After Rescue, New Weakness Seen at A.I.G. (NYT)
If A.I.G.’s incoming premiums shrink, W. O. Myrick, a retired chief insurance examiner warned, “the whole thing’s going to collapse in on itself.”

The Risk Mirage At Goldman Sachs (BusinessWeek)
Down with VaR! says one guy: “Whatever your opinion of Goldman’s fortunes and market forays in this recession, the fact is that a VaR-based analysis of any firm’s riskiness is useless. VaR lies. Big time. As a predictor of risk, it’s an impostor. It should be consigned to the dustbin. Firms should stop reporting it. Analysts and regulators should stop using it.”

HSBC May Post Loss on $15 Billion Bad Loan Provisions (Bloomberg)
Sad trombones all around.

US Administration Working to Keep ‘Clunkers’ Program (CNBC)
Even though it’s basically out of money, etc, etc, etc.

Bernanke’s Popularity (FT)
Do you hate the Fed Chairman because he has a facial hair? Is that it?

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Update: From Bloomberg

July 30 (Bloomberg) — The U.S. Securities and Exchange Commission will review so-called flash orders used by four equity markets, NYSE Euronext Chief Executive Officer Duncan Niederauer said.
Charles Schumer, the third-ranking Democrat in the U.S. Senate, told the SEC to review flash orders in a July 24 letter. Regulators told NYSE officials they will examine them, and based on those discussions it appears unlikely the SEC will impose curbs on other forms of high-speed trading, Niederauer said today in a conference call with analysts to discuss the New York-based company’s second-quarter results.
“I don’t think there is any fear of them doing something that would severely damage the displayed liquidity on U.S. equity markets,” he said. “High-frequency trading is actually the most consistent source of liquidity.”[TD: Time for one more of those "The Y in the NYSE stands for Trust" ads]
John Nester, a spokesman for the SEC, didn’t return a telephone call seeking comment. Last month, SEC Chairman Mary Schapiro said the agency is concerned that electronic indications of bids and offers are being disseminated to a select group of brokerages.
NYSE’s competitors — Nasdaq OMX Group Inc., Bats Global Markets, Direct Edge Holdings LLC and the CBOE Stock Exchange — give information to their clients about orders for a fraction of a second before the trades are routed to rival platforms. NYSE Euronext, the world’s largest owner of stock exchanges, told the SEC in May that these flash orders result in most investors getting worse prices.

By Nomi Prins, via Mother Jones

July 28, 2009 — This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation’s biggest banks can’t be trusted might not matter very much to the rest of us. But since the record bank profits we’re now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed’s role in Goldman’s rapid return to the top of Wall Street.

To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn’t have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.

Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks’. That’s the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.

Goldman didn’t like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what’s called the Market Risk Rules that bank holding companies adhere to when computing their risk.

Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG’s spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG’s free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there’s the $29.7 billion it’s used so far out of the $35 billion it has available, backed by the FDIC’s Temporary Liquidity Guarantee Program, and finally, there’s the $11 billion available under the Fed’s Commercial Paper Funding Facility.

Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.

On February 5, 2009, the Fed granted Goldman’s request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money. Read The Secret Stock Market

Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That’s the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It’s also the division that would stand to gain the most if Waxman’s cap-and-trade bill passes.)

Since Goldman is trading big with our money, why not also use it to pay big bonuses? It’s not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount.

But capital is still key. Capital is the lifeblood that pumps through a financial organization. You can’t trade without it. As of June 26, 2009, Goldman’s total capital was $254 billion, but that included $191 billion in unsecured long-term borrowing (meaning money it had borrowed without putting up any collateral for it). On November 28, 2008 (4Q 2008), it had only $168 billion in unsecured long-term borrowing. Thus, its long-term unsecured debt jumped 14 percent. Though Goldman doesn’t disclose exactly where all this debt comes from, given the $23 billion jump, we can only wonder whether some of it has come from government subsidies or the Fed’s secret facilities.

Not only that, by virtue of how it’s set up, most of Goldman’s unsecured funding comes in through its parent company, Group Inc. (Think the top point of an umbrella with each spoke being a subsidiary.) This parent parcels that money out to Goldman’s subsidiaries, some of which are regulated, some of which aren’t. This means that even though Goldman is supposed to be regulated by the Fed and other agencies, it has unregulated elements receiving unsecured funding—just like before the crisis, but with more of our money involved.

As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase’s results got from Wall Street. Betting is betting.

