Bloomberg reports unsaleable Spanish real estate nearly three years after I warned of this situation, in explicit detail. See ‘Unsellable’ Real Estate Threatens Spanish Banks:

Spanish banks, under pressure to cut property-backed debt, hold about 30 billion euros ($41 billion) of real estate that’s “unsellable,” according to a risk adviser to Banco Santander SA (SAN) and five other lenders.

“I’m really worried about the small- and medium-sized banks whose business is 100 percent in Spain and based on real- estate growth,” Pablo Cantos, managing partner of Madrid-based MaC Group, said in an interview. “I foresee Spain will be left with just four large banks.”

Spanish lenders hold 308 billion euros of real estate loans, about half of which are “troubled,” according to the Bank of Spain. The central bank tightened rules last year to force lenders to aside more reserves against property taken onto their books in exchange for unpaid debts, pressing them to sell assets rather than wait for the market to recover from a four- year decline.

Land “in the middle of nowhere” and unfinished residential units will take as long as 40 years to sell, Cantos said. Only bigger banks such as Santander, Banco Bilbao Vizcaya Argentaria SA (BBVA), La Caixa and Bankia SA are strong enough to survive their real-estate losses, he said. MaC Group is an adviser on company strategy focused on financial services.

The banks will face increased pressure if Mariano Rajoy becomes prime minister as expected after national elections on Nov. 20. The People’s Party leader has said the “clean-up and restructuring” of the banking system is his top priority as he seeks to fuel economic recovery by boosting the credit supply.

... Land in some parts of Spain is literally worthless, said Fernando Rodriguez de Acuna Martinez, a consultant at Madrid- based adviser R.R. de Acuna & Asociados. More than a third of Spain’s land stock is in urban developments far from city centers. About 43 percent of unsold new homes are in these areas, known as ex-urbs, while 36 percent are in coastal locations built up during the real-estate boom.

“If you take into account population growth for these areas, there’s no demand for them, not now or in ten years,” he said. “Around 35 percent of Spain’s land stock is in the ex- urbs, which means it’s actually worth nothing.”

... Spanish home prices have fallen 28 percent on average from their peak in April 2007, according to a Nov. 2 report by Fotocasa.es, a real-estate website, and the IESE business school. Land prices dropped by more than 60 percent in the provinces of Lugo, A Coruna and Murcia, and 74 percent in Burgos since the peak in 2006, data from the Ministry of Development and Public Works showed. Land values fell 33 percent nationwide.

If there were to be a proper mark to market of real estate assets, every Spanish domestic bank would need additional capital,” said Daragh Quinn, an analyst at Nomura Holdings Inc. in Madrid, in a telephone interview.

Santander has 9.2 billion euros of foreclosed assets, followed by Banco Popular SA with 6.05 billion euros, BBVA with 5.87 billion euros, Bankia with 5.85 billion euros, Banco Sabadell SA with 3.6 billion euros and Banco Espanol de Credito SA (BTO) with 3.36 billion euros, according to an analysis by Exane BNP Paribas.

... Dozens of Spanish banks have failed or been absorbed since the economic crisis ended a debt-fueled property boom in 2008. Spain’s bank-bailout fund took over three lenders on Sept. 30, valuing them at zero to 12 percent of book value. Bank of Spain Governor Miguel Angel Fernandez Ordonez said the overhaul of the industry was complete after 45 savings banks merged into 15 and lenders increased capital levels.

... The cost to the public of cleaning up the industry’s books has so far been 17.7 billion euros in the form of share purchases from the government bailout funds known as the FROB.

Banks have made provisions for a potential 105 billion euros of writedowns since the market crashed. Lenders may need to make another 60 billion euros in provisions to clean up their balance sheets, including real-estate debt, according to Rafael Domenech, chief economist for developed nations at BBVA.

...“Since the crisis began, banks have only put their lowest- quality assets on sale while they waited for a recovery, so as not to sell the better properties at a loss,” said Fernando Encinar, co-founder of Idealista.com, Spain’s largest property website. Idealista currently advertises 45,912 bank-owned homes in Spain, up from 29,334 in November 2010. In 2008 it didn’t list any.

Spain is struggling to digest the glut of excess homes in a stalling economy where joblessness is among the highest in Europe. Unemployment has almost tripled to 22.6 percent from a low of 7.9 percent in May 2009, according to Eurostat.

Property transactions fell 28 percent in September from a year earlier, the seventh consecutive month of decline, according to the National Statistics Institute.

Financial institutions have foreclosed on 200,000 homes and that will balloon to as many as 600,000 in coming years as unemployment continues to rise, according to a report by Taurus Iberica Asset Management, a Spanish mortgage servicer which manages 35,000 foreclosed properties for 25 lenders.

... “Spain has 1 million new homes that won’t be completely absorbed by the market until the middle of 2017,” Fernando Acuna Ruiz, managing partner of Taurus Iberica, said in an interview in Madrid. “Prices will fall a further 15 to 20 percent in the next two to three years.”

About 13 percent of Spain’s 25.8 million homes are vacant, according to LDC Group, an Alicante-based specialist in real- estate management. The hardest-hit areas are Madrid, with 337,212 empty properties, and Barcelona with 338,645, LDC said in a report published yesterday.

Lack of financing and concern about economic growth has choked investment in Spanish commercial real estate, currently at its lowest level in a decade, according to data compiled by U.K. property broker Savills Plc. (SVS)

A total of 1.25 billion euros of offices, shopping malls, hotels and warehouses changed hands in the first nine months, 52 percent less than a year earlier, Savills estimated.

... There is an “enormous” gap between prices offered by banks and what investors are willing to pay, preventing sales of large property portfolios, MaC Group’s Cantos said.

He proposes that banks create businesses, in which they can hold a maximum stake of 19 percent, that attract other investors to help dispose of their real estate assets over five to eight years. The investors would manage the businesses.

Cantos says that prime assets can be sold at a 30 percent discount, while portfolios comprised of land, residential and commercial real estate may only sell after 70 percent discounts.

“Therein lies the problem,” he said. “Banks have already provisioned for a 30 percent loss, but if you are selling at 70 percent discount, you have to take another 40 percent loss. Which small and medium size banks can take such a hit?”

I discussed European real estate yesterday in the post Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly? If you have an economic interest or even curiosity in European Real estate, it is suggested you read the afore-linked post as well as...

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.

Excerpted from yesterdays CRE post focusing on the Dutch, but suitable for most of the EU:

As clearly stated in the very first posts of the Pan-European sovereign debt crisis in 2010, this is a pandemic contagion. The media's focus on specific countries must be mollified and modified. Reference the first five posts of the aforemetioned series, published a year and a half 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 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!

Now, reference yesterday's Bloomberg headlines - Spanish, French Debt Auctions Disappoint; Yields Rise: Yield spreads of Spanish and French 10-year government bonds over German equivalents hit euro-era highs on Thursday.

What do you think happens when contagion spreads to Spain? Please don't tell me you think that Italy, France, Greece, Portugal and Ireland are having rate shit fits, but somehow Spain will remain unscathed - with all of those NPAs and highly overvalued, uber leveraged, supposed assets floating around in their bank's balance sheets?

I warned of this happening nearly three years ago. I issued several reports to subscribers. Of course, about a quarter after I warned, Goldman comes around (changing their stance of course, because they were bullish on European banks, cough.. cough... nasty phlegm being held down...). Hey, has anyone ever told you that Goldman's investment advice SUX! Don't believe me? Well, follow the two links below, or you could just continue reading this article...

