Monday, 22 February 2010 23:00

The Beginning of the Endgame is Coming???

So, Fitch finally get's around to downgrading the Greek banks. The sovereign debt short is probably a bit crowded right now, and may be due for a squeeze, but the fundamentals and the macro situation still stands. As a matter of fact, I really believe that most investors, speculators, pundits and regulators are actually looking at the wrong sets of risks - hence may truly be surprised when the choco-pudding hits the fan blades.

From Fitch:

Fitch Ratings-Barcelona/London-23 February 2010: Fitch Ratings has today downgraded the Long-term and Short-term Issuer Default Ratings (IDR) of Greece's four largest banks, National Bank of Greece (NBG), Alpha Bank (Alpha), Efg Eurobank Ergasias (Eurobank) and Piraeus Bank (Piraeus) to 'BBB' from 'BBB+' and 'F3' from 'F2' respectively. The Outlook on the Long-term IDRs is Negative.

  • Alpha Bank warned about in subscriber reports last week - Check!
  • National Bank of Greece warned about in subscriber report last week - Check!
  • Efg Eurobank Ergasias (Eurobank) warned about in subscriber report last week -Check!
  • Piraeus Bank (Piraeus) warned about in subscriber report last week -Check!

All subscribers can download the Greek Bank Tear Sheet here:

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Greek Banking Fundamental Tear Sheet

Pro subscribers can click below for the extended download

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Banks exposed to high sovereign risks

There is only one bank in the analysis that was not downgraded, most likely for political issues. It is really only a matter of time, and when that one goes, so goes Greece...

At the same time, the agency has downgraded the banks' Individual Ratings to 'C' from 'B/C', whilst the ratings of the banks' senior, subordinated and hybrid capital instruments have all been downgraded by one notch. The Support Ratings and Support Rating Floors (SRF) of all four banks have been affirmed.

A full rating breakdown is provided at the end of this comment. Separately, Fitch has also affirmed Agricultural Bank of Greece's (ATEbank) Long-term IDR at 'BBB-', which is on its SRF, and Short-term IDR at 'F3'. The Outlook on the Long-term IDR is Negative. ATEbank's IDRs, Support Rating and SRF are based on sovereign support as the bank is majority-owned by the Greek state (rated 'BBB+'/Negative Outlook).

The rating actions reflect Fitch's view that the banks' already weakening asset quality and profitability will come under further pressure due to anticipated considerable fiscal adjustments in Greece. In particular, Fitch believes the required fiscal tightening that needs to be made by the Greek government will have a significant effect on the real economy, affecting loan demand and putting additional pressure on asset quality. The latter could result in higher credit costs, ultimately weakening underlying profitability.

While the banks' operations in South Eastern Europe (SEE) and Turkey add revenue diversification, such revenues are derived from more volatile economies - some of which have themselves experienced recessionary pressures.

BoomBustBloggers are ahead of you Fitch :-)

The banks' profitability is also likely to be affected by higher funding costs derived from increased funding and liquidity pressures on Greek banks which mostly resulted from the ongoing market perception of elevated risk surrounding the Greek sovereign. The uncertainties surrounding the Greek public finances have to a large extent constrained Greek banks' access to wholesale markets and, to a lesser degree, interbank markets at reasonable prices. As a result, Greek banks continue to rely to some degree on European Central bank (ECB) funding. While unhindered access to ECB facilities provides short-term liquidity, Fitch would welcome a rebalancing of the banks' funding and liquidity profiles towards more traditional funding sources. However, on a positive note, Fitch highlights that Greek banks continue to be primarily funded by customer deposits (86% of gross loans on average for the five largest Greek banks at end-Q309), highlighting limited reliance on non-bank wholesale funding. Additionally, wholesale funding maturities for 2010 are manageable and funding needs for the year should be limited.

Excluding ATEbank, the other four banks' Long-term IDRs remain based on their individual financial strength, as expressed by Fitch's Individual Rating. This takes into account their well-established domestic banking franchises, which support revenue generation and good deposit bases, sound and in most cases recently strengthened capitalisation and also some degree of geographical diversification.