Let’s pause for some reflection: The bank “stars” made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he’s concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn’t add up to a really healthy scenario. It’s more like bad déjà vu.

As a recent New York Times article (and many other publications in different words) said, “For the most part, the worst of the financial crisis seems to be over.” Sure, the crisis may appear to be over because the major banks of Wall Street are speculating well with government subsidies. But that’s a dangerous conclusion. It doesn’t mean that finance firms could thrive without the artificial, public-funded assistance. And it certainly doesn’t mean that consumers are any better off than they were before the crisis emerged. It’s just that they didn’t get the same generous subsidies.

Additional research by Clark Merrefield.

Article From Mother Jones, h/t Zero Hedge, amsterdamtrader

From the WSJ: GSEs Unlikely to Repay U.S. in Full

… “My view is that some assets in the senior preferred will have to be left behind as they come out of conservatorship,” Federal Housing Finance Agency Director James B. Lockhart said Thursday in response to a question at a panel discussion in Washington. “That will mean that some of the losses will never be repaid.”

The Treasury has agreed to pump $200 billion into each company in order to keep them solvent. In exchange, the government receives senior preferred stock that pays a 10% dividend. So far, it has injected $85 billion in total into the companies, but Lockhart said that figure was likely to rise in the coming months.

Fannie and Freddie together own or guarantee $5.4 trillion in mortgages. …

Mr. Lockhart said Fannie and Freddie would likely see their reserves continue to decline next year, but could return to strong profits in two to three years.

Courtesy of Money Morning

In February, I analyzed the top 12 U.S. banks to determine whether they really needed $1.5 trillion in
taxpayer-provided bailout capital. I concluded that only a few of those banks seemed to be in any danger
of collapse, and actually recommended several.

Policymakers and the market later came to agree with me: The Standard & Poor’s 500 Financial Index has
more than doubled from its March low and several bank stocks have posted triple-digit returns.

An April review of the first-quarter financial results of the top 13 U.S. banks (I added Fifth Third Bancorp
(NYSE: FITB), at a reader’s request, to make it a Baker’s Dozen) only reinforced my conclusions.

But now the second-quarter results are out and an examination of those financial statements makes it
appear this optimism may have gone too far. And that could mean that bank stocks will pose more risk in
the year’s second half than they did in the first six months of 2009.

Let’s take a closer look.

Stressed Out Over Stress Tests

The highly controversial government bank “stress tests” may be the best place to start. Since the results
of the government stress tests (Money Morning conducted bank stress tests of its own) were published, a
number of banks raised extra capital.

However, it’s now clear that the government’s stress tests may not have been stressful enough.

The government’s “more adverse” scenario postulated unemployment averaging 8.8% in 2009 and 10.3%
in 2010. With unemployment already at 9.5% in June we have blown through the 2009 estimates. And with
some economists actually projecting that unemployment could actually reach the 12% level next year, the
government estimates for 2010 were clearly also too low.

Furthermore, neither scenario considered what might happen as a result of the enormous budget deficits,
currently forecast at $1.8 trillion in 2009 and $1.3 trillion in 2010. If interest rates zoom up, bank profits will
take an additional hit. On the other hand, the “more adverse” scenario assumed a 22% decline in house
prices in 2009, followed by a gain of 7% next year. Recent good news in housing suggests those figures
may indeed be a bit pessimistic. Overall, therefore, the fact that a bank passed the stress test is not a
guarantee of future success.

Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley Inc. (NYSE: MS) – onetime investment banks
now operating as bank holding companies – fall into a separate category. Both institutions depend almost
entirely on their trading prowess, which in the case of Goldman Sachs produced impressive results in the
second quarter. However, I am old-fashioned enough to regard what they do as not really banking, and
hence propose to ignore them in this piece.

The Indicators That Separate Winners From Losers

There is lots of information – about potential bailout needs and about possible investment bargains – that
can be gleaned from the banks’ second-quarter figures and from the earlier government “stress test”
results. In particular:

A number of banks did fine on the stress tests, but then went on to report thumping losses in the second
quarter, suggesting the stress tests were wrong (my own ratings seem to have been more accurate!).

* Banks that have lost money at an operating level in each of the last three quarters are probably in
terminal trouble, regardless of whether the “stress test” said they were okay.