  1. Is It Now Common Knowledge That Goldman's Investment Advice Sucks???
  2. I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!!

Over a full year and a quarter after I warned of Spanish banks, and a full quarter after I gave the full out warning of European banks in general, guess who comes to the party late bearing stale party favors....

This impetus of this video stemmed from the post Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, as excerpted:

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

image015.png

This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

image009.png
Notice how Ireland is the nation with the second highest NPA to GDP ratio. This was definitely not hard to see coming. In addition, Ireland has significant foreign claims - both against it and against other countries, many of whom are embattled in their own sovereign crisis. This portends the massive exporting and importing of financial contagion. Reference my earlier post, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? wherein I demonstrate that Ireland's banking woes can easily reverberate throughout the rest of Europe, affecting nations that many pundits never bothered to consider. Irish banks will be selling off assets, issuing assets and bonds in an attempt to raise capital just as the Irish government (contrary to their proclamations) will probably be issuing debt to recapitalize certain banks. This comes at a time when the Eurozone capital markets will be quite crowded.

Expected higher fiscal deficit and bond maturities due in 2010 have increased the need for bond auction financing for all major European economies. Amongst all major European economies, France and Italy have the highest roll over debt due for 2010 of €281,585 million and €243,586 million, respectively.

BoomBustBlog Susbscribers, if you're paying attention, this was the one year warning of this series of posts:

eurodebt1.png

While Germany and France are expected to have the highest fiscal deficit of €125.1 billion and €96.0 billion, respectively in absolute amount for 2010 (this is without taking into consideration any possible bailout of Greece and/or the PIIGS, which will be a very difficult political feat given the current fiscal circumstances), Ireland and Spain are expected to have the highest fiscal deficit as percentage of GDP of 12% and 11%, respectively. See our newly released Spanish fiscal analysis for a more in-depth perspective, see our premium subscriber report on Spain's fiscal condition and prospects: Spain public finances projections_033010 Spain public finances projections_033010 2010-03-31 04:41:22 705.14 Kb...

As you can see, when properly researched, one can literally write the Bloomberg/CNBC/MSM headlines a full year and a half into the future. Notice the date on the post excerpt you just read, then reference this post from yesterday concering the bickering between Germany and France: When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!

CNBC reports: France and Germany Clash Over ECB Crisis Role

France and Germany, Europe's two central powers, have stepped up their war of words over whether the European Central Bank should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets. 

Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France urged stronger ECB action, adding to mounting global pressure spelled out by U.S. President Barack Obama.

BoomBustBlog readers and subscribers saw this coming a mile away. The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue.

Is it eastern European mysticism or west African Voodoo magic? No, it's a spreadsheet and an objective mindset, something that the EU leaders apparently don't have nor are willing to hire me for!

Oh yeah! Back to that little side thesis about Goldman's investment advice sucking till the lips bleed...

LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog Warns Of Failure! Saturday, 24 April 2010

Will someone explain to me why the world is so enamored with Goldman. It appears that their research department is now recommending clients to bet on European bank contagion risk. LTTP (Late to the Party), we first warned on European bank risk in Spain with BBVA in January of last year (The Spanish Inquisition is About to Begin...). Starting in January of this year, I went in depth into the European contagion thing when practically all of the banks, pundits, analysts and rating agencies said this was contained to Greece.

In February, I posted "The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one."

In January of 2009, that's right - 35 months ago, I made it clear that Spanish banks will suffer years from Spanish real estate bubble's that had more effort behind being reblown than cured, coupled with I coined the Pan-European Sovereign Debt Crisis a year later...

The Spanish Inquisition is About to Begin…

Now, it is time to see if fundamentals return to the market.

From Bloomberg: BBVA Fourth-Quarter Profit Plunges 94% to $44 Million on Asset Writedowns

Jan. 27 (Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA said fourth-quarter profit slumped to 31 million euros from 519 million euros a year earlier as the lender wrote down the value of some assets.

BBVA fell the most in eight months in Madrid trading after saying net income fell to 31 million euros ($43.6 million) from 519 million euros a year earlier, the Bilbao, Spain-based bank said in a filing today. That missed the 1.05 billion-euro median estimate in a Bloomberg survey of nine analysts as the bank took a 704 million-euro writedown for its U.S. franchise.

BBVA said it took the writedowns after analyzing its “most problematic portfolios” as it prepares for a tough year with recessions in its biggest markets of Spain and Mexico. This was foreseen nearly one year ago, to date. This bank got caught up in the bear rally and apparently (like many banks) was not deserving of the outrageous boost in the share price. Reference the past analysis.

Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank Wednesday, 28 January 2009

Declining housing and stock prices, and rising unemployment levels are squeezing consumer wealth globally and are expected to weigh heavily on the banking system in the form of rising loan defaults. Until very recently, the global banks have experienced most of the impact in the form of distressed securities, capital shortages and funding problems, however the problems have now started to engulf their consumer and commercial loan portfolios as well.

In Spain, BBVA, the second largest domestic bank, could see a massive deterioration in its real estate and consumer loan portfolio. The Spanish real estate sector is making a high horsepower a U-turn after years of a massive housing bubble that has burst - culminating in an unemployment rate that has risen to an outrageous 13.4% level. The power skid is showing no signs of reaching an inflection point, and we believe is only in the beginning throes of a sharp downturn. In addition, the banks' other key growth areas including Mexico, the U.S and South America are witnessing a slowdown in economic activity, restricting BBVA's growth prospectus amid the current turbulent environment. With increasingly challenging economic conditions in each of these economies, BBVA's asset quality has deteriorated sharply with non-performing loans rising to 36% of its tangible equity without corresponding (equal) increase in provisions. As the bank deals with these tough times ahead, we expect BBVA's bottom line growth to remain subdued due to a slower credit off-take and higher provisions in the coming quarters....

...

Key Highlights

Sharp slowdown seen in Europe - According to the European Commission forecasts, the European economy is expected to contract 1.9% in 2009 with a modest recovery in 2010. Spain, in particular, is expected to be one of the worst hit due to the humbling of its housing sector which had, for several years, been a significant contributor to the country's economic growth. This will impact BBVA by slowing down its credit and loan growth in addition to significantly deteriorating the credit quality of its loan portfolio.

BBVA's asset quality is set to deteriorate rapidly as Spain enters recession - Problems in Spain are more pronounced than in most of its European counterparts. The Spain's budgetary deficit has already crossed the 3% threshold limit set by the European Commission and is expected to cross 6% by 2009, only behind Ireland. The unemployment has reached a 12-year high of 13.4% in November 2008, the highest in the Euro zone, while the real estate sector bubble (particularly residential vacation homes purchased by foreigners), the pillar of economic growth engine, has burst. BBVA, with nearly 40% of its total loan exposure tied to real estate & construction loans and individual loans in Spain could see massive deterioration in its asset quality.

Besides Spain the bank has to deal with other challenging economies including Mexico and the U.S - In 3Q2008, U.S and Mexico contributed nearly 29% and 16% of total revenues, respectively. The downturn in the U.S economy is showing no signs of stabilization, with an unabated fall in housing prices and frozen credit markets continuing to shatter consumer confidence. Recession in the U.S has also led to a sharp slowdown in Mexico which is highly dependent on US for exports and remittances. The slowdown in both of BBVA's key markets will not only impact the pace of BBVA's growth but also augment the risk profile for the bank as it now has to deal with vagaries of these economies to navigate itself in these turbulent times.