The Negative Outlook on all the banks' IDRs could be revised to Stable should Greek banks be successful in reducing ECB funding and be able to rebalance their funding and liquidity position without impairing their profitability, and if their underlying earnings capacity proves to be more resilient than currently anticipated to the expected prolonged recessionary environment in Greece and to a lesser extent in SEE.

The real question of the day is when will the rating agencies get serious and start downgrading Bank Greece. Bank Greece is an interesting entity, for it is the publicly traded Central Bank of Greece. Hey, why don't we float an offering of Bernanke Bank, the Federal Reserve - ticker BBFRB:-). Bank Greece's liabilities are backed directly by the Greek Government. I think it is fair to say that the Greek government's explicit backing doesn't necessarily mean that an entity is truly economically indemnified against loss. Who's backing the Greek government? As of the time of this writing, not one!

As we go over the responsibilities of Bank Greece, just keep in mind its financial condition in relation to the other banks, despite being backed by an entity that currently cannot pay its bills, has more debt than annual GDP and is facing civil unrest in trying to adjust its budget in attempt to resolve the issue, Bank Greece has the highest valuation multiple of 1.2x book, and has the highest adjusted leverage - by far - of the group at nearly 90x. Normally, the explicit backing of the Greek government should mean something, but again since it is obvious that the Greek government needs backing, this is sort of an increasingly empty promise - in appearance at least.

The next question is since the Bank of Greece is a member of the European System of Central Banks (ESCB) which is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States, do they get backstopped somehow by forces from the EU? Inquiring minds want to know. I mean, it is quite feasible that the Greek banks can get in trouble once austerity measures take place and the civil unrest picks up. Even if unrest doesn't pick up, there is still a nearly guaranteed deepening of the recession. Then there is CEE exposure, which can help push banks over the edge. If the Greek Central Bank has to come to the aid of the banks, who will come to the Greek Central Banks aid? It is obvious that Greece doesn't have the budget for it.

The Bank of Greece, a short summary taken from their website...

The Bank of Greece

The Bank of Greece is the central bank of the country. It was established in 1927 by an Annex to the Geneva Protocol and started operations in May 1928. It was incorporated as a société anonyme. According to its Statute, its head office is in Athens. It has a nationwide network of 19 branches, 38 agencies and 7 outlets.

As from January 2001, the Bank of Greece is an integral part of the Eurosystem, which consists of theEuropean Central Bank (ECB) and the national central banks (NCBs) of the European Union (EU) Member States participating in the euro area. This implies that the Bank of Greece contributes through its activities to the achievement of the objectives and the performance of the tasks of the Eurosystem, which defines and implements monetary policy in the euro area.

The Bank of Greece is responsible for implementing the Eurosystem’s monetary policy in Greece and safeguarding the stability of the Greek financial system. According to its Statute, its primary objective is to ensure the stability of the general price level. Without prejudice to its primary objective, the Bank supports the general economic policy of the government. In the performance of its tasks, the Bank enjoys institutional, personal and operational independence, and is accountable to the Greek Parliament.


Eurosystem-Related Tasks

Monetary policy

The Bank of Greece participates in the formulation of the single monetary policy in the euro area and implements it in Greece, in line with the guidelines and instructions of the European Central Bank (ECB). The Bank conducts monetary policy operations whereby it provides liquidity to domestic credit institutions (main and long-term refinancing operations). It also provides marginal lending and deposit facilities to credit institutions, in order to grant and absorb liquidity, respectively. Finally, it holds the minimum reserve accounts of domestic banks.

Financial stability

The Bank of Greece is responsible for monitoring financial stability, with a view to identifying vulnerabilities in Greece’s financial system, and assesses its resilience.

