Quanta Analytics Financial Crisis Accounting of the Banking Industry Part III Analysis of Banking...

Quanta AnalyticsQuanta Analytics

Financial Crisis Accounting of the Financial Crisis Accounting of the Banking IndustryBanking Industry

Part IIIPart III

Analysis of Banking Industry AssetsAnalysis of Banking Industry Assets

And Their Changing NatureAnd Their Changing Nature

For Questions contact Jim Boswell--email: Quanta.AFor Questions contact Jim Boswell--email: [email protected]@gmx.com

History of Banking Industry AssetsHistory of Banking Industry Assets

In earlier parts to the Quanta Analytics analysis of the financial crisis and banking industry we looked at:In earlier parts to the Quanta Analytics analysis of the financial crisis and banking industry we looked at: (1) the amount of losses the banks have absorbed due to their lending mistakes (Part I); and(1) the amount of losses the banks have absorbed due to their lending mistakes (Part I); and (2) how the portfolio of banking industry loans have and are currently performing by loan category (Part II).(2) how the portfolio of banking industry loans have and are currently performing by loan category (Part II).

In Part III we are going to investigate the Asset side of the banking industry financials and see what we can In Part III we are going to investigate the Asset side of the banking industry financials and see what we can decipher from that view. First, we will look at how banking industry assets grew from 1992 through to the decipher from that view. First, we will look at how banking industry assets grew from 1992 through to the present time and then we will focus on how the mix of banking industry assets have changed since the present time and then we will focus on how the mix of banking industry assets have changed since the Financial Crisis first began to come into the public’s focus, which we consider to be between the 2Financial Crisis first began to come into the public’s focus, which we consider to be between the 2ndnd and 3 and 3rdrd Quarter of 2008.Quarter of 2008.

The analysis in this section will begin with a high level accounting for assets (i.e., cash, loans, securities, other), The analysis in this section will begin with a high level accounting for assets (i.e., cash, loans, securities, other), then we will break those asset categories down into sub-categories as the data permits or warrants.then we will break those asset categories down into sub-categories as the data permits or warrants.

As a starting point—the next graph will show the eighteen year trend of the four major asset categories (Cash, As a starting point—the next graph will show the eighteen year trend of the four major asset categories (Cash, Securities, Loans, and Other) that will make up our analysis.Securities, Loans, and Other) that will make up our analysis.

Before beginning, QA believes that it is worth noting how banking assets grew steadily up until the Financial Before beginning, QA believes that it is worth noting how banking assets grew steadily up until the Financial Crisis and how they have somewhat stagnated since that time. And although it is just one point on the Crisis and how they have somewhat stagnated since that time. And although it is just one point on the following graph, QA would like to also point out the $0.5 step jump in 2008—which if you look at the following graph, QA would like to also point out the $0.5 step jump in 2008—which if you look at the graph closely was a result of an influx of $0.5 Trillion in Cash, which QA assumes was associated with TARP graph closely was a result of an influx of $0.5 Trillion in Cash, which QA assumes was associated with TARP funding. Later graphs will focus specifically on the banking asset changes since that influx.funding. Later graphs will focus specifically on the banking asset changes since that influx.


History of Banking Industry AssetsHistory of Banking Industry Assets(1992 – 2010)(1992 – 2010)

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History of Banking Industry AssetsHistory of Banking Industry Assets

The next graph uses the information presented in the previous graph and shows how the relative The next graph uses the information presented in the previous graph and shows how the relative mix of the four major asset categories (Cash, Securities, Loans, Other) have changed over mix of the four major asset categories (Cash, Securities, Loans, Other) have changed over time.time.

Because the analysis in this Part III of our Banking Industry Analysis will focus primarily on the Because the analysis in this Part III of our Banking Industry Analysis will focus primarily on the asset changes in the last nine quarters since the 2asset changes in the last nine quarters since the 2ndnd Quarter of 2008, we would like to point Quarter of 2008, we would like to point out some of the overall general trends.out some of the overall general trends.

