VPRO Rating agency documentary billboard

Continuing my rant on the effectiveness (not) of the ratings agencies, I bring to you an interesting documentary on the rating agencies' effect on the sovereign debt crisis in Europe, produced by VPRO Tegenlicht out of Amsterdam. You can see the full video here, but only about half of it is in English. I appear in the following spots: 4:00, 22:30, 40:00...

Reggie Middleton Discussing the Rating Agencies effect on Sovereign Europe


As a recap of my more recent rants on this topic, see the headlines and excerpt summaries below. As you read through this, notice how French-controlled Fitch seems to have a problem downgrading France, who definitively has some serious issues...

Where Are The Ratings Agencies For UK & German Banks Before They Go Boom? How About Those Euro REITs? Agencies Anybody? 

Last week I illustrated the interconnected EU master duo with the most ironic of divergent agendas: When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!  Basically, Germany and France are pulling in two different directions trying to get off of a boat that will drown them both, regardless. Then I posed the taboo question: Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?

The Dutch are probably in for a banging that the vast majority of the populace are not expecting. The presentation below is a subset of the keynote speech that I gave at the ING CRE Valuation Conference in Amsterdam last April. Some may say it was quite prescient. I'd say it was a matter of paying attention.

Before you peruse through the Power Points and related videos, glance over Interbank_Contagion_in_the_Dutch_Banking - 2006 (pdf)  and then review Cross_Border_Bank_Contagion_in_Europe_- 2006 (pdf). It is apparent that I wasn't the only one who used calculators and common sense before it was too late. To wit:

Question the Quality Of BoomBustBlog Bank Research, Will You? Bove and Fitch Follow "The Blog"!

Remember, I warned of a European bank runs early on and even warned the public (after my subscribers had an opportunity to take positions) of the impending fall of BNP Paribas. See "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely "Bank Run Liquidity Candidate Forensic Opinion" - A full forensic note for professional and institutional subscribers.

I then went on to thoroughly analyze the risks and potential downfalls of Goldman, Morgan Stanley and Bank of America - all while the sell side had strong buys on both these banks and the industry. Well, it appears as Fitch has either caught an attitude, caught religion or both. As reported through the MSM,Fitch Downgrades Several Big US and European Banks

So, Now The Rating Agencies Want To Acknowledge The Existence Of The FrankenFinance Monster???

 In the headlines today: S&P Places EFSF's Long-Term AAA Ratings on Creditwatch Negative, May Lower Ratings by One or Two Notches

Is this truly a surprise? Does anyone truly believe this heavily financially engineered FrankenFinance monster actually deserves a AAA rating? Yes, I do mean Frankenstein assets. I implore you to delve in further - "Welcome to the World of Dr. FrankenFinance!" and .

As a matter of fact, it actually appears that those few members of S&P that do read my blog have actually found some influence in the company. If you remember, last week I challenged the rating agencies with this taunting post -Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? Now, it's not as if the agencies have went so far as to actually take heed to my warning, but those who follow me know that I have been leading my subscribers through an explicit path of "contagion to come" for two years now. Who is the major conduit of said contagion? Well, the very same nation who is the 50% of the bilateral lynchpin of the EFSF.

Two Years Ago I Said Greece Was A Guaranteed Default, Today's 1 Yr Yield is 426.118%???

I invite any and all to look at my predictive track record and compare it to ANY of the big three rating agencies. See Who is Reggie Middleton?

Published in BoomBustBlog

Do you want to know who's next for the bond vigilantes? Read on...

In today's headlines:

On Thursday, 22 April 2010 I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic! That post provided ample evidence to support said assertion. Fast forward nearly two years and the Greek Govt Bond 1Year Yield is roughly 426.118%. Many, if not most, pundits swore that Greece would not default. Now, even S&P Says Likely to Cut Greece to 'Selective Default'.

Standard & Poor's will likely downgrade Greece's ratings to "selective default" when the country concludes its debt restructuring, but that will not necessarily destroy the credibility of the European Union, an official with the ratings agency said on Tuesday.

Who's willing to bet the farm on that statement?

"It's not a given that Greece's default would have a domino effect in the euro zone," John Chambers, the chairman of S&P's sovereign rating committee, said in an event organized by Blooomberg Link.

Of course not! It wouldn't effect Portugal, Italy, Spain nor Ireland, right???!!! You know that I know that you know that Portugal is up next. Of course, games will continue to be played with CDS, since some declare that "selective default" does not necessarily trigger CDS. The pertinent fact is being missed, or ignored. Even if one does wiggle around triggering CDS, the losses will have to be taken, even if through counterparty risks blowing apart as the banks that thought they were hedged weren't hedged, collapse, bringing the counterparties who relied on them for payment down with them... Daisy Chain style. There really is no way around it.

CNBC goes on to report...

IMF Positive

Asked if there was still hope of a deal, IMF chief Christine Lagarde said she remained positive.

"I'm determined to be positive," she told Deutschlandradio Kultur. "Political leaders have the instruments and possible measures in order to manage this situation and bring the euro zone back on to a sustainable path."

Yeah, right! You see, the IMF's problem is that they're too positive on Greece and Portugal. As excerpted from Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!:

Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

image005.pngimage005.pngimage005.png

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic. image018.pngimage018.pngimage018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

image013.png

Do remember what I told the Dutch about being optimistic, or pessimistic...

For those who are optmistic of a plan to work out an orderly default with CDS, let me explain again... You are missing the point!  Massive amounts of capital has been destroyed, and it is not coming back. That capital destruction has yet to be recognized by the markets and TPTB are trying their best to postpone said recognition. Once that recognition is upon us, the daisy chain effect will be inevitable as various players seek to be made whole. I have run through the capital destruction scenario two years ago...

  1. What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates
  2. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

Now, all of you hedge fund guys who are trying to stay ahead of the curve, turn your attention past Greece and back to Portugal - as I have. Reference my past writings...