BBVA's NPAs have skyrocketed on back of economic slump - Since January 2008, BBVA's non-performing loans have increased 92% to €6.5 bn. As at the end of 3Q2008, BBVA's loan losses as a percentage of tangible equity stood at an astonishing 36%. Eyles test, a measure of banks' delinquent loans (net of reserves) as percentage of its tangible equity, has increased to 12% in 3Q2008 from 4% in 2Q2008. This sharp rise in the bank's NPA levels, particularly in context of its lower equity cushion, could substantially erode shareholders' equity.

Inadequate provisioning to impact BBVA's bottom line - Owing to deteriorating loan portfolio, BBVA's NPAs have almost doubled to 2.0% of the total loans in 3Q2008 from 1.1% in 3Q2007. Despite an increase in NPAs, the bank's provision has declined to 2.3% of the total loans from 2.4% a year ago. As loan losses are expected to increase in the wake of economic slowdown, BBVA will have to increase its provisions considerably, denting its near-to-medium term net income.

BBVA's valuation at... Subscribers can download the full archived report Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-01-28 16:04:04 439.80 Kb

For those who haven't been to the Spanish coastal areas to see for themselves or are not familiar with the Spanish situation, I have included random research on Spain from pundits around the Globe!

Now, speaking of Spain, Pan-European pandemic and War... Yesterday, I gave an interview with Benzinga radio wherein I referenced the distinct possibiity of European war as the natural result of the collapse of the European banking and sovereign debt system. You can hear the interview here. It appears that certain rather outspoken British MEPs have a very similar outlook.

That's not all. Here are two other occasions, one as recently as yesterday...

This is early 2010...

I've been asked in the past why I don't run for political offce. Well, the answer is I'm just too damn honest and straightforward. I'd make this guy look shy, and probably end up with a car bomb in trunk before long... Has anyone ever seen the movie Bulworth, starring Warren Beatty? If you haven't seen it, take six more minutes of your time to view this clip before you move on...

And the British version of Bulworth returns as of yesterday. You can call him whatever you want, but you have to call him right, as well...

And in closing, here are the two Dutch real estate videos I posted yesterday that were never released before...

Part 1

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:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube
Published in BoomBustBlog

More BoomBustBlog predictions rising to the forefront. As clearly stated in the Pan-European sovereign debt crisis, this is a pandemic contagion. The media's focus on specific countries must be mollified and modified. Reference the first five posts of the aforemetioned series, published a year and a half 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 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!

Now, reference today's Bloomberg headlines - Spanish, French Debt Auctions Disappoint; Yields Rise: Yield spreads of Spanish and French 10-year government bonds over German equivalents hit euro-era highs on Thursday.

And from a very impressive and knowledgeable brother across the blogoshpere known as Ed Harrison, Chart of the day: Contagion spreads to the Netherlands | Credit Writedowns.com

Yesterday, I showed you that contagion had spread and default probabilities were blowing out right across Europe. Every single name on the list for sovereign credit default wideners was European and names like Austria, Estonia, and Slovakia showed marked deterioration, with default probabilities over 10%.

Today is no different. The Netherlands is the notable credit to deteriorate today. Their default probability has just crossed the 10% threshold. Take a look.

At the risk of repeating myself, I have to note that this is a rolling crisis through the euro zone. It will eventually infect every country until we get a systemic solution: full monetisation and union or break up. The longer the ECB waits, the worse things will get. No euro zone sovereign bond is safe.

Ed is absolutely, unequivocally correct - and not just because he agrees with me either (although that may be the primary reasonCool).

Update 1455 EST: There’s nothing wrong with the Netherlands. It’s indiscriminate selling. Warren Mosler reported this morning that he received this message from a AAA bond trading desk:

Our Trading Desk reports “mayhem” in the AAA Eurozone markets

- France 11bps wider

- Netherlands 6bps wider

France now 178bps over Germany

Increasing talk/fear of Eurozone break up and capitulation trades in AAA markets are widespread.

We are seeing no real demand for anything – even Germany.

Tomorrow’s Shatz auction looks a big ask with a yield of 30bps and no risk appetite out there.

These are not high yield punters here. They are AAA bond managers who thought they were buying safe assets. Because of the sovereign debt crisis, no eurozone sovereign bond is safe. So now there is panic.

I actually addressed this issue directly to Dutch investors and bankers in April. There may be more of a reason to panic than is being indicated above. If you haven't seen it, view the entire keynote speech delivered to the real estate investors in Amsterdam at ING's Valuation Conference in April of this year.

 ... Yes, real estate will take its fair share of banks down, again. Reference in detail, my post

Now that I have (quite honestly) issued my most sincerest thanks, let's attempt to remedy the shortcoming of the limited amounted of time that I had. You see, after the 3 minute hit ended there was a brief discussion of commercial real estate in which I didn't get to participate, thus I will take the liberty of doing so through this medium....

... Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs??? and I did it without being privvy to Goldman’s financial innards. Long story short, practically all of the major banks are lying about the value of some of the largest assets on their books.

How many institutional and/or retail investors will be able to ferret out such? Or more importantly, why should they have to? It is the reporting company’s responsibility to report, not to obfuscate. The big problem with this “hide the market marks” thing is that markets tend to revert to mean. Unless said market values fundamentally catch up with said market prices, you will get a snapback. That is what is happening in residential real estate now. That is what happened in Japan over the last 21 years!!! That’s right, it wasn’t a lost decade in Japan, it was a lost 2.1 decades!

This has been the first balance sheet recession that the US has ever had, but there is precedence to follow. Japan had a balance sheet recession following their gigantic real asset bust. They made a slew of fiscal and policy errors, which essentially prolonged their real asset recession (now officially a depression) for T-W-E-N-T-Y  O-N-E long years! For those that may have  a problem reading that, it is 21 long years. What did the Japanese do wrong?
  • They refused to mark assets to market
  • They attempted to prop up zombie banks
  • They failed to promptly clean up NPAs in the banking system
  • They looked the other way in regards to real estate value shenanigans

... The retail investment banker Davidowitz had similar choice comments on this space: Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past. The Dutch have a VERY similar problem on thier hands, but not all are paying attention.

Here is footage never released on the Web, but I felt that this is an opportune time to drill down into the Dutch market and explore the ramifications of this malaise as it relates to real estate and insurance.


Listen up people, HERE ARE THE NASTY FACTS!!!

Real estate is a highly rate sensitive asset class. Capitalization rates (the popular method of pricing real estate) is explained in Wikipedia as:

Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.[1] The rate is calculated in a simple fashion as follows:

 \mbox{Capitalization Rate} = \frac{\mbox{annual net operating income}}{\mbox{cost (or value)}}

Without going into a CRE class, when interest rates go up, cap rates generally go up as well and the value (or cost to purchase) of the property goes down in sympathy unless the rise in interest rates is offset by a commensurate or greater rise in net operating income. Now, either everybody believes that unemployment is going to drop towards zero  in an era of US austerity (reference Are the Effects of Unemployment About To Shoot Through the Roof? then see Budget AusterityGoldman Sees Danger in US Budget Cuts - CNBC) at the same time that historically low interest rates that actually went negative are going to get lower (see the Pan-European Sovereign Debt Crisis) ---- or cap rates are about to skyrocket. I'll let you decide!

As you can see above, CRE drops in value whenever yields spike more than the + delta in NOI. Looking below, you can see that US CRE actually runs to the inverse of the 30 year Treasury.

That visual relationship is corroborated by running the statistical correlations...

