Monday, April 28, 2014

Bank of America , JP Morgan , Citigroup and Deutsche Bank - Can you say Derivativ-nados ?

Re: Bank Of America. Remember The Lessons From Cyprus

Tyler Durden's picture

Submitted by Simon Black of Sovereign Man blog,
And another one bites the dust. Now it’s Bank of America, one of the largest banks in the Land of the Free, that is inadequately capitalized.
Last month, Bank of America made a lot of noise about how they were going to buy back up to $5 billion worth of common shares.
As CEO Brian Moynihan stated, “We have simplified our company and we have more than adequate capital to support our strategic plans. We are well positioned to return excess capital to our shareholders.”
Needless to say, investors cheered the announcement, and BofA’s stock price rose nicely as a result.
Fast forward 45 days… and boy what a difference reality makes.
This morning Bank of America rather embarrassingly said it would suspend the stock buyback, stating that they had been ordered to do so by the Federal Reserve.
Moreover, the company must suspend its planned quarterly dividend increase.
All of this because of a supposed arithmetic error in how the bank calculates its regulatory capital. Apparently Bank of America is nowhere near the level of capitalization they thought they had… or had been telling everyone.
And given that the mistake is attributed to the Merril Lynch acquisition from 2009, the errors likely go back for YEARS.
In the words of the once future US Presidential candidate Rick Perry, “Oops…”
This is a big deal; capital is a bank’s lifeblood and a measure of its safety.
A bank with strong levels of capital (which can be thought of as equity, or its total assets minus liabilities) has a vast margin of safety and can withstand major financial shocks like market crashes and bank runs.
Banks with weak levels of capital will perish. Quickly.
Remember the lessons from Cyprus: last March, people went to bed on a Friday night thinking everything was just fine. The next morning they woke up to find that their entire banking system was insolvent and that the government had frozen their accounts.
This was all rather curious given that, literally just days before, they could log on to their bank’s website and check their balances.
It turns out, though, that there’s a huge difference between a number printed on a screen, and the bank actually HAVING the money.
Bottom line, just because they tell you the money’s there doesn’t mean the money’s there. Just because they tell you they’re well capitalized doesn’t mean they’re well capitalized.
And Bank of America is not. Neither is Citigroup (and many others), which recently failed Fed-mandated stress tests.
So in the Land of the Free, you now have inadequately capitalized banks backed by the inadequately capitalized FDIC insurance fund, which is backed by the highly insolvent US federal government, all of which is supported by the nearly insolvent Federal Reserve.
This is hardly a consequence-free environment. Do you have your seatbelt on?

BofA "Finds" Capital Calculation Math Error, Halts Capital Action Plan, $4 Billion Buyback

Tyler Durden's picture

Just weeks after the Fed signed off on CCAR and ackowledged how great the US banking system is, Bank of America (after being slapped with another $13bn RMBS suit demand) has ackowledged things are not quite as risy as they appeared...
So no buyback boost... no dividend boost... The question now is - how do we (or The Fed) trust any of the numbers?
Subsequent to the press release, the Corporation discovered an incorrect adjustment being applied in the determination of regulatory capital related to the treatment of the fair value option adjustment for structured notes assumed in the Merrill Lynch & Co, Inc. acquisition in 2009, resulting in an overstatement of regulatory capital amounts and ratios.

From the release:
Bank of America Corporation today announced a downward revision to the company’s previously disclosed regulatory capital amounts and ratios due to an incorrect adjustment related to the treatment of certain structured notes assumed in the Merrill Lynch & Co., Inc. acquisition in 2009. The reduction in the regulatory capital amounts and ratios has no impact on the company’s historical consolidated financial statements or shareholders’ equity, which were properly stated in accordance with accounting principles generally accepted in the United States of America (GAAP).

On April 16, the company issued a press release announcing preliminary financial results for the quarter ended March 31, 2014. As part of such release, the company included estimated preliminary Basel 3 capital amounts and ratios as well as Basel 1 capital amounts and ratios for 2013. Subsequent to the press release, the company discovered an incorrect adjustment being applied in the determination of regulatory capital related to the application of the fair value option to certain legacy Merrill Lynch structured notes resulting in an overstatement of its regulatory capital amounts and ratios. The company correctly adjusted for the cumulative unrealized change on structured notes accounted for under the fair value option, but it incorrectly adjusted for cumulative realized losses on Merrill Lynch issued structured notes that had matured or were redeemed by the company subsequent to the date of the Merrill Lynch acquisition.

As a result, the company is making the following adjustments to the previously announced estimated preliminary capital ratios for the first quarter ended March 31, 2014: the estimated Basel 3 Standardized transition common equity tier 1 capital ratio was revised to 11.8 percent, down 5 basis points; the estimated tier 1 capital ratio was revised to 11.9 percent, down 21 basis points; the estimated total capital ratio was revised to 14.8 percent, down 21 basis points; and the estimated tier 1 leverage ratio was revised to 7.4 percent, down 12 basis points.

Although not required by GAAP, the company has in prior periods, including the first quarter of 2014, disclosed estimates for its Basel 3 fully phased-in common equity tier 1 ratios in quarterly earnings releases. On a fully phased-in basis, Bank of America estimates that for the first quarter ended March 31, 2014, the common equity tier 1 capital ratio under the Basel 3 Standardized approach decreased 27 basis points to 9.0 percent from the previously reported estimated ratio, and the estimate for the common equity tier 1 capital ratio under the Basel 3 Advanced approaches decreased 29 basis points to 9.6 percent from the previously reported estimated ratio. These ratios exceed the company’s estimated 2019 minimum common equity tier 1 ratio requirement, including buffers, of 8.5 percent.