I discussed Portugal's role in the domino effect in illustrative detail in Amsterdam last year...

Other articles of interest on the topic...

  1. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
  2. How Greece Killed Its Own Banks!
  3. The Greek Bank Tear Sheet is Now Available to the Public
  4. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
Published in BoomBustBlog

cee_risk_map.pngClick the graphic to enlarge...

Exactly two years ago, I penned a piece called The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! I excerpt it as follows...

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! 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....

I strongly suggest those interested in this topic to peruse the whole article for it explicitly warns of what is about to happen any minute now, but first lets see what's popping in world news today, as Bloomberg reports the IMF, EU May Need to Give E. Europe More Help:

The International Monetary Fund and other lenders, who spent $42 billion to stem an eastern European banking crisis after 2009, may be forced to commit more aid to the region to cushion the effects of banks cutting assets. The IMF, the European Bank for Reconstruction and Development, the World Bank and the European Investment Bank should “stand ready to provide external assistance and financial support to banks” in eastern Europe, the Vienna Initiative group of regulators and policy makers said in a statement after a meeting in the Austrian capital yesterday. “There is a very strong impact of this -- a potentially strong impact,” Erik Berglof, the EBRD’s chief economist, said in an interview today in Vienna. “You have the headquarters making decisions on assets that are very small when you look at the total balance sheet, but when you look at the subsidiaries in eastern Europe they are systemic in the countries where they operate.”

Regulators and policy makers are trying to shield economic growth in eastern Europe as western lenders must meet higher capital requirements to withstand the euro area’s deepening debt crisis.

This makes very little sense since the bulk of growth in the CEE states stems from trade with the EU. If the EU catches a cold, the CEE states contract chronic pneumonia!

About three-quarters of the banking market in eastern Europe is controlled by western European banks including UniCredit SpA (UCG), Erste Group Bank AG (EBS) and Raiffeisen Bank International AG (RBI), the biggest of which are raising capital and shedding assets, causing concerns that credit may become scarce.

As explicitly detailed to my subscribers two years ago, (subscribers, see File Icon Banks exposed to Central and Eastern Europe)

The Vienna group urged western European regulators and policy makers to work together to recapitalize banks and consider the effects on subsidiaries in other countries. Financial regulators need to step up coordination to reduce the risk of “disorderly deleveraging”...

Otherwise known as reality, a properly functioning market and transparent price discovery!!!

... in eastern Europe, Serbian central bank Vice Governor Bojan Markovic said at a Euromoney conference in Vienna today. By the end of June, European banks must have core capital reserves of 9 percent after writing down their holdings of sovereign debt, European Union leaders decided in October. That may require an additional 106 billion euros ($149 billion) of capital, a according to the European Banking Authority.

The 9 percent requirement “is not a very fortunate” plan given the current economic environment, European Central Bank Governing Council member Ewald Nowotny said at a Vienna conference today. “Regulatory requirements shouldn’t have a restrictive impact on the real economy,” Nowotny said.

Heh, let a banker tell the story and look what comes out! Appropriate regulatory requirements will have a restrictive impact on the economy if the prebious regulations were lax enough to allow abusive practives to juice the economy to unsustainable heights!!!

Deleveraging shouldn’t take place in countries that are growing and making structural changes to their economies, Albanian central bank Governor Ardian Fullani said today at the same conference.

Really? Suppose they aren't growing at the same rate that debt service emanating from piled derivative experiments are growing, and the structural changes being made are inadequate or fail to address the pertinent issues? I'm just saying...

The message to foreign banks is “don’t put everyone in the same pot,” Fullani said. “Give stimulus to the right countries.”

Hey, that's novel and new! I've never heard the cry for stimulus before... Like a junkie creeping for another hit...

Banks may reduce funding by as much as 30 billion euros this year, according to estimates by Raiffeisen, board member Patrick Butler said at the Vienna conference. “Compare that to the growth that we saw in 2006 or 2007 of 200 billion euros a year -- it’s minimal,” Butler said. “It is not a credit crunch.”

...“It is important that home country authorities internalize the cross-border effects on EU and non-EU countries in formulating their measures,” the Vienna Initiative said in its statement. “In particular, the recapitalization plans of international banks submitted to the EBA should be scrutinized” for their “systemic impact on host economies.”

Yeah, BoomBustBlog covered this in detail... Two years ago - Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

foreign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

I.          Summary of the methodology

    • We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
    • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors - a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
    • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
    • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.
  • File Icon Sovereign Contagion Model - Retail- contains introduction, methodology summary, and findings
 
Published in BoomBustBlog

Earlier this week I published a controversial rant on the US education system - How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery. This was a lengthy piece, but apparently caught the interest of many as it went semi-viral. This is part of the conclusion, attempting to show how US indoctrinated "GroupThink" prevents many (if not most) from seeing what empirically should be obvious. 

Subscribers, please reference the following documents analyzing the FIRE companies we see at risk as a result of the following circumstances.

We have reviewed the finance portion extensively throughout 2011. See Commercial & Investment Banks section of the subscription content area. This is the latest bank who we feel will suffere significant if the feces hits the fan blades  Bank Haircuts, Derivative Risks and Valuation.

The last forensic report was centered around an insurer - see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! and Our Next Forensic Analysis Subject Is In The Insurance Industry. The actual report is available here:

I have also detailed the risks in commercial real estate in the Dutch markets, see

Now available for download to all paying subscribers is a US REIT headed for distress -  US Commercial REIT Distress Overview
(Commercial Real Estate)
. Professional and institutional subscribers will have an addendum published with additional companies that just missed the shortlist, but may see problems in the near to medium term.