The relationship is obvious and evident! In addition, we have been in a Goldilocks fantasy land for both interest rates and CRE for about 30 years. CRE culminated in the 2007 bubble pop, but was reblown by .gov policies and machinations. The same with rates. Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down??? Let's ask Portugal or any of the other PIIGS group. I have shown, very meticulously, how Portugal can not only afford the path that they are on (record high interest rates) but the losses that will come when they restructure (default) - for all to see. I have done the same with Spain, Ireland and Greece (for subscribers only). See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History (December 6th & 7th, 2010).

Here is the contagion effect we are experiencing today, clearly foretold to the ING clients and banking executives in April of this year, from the banking perspective as opposed to the real estate perspective. Same difference, though... What was not caught in this video is the fact that the Dutch will bear the highest per capita costs for bailing out their more profligate brethren. You can imagine how enthused thery were to hear that tangy fact :-)

So, what's next? The US Follows Japan Into A Balance Sheet Recession: What Do Investors Know and Why Is It That Policymakers Appear Clueless? 

Will the Netherlands be very far behind? Will any country with a high debt load, high NPA/GDP ratios and underwater real estate truly trail very far? I doubt so, but hey... What the hell do I know? I simply called nearly every twist and turn of this debacle from the beginning of the real estate crash in the US to this point in the Pan-European sovereign debt crisis. See "Who is Reggie Middleton?" for more.

Online Spreadsheets (professional and institutional subscribers only)

Published in BoomBustBlog

CNBC reports: France and Germany Clash Over ECB Crisis Role

France and Germany, Europe's two central powers, have stepped up their war of words over whether the European Central Bank should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets. 

Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France urged stronger ECB action, adding to mounting global pressure spelled out by U.S. President Barack Obama.

BoomBustBlog readers and subscribers saw this coming a mile away. The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue. Reference the series:

The Italian problems were brought to the Attention of BoomBustBlog subscribers over a year and a half ago (subscribers reference  Italy public finances projection from March of 2010) and each of the major Italian banks undergoing major distress righ now were identified and outlined over a year and a half ago as well, when their share prices were multiples of what they are now. Subscribers should reference Italian Banking Macro-Fundamental Discussion Note.Long term puts and shorts on these banks (you could've simply closed your eyes and picked two or three) would have made any fund manager's year. Those who don't subscribe can still see the aftermath, after the fact, as referenced by Bloomberg... UniCredit Trades as Junk With $51B Due

Bonds of UniCredit SpA (UCG), the Italian bank that posted a surprise 10.6 billion-euro ($14.3 billion) third-quarter loss this week, are trading as junk as the lender prepares to refinance $51 billion of debt coming due next year.

Fixed-income investors are pricing the Milan-based lender’s bonds at levels that imply a rating of B1, four levels below investment grade and eight steps lower than its A2 ranking, according to Moody’s Analytics. The 13.4 billion euros of UniCredit debt securities that are contained in Bank of America Merrill Lynch’s Euro Corporates Banking index have lost 2.8 billion euros since the start of June.

UniCredit, Italy’s biggest bank, has the highest amount of bonds maturing in 2012 by a major European lender, according to data compiled by Bloomberg. Concern that Italy will struggle to cut Europe’s second-highest debt load and tame the sovereign crisis drove the country’s debt yields to euro-era records, infecting UniCredit’s 40 billion euros of Italian bonds.

Yeah, right! "Surprise" , "loss". Interesting terms considering the warning was given a year and a half ago. Those damn non-BoomBustBlog subscribers... So, where goes Italy, so follows France...After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It - or  Focus on Greece? No! How About Italy? No! It's About Baguettes, Mes Amis! See also, When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

The Catch 22 is that Germany's woes are not that far detached from France's, yet it appears that they do not see this. I reiterate, then query again - Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! This is a Pan-European sovereign debt crisis, not a southern or western European sovereign debt crisis. The countries fates are inextricably linked.

And for those who believe what Fed Member Bullshitterard said, at least according to CNBC: European Debt Crisis Unlikely to Impact US: Fed's Bullard, I refer you to my extended, self-answered query, "Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably! " I place this stamp on Bullard's comments...

grade_a_bullshit_alert_trans

If you really want to know the truth, simply read my post from yesterday, Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

Bond market turmoil is spreading across Europe. Italian 10-year bond yields have risen above 7 percent, unaffordable in the long term. Yields on bonds issued by France, the Netherlands and Austria — which along with Germany form the core of the euro zone — have also climbed.

Asian shares and the euro fell further on Thursday as doubts deepened about Europe's ability to stop its sovereign debt crisis from spinning out of control.

MSCI's broadest index of Asia Pacific shares outside Japan fell 0.2 percent, while Japan's Nikkei stock average opened down 0.5 percent.

The euro  hovered near five-week lows against the dollar, trading not far off Wednesday's trough around $1.3430, a low not seen since Oct. 10.

"The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe," French government spokeswoman Valerie Pecresse said after a cabinet meeting in Paris.

French Finance Minister Francois Baroin repeated Paris's view that the euro zone's EFSF bailout fund should have a banking license, something Berlin opposes. Such a move would allow the fund to borrow from the ECB, giving it extra firepower to fight the spreading crisis.

"The position of France ... is that the way to prevent contagion is for the EFSF to have a banking license," Baroin said on the sidelines of an awards ceremony.

But German Chancellor Angela Merkel made clear Berlin would resist pressure for the central bank to take a bigger role in resolving the debt crisis, saying European Union rules prohibited such action.

"The way we see the treaties, the ECB doesn't have the possibility of solving these problems," she said after talks with visiting Irish Prime Minister Enda Kenny.

The only way to recover markets' confidence was to implement agreed economic reforms and build a closer European political union by changing the EU treaty, Merkel said.

ECB policymakers continue to reject international calls to intervene decisively as Europe's lender of last resort, stressing that it is up to governments to resolve the debt crisis through austerity measures and reforms.

However, many analysts believe such a move now represents the only way to stem the contagion, despite the potential risk of inflation from printing money.

Short Respite

Traders said the ECB bought Spanish and Italian bonds on Wednesday, but the respite was short and there was no sign of a change in its policy of limited, stop-go purchases to calm markets temporarily while maintaining pressure on governments.

Fitch Ratings warned it might lower its "stable" rating outlook for U.S. banks because of contagion from problems in troubled European markets. 

But didn't Fitch here what Fed Member Bullshitterard said??? What's the problem? Are those Fitch guys reading BoomBustBlog now??? Tired of the HPA non-sense (as in [residential] housing perpetual price appreciation). Yep! Those guys from Fitch justified their AAA ratings on Bullshit based upon the concept of prices in housing increasing at XX% per year, FOREVAAAAH!!!! You thought I forget about that, guys???

grade_a_bullshit_alert_trans

Back to CNBC's article...

The size and mood of the rally, the first big protest in almost a month, will signal just how bitterly a restive public will fight further tax rises and spending cuts that international lenders demand in return for a massive bailout.

Greece's main conservative leader Antonis Samaras has refused to bow to EU demands for a written commitment to the bailout program and called for elections in three months to restore social peace.

New data showed that Greece's austerity-fuelled recession had widened the budget deficit in October, the government failing to boost revenues despite unpopular new taxes.

ECB President Mario Draghi has said the 17-nation currency bloc will be in a mild recession by the end of the year, making it tougher for governments to put their finances in order, and Europe's debt crisis is also increasing strains in the money market, the plumbing of the international financial system.

Euro zone banks are finding it harder to obtain dollar funding. While the stresses are nowhere the levels of the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.

