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May 05, 2009

And the Banks that Need to Raise Capital Are...
by Reggie Middleton

I am now releasing the additional calculated capital requirements for several banks, with the full set of calculations available for download for free registered users. I am releasing my proprietary work to demonstrate to those who do not currently subscribe to BoomBustBlog the depth and breadth of this site's capabilities.

The Methodology Used

As stated in my original release of the Sun Trust Stress Test Analysis, I don't necessarily agree with the methodology and assumptions of the government's version of the stress test. For one, they don't risk weight earnings, only assets. Some of the investment banking operations take significant risks to generate earnings (see "Goldman Sachs Banking Secrets Mr. Geithner May Not Share With You!), and these actions pose systemic risk. In addition, the bar is too low to be considered truly stressful (eg. 8.4% average unemployment as a base case in an 8.5% unemployment environment, trending upwards). I have rectified the problem of floating government targets and expectations by creating a scenario analysis that covers multiple assumptions, thus the readers can decide for themselves which set of assumptions to use in order to arrive at what they feel would be the government's (or the most realistic) conclusion.

The following is a summary of my simulated government stress tests based upon the white paper released in the latter part of April 2009. See The Supervisory Capital Assessment Program: Design and Implementation 2009-04-30 02:16:44 286.90 Kb and Bank of Finland Recessionary Stress Testing Methodology 2009-04-30 02:18:39 306.64 Kb for methodology. For my personal accounts, I am assuming a 4% bar for Tangible Common Equity and a 6% bar for Tier One Capital. The actual bars have not been released publicly, to my knowledge. It has been stated in the media and dated government documents that the base case government estimates for unemployment was 8.4%. As previously mentioned, we believe that to be unrealistic (given that the latest government figures show 8.5% unemployment and trending upwards), hence we have used the more stringent RGE Monitor macro assumptions for the base case scenario and have reserved what we perceive as the government's stated parameters as the optimistic scenario.

Please be aware that these are illustrative analyses only, and we are not privy to the same access and information that may have went into the government's analysis of these companies. In addition, the government may have wavered from the stated implementation in the whitepaper released above. All in all, I believe this to be a fairly accurate representation of what one could expect from the government in the upcoming days.

The Scenario Analysis Summary for PNC Bank

Capital to be Raised

Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee PNC being in need of roughly $3.25 billion of additional capital causing approximately 18% in dilution among existing equity investors as of the closing price of the 1st of this month.

Download the full analysis (as a registered user) here: PNC Simulated Government Stress Test 2009-05-05 02:00:10 1.12 Mb

The Scenario Analysis Summary for Morgan Stanley

Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee Morgan Stanley not being in need of additional capital as of the closing price of the first of this month.

Download the full analysis (as a registered user) here: MS Simulated Government Stress Test 2009-05-05 02:17:35 2.49 Mb

The Scenario Analysis Summary for Sun Trust Bank

Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee Sun Trust being in need of roughly $1.5 billion of additional capital causing approximately 31.7% in dilution among existing equity investors, as of the closing price of the first of this month.

I have made the full 36 page report available for all to download here: Sun Trust Banks Simulated Government Stress Test 2009-05-04 13:38:04 1019.01 Kb.

I will follow up with Stress Tests for Goldman Sachs and American Express tomorrow. Stay tuned...

For those who do not know or follow me, I have a strong track record in calling this credit crisis:

1. The Commercial Real Estate Implosion: I called it in 2007 - "GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months".
2. The Investment Bank Implosions: Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]) - and - Lehman Brothers investment banking/CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008])
3. The Mortgage Banking Implosion: I called it in 2004, publicly on the blog in 2007 - Countrywide and Washington Mutual (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide with its peer)
4. The Regional Bank Implosion: Spring of 2008 - nearly all of the failed or failing regional banks of significant size (As I see it, these 32 banks and thrifts are in deep doo-doo!)
5. The Monoline Implosion: 2007-2008 - MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton) and Ambac (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap and Follow up to the Ambac Analysis), among others including the residential homebuilders and their abuse of off balance sheet JVs - well in advance.

I suggest everybody read up on how we got here. I started taking defensive action in 2004, and implemented my offensive actions 2007 - right around the time this blog was started. Read my blog by blow analysis...

Recommended Reading - The Asset Securitization Crisis:

1. Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
5. Municipal bond market and the securitization crisis - part I
6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
9. More on the banking backdrop, we've never had so many loans!
10. As I see it, these 32 banks and thrifts are in deep doo-doo!
11. A little more on HELOCs, 2nd lien loans and rose colored glasses
12. Will Countywide cause the next shoe to drop?
13. Capital, Leverage and Loss in the Banking System
14. Doo-Doo bank drill down, part 1 - Wells Fargo
15. Doo-Doo Bank 32 drill down: Part 2 - Popular
16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
17. The Anatomy of a Sick Bank!
18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
19. GE: The Uber Bank???
20. Sun Trust Forensic Analysis
21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
22. Goldman Sachs Forensic Analysis
23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
24. Part one of three of my opinion of HSBC and the macro factors affecting it
25. The Big Bank Bust
26. Continued Deterioration in Global Lending, Government Intervention in Free Markets
27. The Butterfly is released!
28. Global Recession - an economic reality
29. The Banking Backdrop for 2009
30. Reggie Middleton on the Irish Macro Outlook

Recommended Global Macro Reading from Guest Contributors:

1. Debt - Thoughts On A Global Problem (Part 1),
2. Banking out of Control (Part 2)
3. Global Debt Stats (Part 3)

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Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.

Copyright © 2007-2009 Reggie Middleton

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