Traderbill's Financial Markets Weblog

*record earnings for 2007 of $15.4B (so it was just a 9% writedown), record revenues of $71.4B

*Q4 investment banking revenue down 35% to $3.17B

*Q4 credit card services  revenue +6% to $3.97B…but Q4 credit card loss reserves increased $2.54B

*Subprime portfolio and consumer home equity performed worse than expected

*Like the others big increases in asset management group +26%…but where to from here?

*Q4 net in come per share 86 cents vs. $1.26 consensus.

But the big thing is they “remain cautious” about 2008…that is because they have huge derivative exposure due to counterparty risk. Their credit default swaps, etc. are huge hundreds of billions, and we are just starting to pay attention to that area. When is a hedge, not a hedge? When the other party can’t pay up!

Better news from Wells Fargo (WFC) who added $1.4B to credit reserves…earnings were 41 cents a share after the 27 cent hit for loan losses, still down 38% for the quarter  …delinquent loans increased but at a lower rate than last quarter…wait for resets. They also decided to hold more foreclosed properties…they decided?…market decided! Total provision for loan losses is $2.088B vs $275M a year ago…told you loan loss reserve accounting is archaic.  

Let’s revisit the credit crisis. First, we had a housing boom…to fuel that we went in earnest starting in 2005 seeking subprime borrowers. Then, Greenspan recommended adjustable rate mortgages but later recanted…sort of. That was the last we heard from that fearless leader…much as his stock market bubble comments that he further fueled by not reigning in margin debt…see a pattern here…both allowed Wall Street to profit from the bottom of the barrel. Fed Governor Ed Gramlich tried to persuade him to do something but Greenie insisted they didn’t have the resources to do that…so he did nothing. The most powerful man in the country…where the markets hang on his every word…said he was powerless…but in private! Gramlich got cancer and spent the last six months of his life writing a book on this in a futile attempt to stop this monster in its tracks…but it was too late. Now we are paying the price and the worst part is that those of us in major cities…can’t see a problem! TB has warned for months along with a few others like Merrill’s Dick Rosenberg but have been scoffed at as fearmongering…it can’t happen here. New Yorkers even point to the hot Manhattan real estate market…while downplaying what is happening in the Hamptons. As TB said yesterday, you can’t solve the problem until you realize there is one.

Look at the primaries…the pitch has shifted from the war in Iraq to the economy…except for the GOP candidates who don’t want to admit, for obvious reasons, that there is a problem. But over the past few days even the Administration is starting to blink. The point is that they are out in the hinterlands, not inside New York or the Beltway and people’s concerns are far different. These are the top 6% of taxpayers ($145k), or even the top 10% ($100k), but more like the $40k average income…and they are hurting. They are hurting from taxes…which will almost definitely have to rise at the state and local level, soaring energy costs…read from a friend in a small town in Maine that three businesses have gone out of business due to rising propane costs, and of course food as other than that small town in Maine, prices of bread and eating out are rising sharply…thank you Federal Government for giving us Ethanol!

While the image of the US has deteriorated due to the government (you plug in the names) over the past seven years, it is now being tarnished by Wall Street…with ill-designed CDO’s which are dragging everyone down…including in the UK, France, Germany…and even a small town in Norway for God’s sake. That town bought them, not knowing they could be subject to margin calls due to the imbedded derivatives in them which they believed were mortgages, but were in fact subprime contracts, and thus the margin calls. Federal regulators say the securities were misrepresented. The town bought them from a broker they had dealt with for 30 years which has since filed bankruptcy…but was owned by a consortium of banks who say it is not their problem. How can one have confidence in a financial system when it is the very underpinnings of that system that are cheating you?

TB had to laugh yesterday when Betsy Quick on CNBC said that Citi CEO Pandit (comes awfully close to Panic or even Bandit, no?), had looked thru their subprime portfolio and thoroughly understands them. Hogwash! The guys who created them didn’t even understand them. How else would you put derivatives in an instrument purported to be made up of a pool of loans? How could you use default assumptions from a period of rising real estate prices? How could rating agencies take a pool of crap and call a big portion of it Aaa??? As for you…how can you see your friendly banker reaching out for capital…and not being able to obtain it here getting it from the Arabs, China, Singapore and other places and be happy because their stock is diluted (at favorable terms to these investors) even as the dividend is cut (42% at Citi!). But it appears we are finally awakening…at least a big yawn…you saw it yesterday.   

The Dow opened one point below the prior days close…and THAT was the high of the session…from there the only bounce was a run of about 200 points from the session low which was quickly quashed and likely just shortcovering…this is not the way it is supposed to work this close to options expiration. Worse still volatility was mixed…rising slightly on the VIX (S&P 500) and falling on VXN (NDQ 100). This tells TB there are few surprises left for Friday morning. Retail Sales were abysmal (-0.4%), the worst in five years and November was even revised down to +1.0% from +1.2%. Netting out gasoline sales they would still have been -0.2%. Producer Prices were not a problem…let’s see how CPI does today…actually just coming out and both headline and core are up 0.2% in line with expectations…the bad thing is for 2009 CPI rose 4.3% the most since 1990…further complicating the Fed’s problems.

Are we closer to the beginning or the end of the credit crisis?  …you decide…but note that the Fed’s TAF auction yesterday to fund the maturity of $20B, rose to $30B…albeit at a lower rate and fewer bidders.