Prior to 2008, the trend in banking assets followed this general pattern:Prior to 2008, the trend in banking assets followed this general pattern: (1) loans represented a fairly steady 60% of all banking assets;(1) loans represented a fairly steady 60% of all banking assets; (2) the relative amount assets held as cash and securities tended to follow a general (2) the relative amount assets held as cash and securities tended to follow a general

downward trend; anddownward trend; and (3) those downward trends were compensated by increases in the “other asset category”(3) those downward trends were compensated by increases in the “other asset category”

Since 2008, the trend in banking assets have followed this pattern:Since 2008, the trend in banking assets have followed this pattern: (1) loans represent a smaller relative percentage of banking assets;(1) loans represent a smaller relative percentage of banking assets; (2) the amount of cash and security assets have risen; and(2) the amount of cash and security assets have risen; and (3) the amount of “other assets” have dropped as a relative percent.(3) the amount of “other assets” have dropped as a relative percent.


History of Banking Industry AssetsHistory of Banking Industry Assetsas a Percent of Total Assetsas a Percent of Total Assets

(1992 – 2010)(1992 – 2010)

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History of Banking Industry AssetsHistory of Banking Industry AssetsSince the Beginning of the Financial Crisis Since the Beginning of the Financial Crisis

(2(2ndnd Qtr 2008 to the Present) Qtr 2008 to the Present)

As we move forward with our more detailed analysis of the changes in banking industry assets relating to the As we move forward with our more detailed analysis of the changes in banking industry assets relating to the Financial Crisis, QA will use a similar 3-graph configuration to show and explain the changes that have Financial Crisis, QA will use a similar 3-graph configuration to show and explain the changes that have been occurring.been occurring.

The first graph of each 3-graph series will show how banking industry assets have changed since the 2The first graph of each 3-graph series will show how banking industry assets have changed since the 2ndnd Quarter of 2008 to the latest reported quarter (3Quarter of 2008 to the latest reported quarter (3rdrd Qtr 2010) as a stacked bar graph. Qtr 2010) as a stacked bar graph.

The second graph of each 3-graph series will present a more clear picture of how each of the main asset The second graph of each 3-graph series will present a more clear picture of how each of the main asset categories we are investigating have been changing quarter by quarter since the Financial Crisis began.categories we are investigating have been changing quarter by quarter since the Financial Crisis began.

The third graph of each 3-graph series will simply show the overall change in asset category since the crisis The third graph of each 3-graph series will simply show the overall change in asset category since the crisis began (or since pre-TARP).began (or since pre-TARP).

As you look at the details presented throughout this analysis, it is important to rememberAs you look at the details presented throughout this analysis, it is important to remember two major benchmark points:two major benchmark points:

One: As of the last quarter (09/30/2010) the Total for all Bank Assets = $13.4 TrillionOne: As of the last quarter (09/30/2010) the Total for all Bank Assets = $13.4 TrillionAnd And

Two: Since the 2Two: Since the 2ndnd Qtr of 2008 (pre-TARP) “Total” Bank Assets have increased by only $ 0.1 Trillion Qtr of 2008 (pre-TARP) “Total” Bank Assets have increased by only $ 0.1 Trillion


List of Asset Categories That Will Be ReviewedList of Asset Categories That Will Be ReviewedShowing current portion of $13.4 Trillion of Total Assets in ParenthesisShowing current portion of $13.4 Trillion of Total Assets in Parenthesis

Cash Cash ($ 1.0 T)($ 1.0 T)

Loans ($ 7.1 T)*Loans ($ 7.1 T)* Real Estate Loans ($ 4.3 T)Real Estate Loans ($ 4.3 T)

Single Family ($ 2.5 T)Single Family ($ 2.5 T) Commercial ($ 1.1 T)Commercial ($ 1.1 T) Construction ($ 0.4 T)Construction ($ 0.4 T) Multifamily ($ 0.2 T)Multifamily ($ 0.2 T) Farmland Other ($ 0.1 T)Farmland Other ($ 0.1 T)

Commercial Loans ($ 1.2 T)Commercial Loans ($ 1.2 T) Individual Loans ($ 1.3 T)Individual Loans ($ 1.3 T)

Credit Cards ($ 0.7 T)Credit Cards ($ 0.7 T) Other Individual ($ 0.6 T)Other Individual ($ 0.6 T)

Farmland Loans ($ 0.1 T)Farmland Loans ($ 0.1 T) Other Loans ($ 0.5 T)Other Loans ($ 0.5 T)

* Loan Loss Allowances of $ 0.3 Trillion explain the * Loan Loss Allowances of $ 0.3 Trillion explain the discrepancy in Total Loans and subtotalsdiscrepancy in Total Loans and subtotals