  • It promotes arrangements for the maintenance of financial stability and effective management of financial crises, in cooperation with other competent authorities in Greece.
  • It monitors banking risks, analyses developments affecting them and presents proposals for ensuring financial stability. It also monitors developments in insurance and investment firms, as well as in undertakings in collective investments not supervised by the Bank of Greece.

I think it is fair to say they are not doing a very good job of excelling at the financial stability task right now.


Collecting statistical data from monetary financial institutions (MFIs) (i.e. banks and money market funds) is also a very important task of the Bank. The Bank of Greece collects data on bank rates, as well as data that make up monetary statistics (loans, deposits and other assets and liabilities of MFIs). These statistics are sent to the ECB and taken into account for the calculation of average interest rates in the euro area and the compilation of euro area monetary and credit aggregates. These aggregates are monitored in the context of the Eurosystem’s monetary analysis and their outcomes directly affect monetary policy decisions.

The statistics task appears to have succumbed to manipulation at worst, and quite liberal interpretation at best. From finding information that significantly increases the deficit over the weekend to private sector swaps with banks that mask debt obligations, I feel there is a reason to truly audit this bank and its past tasks and procedures as a condition of remaining an EMU member. Then again, that's just my opinion.

Treasurer and fiscal agent of the government

The Bank of Greece keeps current and time deposit accounts of the government and legal persons in public law in euro and foreign exchange, on the one hand for meeting domestic requirements and, on the other hand, for servicing the external debt. It also carries out payment and collection orders of the government and legal persons in public law in connection with foreign counterparties and provides intermediation services for their international financial activities.



The Bank of Greece also compiles and publishes the monetary and credit aggregates concerning the Greek economy and the average interest rates applied by domestic credit institutions to various categories of deposits and loans. In addition to collecting data for monetary statistics, the Bank of Greece also compiles the balance of payments and the financial accounts of the country and, generally, collects and publishes data concerning the Greek economy in the Bulletin of Conjunctural Indicators. Moreover, it conducts specialised statistical surveys on matters related to its tasks (e.g. household indebtedness surveys).

Collecting statistical data aims at both meeting the Bank’s own statistical information requirements and performing its obligations towards the ECB and other international organisations, as well as informing the public and researchers in Greece and abroad. Specifically, the data – in addition to monetary statistics – collected and compiled by the Bank of Greece concern the following four categories:

i. assets and liabilities of financial corporations and data on the mutual fund market

ii. Greece’s balance of payments and international investment position

iii. the country’s financial accounts, according to the methodology of the European System of Accounts 1995 and

iv. general data on the Greek economy.

Can we really trust these numbers?

See Will Greece Set Off the Pan-European Sovereign Debt Crisis? as well as:

  • The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
  • What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
  • The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations.
  • The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  • The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  • Published in BoomBustBlog

    This is the 2nd to last installment in my Pan-European Sovereign Debt Crisis series. After covering western and southern Europe, we are moving eastward. Before we go any further, be sure you have caught up on the previous portions:

    1. Can China Control the "Side-Effects" of its Stimulus-Led Growth? Let's Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China. While not European, it is quite likely to kick off the daisy chain effect.
    2. The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
    3. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
    4. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations.
    5. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

    Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression!

    Click to Enlarge...


    These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly "OVERBANKED" (a term that I have coined).

    So as to quiet those pundits who feel I am being sensationalist, let's take this step by step.

    Depression (Wikipedia): In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen as part of a normal business cycle.

    Considered a rare and extreme form of recession, a depression is characterized by its length, and by abnormal increases in unemployment, falls in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation, financial crisis and bank failures are also common elements of a depression.

    There is no widely agreed definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions.[1] Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output).[2] Another proposed definition of depression includes two general rules: 1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years.[3][4]

    Before we go on, let's graphically what a depression would look like in this modern day and age...