* Banks that relied more on the Goldman-Sachs-type trading business had better quarters than the
banks that relied upon more-traditional lending. I regard this as a danger sign, since that business is likely
to be much less profitable going forward and some products (credit default swaps, for example) may land
an institution in serious trouble. What’s more, it now appears that commodities trading is poised to come
under political fire, particularly since it appears that regulators are looking to restrict risk.

* In most cases, such key financial-analysis ratios as stock price to book value (Price/Book ratio, or P/B
ratio) have risen sharply in the last few weeks. If the bank is trading above book value, but is still making
losses or tiny profits, it’s overvalued.

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* Several banks did share issues at huge discounts to book value, badly diluting existing shareholders.
As far as I’m concerned, any bank that has a management team that’s hostile to shareholders is a bank to
avoid.

* None of the banks seem likely to pay reasonable dividends going forward, though BB&T Corp. (NYSE:
BBT) is at least making an effort, with a dividend yield of around 2.7%. Over the long term, dividends are a
key component of investment returns, so they should always be a consideration.

The Four Categories of U.S. Banks

Using these indicators, we can assess the viability of the leading U.S. banks. They can be divided, as
before into four categories:

* Zombies: Institutions making persistent losses at an operating level. These subtract value from the
economy and should be put out of their misery through controlled liquidation, with the healthy parts being
salvaged. They are surviving only because of ill-advised government (taxpayer) largesse.
* Walking wounded: These may well need another bailout if troubles develop. Right now, however,
despite the fact that profits are too low, these banks are currently operating adequately on their own. An
intensification of economic downturn would push some of them into “zombie” status or bankruptcy.
* Risky but Proud: These banks have relatively high risks, because of acquisitions or their business
mix, but appear to be overcoming the challenges they face. However, their profitability is poor and may
remain so.
* Hidden gems: These banks have conquered 2008’s difficulties, taken care of their bad-debt problem,
and still managed to make a substantial profit. Short of a repeat of 1929-33, they should continue to do
so. However, many have seen their stocks soar, meaning their shares are often now overpriced -
especially given the likelihood of a prolonged recession still to come.

A Baker’s Dozen for Bank Investors

That brings to a review of the 13-largest U.S. banks by assets as of Dec. 31 (ignoring Goldman Sachs,
Morgan Stanley, and foreign-owned banks). They are listed here in reverse order of size (as measured by
assets):

13. Fifth Third Bancorp (Nasdaq: FITB) – Zombie: With $120 billion in assets, this Cincinnati-based
regional bank accepted a $3.4 billion Troubled Assets Relief Program (TARP) investment from the federal
government. Fifth Third grew by buying other banks in the Midwest and Florida. At Monday’s closing price
of $8.67 a share, the bank is trading at 67% of book value and twice its level of three months ago. It lost
$1.2 billion in 2008 even after goodwill write-offs, and has lost another $26 million in the first quarter of
2009 – a bad result, since the 2008 disaster and the TARP investment should have allowed it to mark
down its bad assets, taking “everything but the kitchen sink” into the 2008 loss. It posted an additional
operating loss of $200 million in the second quarter, but showed a profit because of a $1.1 billion sale of
its processing unit. Stress test said it needed another $1.1 billion of capital, which it raised through the
dilutive sale of $1 billion in stock, as well as the asset sale. Fifth Third’s survival as an independent entity -
without further state assistance – remains doubtful; an orderly liquidation would seem the best alternative.
However, both the Ohio economy, and the U.S. housing market – both major problems for FITB – are
looking better. Second-half rating: AVOID.

12. Regions Financial Corp. (NYSE: RF) – Zombie: With $146 billion in assets, and a $3.5 billion TARP
investment, this Birmingham-based regional bank operates primarily in the Southeast. At Monday’s closing
price of $3.69, Regions’ shares are trading at 28% of book value. The bank lost $5.6 billion in 2008, and
its tangible net worth is only $10.5 billion, but that loss was based entirely on goodwill impairment; on an
operating basis it made a profit of about $300 million. Regions earned $77 million in the first quarter, but
lost $244 million in second quarter. According to the federal stress test, Regions needed $2.5 billion; it
raised $2.1 billion through equity issues, thus diluting the hell out of existing shareholders. I have
downgraded it from Walking Wounded to Zombie, although there may still be a pulse there.
Second-half rating: AVOID.