* * *

Bank of America promptly notified the Federal Reserve Board (FRB) of the revisions and has been in close communication with the FRB regarding the effects of the revisions. The FRB has directed the company to resubmit its data templates and requested capital actions contained in the 2014 Comprehensive Capital Analysis and Review (CCAR). As part of this process, Bank of America will engage a third party to review processes and the materials prior to resubmission.

At the FRB’s request, the company is suspending its previously announced 2014 capital actions, including the $4.0 billion common stock repurchase authorization and the planned increase in the quarterly common stock dividend from $0.01 per common share to $0.05 per share. Subject to completion of the third-party review and approval from the Bank of America Board of Directors, the company will expeditiously resubmit its data templates and requested capital actions in the 2014 CCAR plan for FRB approval. The company expects the requested capital actions to be contained in the revised CCAR submission will be less than the company’s previously announced 2014 capital actions.
The good news: at least Bank of America has no error in its $55.7 trillion in total derivative exposure notional:

And now, presenting... The Brian Moynihan Center for bankers who can't do math good and want to fudge other numbers good too.

The Elephant In The Room: Deutsche Bank's $75 Trillion In Derivatives Is 20 Times Greater Than German GDP

Tyler Durden's picture

It is perhaps supremely ironic that the last time we did an in depth analysis of Deutsche Bank's financial situation was precisely a year ago, when the largest bank in Europe (and according to some, the world), stunned its investors with a 10% equity dilution. Why the capital raise if everything was as peachy as the ECB promised it had been? It turned out,nothing was peachy, and in fact DB would proceed to undergo a massive balance sheet deleveraging campaign over the next year, in which it would quietly dispose of all the ugly stuff on its balance sheet during the relentless Fed and BOJ-inspired "dash for trash" rally in a way not to spook investors about everything else that may be beneath the Deutsche covers.
We note this because moments ago, Deutsche Bank did the same again when it announced that it would issue yet another €1.5 billion in Tier 1 capital.
The issuance will be the third step in a co-ordinated series of measures, announced on 29 April 2013, to further strengthen the Bank’s capital structure and follows a EUR 3 billion equity capital raise in April 2013 and the issuance of USD 1.5 billion CRD4 compliant Tier 2 securities in May 2013. Today’s announced transaction is the first step towards reaching the overall targeted volume of approximately EUR 5 billion of CRD4 compliant Additional Tier 1 capital which the Bank plans to issue by the end of 2015
Ok, so in retrospect nothing is peachy in Frankfurt, and for all the constant lies about improving NPLs and rising cash flows, banks - especially those which not even the ECB can bailout when push comes to shove - Deutsche is as bad as it was a year ago.
So, just like last year when we decided to take a look inside the company's financials to understand why DB was scrambling to dilute its shareholders and raise a few paltry billion in cash, so this year too, we had the pleasure of perusing the European megabank's annual report.
What we found, while hardly surprising for those who read out post from also a year ago, "At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World (Hint: Not JPMorgan)", is just as jarring.
Because while America's largest bank by assets, and certainly ego of its CEO, that would be JPMorgan of course, had awhopping $70.4 trillion in total notional of derivative holdings (across futures, options, forwards, swaps, CDS, FX, and so on), Deutsche Bank once again put it well in the dust.
The number in question?€54,652,083,000,000 which, converted into USD at the current exchange rate, amounts to $75,718,274,913,180.Which is over $5 trillion more than JPM's total derivative holdings.
As we explained last year, the good news for Deutsche Bank's accountants and shareholders, and for Germany's spinmasters, is that through the magic of netting, this number collapses to €504.6 billion in positive market value exposure (assets), and €483.4 billion in negative market value exposure (liabilities), both of which are the single largest asset and liability line item in the firm's €1.6 trillion balance sheet mind you (and down from €2 trillion a year ago: a 20% deleveraging which according to DB "was predominantly driven by interest-rate derivatives and shifts in U.S. dollar, euro and  pound sterling yield curves during the year, foreign exchange rate movements as well as trade restructuring to  reduce mark-to-market, improved netting and increased clearing"), and subsequently collapses even further into a "tidy little package" number of just €21.2 in titak derivative "assets."
And as we further explained both last year and every other time we have the displeasure of having to explain the reality of gross vs net, this accounting gimmick works in theory, however in practice the theory falls apart the second there is discontinuity in the collateral chain as we have shown repeatedly in the past (and certainly when shadow funding conduits freeze up), and not only does the €21.2 billion number promptly cease to represent anything real, but the netted derivative exposure even promptlier become the gross number, somewhere north of $75 trillion.
The conclusion of this story has not changed one bit from last year: this epic derivative exposure is the primary reason why Germany, theatrically kicking and screaming for the past five years, has done everything in its power, even "yielding" to the ECB, to make sure there is no domino-like collapse of European banks, which would most certainly precipitate just the kind of collateral chain breakage and net-to-gross conversion that is what causes Anshu Jain, and every other bank CEO, to wake up drenched in sweat every night.
Finally, just to keep it all in perspective, below is a chart showing the GDP of both Germany and Europe compared to Deutsche Bank's total derivative exposure. If nothing else, it should make clear, once and for all, just who is truly calling the Mutually Assured Destruction shots in Europe.
As always, there is nothing to worry about: this €55 trillion in derivative exposure, should everything go really, really bad is backed by the more than equitable €522 billion in deposits, or just over 100 times less.

Derivativ-nados  ?  ?