Securities ($ 2.7 T)Securities ($ 2.7 T) U.S. Government Securities ($ 1.7 T)U.S. Government Securities ($ 1.7 T)

Treasuries ($ 0.2 T)Treasuries ($ 0.2 T) Non-Mortgage ($ 0.2 T)Non-Mortgage ($ 0.2 T) Fannie/Freddie Mortgage Pass Throughs ($ 0.6 T)Fannie/Freddie Mortgage Pass Throughs ($ 0.6 T) Ginnie Mortgage Pass Throughs ($ 0.2 T)Ginnie Mortgage Pass Throughs ($ 0.2 T) CMOs ($ 0.4 T)CMOs ($ 0.4 T) Other ($ 0.1 T)Other ($ 0.1 T)

State and Local Securities ($ 0.2 T)State and Local Securities ($ 0.2 T) Domestic Securities ($ 0.5 T) Domestic Securities ($ 0.5 T) Foreign Securities ($ 0.3 T)Foreign Securities ($ 0.3 T) Other Securities ($ 0.0 T)Other Securities ($ 0.0 T)

Other Assets ( $2.6 T)Other Assets ( $2.6 T) Fed Funds Sold & RRAs** ($ 0.4 T)Fed Funds Sold & RRAs** ($ 0.4 T) Trading Accts ($ 0.8 T)Trading Accts ($ 0.8 T) Bank Premises ($ 0.1 T)Bank Premises ($ 0.1 T) REO ($ 0.1 T)REO ($ 0.1 T) Goodwill/Intangibles ($ 0.4 T)Goodwill/Intangibles ($ 0.4 T) All Other Assets ($ 0.8 T)All Other Assets ($ 0.8 T)

** RRAs = Reverse Repurchase Agreements** RRAs = Reverse Repurchase Agreements

Changing View of Banking Industry AssetsChanging View of Banking Industry Assetsby Major Categoryby Major Category

(Cash, Loans, Securities, and Other)(Cash, Loans, Securities, and Other)Since TARPSince TARP


History of Banking Industry Major Asset CategoriesHistory of Banking Industry Major Asset CategoriesSince TARPSince TARP

(2(2ndnd Qtr 2008 thru 3 Qtr 2008 thru 3rdrd Qtr 2010) Qtr 2010)

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History of Banking Industry Major Asset CategoriesHistory of Banking Industry Major Asset CategoriesSince TARPSince TARP


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History of Change in Banking Industry Major Asset CategoriesHistory of Change in Banking Industry Major Asset CategoriesSince TARPSince TARP


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Quanta Analytics’ Objective/Subjective OverviewQuanta Analytics’ Objective/Subjective Overviewof Banking Industry Asset Changesof Banking Industry Asset Changes

Clearly the Banking Industry has “retrenched” since the beginning of the Financial Crisis. Some of the changes Clearly the Banking Industry has “retrenched” since the beginning of the Financial Crisis. Some of the changes we see are due to “loan asset cleanup” as addressed in Parts I and II of our analysis; some are due to new we see are due to “loan asset cleanup” as addressed in Parts I and II of our analysis; some are due to new regulatory constraints put on the banking industry; and some are due to a much more “risk adverse” and regulatory constraints put on the banking industry; and some are due to a much more “risk adverse” and conservative lending strategy used by the banks compared to pre-crisis periodsconservative lending strategy used by the banks compared to pre-crisis periods

The fact that Cash assets have nearly “doubled” to $1.0 Trillion since the crisis began is rather interesting The fact that Cash assets have nearly “doubled” to $1.0 Trillion since the crisis began is rather interesting considering the general complaint that banks are not issuing “new loans” and since most of the TARP considering the general complaint that banks are not issuing “new loans” and since most of the TARP funds are reported as having been paid back.funds are reported as having been paid back.

QA views the decline in Loan Assets as being consistent with the bank losses as identified in Parts I and II of our QA views the decline in Loan Assets as being consistent with the bank losses as identified in Parts I and II of our analysis due to chargeoffs and current poor loan performance increasing loan loss allowances ($550 analysis due to chargeoffs and current poor loan performance increasing loan loss allowances ($550 billion), plus what would be expected from the normal principal pay down of existing loans over a nine billion), plus what would be expected from the normal principal pay down of existing loans over a nine quarter period through amortization ($200 billion). So QA can only conclude or support the interpretation quarter period through amortization ($200 billion). So QA can only conclude or support the interpretation that that few “new” loans are being originated internally through the banks since the crisis began.that that few “new” loans are being originated internally through the banks since the crisis began.