Published in BoomBustBlog

I was going to walk my blog subscribers and readers through my recent thoughts and related developments in the insurance and real estate industries, but I think I will postpone that until tomorrow for two companies that I have picked apart in considerably more detail than the average buyside investor and sell side analyst were featured in Bloomberg this morning. The questions asked forced one to query whether more than an editor or two are full time BoomBustBlog subscribers. Yes, boys and girls... Like it, love it, leave it or hate it... It's now time to get back to business. We are once again...

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

and attempting to gain a green card for our entrance into the "Economic Republic of JP Morgan..."

 image001.png

Bloomberg reports (and Reggie clarifies): JPMorgan Joins Goldman Keeping Italy Debt Risk in Dark

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.

BoomBustBlog annotation...

As excerpted from An Independent Look into JP Morgan:

When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide.

And as excerpted from Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Goldman has the most shortable share price of all the big banks at around $100 and is quite liquid; it is more susceptible to mo-mo traders than it is to it's own book value, it is highly levered into the European debt/banking mess, and last but not least, Goldman is the derivatives risk concentration leader of the world - bar none!

And now back to our regularly scheduled Bloomberg article on World Dominating Squids Wielding GDP busting Morgan Explosives with indeterminate fuses...

Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.

As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

“If you don’t have to, generally people don’t see the advantage to doing it,” said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who worked at Bear Stearns Cos. from 1999 through 2006. “On the other hand, if there were a run on Goldman Sachs tomorrow because the rumor was that they had exposure to Greece, you’d see them produce those numbers.”

A run on the SQUID??? God Forbid! After all, they are doing God's work! In Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?" I included a graphic that illustrated Goldman's raw credit exposure...

So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

 image006

Mr. Middleton discusses JP Morgan and concentrated bank risk.

A case in point: Jefferies Group Inc. (JEF), the New York-based securities firm, disclosed every long and short position it held on European debt earlier this month after its shares plunged more than 20 percent. Jefferies also said it wasn't relying on credit-default swaps, contracts that promise to pay the buyer if the underlying debt defaults, as a hedge on European holdings.

One would hope not, because ISDA and the EU leaders want to invalidate those bilateral, privately negotiated contracts, basically making them worth just a little less than the hard drive they were saved to... As excerpted from Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably!

What's even more interesting is the fact that derivatives concentration and counterparty risk is rampant in the US, while credit risk in Europe is literally blowing up. What if CDS really are a faux hedge as I and other astute (read objective) observers have come to realize? ReferenceThe Banks Have Volunteered (at Gunpoint)…

... let's peruse an email I received from one of my many astute BoomBustBloggers.

I'm a lawyer (and investor). There is no analysis by anyone on the Internet about whether the announcement last night would in fact trigger CDS payout. Rather, everyone seems to be accepting the claim by ISDA that the decision would not trigger it. Because I can't find any legal analysis worth reading on the Internet I decided to do my own research. In about 5 minutes I found a case in the 2nd Circuit (USA) that explained to me what's going on with those contracts. First of all, they are unregulated private contracts between private parties. In order to know whether a trigger occurred you have to read each individual contract. As a result, what the ISDA says about whether a trigger occurred as to private contracts that are out there is totally meaningless.

There is merit to this assertion since the ISDA contract is simply a non-binding template, often marked up to accommodate financial engineering widgets designed to increase profit margin and decrease transparency to clients and counterparties. By the time all of the widgets are installed on some of these highly customized deals, the original ISDA template is a non-issue.

What seems to be the issue is whether there is considered to be "economic coercion" going on if one of the events to trigger is "restructuring." 

Whaaattt!!! Coercion? What Coercion???!!! robbery_gun_1robbery_gun_1

 Furthermore, you have to not look at voluntariness in a vacuum but compare the (Greek) bond with the substitute being offered by EU to determine if economic coercion or true voluntariness exists. For example, if the EU will give priority in payment to the substitute it is offering and not the original bond, that is the proper analysis in determining economic coercion/voluntariness etc. My analysis here is based upon a very brief reading of the case and I would need time to analysis fully. Also I'm not a financial professional I don't understand all the implications of what the EU announced. The reason I'm contacting you is because I believe that in the coming days/weeks we will hear of entities that are buyers of the CDS protection giving notice of a credit event to their counterparties to seek to collect on the CDS contract. If payouts aren't made lawsuits will be filed. 

You had better believe it. I really don't know why everybody is glazing over this very obvious fact! Imagine if you bought protection on a bond you acquired at par and you are offered 50% of it back (NPV) to be considered whole while the CDS writer laughs at and says thanks for the premiums... You'd probably break your fingers dialing your lawyer - out of both the swap payments, the CDS payout, and 50% of your investment that you thought (but really should have known better) was protected!

I don't know what a US Court will decide as to whether a trigger has occurred but there is a 2nd circuit case (the one I mentioned above) that is the best I've found to give an inkling about this... I'm telling you all this, because if I am right and there are claims that CDS was triggered and CDS in fact gets triggered... [it should be made] public so people start analyzing whether CDS was in fact triggered instead of blindly accepting the drivel out of Europe that no trigger will occur. That claim is obviously all about perception management not necessarily truth.

‘Funded’ Exposure

By contrast, Goldman Sachs discloses only what it calls “funded” exposure to GIIPS debt -- $4.16 billion before hedges and $2.46 billion after, as of Sept. 30. Those amounts exclude commitments or contingent payments, such as credit-default swaps, said Lucas van Praag, a spokesman for the bank.

Goldman Sachs includes CDS in its market-risk calculations, of which value-at-risk is one measure, and it hedges the swaps and holds collateral against the hedges, primarily cash and U.S. Treasuries, van Praag said. The firm doesn’t break out its estimate of the market risk related to the five countries.

JPMorgan said in its third-quarter SEC filing that more than 98 percent of the credit-default swaps the New York-based bank has written on GIIPS debt is balanced by CDS contracts purchased on the same bonds. The bank said its net exposure was no more than $1.5 billion, with a portion coming from debt and equity securities. The company didn’t disclose gross numbers or how much of the $1.5 billion came from swaps, leaving investors wondering whether the notional value of CDS sold could be as high as $150 billion or as low as zero.

Yeah, but if the EU and ISDA are correct that a 60% devaluation/haircut in Greek debt does not constitute a credit event, then JPM and GS are essentially undhedged, RIGHT!!!!????

Here's the question du jour - Can Goldmans Sachs Derivative Exposure, realistically unhedged, cause the biggest run on the bank in Financial History?

As excerpted from Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question “Has the value or the economic quantity of the underlying increased at a similar pace, and if not does this indicate that everyone on the street has doubled and tripled up their ‘bets’ on the SAME HORSE?”

Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?

Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history.  In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago. The notional amount of a derivative contract is a reference amount from which contractual payments will be derived, but it is generally not an amount at risk. However, the changes in notional volumes can provide insight into potential revenue, and operational issues and potentially the contagion risk that banks and financial institutions poses to the wider economy – particularly in the form of counterparty risk delta. The top four banks with the most derivatives activity hold 94% of all derivatives, while the largest 25 banks account for nearly 100% of all contracts.  Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.

In absolute terms, JPM leads this list with total notional value of derivative contracts at $78 trillion, or 1.3x times the Wolds GDP. However, in relative terms, Goldman Sachs leads the list with total value of notional derivatives at 537 times is total assets compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).