There are many analysts and pundits who outline their predictions for the new year. I don't believe in "predicting" personally, but it is very important to form an outlook for the future and back said outlook up with objective observation and prudent analysis. Several big bank analysts have outlined what they perceive to be the biggest threat to stability for 2012, and material amount of them chose the same threat...

shah_of_iran

Iran

Former CIA Chief: Iran 'Single Greatest Destabilizing' Force in 2012

Tehran will be the top threat in 2012, former CIA Director Michael Hayden predicted Wednesday as Iran dominates foreign policy debate even while national security officials appeared to dismiss the Islamic Republic's latest threat to close the Strait of Hormuz.

"It is the single greatest destabilizing element right now with regards to global security," Hayden told Fox News, adding that the outlook is not encouraging.

Don't get me wrong, I fully appreciate and agree with the assertion that Iran is a serious threat to global stability - and I'm not the only one...

Whle PIMCO didn't actually label Iran as the biggest threat, they did do a superb job of outlining the potential fallout from an Iranian oil event....

"Pimco's 4 "Iran Invasion" Oil Price Scenarios: From $140 To "Doomsday"",

 "Whenever the global economy is in a fragile state, as it is today, geopolitical concerns such as the possibility of a strike on Iran’s nuclear facilities become much more exaggerated. Although we cannot (and will not) predict whether an attack is imminent, or even likely, our experience and research tells us that any major disruption in the supply of oil from Iran could have either subtle or profound global repercussions – especially as excess capacity is virtually exhausted and we doubt that other OPEC nations would be able to compensate for a reduction in Iranian oil production."

The 4 scenarios presented by PIMCO here they are: "i)Scenario 1Exports minimally effected. Concerns would drive initial price response; Oil could spike initially to $130 to $140 per barrel and then settle in a higher range, around $120 to $125; ii) Scenario 2Iranian exports cut off for one month. In this case, we would expectprices could reach previous all-time highs of $145/bbl or even higher depending on issues with shipping; iii) Scenario 3: Iranian exports are lost for half a year. We think oil prices could probably rally and average $150 for the six months, with notable spikes above that level; iv)Scenario 4Greater loss of production from around the region, either through subsequent Iranian response or due to lack of ability to move oil through Straits of Hormuz. This is the Armageddon scenario in which oil prices could soar, significantly constraining global growth. Forecasting prices in the prior scenarios is dangerous enough. So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario."

Now, SocGen weighs in...

SocGen Lays It Out: "EU Iran Embargo: Brent $125-150. Straits Of Hormuz Shut: $150-200"

1) "Scenario 1: EU enacts a full ban on 0.6 Mb/d of imports of Iranian crude. In this scenario, we would expect Brent crude prices to surge into the $125-150 range." 2) "Scenario 2: Iran shuts down the Straits of Hormuz, disrupting 15 Mb/d of crude flows. In this scenario, we would expect Brent prices to spike into the $150-200 range for a limited time period."

Now, the last thing an already crippled Europe needs is a doubling of its primary transportation energy source. Alas, methinks Europe has bigger problems to with which to cause goose bumps on its booty - namely.... It's banking AND insurance system is still one step from absolute implosion! It's gotten so bad that the borrowers are actually lending to the lenders because the lenders have no effective credit in the markets!!!

European Banks Now Get Loans From Cash-Rich Firms

Blue-chip names like Johnson & Johnson, Pfizer, and Peugeot are among firms bailing out Europe's ailing banks in a reversal of the established roles of clients and lenders.
Euro bills and U.S. dollars being exchanged. One source with knowledge of the so-called repo deals, or short-term secured lending, said the two U.S. pharmaceutical groups and French car maker were the latest to sign up for them. Europe's banks are struggling to secure the cash to fund their day-to-day business and have largely stopped lending to each other for fear Europe's sovereign debt [cnbc explains] crisis could land any of their peers in trouble.

As a result a group of well-known, cash-rich companies with solid cash flows has stepped in the repo market, which provides a form of lending so far almost exclusively in use between banks, and between banks and central banks. One market participant said in one key area of lending companies now accounted for 25 percent of these deals. Repos provide the new financiers with the strict guarantees they need before parting with their cash, answering worries that the crisis has weakened Europe's banks to the extent that they might not be able to pay the money back.
"Companies in the past were ... happy to deposit cash on an unsecured basis to a bank for an interest payment," said Frank Reiss, who oversees some of the repo business at Euroclear, the Brussels-based settlement house owned by a group of banks. "Now following the crisis, we have seen that companies are engaging in repos secured with collateral against the cash they are lending," said Reiss. Euroclear is the largest administrator of repo trades in Europe. At the moment the European Central Bank provides the main lifeline for banks and has pumped hundreds of billions of euros of cash into the market. But the banks are parking most of the money they borrow back at the ECB [cnbc explains] rather than trusting to lend to each other.

Yes, this appears to be the fact... Deposits at ECB Hit New High

Commercial banks' overnight deposits at the European Central Bank hit a new record high of 464 billion euros, data showed on Monday, and traders said they could hit half a trillion euros by next week. High deposits indicate banks prefer the safety of the central bank for their funds to higher rates they could get by lending to each other.

Banks are awash with cash after taking an unprecedented 489 billion euros in the ECB's [cnbc explains] first-ever three-year liquidity operation late last month, and are mulling what to do with the money in the longer term. The liquidity operation was designed to underpin banks' finances and hopefully repair some confidence in the sector, but the sovereign debt crisis means many institutions still lack enough trust to lend to each other and prefer to stash their money at the ECB.

"The market is more or less closed, all the over-liquidity is going back to ECB," the trader said. "Slowly people are getting some longer funding, but there is no easing in the short end."

Now, Germany has acted as stalwart stopgap in the sovereign debt carnage of the EU nations. It's perceived as the strongest, most stable and most disciplined economy. As such, there has been a massive flight to quality trade that has pushed German bunds to negative yields. That's right! As in the US, you literally have to pay Germany for the privilege of lending it your hard earned money.