QA views the increase in Security assets as an example of the Banks general “flight to safety” since the crisis QA views the increase in Security assets as an example of the Banks general “flight to safety” since the crisis began , increasing their commitment for new loans through the purchase of Government guaranteed began , increasing their commitment for new loans through the purchase of Government guaranteed securities rather than through their own internal banking and lending processes.securities rather than through their own internal banking and lending processes.

QA views the decrease in the “Other” assets as a generally good trend that is likely tied to new regulatory QA views the decrease in the “Other” assets as a generally good trend that is likely tied to new regulatory restrictions and increased regulatory oversight.restrictions and increased regulatory oversight.

Changing View of Banking Industry Changing View of Banking Industry “Loan” Assets“Loan” Assets

(Real Estate, Commercial, Individual, Farm, and Other)(Real Estate, Commercial, Individual, Farm, and Other)Since TARPSince TARP


History of Banking Industry “Loan” AssetsHistory of Banking Industry “Loan” AssetsSince TARPSince TARP


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History of Banking Industry “Loan” AssetsHistory of Banking Industry “Loan” AssetsSince TARPSince TARP


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History of Change in Banking Industry “Loan” AssetsHistory of Change in Banking Industry “Loan” AssetsSince TARPSince TARP


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Quanta Analytics’ Objective/Subjective OverviewQuanta Analytics’ Objective/Subjective Overviewof Banking Industry “Loan” Asset Changesof Banking Industry “Loan” Asset Changes

Clearly the biggest drop off in total loan assets are due to the clean-up and normal amortization of “Real Clearly the biggest drop off in total loan assets are due to the clean-up and normal amortization of “Real Estate” loans (-$ 0.6 Trillion) and “Non-Real Estate Commercial” loans (-$ 0.3 Trillion), which is somewhat Estate” loans (-$ 0.6 Trillion) and “Non-Real Estate Commercial” loans (-$ 0.3 Trillion), which is somewhat consistent with what QA observed in Parts I and II of its analysis, which showed these areas to be where consistent with what QA observed in Parts I and II of its analysis, which showed these areas to be where the worst loan performance took place.the worst loan performance took place.

In fact, without the somewhat surprising increase in “Individual” loans of approximately $ 0.3 Trillion over the In fact, without the somewhat surprising increase in “Individual” loans of approximately $ 0.3 Trillion over the period since the crisis, the total drop off in all loan assets would be $ 0.9 Trillion rather than just $ 0.6 period since the crisis, the total drop off in all loan assets would be $ 0.9 Trillion rather than just $ 0.6 Trillion. QA will show more clearly where the “Individual” loan increase came in subsequent charts.Trillion. QA will show more clearly where the “Individual” loan increase came in subsequent charts.

The relative drop off in non-Real Estate Commercial lending is a little more than what QA would otherwise The relative drop off in non-Real Estate Commercial lending is a little more than what QA would otherwise expect from loan writeoffs and losses, so QA assumes some of the drop off simply reflects the general expect from loan writeoffs and losses, so QA assumes some of the drop off simply reflects the general decline in the economy but also a result of a more conservative, “risk adverse” view towards business decline in the economy but also a result of a more conservative, “risk adverse” view towards business investment in general.investment in general.

Regardless, based upon the general decline in the total “loan asset” category, QA is left with no other Regardless, based upon the general decline in the total “loan asset” category, QA is left with no other conclusion than this: the banks have retrenched and are spending most of their effort in cleanup without conclusion than this: the banks have retrenched and are spending most of their effort in cleanup without issuing new loans within their internal operations while sitting on Cash.issuing new loans within their internal operations while sitting on Cash.