    Published in BoomBustBlog

    Now that the Fed has sent a clear signal that they are withdrawing some of the hyper-stimulus measures, combined with the fact that the monopolistic trading profits of the big banks are returning to mean, the trash on bank balance sheets should start coming to fore. Higher rates will compress net interest margins, and if you have been following my research the NIM of many banks were actually rather anemic despite zero interest rate policy. Now that banks are going to have to actually earn money by lending in lieu of a free lunch from the government, you should start seeing some very big hits to earnings - accounting and otherwise.

    Published in BoomBustBlog

    UPDATED -It is beyond a hallucinogenic-induced pipe dream to even consider that the Eurozone will come out of this attempt at replicating the US "extend and pretend" policy intact and unscathed. The mere concept of global equity rallies should have macro traders and fundamental investors chomping at the bit. The US won't even get away with it, and we have the world's reserve currency printing press in our basement running with an ink-based, inter-cooled, twin-turbo supercharger strapped on that will make those German engineers green with envy, not to mention green with splattered printer ink as the presses go berserk!

    In part 2 of my series on the Pan-European Sovereign Debt Crisis, we will review Italy and Ireland in comparison to the whipping child of the media - Greece (see "The Coming Pan-European Sovereign Debt Crisis" for part one covering Greece and Spain along with tear sheets for the Spanish banks at risk for subscribers).

    Published in BoomBustBlog
    Monday, 01 February 2010 23:00

    Readers Comments on Goldman's Valuation

    A knowledgeable reader, who is currently a sell side analyst, questioned me about using book value to value Goldman and investment banks in general. He proposed using a formula that entails revenues as well due to the fact that the main concern during the crisis was breakup value while revenue visibility is clearer now that the crisis is over.

    Without going into the merits of his valuation suggestion (I am allowing him to make a more compete argument with me), this suggestion does bring up several pertinent points. For one, while the crisis may be over, the root causes of the crisis have went nowhere, and the counterparty risk concentration is actually much worse than before. In addition, not only is it political suicide to attempt to bailout another bank, I think it is poor economic policy as well. Combining these two assertions, it is not clear that we will not see anymore bank failures. The probability of such has dropped considerably though.

    Published in BoomBustBlog

    sen._corker.jpgSenator Corker challenged Mr. Volcker's stance in today's congressional hearings on the Volker Rule by saying that no financial holding company that had a commercial bank failed while performing proprietary trading. It appears as if Mr. Cofker may have received his information from the banking lobby, and did not do his own homework.
    Let's reference the largest commercial bank/thrift failure of the all. First off, a little historical reference courtesy of

    WaMu Is Seized, Sold Off to J.P. Morgan, In Largest Failure in the History of the US!!!

    In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co...

    The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis...

    Published in BoomBustBlog
    Sunday, 31 January 2010 23:00

    The Volcker Rule Has Merit

    Volcker is correct in that banks conflicts of interests need to be stemmed. One would not have to worry about over regulation if one does not attempt to regulate every single act or attempt to guess what might go wrong. What needs to be done is to use regulation to disincentivize banks from engaging in activities that engender systemic risks and/or harm clients. By putting everybody on the same side of the table, you don't have to worry about outsmarting the private sector.

    From CNBC:

    Published in BoomBustBlog
    Friday, 29 January 2010 23:00

    Quick Bank Thoughts

    The lead story this morning of ZH is "The Only Thing Better Than A Zero Hedge? Wells Fargo's "Never Lose" Economic Hedge", explaining more accounting shenanigans (if you read the links below, you will see that I have caught Wells in a few rather aggressive interpretations) related to MSR's. One thing that was noted was the inputs for valuing MSRs using interest rates as was extolled by management. Well...

    The biggest input for MSRs are foreclosures, not interest rates. The interest rate argument is academic (assuming a refinance, that may or may not happen when few can qualify) while the foreclosures are happening at a much more rapid and prevalent clip and are much more likely to happen. The foreclosures are also a guaranteed end to MSR income. You can't service a loan on an REO, now can you? So while interest rates are remaining steady and can be put into an MSR valuation formula for a positive GAAP dollar generating result, foreclosures are on the rise and will continue to be, which will (and rightfully so) drive down the values of MSRs. This is probably why (the more academic) interest rates are used for inputs in lieu of a straight pipe to the foreclosure rates.