So, what does this mean? Well, it should be assumed that Goldman is well hedged for its exposure, at least on academic basis. The problem is its academic. AIG has taught as that bilateral netting is tantamount to bullshit at this level without government bailout intervention. If there is any entity at risk of counterparty default or who is at the behest of a government bailout if the proverbial feces hits the fan blades… Ladies and gentlemen, that entity would be known as Goldman Sachs.

As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...

GS__Banks_Derivatives_exposure_temp_work_Page_2GS__Banks_Derivatives_exposure_temp_work_Page_2

Goldman is much more highly leveraged into the derivatives trade than ANY and ALL of its peers as to actually be difficult to chart. That stalk representing Goldman's risk relative to EVERY OTHER banks is damn near phallic in stature!

GS__Banks_Derivatives_exposure_temp_work_Page_3GS__Banks_Derivatives_exposure_temp_work_Page_3

As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... , this is not a new phenomenon. Quite to the contrary, it has been a constant trend through the bubble, and amazingly enough even through the crash as banks have actually ratcheted up risk and assets in a blind race to become TBTF (to big to fail), under the auspices of the regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture). So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

 image006image006

And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just giving y'all a heads up ahead of time...

image009image009

Do you remember France? That country that no on is really paying attention to, but whose exposure and risk is so systemic that it can literally and unilaterally blow up the entire European continent? I post again, for effect...

In a further worrying sign, French borrowing costs rose, lifting the premium it pays over Germany to a fresh euro-era record of 135bp. Investors are increasingly worried that France could lose its triple A rating, which in turn would threaten the status of the European financial stability facility, the eurozone’s rescue fund.

Counterparty Clarity

“Their position is you don’t need to know the risks, which is why they’re giving you net numbers,” said Nomi Prins, a managing director at New York-based Goldman Sachs until she left in 2002 to become a writer. “Net is only as good as the counterparties on each side of the net -- that’s why it’s misleading in a fluid, dynamic market.”

This is so true... So true. Lest we forget, Lehman and Bear Stearns were hedged!

Investors should want to know how much defaulted debt the banks could be forced to repay because of credit derivatives and how much they’d be in line to receive from other counterparties, Prins said. In addition, they should seek to find out who those counterparties are, she said.

Hey, just ask your local BoomBustBlog subscriber!

JPMorgan sought to allay concerns that its counterparties are unreliable by saying in the filing that it buys protection only from firms outside the five countries that are “either investment-grade or well-supported by collateral arrangements.” The bank doesn’t identify the counterparties.

Spare me the bullshit. Please click the link "Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably!" and read..

The top four banks with the most derivatives activity hold 94% of all derivatives, while the largest 25 banks account for nearly 100% of all contracts.  Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.

If there are only 4 banks carrying 94% of the risk, then there is roughly a 6% chance that JPM bought protection from a bank outside of a cartel that is guaranteed to collapse if anyone its members fall. To make matters even worse, even if we win with only 6% odds, contagion will drag those other 25 banks along for the ride. Basically, that means that there is rougly a 100% chance that that JPM statement is...

grade_a_bullshit_alert_trans


Bungee Cords

If the value of Italian bonds drops, as it did last week, a U.S. firm that sold a credit-default swap on that debt to a French bank would have to provide more collateral. The same U.S. company might be collecting collateral from a British bank because it bought a swap from that firm.

As long as all three banks can make good on their promises, the trade doesn’t have much risk. It could all unravel if the British firm runs into trouble because it’s waiting for a payment from an Italian company that defaults. The collapse of Lehman Brothers Holdings Inc. in 2008 demonstrated some of the ripple effects that one failure can have in the market.

“We learned from Lehman that all of these firms are tied together with bungee cords -- you can’t just lift one out without it affecting everyone else in the group,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who previously worked at Lehman Brothers and Morgan Stanley. More disclosure “may push the stock prices down when it becomes clear how big the bungee cords are. But it certainly would be a welcome addition for an analyst.”

BoomBustBlog subscribers covered this scenario months ago.

Italy has a funding issue that nobody was able to foresee, right? Wrong! After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It

France is heavily levered into Italy and Franco-Italiano fortunes are closely linked, right? Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!!

American banks (like Goldman) are on the hook for protecting the damn near doomed French banks right?  French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!

image009

But in the end of one, or two, three big banks go down, it's basically a giant pan-global clusterfuck, no?

"The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... 

Guarantees provided by U.S. lenders on government, bank and corporate debt in Greece, Italy, Ireland, Portugal and Spain rose by $80.7 billion to $518 billion in the first half of 2011, according to the Bank for International Settlements.

‘Longs and Shorts’

“We either have netting agreements, or they foot, or they cancel each other out, or they’re longs and shorts on the same instrument,” he said, answering a question about how the firm manages so many contracts in a crisis. “The only way you can run a business like that is to have these systems work so they can aggregate stuff, so you can run the business on a macro basis, and also so you can get the details quickly if you need them. And that’s all systems and technology.”

Lindsey, the former SEC official who’s now president of New York-based Callcott Group LLC, which consults on markets and market operations, said few firms have systems that can portray their real-time exposure to trading partners.

“That’s very difficult for any firm to have a good handle on all of that -- you know large positions and you know what certain positions are, but to be able to say I’ve adequately aggregated all of my long exposure and all of my short exposure to a specific counterparty may be very difficult,” Lindsey said. “I don’t know of a firm where it’s not pulled together by a phone call, where somebody says, ‘OK, we need to know our exposure to X,’ and a lot of people stop their day jobs and try to find an answer.”

‘Needlessly Cause Reaction’

Lindsey said banks may be wary of disclosures that could confuse investors. Figures such as gross notional exposure -- the total amount of debt insured by credit derivatives -- give investors an exaggerated sense of the risk and could “needlessly cause reaction,” he said.

Other methods, such as stress-testing, scenario analysis or so-called value-at-risk estimates, rely on models that may underestimate risk because historical data on sovereign defaults show them to be unlikely.

“If you’re looking at your exposure to a defaulting sovereign, there’s a relatively low frequency rate,” Lindsey said. “So it really depends on what they’ve done internally to back up their ideas of what their assessment of the probability of default is.”

"...Give investors an exaggerated sense of the risk and could “needlessly cause reaction...

"...historical data on sovereign defaults show them to be unlikely..."

"...If you’re looking at your exposure to a defaulting sovereign, there’s a relatively low frequency rate"

BUULLLLSHIIITTT!!!

 bullshit-bag

I know these Goldilocks guys may not mean any harm, but do they know what happened to the Bull that Shitted too much?dead_bull_run


I query, How Long Does It Take For Losing Money To Result In Lost Money? The Effects Of Rampant Bond Selling on Devalued Sovereign Debt

thumb_image018thumb_image018

But including losses on Spanish, Italian, Irish and Portuguese capital losses realized upon disposition, and the ongoing losses on Greek debt, what then????

You see, the truly under appreciate problem here is that the private banks rampant selling is driving down the prices of already highly distressed and rapidly devaluing bonds. Reference Bloomberg's European Banks Selling Sovereign Bond Holdings Threatens to Worsen Crisis.

Those trillions in swaps are "guaranteed" to get called on!

More from Reggie Middleton...

The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!

This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

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

What Was That I Heard About Squids Raising Capital Because They Can't Trade?

ZeroHedge Is Good In Uncovering BS, But I Will Not Be Outdone In Busting BS Bank Reporting - I Simply Refuse, Right BNP?

BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter

 
Published in BoomBustBlog
So, Italy Sells 5-Year Bonds as Yield Surges to a Eurozone record and the inevitable continues to unfold as nearly all market participants continue to ignore basic arithmetic and common sense. Bloomberg reports:

Italy sold 3 billion euros ($4 billion) of five-year bonds, the maximum target, at the highest yield in more than 14 years as Mario Monti seeks to form a new government to restore investor confidence in public finances.