11. BB&T Corp. (NYSE: BBT) – Hidden Gem: With $152 billion in assets, this Winston-Salem, NC-based
regional bank operates mostly in the Mid-Atlantic region. At Monday’s closing price $21.62, BB&T was
trading at about 90% of book value. This bank was profitable in each quarter of 2008, as well as in both
quarters so far this year, making $1.5 billion for all of last year, $271 million in this year’s first quarter and
$208 million in the second quarter. BB&T “aced” the government stress test, sold $1.7 billion in common
stock and repaid its TARP funding. It cut quarterly dividend to 15 cents a share for second quarter of 2009
and it will be interesting to see what it does going forward. The shares are up more than 50% since I
highlighted BB&T as one of the three U.S. banks that posed plenty of promise with very little downside risk.
However, the stock-price increase since spring doesn’t reflect BB&T’s truly superior performance, which
should improve now that it’s rid of TARP. Second-half rating: BUY.

10. Capital One Financial Corp. (NYSE: COF) – Zombie: Based in McLean, Va., Capital One is primarily
a credit-card operation, though it has also acquired banking operations. Total assets equal $161 billion. It
has repaid its $3.5 billion TARP investment. Because of its large market share with aggressive lending
practices, Capital One looks to me like the credit card equivalent of the formerly independent mortgage
lender Countrywide Financial Corp., which is now part of Bank of America Corp. (NYSE: BAC). At Monday’s
closing price of $29.79, Capital One was trading at 53% of book value. It lost $1.4 billion in fourth quarter
of 2008, $112 million in first quarter of 2009, and $275 million in second quarter. The second-quarter loss
included the alleged $453 million cost of repaying TARP, but also a negative write-down on its credit-card
portfolio. Stress test said it was fine; an extraordinary view, so it issued $1.5 billion of very-dilutive shares
and repaid TARP. I don’t like the business and I don’t trust the accounting. Second-half rating: AVOID.

9. State Street Corp. (NYSE: STT) – Risky but Proud: A Boston-based bank, with a uniquely institutional
orientation, State Street has $174 billion in assets, and repaid its $2 billion TARP investment. At Monday’s
close, its share price was $48 – an extremely rich 199% of book value. State Street has $2 billion in
(non-dilutive) stock to repay TARP. Last year’s reported per-share earnings of $3.89 represented a 13%
increase from 2007. Its first-quarter net income fell 16%, but was still $445 million. However, State Street
posted a second-quarter loss of $3.3 billion after a $6.3 billion charge that was related to its asset-backed
commercial paper (ABCP) program. Although the government stress test said State Street was fine, those
conclusions were made before the ABCP loss. Rating cut a notch; one worries how many other banks
have this kind of disaster lurking somewhere. Way overpriced. Second-half rating: AVOID.

8. SunTrust Banks Inc. (NYSE: STI) – Walking Wounded, but on a path to Zombification: Based in
Atlanta, this regional bank has $189 billion in assets and operations throughout the Mid-Atlantic region, as
well as throughout the Southeast – particularly in Florida. SunTrust accepted a $4.9 billion TARP
investment. At Monday’s closing price of $18, SunTrust was trading at 47% of book value. It posted a
fourth-quarter loss of $379 million, but an overall 2008 profit of $747 million. However, SunTrust’s
first-quarter loss of $815 million included $715 million of mortgage and real-estate-loan losses and it
posted a second-quarter loss of $184 million. The stress test concluded it needed $2.2 billion in additional
capital, which it raised by a share issue, heavily diluting existing shareholders. SunTrust has not been
permitted to repay TARP. Second-half rating: AVOID.

7. The Bank of New York Mellon Corp. (NYSE: BK) – Hidden Gem: A New York-based bank with
operations primarily in New York and Pennsylvania, and an institutional/corporate business orientation,
Mellon has $237 billion in assets and repaid its TARP investment. Monday’s closing price of $27 meant the
bank was trading at 119% of book value. It passed the stress test. Net income for 2008 was $1.39 billion
and it reported a first-quarter profit of $322 million, after which bank reduced its quarterly dividend from 24
cents to 9 cents. It posted a second-quarter profit of $176 million after a $196.5 million charge for TARP
repayment costs. Bank of New York Mellon raised $1.5 billion of subordinated debt and $1.4 billion of
non-dilutive equity to repay TARP. This looks solid to me, with profits steady if you add back the TARP
repayment cost. Second-half rating: BUY.