    For those who haven't read my take on Well's Q4, you can read it here:

    This is also a reason why assets need to be market to market, and not to model. Outside of the possibility of the models actually being faulty or just plain old wrong, they are subject to bias and fraud. If one were to simply force he banks to reveal cash flows and yields on the MSRs, as in raw revenues less all expenses divided by acquisition costs, I am sure you will find an inverse relationship with localized foreclosure rates, much tighter than that of interest rates. You will also find that, on a discounted basis, these MSRs are highly overvalued on bank's books. Unfortunately, banks don't do this so the easiest way to get to the values is to let the market set it.

    Anybody who is a member of my blog should download the forensic reports from 2009 to remind themselves of the amount of issues that reside within Wells. It is very, very overrated.

    Published in BoomBustBlog

    I have decided to release a significant amount of opinion on Wells to the public, and have created an extended version of the report for subscribers with geo-specific charge-off estimates stemming from the FDIC/NY Fed model that we have created in house. A rather comprehensive piece of work. It appears that much of the sell side community is much, much more optimistic on the prospect of Wells than I am. It must be the Warren Buffet investment...

    Published in BoomBustBlog

    Well, it looks like Blankein, Dimon, et. al. really should have tried
    harder to make that meeting with the President a couple of weeks ago.
    It appeared as if he may have had something important to discuss. As my
    readers and subscribers know, I have been very bearish on the big money
    center banks since 2007, and quite profitably so. The last 3 quarters
    saw a much larger trend reversal than I expected, that resulted in the
    disgorgement of a decent amount of those profits - a disgorgement that I am still
    beating myself up over. You see, as a fundamental investor, I don't do
    well when reality diverges from the fundamentals for too long a period.
    Luckily for me, fundamentals always return, and they usually return
    with a vengeance. To keep things in perspective though, I am still up
    on a cumulative basis many, many multiples
    over the S&P (which is still negative, may I add) as well as your
    average fund manager. Why? How was I able to do this? Well, its not
    because I am supersmart, or well connected. It is because I keep things
    in perspective. Those that look at the records that I publish say,
    "Well he was down the last couple of quarters, so..." while
    disregarding what happened the 8 or even 40 or so quarters before that.
    Such a short term horizon will probably not be able to appreciate the
    longer term perspective and foresight that enabled me to see this
    entire malaise coming years ago and profit from it. No, I am not
    perfect and I do mess up on occasion, but I also do pay attention to
    the facts.

    These facts pointed to a massive overvalutation in banks throughout the
    bulk of last year, again! I made it clear to my subscribers that the
    banks simply have too many
    things going against them: political headwinds, nasty assets,
    diminishing revenue drivers, over-indebted consumers, and a soft
    economic cycle. I also warned explicitly that I didn't think Obama
    would be nearly as lenient on the banks as Bush was. Well, the
    headwinds are stiffening. On that note, let's take an empirical look at
    just what this means in terms of valuation (note, I will following this
    up with a full forensic re-valuation for all subscribers, incuding a
    scenario analysis of varying extents of principal trading limits). Some
    of these banks are I-N-S-A-N-E-L-Y overvalued
    at these post bear market rally levels considering the aforementioned
    headwinds. Methinks fundamental analysis will make a comeback in a big
    way for 2010 as it meets the momentum and algo traders in a mutual BEAR
    feast on the big investment banks cum hedge funds. I can't guarantee it
    will happen, but the numbers dictate that it should. We shall see in
    the upcoming quarters.

    We have retrieved information about trading revenues for GS, MS, JPM and BoFA. We have also retrieved some balance sheet data to reflect the trend in investment holdings and the level of leverage, but I will address that in a future post for the sake of expediency. While the banks don't break out the P&L for principal trading, we can sort of back into it. Remember, traders are fed bonuses off of net revenue, not profit.

    Published in BoomBustBlog