Changing View of Banking Industry Changing View of Banking Industry “Real Estate Loan” Assets“Real Estate Loan” Assets(a subset of the “Total Loan” category)(a subset of the “Total Loan” category)

(Single Family, Commercial, Construction, Multifamily, Farmland, and Other)(Single Family, Commercial, Construction, Multifamily, Farmland, and Other)Since TARPSince TARP


History of Banking Industry “Real Estate” Loan AssetsHistory of Banking Industry “Real Estate” Loan AssetsSince TARPSince TARP


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History of Banking Industry “Real Estate” Loan AssetsHistory of Banking Industry “Real Estate” Loan AssetsSince TARPSince TARP


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History of Change in Banking Industry “Real Estate” Loan AssetsHistory of Change in Banking Industry “Real Estate” Loan AssetsSince TARPSince TARP


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Other Column 7 Net Change


Quanta Analytics’ Objective/Subjective OverviewQuanta Analytics’ Objective/Subjective Overviewof Banking Industry “Real Estate Loan” Asset Changesof Banking Industry “Real Estate Loan” Asset Changes

Clearly the biggest drop in the Real Estate area are due to the clean-up of “Single Family” loans and Clearly the biggest drop in the Real Estate area are due to the clean-up of “Single Family” loans and “Construction and Land Improvement” loans, which is consistent with what QA observed in Parts I and II “Construction and Land Improvement” loans, which is consistent with what QA observed in Parts I and II of its analysis, which showed those areas to be where the greatest amount of losses (see Part 1) took of its analysis, which showed those areas to be where the greatest amount of losses (see Part 1) took place and which continue to show the worst on-going loan performance characteristics (Part II).place and which continue to show the worst on-going loan performance characteristics (Part II).

One somewhat small, but positive sign in the Real Estate loan area is that “Commercial Real Estate” Lending One somewhat small, but positive sign in the Real Estate loan area is that “Commercial Real Estate” Lending (distinguishing this from general Commercial lending discussed earlier) has at least grown slightly rather (distinguishing this from general Commercial lending discussed earlier) has at least grown slightly rather than decline, which is different than what we observed in the overall non-Real Estate Commercial Loan than decline, which is different than what we observed in the overall non-Real Estate Commercial Loan lending area.lending area.

Considering the current backlog inventory of Real Estate on the market and the general decline in housing Considering the current backlog inventory of Real Estate on the market and the general decline in housing prices throughout the nation it would not surprise QA if the amount of Banking Industry Real Estate Loan prices throughout the nation it would not surprise QA if the amount of Banking Industry Real Estate Loan Assets remain somewhat stagnant in the near future.Assets remain somewhat stagnant in the near future.

Changing View of Banking Industry Changing View of Banking Industry “Individual Loan” Assets“Individual Loan” Assets(a subset of the “Total Loan” category)(a subset of the “Total Loan” category)

(Credit Card and Other Individual)(Credit Card and Other Individual)Since TARPSince TARP


History of Banking Industry “Individual” Loan AssetsHistory of Banking Industry “Individual” Loan AssetsSince TARPSince TARP


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History of Banking Industry “Individual” Loan AssetsHistory of Banking Industry “Individual” Loan AssetsSince TARPSince TARP


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History of Change in Banking Industry “Individual” Loan AssetsHistory of Change in Banking Industry “Individual” Loan AssetsSince TARPSince TARP


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Quanta Analytics’ Objective/Subjective OverviewQuanta Analytics’ Objective/Subjective Overviewof Banking Industry “Individual Loan” Asset Changesof Banking Industry “Individual Loan” Asset Changes

Clearly the $ 0.3 Trillion step jump increase in “credit card” lending during the first quarter of 2010 is an Clearly the $ 0.3 Trillion step jump increase in “credit card” lending during the first quarter of 2010 is an anomaly that is hard to explain other than possibly as an after effect of individuals’ spending over the anomaly that is hard to explain other than possibly as an after effect of individuals’ spending over the holiday period at the end of 2009 on credit.holiday period at the end of 2009 on credit.

What makes this step jump even more interesting, if not disconcerting, is the fact that overall “credit card” What makes this step jump even more interesting, if not disconcerting, is the fact that overall “credit card” lending had been fairly stable for a long period of time (years) prior to this step jump. In other words, it lending had been fairly stable for a long period of time (years) prior to this step jump. In other words, it may reflect as much as anything else, the general tight straight that many households have been may reflect as much as anything else, the general tight straight that many households have been experiencing since the financial crisis.experiencing since the financial crisis.

In relative terms, bank credit card lending increased 69% in that one quarter (1In relative terms, bank credit card lending increased 69% in that one quarter (1stst quarter of 2010)—the quarter quarter of 2010)—the quarter after the Christmas holiday of 2009.after the Christmas holiday of 2009.