6. U.S. Bancorp (NYSE: USB) – Hidden Gem: With $266 billion in assets, this Minneapolis-based
regional bank operates mostly in the Northwest and Upper Midwest. It has repaid its TARP investment.
Monday’s closing price of $20 a share meant the bank was trading at 169% of book value. It reported a
profit of $2.94 billion for all of 2008. It posted a first-quarter profit $419 million, and a second-quarter profit
of $221 million after a $154 million TARP repayment charge. It passed the stress test. It issued $1 billion of
debt and $2.7 billion of non-dilutive equity. It cut its quarterly dividend from 42.5 cents per common share
to 5 cents to repay TARP. Second-half rating: HOLD.

5. PNC Financial Services Group Inc. (NYSE: PNC) – Hidden Gem: With $291 billion in assets, this
Pittsburgh-based bank bought the slightly larger Cleveland-based National City Corp. in October, and now
operates in the Mid-Atlantic and Midwest regions. It accepted a $7.6 billion TARP investment. At Monday’s
closing price of $35, PNC is trading at 84% of book value. It reported net income of $882 million for 2008,
$460 million for first quarter of 2009 and $207 million for second quarter of 2009. PNC’s quarterly dividend
is now 10 cents per common share. The bank raised $600 million as required under TARP, with only small
dilution. PNC appears to be integrating its National City acquisition well, but remains concerned about
possible deteriorations in its credit quality. It plans to redeem TARP in a “shareholder-friendly manner.”
I’ve upgraded this to a Hidden Gem on the basis of continued earnings and a reasonable stock price.
Second-half rating: BUY.

4. Wells Fargo & Co. (NYSE: WFC) – Risky but Proud: A San Francisco-based bank that’s evolved into
a nationwide player following its buyout of Wachovia Corp., Wells Fargo has $1.31 trillion in assets, and
accepted a $25 billion TARP investment. Monday’s closing price of $24 means the stock is trading at
135% of book value. Wells reported a fourth-quarter net loss of $2.55 billion, not including an $11 billion
net loss at Wachovia; full-year 2008 earnings totaled $2.84 billion. So far this year, Wells has reported a
first-quarter profit of $2.38 billion, and a second-quarter profit related to common stock of $2.58 billion.
The bank cut its dividend to 5 cents per share. The government stress test concluded that Wells Fargo
required an additional $13.7 billion, which it raised via $8.6 billion in outside equity and $5 billion from
internal sources. Wells now looks riskier than PNC; its loan write-offs in the second quarter exceeded
loan-loss provisions. Second-half rating: HOLD.

3. Citigroup Inc. (NYSE: C) – Zombie: For regulators, Citi is the Big Kuhuna, and in my opinion, it should
have been liquidated. A global financial conglomerate based in New York, Citigroup has been a serial
flirter with bankruptcy over the last 30 years. Citi right now has $1.945 trillion in assets, and accepted both
a $45 billion TARP investment, and government guarantees on $301 billion of assets. At Monday’s close
of $2.86 per share, Citi is trading at 19% of book value. It lost $18.7 billion in 2008. It theoretically made
money in the first quarter of 2009, but then fell back to a loss because it had to re-set the terms of some
preference shares issued the previous year, diluting common shareholders further. Its $11.1 billion gain
from the sale of its Smith Barney brokerage gave it a $4.3 billion second quarter profit, but Citi still lost
oodles on an operating basis. The banking giant swapped $58 billion of preference shares for common,
which will dilute shareholders still further. And it reduced its dividend to a nominal 1 cent per share. This is
the Zombie of Zombies, and seems to be getting no better. Second-half rating: AVOID – though, as a
taxpayer, you own 34% of it, anyway.

2. JPMorgan Chase & Co. Inc. (NYSE: JPM) – Risky but Proud: With $2.175 trillion in assets,
JPMorgan is a major international player with a New York headquarters and its banking and
investment-banking operations are both major global players. It bought The Bear Stearns Cos. Inc.
investment bank in March 2008 and the Washington Mutual Inc. (OTC: WAMUQ) thrift in September, both
with federal government help. It has paid back its TARP investment. Monday’s closing price of $38 meant
that JPMorgan was trading at about 102% of net asset value. It reported net income of $5.6 billion for
2008. So far this year it reported $2.1 billion in first quarter and $2.8 billion in second quarter – after TARP
repayment costs of more than $2 billion. JPMorgan reduced its quarterly dividend from 38 cents per share
to 5 cents a share. However, the second-quarter profit was largely from investment banking, which I view
as very low quality earnings, though JPM gains from lack of competitors currently. Second-half rating:
HOLD.