Right here and now, the more astute should see there's something wrong here, but we shall move on. Wait a minute! This net export nation (that means its livlihood is based on selling goods to others) whose major trading partners suffer from a myriad of maladies ranging from hard landing to near depression is in economic recession, yet there's enough demand to lend it money that lenders have to pay for the privilege???

  1. Latest Numbers from Germany Confirm Recession The New American -The announcement from the German Economy Ministry over the weekend confirmed that the long-awaited European recession has officially begun: German factory ...
  2. Germany in recession - The Daily Economist - Entering the new year, we can now add Germany to the growing list of countries in recession, as noted by more than a dozen economists who have come to this ...
  3. Economists: Germany in a recession now - The Local - As European leaders struggle to stave off a looming recession this year,Germany – the continent's biggest and healthiest economy – is probably already in one,...

  4. Survey shows Germany already in recession: report - MarketWatch - BERLIN -The German economy is already in recession, Die Welt newspaper reported Monday, citing its survey of 14 bank economists.

I believe Germany poses the biggest threat to global harmony for 2012. Here's why...

European banks are (in addition to borrowing on a secured basis from those customers they usually lend to) also paying insurers and pension funds to take their illiquid bonds in exchange for better quality ones, in a desperate bid to secure much-needed cash from the ECB, which only provides cash against collateral. This may not be as safe a measure as it sounds. Below is a sensitivity analysis of Generali's (a highly leveraged Italian insurer, subscribers see File Icon Exposure of European insurers to PIIGS) sovereign debt holdings.

image004

As you can see, Generali is highly leveraged into PIIGS debt, with 400% of its tangible equity exposed. Despite such leveraged exposure, I calculate (off the cuff, not an in depth analysis) that it took a 10% hit to Tangible Equity. Now, that's a lot, but one would assume that it would have been much worse. What saved it? Diversification into Geman bunds, whose yield went negative, thus throwing off a 14% return. Not bad for alleged AAA fixed income. But let's face it, Germany lives in the same roach motel as the rest of the profligate EU, they just rent the penthouse suite! Remember, Germany is not in recession after a rip roaring bull run in its bonds, and I presume the recession should get much deeper since as a net exporter it has to faces its trading partners going broke. Below you see what happens if the bund returns were simply run along the historical trend line (with not extreme bullishness of the last year).

image005

Companies such as Generali would instantly lose a third of their tangible equity. This is quite conservative, since the profligate states bonds would probably collapse unless the spreads shrink, which is highly doubtful. Below you see what would happen if bunds were to take a 10% loss.

image006

That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out. The same situation is evident in banks and pension funds as well as real estate entities dependent on financing in the near to medium term - basically, the entire FIRE sector in both European and US markets (that's right, don't believe those who say the US banks have decoupled from Europe).

thumb_Reggie_Middleton_on_Street_Signs_Fire

The damage to banks will probably be worse due to the higher level of leverage in European institutions. This is saying a lot since Italy's Generali is truly levered up the ASS! As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008

Be aware that Greece, et. al. currently trade at a very fat spread to the bund. Said spread should actually widen as reality starts to set in. Remember, these are spreads, not static yields! If German bunds reflect the fact that Germany, as a net export nation that derives its bread and butter from exporting to economies that currently range from facing hard landings to recession to down right borderline depression (China/US/EU), then Bund prices may feel the effects of fundamentals over the flight to (alleged) quality trade that has pushed yields negative. When you have to pay somebody to lend them money, the wrting should be written very clearly on the wall. If only American Group think indoctrination style education taught us to read (the writing on the wall, that is). See for How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery more on this.

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipeout, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, andlying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trastde and European Bank Run Trading Supplement

I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head. As clearly predicted in the last quarter of 2009, Another Banking Crisis Is Inevitable? There will be several bank runs, although they may be cleveraly concealed by central banks and governmental authorities. Reference The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! These bank runs will not be confined to the annals of the EU either, reference Yes, The BoomBustBlog Forecast Pan-European Bank Run Has Breached American Soil!!! The US has a greater than 50% chance of seeing additional bank runs, albeit most likely cloaked. Remember, Lehman Brothers, WaMu and Bear Stearns were victims of bank runs, as was MF Global - which many people fail to realize, and it was a highly leveraged bank run to boot - On MF Global, Hyper-Hypothecation That Creates $6b Out $2B And A Central Bank That Couldn't See A Bankruptcy Staring It In The Face. The big name brand banks whom many thought were infallible, actually have many similarities to that of the now bankrupt MF Global, to wit - Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies!

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

So, What's the Next Shoe To Drop? Read on...

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

I would like my subscribers to remain cognizant of the face that equity prices probably will detach from fundamentals this quarter as the inevitable wave of global QE is once again instituted via version 3.5x, but this can kicking has pushed the party's participant into a virtual dead end. Yes, it can continue, but I don't foresee many years of this. Although this is merely speculation on my part, but methinks 2012 may very well be the year of reckoning.

Those who wish to subscribe to BoomBustBlog research, analysis and opinion should click here! You can follow my public comments via the following avenues....

Relevant subscriber documents:

 

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Published in BoomBustBlog

I discuss how Greece became over indebted through banks imprudently making bad loans, and more importantly why practically no one in all of Wall Street warned of the sovereign debt crisis besides BoomBustBlog. This is hard hitting opinion that is too controversial to publish anywhere else.

How did I see this "Eurocalypse" coming while Wall Street remained aloof? Well the same question can be asked as to how I saw the Housing market crash, the fall of Lennar, Voodoo Accounting & the homebuilders, the breaking of the Bear Stearns, wondering whether Lehman really was a lemming in disguise or the fall of commercial real estate, among a plethora of other controversial, contrarian, and direct contravention to the Sell Side calls that I have made.

