On another thread, someone else on this board stated that SCHW had zero exposure to sup-prime mortgages. Really?
Does anyone have a link to credible info that supports this claim?
I was sort of wondering if the Charles Schwab Bank subsidiary (which I believe is involved in mortgage lending, among other things,) might not be adversely impacted somehow.
Hope SCHW is not another HRB in the making. Wouldn't want to be blindsided by an after-hours announcement or something.
The 10-K for 2007 contains the following statement (on page 8):
"The Company has exposure to credit risk associated with its securities available for sale portfolio which includes U.S. agency and non-agency collateralized mortgage obligations and corporate debt securities among other investments."
This comes close to the point I was trying to make in my previous posts. Maybe I did know what I was talking about, contrary to what some other posters suggested. I suppose it's a good thing that they've mentioned it in the 10-K now. It's interesting to note that this statement is absent in previous 10-K filings.
The 10-K for 2007 also states (on page 48):
"Securities owned include securities available for sale, which are recorded at fair value based on quoted market prices and other observable market data. "
Preivious 10-K filings, for 2002, 2003, 2004, 2005 and 2006, all state:
"Securities owned are recorded at estimated fair value. Such fair values are estimated using quoted market prices, where available, or third-party pricing services."
It sounds to me like they no longer use third-party pricing services to determine the value of some of their assets. I can only speculate as to the reason. Your guess is as good as mine.
Try googling "securities available for sale" and you might find that gains and losses of assets in this category are generally not booked until the assets are actually sold, according to generally accepted accounting practices.
Six months ago, I read this article on Seekingalpha.com:
The author seemed to suggest that etrade was an attractive investment with minimal subprime exposure. I think ETFC was between $15 and $20 back then. It was below $5/share last time I checked. The scary thing is that I don't see anything wrong with his analysis. It seems sincere and well-reasoned.
So I cringe whenever someone tells me SCHW stock is a-ok because it has minimal subprime exposure. I'm not buying it.
SCHW has big institutional investors. Fidelity, Goldman Sachs, Vanguard. It is in their interest to make sure the lipstick sticks and I guess they have the financial muscle to do it too. Not to mention the $1/share dividend stunt and the furious buy-backs by the company iteself to try to prop up the price-per-share.
Looking at page 15 of the 10-K, it looks to me like the financial condition for SCHW has deteriorated. A decline in total assets, a dramatic increase in debt, and most disturbingly, a significant decrease in the assets to stockholders’ equity ratio.
Now that the 10-K has warned investors of the credit risks associated with the CMOs listed under securities available for sale, they COULD at some point in the future write down any unrealized losses in that category without fear of investor lawsuits. It seems like a case of CYA, if you know what I mean. In my opinion, I can not think of a better stock to walk away from than SCHW, especially for small and individual investors.
Looks to me like Bl@ckstone may be having difficulty coming up with funds to acquire the PHH Mortgage division of PHH after the banks did a "revised interpretaion" of their "funding commitments":
Is it just the credit crunch? Or did the banks re-assess the value of PHH Mortgage's assets and liabilities and found them to be less appealing than before?
And it sounds to me like GE (still) doesn't want to get stuck holding the PHH Mortgage bag either:
Now... if PHH Mortgage is suddenly a hot potato being tossed aroud because presumably no one believes it's worth what it was supposed to be worth any more, and if the Charles Schwab Bank was outsourcing its mortgage lending business to PHH Mortgage, then... then...
Etrade came clean. Merrill is coming clean this week.
I'm still waiting for Schwab.
To me it looks like:
a head-and-shoulders, interrrupted by the $1/share special dividend announcement, followed by a double-top, followed by a sharp downturn on large volume. Not very bullish imo.
Income-producing asset sold? Cash burned in share buybacks and special dividends to prop up stock while large shareholders bail? If the Schwab Bank's CMOs have been impacted by the mortgage loan meltdown, and if those secutrities are eventually downgraded by the rating agencies, what will happen to SCHW when resulting losses (if any) are finally marked to book?
Don't get blodgetted by the Street again.
Once the CMO is sold, the losses from the collateral pass through to the bond holders. Upgrade or downgrade of the bonds in CMO has no impact on the issuer whatsoever. In fact, even if the whole CMO wipes out, issuers doen't care. You subprime fearmongers should first learn about asset backed markets. Subprime loans are a niche market that represents loans to the poor. That's what a subprime is. The % of subprimes to conventional mortgages is something like this. A decent subprime CMO is 200M once a quarter affair for the investment bank, while agency deals are monthly tens of billions of dollars of issued agency paper. I'm not counting whole loans. The whole subprime market if gets blown up, is 0 risk to the whole economy. The people who comprise this market are not contributors to the economy anyway. It's probably 5% from the bottom of income population, and you know they have no wealth to speak of to affect anything. It probably doesn't sound good, but subprimes are largely irrelevant to the economy. The real risk is if alternative conventional mortgages start blowing up (read speculators). That would be risky for issuers of collateral, and will cause S&L and thrift issues like in the 80's. They hold up for now, but subprimes problems are basically not indicative of anything. It's just a guy who works 2 minimum wage jobs is not able to afford his $180K house. It's sort of known to begin with, but lately they were saved by raising real estate, so when they wentbelly up, their house was worth more then before and that caused large recovery from the loan. They blow up statistically at the same rate, but recovery value is market driven. So it's obvious that now those guys cause bigger losses. They default at the same rates as before. It's all media BS. Basically it's all #'s game, and its still worth buying subprime collareral, just not at the prices it was issued. So it's an issuer's problem more then IBK's.