QA believes it will be interesting to see if we see another such effect after this year’s holiday season.QA believes it will be interesting to see if we see another such effect after this year’s holiday season.

Changing View of Banking Industry Changing View of Banking Industry “Security” Assets“Security” Assets

(U.S. Government, State and Local, Domestic, Foreign, Other)(U.S. Government, State and Local, Domestic, Foreign, Other)Since TARPSince TARP


History of Banking Industry “Security” AssetsHistory of Banking Industry “Security” AssetsSince TARPSince TARP


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History of Changes in Banking Industry “Security” AssetsHistory of Changes in Banking Industry “Security” AssetsSince TARPSince TARP


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History of Change in Banking Industry “Security” AssetsHistory of Change in Banking Industry “Security” AssetsSince TARPSince TARP


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Quanta Analytics’ Objective/Subjective OverviewQuanta Analytics’ Objective/Subjective Overviewof Banking Industry “Security” Asset Changesof Banking Industry “Security” Asset Changes

QA views the increase in U.S. Government Securities as a sign of the Banking Industry’s general “flight to QA views the increase in U.S. Government Securities as a sign of the Banking Industry’s general “flight to safety”. In lieu of originating loans internally through their own operations while they clean-up their own safety”. In lieu of originating loans internally through their own operations while they clean-up their own mortgage loan portfolios, the Banking Industry seems to support new loan issues by purchasing securities mortgage loan portfolios, the Banking Industry seems to support new loan issues by purchasing securities guaranteed by the U.S. Government.guaranteed by the U.S. Government.

QA would also like to point out that the Banking Industry is “not” significantly committed to securities issued by QA would also like to point out that the Banking Industry is “not” significantly committed to securities issued by states and other political subdivisions. In fact, the level of bank securities in this subdivision represent less states and other political subdivisions. In fact, the level of bank securities in this subdivision represent less than 1.4% of Total Banking Assets and less than 6.7% of all Banking Security Assets. We mention this than 1.4% of Total Banking Assets and less than 6.7% of all Banking Security Assets. We mention this because some experts are claiming that states and municipalities are going to be the next “shoe to drop” because some experts are claiming that states and municipalities are going to be the next “shoe to drop” that will put the banks and our economy in another tailspin. that will put the banks and our economy in another tailspin.

QA also finds it interesting that the Banking Industry has increased its purchase of Foreign Dept Securities since QA also finds it interesting that the Banking Industry has increased its purchase of Foreign Dept Securities since the financial crisis. This increase in Foreign Debt Securities represents a growth of 144%, even though the financial crisis. This increase in Foreign Debt Securities represents a growth of 144%, even though these assets still only represent less than 2% of Total Banking Assetsthese assets still only represent less than 2% of Total Banking Assets

Changing View of Banking Industry Changing View of Banking Industry “U.S. Government Security” Assets“U.S. Government Security” Assets

(a subset of the “Security Asset” category)(a subset of the “Security Asset” category)

(Treasuries, Non-Mortgage, Mortgage Pass Throughs, CMOs, Other)(Treasuries, Non-Mortgage, Mortgage Pass Throughs, CMOs, Other)Since TARPSince TARP


History of Banking Industry “U.S. Government” SecuritiesHistory of Banking Industry “U.S. Government” SecuritiesSince TARPSince TARP


$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

$1.8

2Q/08 3Q/08 4Q/08 1Q/09 2Q/09 3Q/09 4Q/09 1Q/10 2Q/10 3Q/10

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Treasury Non-MBS F/F Pass Ginnie Pass F/F/G CMOs Other


History of Changes in Banking Industry “U.S. Government” Securities History of Changes in Banking Industry “U.S. Government” Securities Since TARPSince TARP


$0.0

$0.1

$0.2

$0.3

$0.4

$0.5

$0.6

$0.7

$0.8

Treasury Non-MBS F/F Pass Ginnie Pass F/F/G CMOs Other

U.S

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2Q/08 3Q/08 4Q/08 1Q/09 2Q/09 3Q/09 4Q/09 1Q/10 2Q/10 3Q/10


History of Change in Banking Industry “U.S. Government” SecuritiesHistory of Change in Banking Industry “U.S. Government” SecuritiesSince TARPSince TARP