The Rome-based Treasury sold the bonds to yield 6.29 percent, the highest since June 1997 and up from 5.32 percent at the last auction on Oct. 13. Demand was 1.47 times the amount on offer, compared with 1.34 times last month.

... Monti, 68, accepted a mandate from President Giorgio Napolitano yesterday to succeed Silvio Berlusconi, who resigned as premier on Nov. 12 after defections eroded his parliamentary majority and the country’s 10-year bond yield surged over the 7 percent threshold that prompted Greece, Ireland and Portugal to seek bailouts. The yield on Italy’s benchmark 10-year bond was 6.4 percent at 11:15 a.m. in Rome after the auction, down from a euro-era record of 7.48 percent on Nov. 9.

Italy was forced to pay 6.087 percent on one-year bills at an auction on Nov. 10, the most in more than 14 years, amid the worsening European debt crisis. Monti, an economist and former adviser to Goldman Sachs Group Inc., will try to reassure investors that Italy can cut a 1.9 trillion-euro debt and spur economic growth that has lagged behind the euro-region average for more than a decade.

The country faces about 200 billion euros in bond maturities next year, more than twice as much as Spain, which has also seen yields surge on fallout from the debt crisis. The first bond redemption comes on Feb. 1, when Italy must pay back 26 billion euros for debt sold 10 years ago.

Whoa.. This was hard to see coming, wasn't it? Yeah, right. BoomBustBlog subscribers reference the explicit warning from early 2010 -

Italy public finances projection.

These severe devaluation in bonds definitely do take their toll, and not just on those who gorged on Grecian debt, as Bloomberg also reports UniCredit Posts a Record $14.5 Billion Loss on Impairments; Shares Tumble:

UniCredit SpA (UCG), Italy’s biggest bank, posted a record loss of 10.6 billion euros ($14.5 billion) in the third quarter after writing down goodwill on acquisitions and investments.

The stock fell as much as 9.6 percent as UniCredit unveiled a plan to raise as much as 7.5 billion euros by selling shares. The company took an impairment of 8.7 billion euros as it wrote off goodwill on purchases in Ukraine and Kazakhstan, UniCredit said in a statement today. The bank said it will exit non- strategic units, without elaborating.

Wider spreads on government bonds contributed to a 285 million-euro trading loss, the company said. The lender also scrapped its dividend for this year and plans 5,200 job cuts through 2015. UniCredit is raising money as it faces the biggest capital shortfall among Italy’s lenders, as ranked by the European Banking Authority last month.

“Our decision to write down the goodwill of several brands and to raise capital will reinforce the bank from both a balance-sheet and capital point of view,” Chief Executive Officer Federico Ghizzoni told reporters in Milan.

UniCredit shares were 6.3 percent lower at 77.3 cents as of 3:34 p.m. Milan time.

The lender said the goodwill charges won’t affect UniCredit’s cash and capital positions. UniCredit’s loan-loss provisions rose to 1.85 billion euros in the quarter from 1.63 billion euros a year earlier. Revenue declined 11 percent to 5.7 billion euros in the quarter.

The stock sale is part of UniCredit’s new business plan, which targets net income of 6.5 billion euros by 2015.

 Wow! What a surprise... Oh, my mistake... From Subscriber download dated February 2010, Italian Banking Macro-Fundamental Discussion Note, page 7 - Italian banks at risk!

You see, this is the problem. This Pan-European debacle has been moving in relatively slow motion and was very, very easily foreseeable. As a matter of fact, I have called it with nigh unerring precision from the first quarter of 2010. Reference the series of 40 or so articles starting in January of 2010, together known as Pan-European Sovereign Debt Crisis.

In The Coming Pan-European Sovereign Debt Crisis, dated Sunday, 07 February 2010 (please take notice of the date), I introduced the crisis and identified it as a pan-European problem, not a localized one. You see, the media and the sell side attempted to make this all about Greece when the reality of the matter was that it was anything but. This is a Pan-European Sovereign Debt Crisis, not a Greek, Irish or even Italian debt crisis. As excerpted:

Much of the analysis that I have seen fails to put enough weight on the bad loan/NPA issue in each country's respective banking system, which essentially is the cause of most of the countries' particular malaise to begin with. I have thrown together a crude, rudimentary chart to put this into perspective...

image021.pngimage021.pngimage021.png

When comparing these sovereigns using metrics that encompass more than the usual suspects, you get a clearer picture. The bank bailouts were expensive, arguably too expensive. It may have been better to let them fail in the market and nationalize them. Notice how the nations with the highest NPAs are doing the worst. In addition, one should remain cognizant that the "extend and pretend" game has allowed hundreds of billions of "phantom" NPAs to roam free in each of these countries' GDPs unrecorded. I believe there may be some surprises left in quite a few of the German banks. We will probably see if I'm right over the next few quarters. See German Recovery Stalls Unexpectedly in Fourth Quarter:German gross domestic product showed no growth in the final quarter of last year, official data showed on Friday, leaving Europe's largest economy on a weak footing going into 2010.

 And you wonder what happend to Unicredit???

In the piece What Country is Next in the Coming Pan-European Sovereign Debt Crisis?, dated Tuesday, 09 February 2010 (please take notice of the date) – I illustrated the potential for the domino effect, as excerpted:

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).

Click to enlarge...

italy_-_ireland.pngitaly_-_ireland.pngitaly_-_ireland.png

As seen above, Italy's gross debt as a % of GDP is worse than that of Greeces. Spain's stuctural balance is nearly as bad as Greece's and their GDP is heading backwards at a faster rate than Greece. Spain's high unemployment trumps all in the comparison, with Ireland coming a close second. Despite all of this, Greece has two to three times the CDS spread. Greece is a dress rehearsal for sovereign debt failure in several larger countries. Ireland is in very bad shape, and the UK is heavily levered into Ireland through the banking system and bonds (to the tune of $190 billion+) which exacerbates the issues that the UK already has (we will get to this in a future post). Spain and Italy combined are a sizeable chunk of the entire EU, and they are at risk. I say this just to keep things in perspective. We still have at least 9 or 10 more nations to review, and it doesn't necessarily get any better from here.

The worst has yet to come. With nearly all of Europe's banking system in the toilet, and roughly half a trillion Euros of mortgage loans coming due for rollover on a property market that is currently underwater with increasing vacancies, softening rents and a fukked macro outlook, pray tell what do you think will come of it?

Reggie Middleton Featured in Property EU, one of Europes leading real estate publicatios

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.


Of course, you can bet the farm on the industry group that will be hit second hardest by all of this, and yet somehow has not recieved nearly enough attention. Stay tuned, collapses commencing shortly. BoomBustBlog subscribers should hit the professional (professional only) addendum to the (all paying subscribers) icon Sovereign Debt Exposure of European Debt Exposed Industry (439.61 kB 2010-05-19 01:56:52) which can be found online here: Sovereign Debt Exposure Worksheets - Professional. I will be updating this list within a week.

Published in BoomBustBlog

 

Comments from Eurocalypse, the resident BoomBustBlog credit trading guru...

Update of the updated: Trendline broken in French bonds: today again Italy coming in but France is still moving out… hardly surprising.  Just as i said... and stocks i think will break out up, even if that seems contradictory.