As explained in the second half of the video above, many still fail to understand the typical Wall Street bank business model, and more importantly fail actually audit the performance of said banks advice, recommendation and trading. I have laid it bare in BoomBustBlog many a time, which is probably the reason why my blog is banned from more than half of the big bank intranets!!! If you need an explicit example of what I a talking about, simply reference "Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!"

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For those who have not heard....

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

In the video above, the audience's interesting question as to why I clamored on about the Pan-European Sovereign Debt Crisis, warning since January 2010 while the sell side of Wall Street kept selling PIIGS debt to clients was quite telling, indeed. Well... The proof is in the pudding. Click here for the first year of warnings and admonitions, or click here for the latest scoop!

Anecdotal picks from the BoomBustBlog archives nearly two years ago...

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.
  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

  3. 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.

  4. The Coming Pan-European Sovereign Debt Crisis, Pt 4: The Spread to Western European Countries

  5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

  6. The Beginning of the Endgame is Coming???

  7. I Think It’s Confirmed, Greece Will Be the First Domino to Fall

Published in BoomBustBlog

Ruminations on Greece's sovereign debt crisis. This video was recorded two months ago. There have been some pertinent developments since then.

The full forensic analysis of the insurance short candidate as well as several US REITs that we are investigating will be released within 24 hours.

Published in BoomBustBlog

Here's the rub upfront for those who desire quick summaries:

  1. We had a massive CRE bubble which bust - See The Commercial Real Estate Crash Cometh, and I know who is leading the way.
  2. The CRE bubble bust, even as disguised and manipulated as it was, claimed some serious retail casualties. See GGP and the type of investigative analysis you will not get from your brokerage house.
  3. A public-private partnership of misdirection allowed the popping bubble to be disguised. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
  4. Even with the "kicking the can down the road mentality", fundamental and macro realities are bound to rear their heads. See The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance and then see Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate 
  5. ... and will do so both in the US and abroad, see The "American Realist" Says: Past as Prologue - Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!!
  6. Those who truly believe that the more conservative EU nations will skate past this are sorely mistaken. See "Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?" Then see The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History
 
The fact of the matter is that there is a very fundamental, and sparsely recognized reason for retail real estate to take a tumble.
When discussing the proposed Dutch real estate short release to my subscribers a couple of weeks ago (see The Real Estate Recession/Depression is Here, Eurocalypse Style and The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History), I asked my analysts if there was evidence of increeased retail web activity affecting European mall sales. I know that was the fear in the Netherlands (see the last two videos at the bottom of the post here) and the reality in the states (see below). After all, Amazon.com doesn't pull in all of those hypergrowth billions of retail online dollars through physical malls. And if Amazon is making it, some mall store is losing it. Now, said mall store could open up its own website and potentialy successfully compete with Amazon (think Walmart.com, etc.) but exactly where does that leave the overbuilt, and probably over leveraged mall operator???
Exactly! Fu@ked! Professional subcribers can see the rapid growth of online retailing in Europe via this document -File Icon Online Retail Sales Penetration, as excerpted...
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Online retail sales in Europe - Source: comScore Media Metrix

               In 2010, the online retail sales penetration increases noticeably among all major European nations, reaching an average 74.5% in Jan 2011 versus 66.0% in Jan 2010. This is a sharp increase. 

The UK recorded the highest Retail site penetration at 89.4% of the total online audience (up 6.3 points from last year). The Netherlands was ranked fifth with penetration of 80.2 percent (up 4.9%). The average minute per visitor for Europe was 52.4, close to 50.2 for Netherlands. For UK and France, this figure is above 80 minutes. This could imply that online spending would increase more sharply in the Netherland than in the UK, France and Germany. 

You see, during the bubble, a massive amount of retail space was built - much more than could possibly be effiiciently utilized. This is particularly true in the US, but also valid in Europe and even Asia as well (re: Ordos of empty cities fame). According to Howard Davidowitz, "We have 21 sq. ft. of retail selling space for every man, woman and child in this country." That's a tad bit much, eh? Do you know what makes it even worse? That selling space is becoming even less valuable, becuase more and more (and more) sales are being done online versus in a physical mall. I commented on Davidowitz's take, which is lockestep with mine this time last year: Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past 

In December of 2009, I posted and article and accompanying research titled, "A Granular Look Into a $6 Billion REIT: Is This the Next GGP?" The following are excerpts from it:

The results of these activities have been congealed in our analysis of Macerich’s entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).image001.pngimage001.pngimage001.png

Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV’s above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis. Even if we were to assume that we are still in the midst of the credit bubble and REITs can still refi at 70LTV (both assumptions patently wrong), rents, net operating income and cap rates have moved so far to the adverse direction that MAC STILL would not be able to rollover the debt in roughly 37 properties (31% of the portfolio) whose LTVs are above the 70% mark – and that’s assuming the credit bubble returns and banks go all out on risk and CMBS trading. Rather wishful thinking, I believe we can all agree.

For those of you who didn't catch it in the table above, I'll blow it up for you...

Notice anything familiar??? There is a very strong chance that every single property on the list detailed in the forensic reports will be taken over by the lenders, that's a lot of properties. Subscribers should reference MAC Report Consolidated 051209 Retail MAC Report Consolidated 051209 Retail 2009-12-07 03:46:49 580.11 Kb , MAC Report Consolidated 051209 Professional MAC Report Consolidated 051209 Professional 2009-12-07 03:48:11 1.03 Mb, those who don't subscribe should download my  CRE 2010 Overview CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. For those who want access, click here to subscribe!

So, why has Macerich and the entire REIT sector defied gravity despite the fact they are getting foreclosed upon faster than a no-doc, subprime, NINJA loan candidate who just lost his minimum wage job amongst all of these “Green Shoots”??? Well, I took the time to answer that in explicit detail... I urge all to read The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?