1. Bank of America Corp. (NYSE: BAC) – Zombie: With roughly $2.8 trillion in assets – including Merrill
Lynch, which was acquired after the 2008 year-end – this nationwide retail-banking giant is based in
Charlotte, and has used the financial crisis to grow through acquisitions. In addition to its purchase of
Merrill, the No. 3 investment bank, BofA also purchased No. 1 mortgage giant Countrywide

Financial Corp. last year. Bank of American accepted a total TARP investment of $45 billion, as well as
$118 billion in asset guarantees against Merrill Lynch assets. Monday’s closing price of $13 meant that
BofA was trading at 50% of book value. The banking giant reported a fourth-quarter net loss of $1.55
billion, and had to shoulder the additional Merrill Lynch net loss of $15.3 billion. Bank of America reported
a first-quarter profit of $2.8 billion after preferred-share dividends, but that included $2.2 “mark-to-market”
write-up of Merrill Lynch debt (the opposite of all those “mark to market” write-downs banks are whining
about). It reduced its quarterly dividend to a nominal 1 cent per share. Second-quarter net income of $3.2
billion was after $9.1 billion of pre-tax gains from asset sales, so on an operating basis it still loses money.
It’s still a Zombie, and I question the quality of its management. Still a Zombie, and management quality is
doubtful. Second-half rating: AVOID.

A Final Look Forward

From this extensive analysis, it’s very clear that the leading U.S. banks are still very troubled, and that
several lf them will probably have to be liquidated over time or taken into public ownership. In fact, in many
ways the continued virulence of the problems in this sector make me even less optimistic than in February.
In particular, the government’s decision to allow Citigroup and perhaps even Bank of America to continue
operating causes a huge moral hazard: As a Money Morning investigation demonstrated, banks will take
endless risks and merge like madmen in order to be thought “too big to fail.”

There’s another problem – this one of particular concern to current stockholders, or prospective investors:
The downside risks for all these banks now exceeds the upside.

Many of these banks have experienced huge share-price run-ups. Take Bank of America. At the closing
price of $13.34 yesterday, BofA’s shares have soared more than 320% from their early-March lows.
Looking ahead, the liquidity growth in the U.S. monetary system has been so excessive, and the projected
U.S. federal budget deficit is so great, that there must be a substantial chance of a bond market crash in
the months ahead. That would undoubtedly hit some of these banks hard, possibly pushing them over the
edge – but there’s no way of figuring out which. So, in general, I would give the sector a miss.

[Editor's Note: When it comes to global investing, longtime market guru Martin Hutchinson is
one of the very best - because he knows the markets firsthand. After years of advising
government finance ministers, crafting deals with global investment banks, and analyzing the
world's financial markets, Hutchinson has used his creative insights to create a trading service
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Courtesy of Zero Hedge

The bloodbath at GE’s propaganda station has reached critical levels: according to Nielsen, CNBC has lost 28% of viewers year over year, and 24% in the 25-54 age group category. This is obviously a stunning failure in an environment where the top stories on any other medium are finance and economy related. Maybe if they were to actually report objective news, Jeff Immelt would not have to scratch his head in wonderment, pondering how to generate ad revenue and something even remotely resembling positive cash flow. Then again what are the poor anchors to do since the infamous Immelt memo made the rounds. At least GE stock is up: and for that GE, Barney Frank and Goldman Sachs, deserve a golf clap.

Oh, and Larry, with a 46% drop, you may want to reevaluate your content strategy.

But for all intents and purposes, CNBC’s core viewership has spoken and it openly demands more of Amanda Drudy’s enhanced cleavage.

Everything is playing out exactly as we hoped and expected this week. We have been so close to a buy signal in gold and silver but Monday’s intraday observations saved us from a nasty trade. Those of you in love with oil just had a Kiss Good Bye! Better PUT some love letters together J pardon the pun. Natural Gas is all bottled up. Can you smell that?…..Complete Story

Courtesy of Calculated Risk

The DOL reports on weekly unemployment insurance claims:

In the week ending July 25, the advance figure for seasonally adjusted initial claims was 584,000, an increase of 25,000 from the previous week’s revised figure of 559,000. The 4-week moving average was 559,000, a decrease of 8,250 from the previous week’s revised average of 567,250.
…
The advance number for seasonally adjusted insured unemployment during the week ending July 18 was 6,197,000, a decrease of 54,000 from the preceding week’s revised level of 6,251,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 8,250, and is now 99,750 below the peak of 16 weeks ago. It appears that initial weekly claims have peaked for this cycle. Continue Reading.

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