-$0.1

$0.0

$0.1

$0.2

$0.3

$0.4

$0.5

$0.6

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Treasury Non-MBS F/F Pass Ginnie Pass F/F/G CMOs Other Net Change


Quanta Analytics’ Objective/Subjective OverviewQuanta Analytics’ Objective/Subjective Overviewof Banking Industry “U.S. Government Security” Asset Changesof Banking Industry “U.S. Government Security” Asset Changes

Although known, but still remaining a fairly well-kept secret, the Government programs of the FHA, VA, and Although known, but still remaining a fairly well-kept secret, the Government programs of the FHA, VA, and Ginnie Mae did not play the same mortgage-loan game of risk that their more privately-operated sister-Ginnie Mae did not play the same mortgage-loan game of risk that their more privately-operated sister-GSE agencies (Fannie Mae and Freddie Mac) and many of the private banks did.GSE agencies (Fannie Mae and Freddie Mac) and many of the private banks did.

As a result, after the crisis hit and the GSEs and the banks started to come under intense scrutiny and curtail As a result, after the crisis hit and the GSEs and the banks started to come under intense scrutiny and curtail their loan programs, much of the loan activity that was taking place in the form of mortgage refinancing their loan programs, much of the loan activity that was taking place in the form of mortgage refinancing was picked up by the primary Government programs of the FHA and Ginnie Mae. was picked up by the primary Government programs of the FHA and Ginnie Mae.

QA believes it is predominantly these securities that the Banking Industry purchased in the form of either QA believes it is predominantly these securities that the Banking Industry purchased in the form of either mortgage-backed pass through securities or Collateralized Mortgage Obligations (CMOs). Unlike many mortgage-backed pass through securities or Collateralized Mortgage Obligations (CMOs). Unlike many financial firms, QA views these as worthy investments, especially those backed with the FULL FAITH AND financial firms, QA views these as worthy investments, especially those backed with the FULL FAITH AND CREDIT stamp of the U.S. Government on them.CREDIT stamp of the U.S. Government on them.

The same holds true for U.S. Treasuries.The same holds true for U.S. Treasuries.

Changing View of Banking Industry Changing View of Banking Industry “Other” Assets“Other” Assets

(Fed Funds, Trading Accts, Bank Premises, REO, Goodwill, All Other)(Fed Funds, Trading Accts, Bank Premises, REO, Goodwill, All Other)Since TARPSince TARP


History of “Other” Banking Industry Assets History of “Other” Banking Industry Assets (i.e., Non Cash, Non Security, and Non Loan Assets)(i.e., Non Cash, Non Security, and Non Loan Assets)

Since TARPSince TARP(2(2ndnd Qtr 2008 thru 3 Qtr 2008 thru 3rdrd Qtr 2010) Qtr 2010)

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

2Q/08 3Q/08 4Q/08 1Q/09 2Q/09 3Q/09 4Q/09 1Q/10 2Q/10 3Q/10

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Federal Funds Trading Accts Bank Premises REO Goodwill/Intgbl All Other


History of Changes in Banking Industry “Other” Assets History of Changes in Banking Industry “Other” Assets (i.e., Fed Funds, Trading Accts, Premises, REO, Goodwill, All Other)(i.e., Fed Funds, Trading Accts, Premises, REO, Goodwill, All Other)

Since TARPSince TARP(2(2ndnd Qtr 2008 thru 3 Qtr 2008 thru 3rdrd Qtr 2010) Qtr 2010)

$0.0

$0.1

$0.2

$0.3

$0.4

$0.5

$0.6

$0.7

$0.8

$0.9

$1.0

Fed Funds Trading Accts Premises REO Goodwill All Other

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2Q/08 3Q/08 4Q/08 1Q/09 2Q/09 3Q/09 4Q/09 1Q/10 2Q/10 3Q/10


History of Change in Banking Industry “Other” AssetsHistory of Change in Banking Industry “Other” AssetsSince TARPSince TARP


-$0.4

-$0.3

-$0.2

-$0.1

$0.0

$0.1

$0.2

Ch

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Fed Funds Trading Accts Premises REO Goodwill All Other Net Other


Quanta Analytics’ Objective/Subjective OverviewQuanta Analytics’ Objective/Subjective Overviewof Banking Industry “Other” Asset Changesof Banking Industry “Other” Asset Changes

QA views the decreases in the Banking Industry’s “Other” asset category positively and hopes that this trend QA views the decreases in the Banking Industry’s “Other” asset category positively and hopes that this trend continues.continues.