More hard hitting BoomBustBlog commercial real estate commentary and research from Reggie Middleton:

Archived retail research and opininion from BoomBustBlog...

This is an example of exactly what we were talking about in our subscription documents regarding the ridiculous run up in consumer discretionary shares when taken in context of  the American consumer and the stress born from the Pan-European Sovereign Debt Crisis (click the link for our detailed analysis). You can find the earlier articles in this consumer mini-series as follows:

  1. What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
  2. What We’re Looking For To Go Splat! Part 2: A list of 147 retail stocks with attributes that causes on to question their gain in prices, with a shortlist of companies who may very well go “splat”!
  3. Is the Consumer Really Back? Well, It Depends On If You Believe What the Government Tells You or Whether You’re An Indendent Thinker – The American Recovery and the North American Economic Outlook.

  

Published in BoomBustBlog

I've been renown for calling the housing crash in 2006-7 and the commercial real estate crash in 2007. Late in 2007, I penned a piece titled "The Commercial Real Estate Crash Cometh, and I know who is leading the way!" wherein I made it clear that the CRE party was over, the music stopped and the DJ was packing up. Part and parcel of this general CRE warning (the first of which was the introductory post to BoomBustBlog in September of 2007) was the identification of a particular short candidate whose profligate spending and excessive leverage made for what ultimately was one of our most profitable and thoroughly analyzed shorts - Generally Negative Growth in General Growth Properties - GGP Part II. This company was investment grade (AA) rated and it's common equity traded in the $65 range when I initiated my short position. Roughly twelve months later it filed for bankruptcy. It was the 2nd largest mall REIT in the US and the largest real estate bankruptcy ever although the CFO explicitly called my research and opinion "trash"! The entire story can be followed via: GGP and the type of investigative analysis you will not get from your brokerage house.

Unfortunately, many investors, the equity market, commercial, investment and morgtage banks failed to heed my admonitions. The result of which was the literal pillaging of investors by investment bank private equity and asset management arms. For those who think I'm being rather bombastic and dramatic, reference "Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!", to wit:

 Oh, yeah! About them Fees!

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost abuot 2/3rds of thier clients money. I though to myself, "Damn, now that's some bold, hubristic s@$t". So, I decided to attempt to lay it out for everybody in the blog, see "

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics.

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To depict a varying impact on the potential returns via a change in value of property and operating cash flows in each year, we have constructed three different scenarios. Under our base case assumptions, to emulate the performance of real estate fund floated during the real estate bubble phase,  the purchased property records moderate appreciation in the early years, while the middle years witness steep declines (similar to the current CRE price corrections) with little recovery seen in the later years.  The following table summarizes the assumptions under the base case.

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Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.

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re_fund_returns_tables.png

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Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Under a relatively optimistic case where some mild recovery is assumed in the later years (3% annual increase in year 5 and year 6), LP still loses a over a quarter of its capital invested while GP earns a phenomenal return. Under a relatively adverse case with 10% annual decline in year 5 and year 6, the LP loses most of its capital while GP still manages to breakeven by recovering most of the capital losses from the management and acquisition fees..

re_fund_returns_tables3.png

Anybody who is wondering who these investors are who are getting shafted should look no further than grandma and her pension fund or your local endowment funds...

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/volcker/MSREF%20V%202.jpg

What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overses, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has littel effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks faile to roll over all of that underwater Eu mortgage debt?

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Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

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Do you really think they will rollover the US debt anyway? How about the result  of the guaranteed losses that both bank and investor will take as said debt either fails to get rolled over or is forced to do equity cramdowns? Then think about EU banks going down and American banks being called to pay CDS!

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Then think about those sovereign states that truly cannot afford to bail out their banks.

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I made this perfectly clear as the keynote speaker at ING's CRE Valuation Confeence in Amsterdam this past April.

Yes, "The Real Estate Recession/Depression is Here, Eurocalypse Style". We have already identified a Dutch real estate short candidate - subscribers (click here to subscribe), please download Northern Europe CRE short candidate #1. This company is suffering from a variety of maladies that, on an individual basis, may not seem that bad but once aggregated put it on the same path that GGP was on. The difference? This is after the so-called economic recovery, in the conservative EU state of the Netherlands, and right before the massive rate storm that will be the Pan-European Sovereign Debt Crisis that I have warned about since 2009. The result, many properties that will either be difficult or impossible to refinance or roll over. Again, subscribers, reference Dutch REIT Debt Analysis, Blog Subscriber Edition. This is a succinct illustrtion of how this company will not be able to rollover much of its debt, and the absolute lack of recognition of such by the markets. Of interest is the fact that the number 3 short candidate on our short list is over 50% owned by this company  (which came in as #!). With friends such as that, who needs enemies!

Yes, this company's share price does not reflect its financial condition. Hedgies, macro speculators, and those looking to generate alpha - this is the opportunity for you!

For those who have not followed my CRE forensic analysis in the past, below is an excerpt of the full analysis that I included in the updated Macerich (a large US developer/REIT) forensic analysis from several years ago. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).

image001.pngimage001.pngimage001.png

Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV's above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis

The same is the basic case over in Europe.

Click the following pages to englarge...

PEU11-MA04-012-INGACADEMY-v2_Page_1

PEU11-MA04-012-INGACADEMY-v2_Page_2

PEU11-MA04-012-INGACADEMY-v2_Page_3

 Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

I have actually discussed the Dutch market in depth at the ING conference

Keynote presentation

Q&A and discussion, part 1

Q&A and discussion, part 2

As usual, I can be reached via the following (or directly via email), and urge all who rely on the perenially wrong sell side to subscribe to BoomBustBlog:

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Published in BoomBustBlog

reggie_on_ratings_agencies

About 48 hours ago, I was part and parcel to a documentary on rating agencies and their effectiveness (or lack thereof) in ascertaining risk in investment opportunities on a timely basis. IT was an interesting interview in my (see pic of the perpetually smiling pundit in his office, to the left) about an interesting topic that was heavy in the headlines during the subprime debacle days, but a slap on the wrist from congress and a couple of years of disinformation does wonders for the American short term memory. Of course, the Europeans may still be a little salty, but likely for the wrong reasons. After all, EU officials actually believe the rating agencies are being too tough on the faux sovereign states of the want to be union. The fact of the matter is that rating agencies are STILL moving in slow motion and using kids gloves, as was articulated in the piece Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? In said piece, I included excerpts from the presentation given to a large banking audience in Amsterdam that literally proved to be a template of rating agency downgrades and negative watches - just 7 to 12 months in advance!