Maybe it's just me. But I keep wondering about mortgages.
Check out this document from when the Charles Schwab bank was undergoing regulatory approval back in 2003:
QUOTE - One commenter sought assurances that Schwab and its subsidiaries would not securitize "predatory" mortgage loans. Schwab stated that it does not originate, purchase, or securitize subprime mortgage loans for itself or other lenders. U.S. Trust, which offers mortgage loans to its high-net-worth private banking customers, has previously securitized one pool of mortgage loans, and it has no current plans to securitize additional mortgages. Schwab stated that Bank would adopt policies and procedures designed to ensure that no high-cost loans would be offered to customers of Bank, and that the mortgage loans originated by or on behalf of Bank would not contain fees or terms that could be characterized as predatory or abusive" - END QUOTE
Sounds good, doesn't it? Maybe Schwab's exposure to mortgages-gone-bad really is minimal after all.
Or is it?
Here's a couple of documents that disclose the relationship between the Charles Schwab Bank and a company called PHH.
If I understood things right, it seems like the Schwab Bank has been outsourcing it's mortgage lending business to PHH for quite some time now. I believe this is the same PHH that's being bought out by GE and Blackstone. (Blackstone is a hedge fund.)
After reading the article above, it looks to me like GE wants no part of PHH's mortgage business. Apparently, GE only want's the vehicle fleet management part of PHH and will reportedly sell it's share of the PHH mortgage business to Blackstone right away.
Blackstone, of course, has announced it's intention to go public real soon:
Some people seemed surprised that the mighty Goldman Sachs is not among the underwriters of the multi-billion dollar Blackstone IPO:
Hmmm... I wonder why.
Btw, PHH used to be called Cendant Mortgages, back when it was a subsidiary of Cendant.
Remember Cedant? They had some kind of a major accounting fiasco way back when:
Apparently, Cendant investors are STILL trying to recover some of the billions of $$$ they lost from former Cendant execs convicted of this and that:
But that's all in the past, right? Things are OK with PHH ever since it was spun off by Cendant, right?
Well... here are some more articles about PHH. Like how they delayed 2005 annual results until November of 2006:
And how they're being sued by a bunch of not-a-happy-camper PHH shareholder types.
I guess what I'm trying to say is, even if Schwab itself is on the up-and-up, if the Schwab Bank's portfolio is loaded with mortgage securities backed by loans made by PHH, then... I gotta wonder if those securities are as solid as Schwab believes they are.
Anyway, it looks to me like Blackstone is cashing out. Looks like PHH is selling out too. Schwab's CFO is retiring in May (at age 47?!) and they announced a stock buyback at about the same time they announced his plan to retire. (I guess maybe someone doesn't want the pps to plummet while someone's shares are being dumped on the market.) And you gotta wonder why GE and Goldman Sachs seem to be steering clear of certain things.
Now you don't suppose the big boys are trying to exit quietly while encouraging small retail investors to hold the mortgage bag, do you? What if they drove the price up a few dollars, and got some analysts to spread around some rosy, upbeat outlooks?
Nah, that sort of thing could never happen, imo. Don't mind me at all. I'm probably totally wrong. So what if only China has more red flags on it than this thing?
I don't have an exact number for sub-prime exposure but for 2006.
Schwab has a issued a total of $2.3 billion in mortgages. Non-performing mortgages (more then 90 days late) totaled $1 million.
This should tell you several things:
1) A 0.04% default rate would indicate that Schwab is only offering loans those of the highest credit quality.
2) Schwab's (cash + cash equivalent), totaled $4.5 billion in the same period. Which means even a substantial default rate would not effect Schwab's liquidity.
The risk Schwab has from the Sub-Prime market would be if the fallout extends into the stock market, and results in a sell off. This would be due to Schwab's $10.4 billion exposure in the margin loan market.
Source: Annual Report, Dated Feb 2007
Schwab is one of the most fiscally sound and well managed financial firms around. I wouldnt expect any sub prime exposure, their customers have cash, take a look at etfc though, ouch....
Thanks for the thoughtful response.
The Annual report dated Feb 2007...
... also mentions Collateralized Mortgage Obligations (CMOs) among Schwab's investment assets.
In the report, the CMOs appear to be valued at just over $3Billion.
I've read articles like this one from Forbes...
... that express concerns about financial organizations holding CMOs:
QUOTE - Also vulnerable are banks and financial organizations that hold sub-prime mortgage debt, as well as the collateralized mortgage obligations being marketed direct to unsuspecting investors. - END QUOTE
I seem to remember reading somewhere else that one of the reasons the sub-prime lenders were so eager to make so many questionble loans was to satisfy a growing demand for CMOs. Which I take it to mean that some of the more recently issued CMOs may be backed (at least in part and to some extent) by questionable sub-prime loans.
Now if the CMO's in Schwab's portfolio have become impaired (and I don't know if this is the case or not,) might this not also impact Schwab's earnings and book value?
Btw, I wasn't questioning Schwab's liquidity, just the earnings. I would have thought a stock market sell-off (which means lots of trades for brokers like Schwab) would have meant more commission $$$ for SCHW.
Frankly, I'm kind of annoyed by the silence from the company. The market hates uncertainty.