For example, issues have been raised recently regarding the mishandling or misuse of repurchase agreements For example, issues have been raised recently regarding the mishandling or misuse of repurchase agreements (part of the Fed Fund account) by Lehman Brothers, significantly covering up the true risk-burden of their (part of the Fed Fund account) by Lehman Brothers, significantly covering up the true risk-burden of their endeavors. And now that the banks are coming under more scrutiny, we would expect the banks to be endeavors. And now that the banks are coming under more scrutiny, we would expect the banks to be more cautious in their use of these type of assets to cover their risk position.more cautious in their use of these type of assets to cover their risk position.

QA also finds the decline in the Goodwill/Intangible asset category especially positively. QA feels that Goodwill QA also finds the decline in the Goodwill/Intangible asset category especially positively. QA feels that Goodwill more than any other asset (including the mortgage-backed assets that the mark to market people like to more than any other asset (including the mortgage-backed assets that the mark to market people like to deride) is the most questionable asset on the Banking Industry Books. Since the beginning of the financial deride) is the most questionable asset on the Banking Industry Books. Since the beginning of the financial crisis, Goodwill has been reduced by about 25% and now represents less than 2.25% of all total Banking crisis, Goodwill has been reduced by about 25% and now represents less than 2.25% of all total Banking Assets.Assets.


Quanta Analtics’ Final CommentsQuanta Analtics’ Final CommentsRegarding the Asset Changes Taking Place in the Banking IndustryRegarding the Asset Changes Taking Place in the Banking Industry

Some people may question the value of even looking at the “book accounting of bank assets” because they feel Some people may question the value of even looking at the “book accounting of bank assets” because they feel that the books do not represent true or real value. QA does not carry that same view. QA feels that its that the books do not represent true or real value. QA does not carry that same view. QA feels that its review of the Banking Industry books, based upon the summary compilation of standardized financial review of the Banking Industry books, based upon the summary compilation of standardized financial reports that have been regularly submitted by more than 7,700 banking institutions over a period of years, reports that have been regularly submitted by more than 7,700 banking institutions over a period of years, is consistent with good financial analysis. Neither is QA concerned about mark-to-market issues relating is consistent with good financial analysis. Neither is QA concerned about mark-to-market issues relating to assets that have survived the test of time through one of the most financially confusing periods in the to assets that have survived the test of time through one of the most financially confusing periods in the last sixty years.last sixty years.

In its review of Banking Industry assets, Quanta Analytics sees no reason to change its rather upbeat opinion In its review of Banking Industry assets, Quanta Analytics sees no reason to change its rather upbeat opinion

regarding the future of the Banking Industry and the U.S. Economy.regarding the future of the Banking Industry and the U.S. Economy.

QA views the asset changes that are taking place within the Banking Industry as being consistent with what QA QA views the asset changes that are taking place within the Banking Industry as being consistent with what QA feels is the necessary “cleanup” of the Banking Industry’s previous mistakes and consistent with a more feels is the necessary “cleanup” of the Banking Industry’s previous mistakes and consistent with a more conservative, financially responsible mode of operation.conservative, financially responsible mode of operation.

QA also feels the banks are in somewhat the same position as the whole of U.S. business. Overall things might QA also feels the banks are in somewhat the same position as the whole of U.S. business. Overall things might be better for the banks, but the banks are far from being in “critical” condition. In fact, QA feels the banks, be better for the banks, but the banks are far from being in “critical” condition. In fact, QA feels the banks, like U.S. business as a whole, seem to be waiting for either the “next shoe to drop” or the “first legitimate like U.S. business as a whole, seem to be waiting for either the “next shoe to drop” or the “first legitimate sign of recovery”. QA feels that “no other shoe is going to drop” and that there is no reason to wait or any sign of recovery”. QA feels that “no other shoe is going to drop” and that there is no reason to wait or any time better than the present to start “investing again” in American business, supplying valued products time better than the present to start “investing again” in American business, supplying valued products and services to the rest of the world. Onward and upward as we charge ahead.and services to the rest of the world. Onward and upward as we charge ahead.

More to Come LaterMore to Come Later

Quanta Analytics Financial Crisis Accounting of the Banking Industry Part III Analysis of Banking...

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