Pray tell, how can a small time entrepreneurial investor and blogger consistently outrun ALL THREE of the rating agencies and virtually of sell side Wall Street over a period of nearly 5 years? Reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Rhetoric question for those in the know. Now, let's turn to the front page headlines in the MSM, carried by both:

CNBC: Moody's Downgrades Three French Banks

and Bloomberg: Biggest French Banks’ Ratings Cut by Moody’s -as excerpted...

BNP Paribas SA (BNP), Societe Generale SA and Credit Agricole SA (ACA) had their credit ratings cut by Moody’s Investors Service, which cited funding constraints and deteriorating economic conditions amid Europe’s debt crisis.

Moody’s cut the long-term debt ratings for BNP Paribas and Credit Agricole by one level to Aa3, the fourth-highest investment grade. Societe Generale’s rating was cut to A1, the fifth highest. Moody’s also cut the standalone assessments of financial strength of the three banks, while saying there’s a “very high” chance they will get state support if needed.

“Liquidity and funding conditions have deteriorated significantly,” the ratings company said in a statement. The likelihood that they “will face further funding pressures has risen in line with the worsening European debt crisis.”

The banks’ woes put at risk France’s AAA rating. Standard & Poor’s warned this week that the country’s top credit rating risks being downgraded, citing banks’ funding constraints among the reasons. French banks have been forced to borrow from the European Central Bank as their access to U.S. money-market funds has dried up on concerns about their holdings of European debt.

“The stress comes from the closing of the dollar taps, which constitute a part of the banks’ needs,” said Francois Chaulet, who helps manage 250 million euros ($333 million) at Montsegur Finance and owns the three banks’ shares.

At $681 billion as of June, French banks have the highest holdings of public and private debt in the five crisis-hit countries of Greece, Ireland, Italy, Spain and Portugal, according to data from the Bank for International Settlements.

But.... Wait a minute! Didn't a blog warn of liquidity and capital issues in the French banks in EXPLICIT detail about... Uhmm.... SIX MONTHS AGO? To wit...

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

I also made the effort that the rating agencies are trying to drive home, that France itself is very susceptible to contagion through its banks. There go those agencies again, running up to a smoldering pile of ashes with a fire hose to spray profusely yet wondering why they couldn't save the house!

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro Ponzi scheme down, on its head. See also The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

I then provided a deep dive of the French bank we feel is most at risk. Let it be known that every banke remotely referenced by this research has been halved (at a mininal) in share price!

Okay, back to our regularly schedule MSM...

Capital Shortfall

BNP Paribas doesn’t need new capital, spokeswoman Carine Lauru reiterated. Societe Generale (GLE) said it was “surprised” by the Moody’s decision, adding that it was “confident” it can meet regulatory capital goals through its own means. Credit Agricole spokesman Denis Marquet declined to comment.

BNP Paribas, France’s biggest bank, slid as much as 4.9 percent before rebounding 2.7 percent to 31.95 euros as of 3:03 a.m. in Paris. Societe Generale, the No. 2 bank, fell as much as 4.9 percent and was trading 1.5 percent lower at 18.84 euros. Credit Agricole, which tumbled as much as 4.5 percent, was up 3.1 percent to 4.75 euros.

Before today, BNP Paribas had fallen 35 percent this year, Societe Generale 53 percent and Credit Agricole 52 percent. That compares with a 33 percent drop in the 46-company Bloomberg Europe Banks and Financial Services Index.

... The European Banking Authority said yesterday that France’s four largest lenders have a 7.3 billion-euro shortfall in capital, less than its 8.8 billion-euro estimate in October. The new capital is needed to reach a 9 percent core Tier 1 capital ratio by mid-2012, after marking their sovereign bonds to market, it said.

...The Moody’s downgrade today follows reviews the ratings company began in June and extended in September, when it cut the long-term credit ratings of Credit Agricole and Societe Generale while leaving BNP Paribas unchanged. Standard & Poor’s placed ratings of European banks, including BNP Paribas, Societe Generale, Groupe BPCE and Credit Agricole, on watch Dec. 7 for a possible downgrade amid a similar review of 15 countries in the region.

ECB Funding

French banks’ liquidity woes have intensified as their U.S money-market fund access has dried up. The eight largest prime U.S. money-market mutual funds cut holdings in French banks by 68 percent in November, shifting investments to Swiss, Swedish, Canadian and Japanese banks.

French bank holdings declined by $11.7 billion to $5.56 billion, according to an analysis of fund disclosures by the Bloomberg Risk newsletter. The eight funds have reduced French bank debt by $76.8 billion in the past 12 months.

The decline in short-term lending by U.S. funds has forced French banks to increase their borrowing from ECB more than four-fold over the last four months.

Hmmm.... I heard of this dilemma before. Let me think. It's right on the tip of my tongue. Oh yeah! That's right, I remember now. It was a reserarch report that I issued to my subscribers 6 whole months ago and described in the public portion of BoomBustBlog for all to read. It was aptly titled...

The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

As excerpted:

Below is a chart excerpted from our most recent work showing the asset/liability funding mismatch of a bank detailed within the report. The actual name of the bank is not at issue here. What is at issue is what situation this bank has found itself in and why it is in said situation after both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM!

Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).

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The problem then is the same as the European problem now, leveraging up to buy assets that have dropped precipitously in value and then lying about it until you cannot lie anymore. You see, the lies work on everybody but your counterparties - who actually want to see cash!

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Using this European bank as a proxy for Bear Stearns in January of 2008, the tall stalk represents the liabilities behind Bear's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk displayed in the first chart in this missive, and that is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

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I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence. The risk of a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable. A more important concern appears to be the threat of short-term liquidity and funding difficulties for European banks stemming from said haircuts. This is the one thing that holds the entire European banking sector hostage, yet it is also the one thing that the Europeans refuse to stress test for (twice), thus removing any remaining shred of credibility from European bank stress tests. As I have stated many time before, Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run!

The biggest European banks receive an average of US$64bn funding through the U.S. money market, money market that is quite gun shy of bank collapse, and for good reason. Signs of excess stress perceived in the US combined with the conservative nature of US money market funds (post-Lehman debacle) may very well lead to a US led run on these banks. If the panic doesn’t stem from the US, it could come (or arguably is coming), from the other side of the pond. The Telegraph reports: UK banks abandon eurozone over Greek default fears

UK banks have pulled billions of pounds of funding from the euro zone as fears grow about the impact of a “Lehman-style” event connected to a Greek default.

 Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to euro zone banks, raising the prospect of a new credit crunch for the European banking system.

Standard Chartered is understood to have withdrawn tens of billions of pounds from the euro zone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.

Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal.

In its interim management statement, published in April, Barclays reported a wholesale exposure to Spain of £6.4bn, compared with £7.2bn last June, while its exposure to Italy has fallen by more than £100m.

One source said it was “inevitable” that British banks would look to minimise their potential losses in the event the euro zone crisis were to get worse. “Everyone wants to ensure that they are not badly affected by the crisis,” said one bank executive.

Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.

Make no mistake - modern day bank runs are now caused by institutions!

As for BNP management's proclamations that all is find in Franco bankingville...

May I please be allowed reminisce, as excerpted from Small Independent, Bombastic Financial News Show Dramatically Scoops the Financial Times On French Bank Run Story :

 Post Note: BNP management is now shopping around for capital investment.

On that note, let's review my post last week, "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers. It outlined some very telling reasons why BNP's share price appears to be spillunking, namely:

    1. Management is lying being less than forthcoming with the valuation of toxic assets on its books.
    2. The sheer amount of these assets on the books and the leverage employed to attain them are devastating
    3. BNP has employed the proven self destructive financing methodology of borrow short, invest in depreciating assets long!
    4. BNP management lying being less than forthcoming about reliance on said funding maturity mismatch, despite the fact it handily dispatched Bear Stearns and Lehman Brothers in less than a weekend!

Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008image008

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipe out, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10BNP_Paribus_First_Thoughts_4_Page_10BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

What makes the rating agency moves, and the fact that the MSM carries it so much more fervently than my own more timely, relevant and useful research, is that explained this in detail to bankers and investors in Amsterdam in April - yes, months even further in advance.

And if that is not enough of an advanced warning, there are my proclamations from the spring of 2010 - a year and a half ago via the Pan-European sovereign debt crisis series.

As you can see from the many links below, any prudent investor or entity who has an economic interest in the outcome of the events of the quasi-sovereign nations of Europe, the banks domiciled within them, or the entities that do business with them, is literally out of his/her damn mind if they subscribe to the rating agencies opinion in lieu of, or even ahead of that of BoomBustBlog proprietary research. That's right, I said it, and dare... No Double Dare, anyone to prove otherwise.

As excerpted from the link above, relevant articles posted since January of 2010.

The Asset Securitization Crisis of 2007, 2008 and 2009 led to the demise of several global banks and institutions. Central bank induced risky asset bubbles gave rise to, what was popularly considered and reported as through the popular media, a rapid recovery. The reality was that the insolvencies that marked the crisis were passed on, in part, to the sovereign nations that sponsored the Crisis, and as the chickens came home to roost the Asset Securitization Crisis has now blown into a full Sovereign debt crisis.

The Pan-European Sovereign Debt Crisis, to date (free):

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a

    localized one.

  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

  3. 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.

  4. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

  5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

  6. I Think It’s Confirmed, Greece Will Be the First Domino to Fall

  7. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

  8. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!

  9. Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino

  10. Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?

  11. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

  12. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

  13. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

  14. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

  15. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

  16. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!

  17. LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog

  18. Beware of the Potential Irish Ponzi Scheme!

  19. The Daisy Chain Effect That I Anticipated Appears To Have Commenced!

  20. How Greece Killed Its Own Banks!

  21. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

  22. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

  23. What We Know About the Pan European Bailout Thus Far

  24. How the US Has Perfected the Use of Economic Imperialism Through the European Union!

  25. The Greek Bank Tear Sheet is Now Available to the Public

  26. BoomBustBlog Irish Research Becomes Reality

  27. PIIGSlets in a Bank: Another European Banks-at-Risk Actionable Research Note

  28. Sovereign debt exposure of Insurers and Reinsurers

  29. As We Have Warned, the Fissures Are Widening in the Spanish Banking System

  30. “With the Euro Disintegrating, You Can Calculate Your Haircuts Here”

  31. What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates

  32. The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!

  33. Introducing the Not So Stylish Portuguese Haircut Analysis

  34. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

  35. Osborne Seems to Have Read the BoomBustBlog UK Finances Analysis, His U.K. Deficit Cuts May Rattle Coalition


Related reading of interest...

Watch The Pandemic Bank Flu Spread From Italy To France To Spain: To Big Not To Fail!!!

Italy’s Woes Spell ‘Nightmare for BNP - Just As I Predicted But Everybody Is Missing The Point!!!

Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody?

French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!

Published in BoomBustBlog