into the Great Recession beginning 2008 Q2, a rebound peaking in 2009 Q4, a downward trend in 2010 Q1 and Q2. The USA economy appeared to be at a crossroads at 2010 Q2: a continuing downwards trend towards zero growth or a bounce upwards from there? The 2010 Q3 +2.6% (third estimate) was a bounce upwards and the 2010 Q4 +3.2% continues the uptrend. The Federal Reserve via the Federal Open Market Committee has resorted to QE2, a second round of quantitative easing, plus indirect quantitative easing in an attempt to boost the economy, increase the GDP, and bring down the unemployment rate. The chart covers the last 24 quarters of the USA GDP as reported by BEA from 2005 Q1 through 2010 Q4 (advance estimate).






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Federal Open Market Committee Statement

Federal Open Market Committee
Release Date: January 26, 2011
For immediate release

Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

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Tuesday, January 25, 2011

Bank of America Reports Huge $1.2 Billion Loss (Financial Charts, Review) "Headwinds still remain" BAC

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Bank of America reported Q4 2010 financial results on Friday, January 21, 2011


Bank of America Reports Huge $1.2 Billion Quarterly Loss

Bank of America reported quarterly financial results on Friday, January 21 before the market opened. Bank of America financial performance charts for Q4 2010 and prior quarters have been posted, along with commentary, on the Bank of America Financial Performance page. The charts are:

Bank of Ameica Performance by the Quarters
Earnings per Share (Diluted)
Net Revenues, Operating Income, Net Income
Operating Margin, Net Margin
Capital to Assets and Tier 1 Capital Ratios
Return on Assets
Income Statement Components
Asset Mix

In addition, a Bonus Chart has been included below in this post, Bank of America Operating Expense Ratio. More charts have been posted on the Bank of America Financial Performance page.

Summary Q4 2010 The state of financial performance at Bank of America is such that the huge Q4 loss of $1.2 billion is a significant improvement over the colossal Q3 loss of $7.3 billion. However, it is a larger loss than the prior year Q4 2009 loss of $194 million, which does not seem so bad now. The losses continue pouring in from every direction. Goodwill impairment charges were an almost incomprehensible $12.4 billion in 2010 and provision for representation and warranties expense, related to mortgage loan buybacks, were $4.1 billion in 2010. See below for more discussion.

Income Statement Q4 2010 Bank of America reported net revenues of $22.4B, net loss of ($3.6B), and a loss per share of ($0.16). From the prior quarter Q3 2010, net revenues were down -16.11%, net loss decreased +82.96%, and loss per share decreased +79.22%. From the prior year Q4 2009, net revenues were down +10.86%, net loss increased +541.24%, and loss per share decreased +73.33%, respectively. The operating and net margins continue negative at -16.05% and -5.55%, respectively. This is an improvement over the prior quarter Q3 2010 at -22.14% and -27.34%, respectively. On a positive note, the quarterly Provision for Credit Losses of $5.1B is a multi-year low and the net charge-off ratio continues decreasing as credit quality improves.

Balance Sheet Q4 2010 Total assets decreased QoQ -3.19% to $2.265 trillion. The capital to assets ratio (total stockholders' equity divided by total assets) increased to 10.08%, which is adequate. Tier 1 capital increased to 11.24%, which is adequate and the highest since September 2009. Loans slightly increased QoQ +0.70%. The ALL/Loans ratio (Allowance for Loan Losses divided by Gross Loans) decreased to 4.45%, should be adequate, and continues above 4% for the 5th consecutive quarter.

Asset Mix Q4 2010 Higher yielding loans, net loans, continue in the high 30% range, near 40%. Lower yielding cash & securities had increased for the past 6 quarters, since March 2009, but decreased slightly in Q4 2010 to 41.95%.  NonEarning assets of 16.16% had decreased the past 5 quarters, since June 2009, but increased slightly in Q4 2010. A chart of the asset mix is at the bottom of this page.

Representations and Warranties Expense (Home Loans) In the current quarter Q4 2010, part of the huge net loss of $1.2 billion was due to an enormous provision for representations and warranties expense of $4.1 billion in the Home Loans segment. This charge is related to mortgage loan buybacks. During the Credit Bubble, Bank of America sold billions of dollars of mortgage loans to GSEs FNMA and FHLMC plus other mortgage investors that were inadequately underwritten and improperly documented. Bank of America also acquired Countrywide Financial, at the time the largest mortgage lender in the USA, which had done the same. Bank of America has since been entangled in lawsuits and negotiations to resolve, settle, and even buy back these misrepresented and substandard mortgage loans which eventually defaulted. The total provision for representations and warranties expense in 2010 was $6.8 billion.

Goodwill Impairment Charge (Home Loans) In the current quarter Q4 2010, part of the huge net loss of $1.2 billion was due to a very large goodwill impairment charge of $2 billion in the Home Loans segment. This charge is related to the write-down of the value of the mortgage business acquired from Countrywide Financial.

Litigation Expenses (Home Loans) In the current quarter Q4 2010, part of the huge net loss of $1.2 billion was due to increased litigation expenses of $1.5 billion mostly in the Home Loans segment. This expense is related to the mortgage loan buybacks discussed above, including the Countrywide Financial mortgages.

Goodwill Impairment Charge (Global Card Services) In the prior quarter Q3 2010, the colossal net loss of $7.3 billion was due to an astronomical goodwill impairment charge of $10.4 billion in the Global Card Services segment. This charge was related to limits to be placed on debit interchange fees under the financial reform legislation enacted in July 2010, which will reduce future revenues in the global card services business.


Bank of America Performance by the Quarters (Operating Expense Ratio)

Morgan Stanley Operating Expense Ratio (Chart) Below is a chart of the operating expense ratio for Bank of America. The operating expense ratio is NonInterest Expense divided by Total Revenues which are NonInterest Income and Interest Income. Overall, the operating expense ratio is high and has been the past 2 quarters. This is due to goodwill impairments and extraordinary provision expense in Q3 2010 and Q4 2010. A higher share of each dollar of revenues is being spent on operating expenses and in this case on goodwill impairments, extraordinary provision expenses, and litigation expenses. This negatively affects profitability and already has as an ongoing drag on earnings. The chart covers the past 11 quarters, from June 2008 through the latest quarter reported, December 2010. More charts have been posted on the Bank of America Financial Performance page. Recent chart data is:
Quarter, Operating Expense Ratio
Dec09: 52.58%
Mar10: 46.65%
Jun10: 48.78%
Sep10: 83.81%
Dec10: 73.86%




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