Update: I wrote this this morning. Markets react really fast. Huge move in French yields today. See charts on Mish blog. The declining trend line broken now 10yr 3.47. 3.75 or even 4.00 in a matter of few days. 4.80 is where France starts to spiral out like Italy, Greece, etc... Now the ECB monetizes massively or its massive defaults. Time is running out. My 2 cent guess is EFSF won’t even have time to do anything significant before the ECB steps in massively...

picsay-1319726495The most important development is that the Eurocalypse is in full panic mode and Italy blowing up. The inferno machine is now running full speed and there is little way back for it to now. When Italian bonds yields rise 70bp a day, roughly getting hit 4% in price, worse than stock indexes, its game over. VAR is too high, all traders, portfolio managers MUST exit, ECB is the only real bid in size (for how long ?); and sooner or later Italy has to show the white flag and ask for a bailout, but we all already know how big the problem is… So what can happen from here short term and long term?
Looking at the short term dynamics, the Run must be in full mode. Simply put, confidence is gone, basta. Everybody is trying to take its chips off the table, selling brings in more selling, no more bids means auctions failing or getting filled at higher and higher yields. France will inevitably get hit.
What are the levels to watch to see how close we are from the end? I think the bond market is again the thing to watch. Well, 3.30 on 10Y French bond would break an intermediate downtrend line. As bunds are still in a bull market, that would signal the total end of French banks seen as fly-to-quality bonds, though they still keep some of that status with yields still in the low 3% handle. Then we’d go rather quickly to 3.75% or even 4%. Breaking 4.8% the highs of 2008 means total chaos and signals for good the bailout/default scenario for French bonds.

So we still have some time (but probably not much).

Italy is too big to fail, the only possible plan at this stage, which would be quick enough to implement is for ECB to adopt heavy "QE" and buy bonds seriously, I mean 2x, 5x or 10x more than they do. Fast printing… Pure monetization of debt… And all the problems that might go with it. The problem? The Germans don’t seem to want to agree on that. Neither do the French.
Think of what the impact could be to European financial stocks if that happens, though. Very bullish, at least potentially.

The EFSF and adding more debt to sustain insolvent borrowers never worked and won’t work.

Reggie here: Let me remind everybody that the EFSF is supposed to be a trillion euro vehicle, but its first 4 billion euro offering #FAILED!, followed by a barely completed 3 billion euro offering at sweeter terms. Okay, 3 million euro down, and just 997 million euro to go before we find out that this structure was a total #FAIL to begin with… Remember the question I posed several months ago? What Happens When That Juggler Gets Clumsy? - BoomBustBlog

man_jugling_money

 

The EFSF can’t even borrow decent amounts on the market, if the ECB would be the only one to buy it; why not simply buy Italian bonds instead? Much simpler and not adding more debt to the system (but adding more phony "money").

I think your blog (BoomBustBlog) and ZH so forcefully and perfectly demonstrate that the whole system is insolvent with just minimal haircuts from sovereigns. Because banks are too leveraged, and because (gov’t. but also private) debt in the system is unsustainable. All the evidence anyone needs is right here, and you’ve demonstrated as well that runs are quite possible, and the rational things for investors to do is to try to escape the chaos by removing their money from the weakest banks and countries, but that poses a prisoner’s dilemma. If everyone does the same, then we’re sure it will happen! The weakest is finished, but then, like in 10 Little Indians or any “B” rated “slasher” movie, the 2nd weakest is soon to be the next victim, and so on. Italy or banks are not (much) more (really or potentially) insolvent today than a few months or years ago. There is no magical number like 100%, 120% debt to GDP ratio that makes things SUDDENLY unworkable… It’s the realization of all this by investors, individuals and bankers alike.
Actually I am must more pessimistic than you, Reg. I’ve been thinking for a while, USSR 1989 or better put, Capitalism 2012. In USSR in 1988 nobody had a real clue that everything would be over in less than a year. I think it’s the same here. People don’t disappear, all factories don’t close, but a massive change and chaotic transition occurs. I expect the same in Europe, with some revolution or coups in some countries, big institutional changes, massive defaults and bankruptcies in both banks and (the leveraged) corporate sector, returning to some state-nations, or forming of several blocs, but EMU won’t exist as it is even in 1 year (most realistic analysts say 5 years..). As you demonstrated, I think it goes further than EMU and we can include UK, US and perhaps even Japan; all the western world with it, with a short 1-2 year lag at the very most. I’m not forecasting (nor hoping for) war, but that’s become my main scenario.

However, saying everything’s fucked up, it’s the bankster’s faults etc., misses the point and isn’t really constructive. That’s what I’d like people to discuss more on blogs. For example what’s the good of saying gold will go to 5000$ and making fun of fiat money? Who will it help ? What will it fix? If tomorrow gold was 5000$ would the crisis be over? It will only help those who have gold, or those who are buying now, taking money away from the fools who sell.

The only thing about gold and fixed (no) money supply system is that there SHOULD be some discipline, but in a gold system, one who owns GOLD initially is squeezing the money supply, and manipulates it in its favour, accumulating in time more and more of it, to the expense of other nations/people and dominating them. No wonder that just the TALK of returning to some gold system entices central banks to accumulate more than its neighbour just in case this happens. The bubble stage is only starting there.

The current monetary system was built on the assumption that gov’t debt was a riskless asset, debt will be always repaid, and more importantly that debt always could be repaid with more debt. Truth be told,  in nations where the gov’t can tax or print the money as it wants, indeed there is no absolute need for it to default (but it could strategically be a good idea if the lenders are mostly foreigners for example; but it could just heavily tax foreign holders or default on them only which is the same). So defaulting by printing/ inflation was always possible.

 

So its only too natural that the answer to Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding XXX%?


My quick answer is NATURALLY !!! Any extra Euro of deposit in a bank gets marginally invested in those gov’t bonds, I’d say it’s almost the analog of the law of conservation of Energy in Physics as gov’t debt is the biggest and most liquid debt instruments.

If the banks didn’t then the states would never been able to borrow money in the first place.

The reason??? Because if most people don’t know that their pension funds and life insurance are invested in bonds, they ignore even more that their deposits are invested indirectly in those very same instruments, even though most would say “No!” if they had the choice !!!

So governments put in a lot of regulations to help this situation and extend the numbers of possible buyers of (this) debt, ex. risk-free weightings for banks, tax-free for this or that, allowing derivatives, etc...
Now with regulation asking for more capital, and volatility exploding, there is no more capital to buy debt, gov’t or corporate, any more.

So, what is the proposed solution to that ? Recapitalizing banks with borrowed gov’t money so they can buy gov’t debt ? That seems stretched and very inefficient to me and adding more debt to debt makes it worse, we all know that.

I would also add that an indirect effect of recapitalizing banks, and ever-adding debt is to make banks even bigger and more cannibalizing. After all, banks revenues should be proportional to their deposits and to existing debt. When this is the only thing growing faster than anything else, it is hardly surprising that banks profits (becoming acknowledged paper and virtual profits as opposed to real losses) and bankster’s revenues and bonuses are going higher and higher.

If people don’t want bankers to be rich, don’t bank! Move your money out of your bank. If you think footballers or rock stars are too well paid, don’t watch football or buy rock records! So basically the drug addict is complaining that the drug dealer is too rich.

My view is that gold or something else won’t solve anything. If not, then what would?
One of the ZH articles that I really liked, but must search to find it, was a chart of existing debt across countries, with who owes what to who, and how looking at NET debt, how this could be solved.

The real meaning of this debt crisis is:
- the market is not working anymore because of too much debt and due to current debt dynamics and current prices of goods and FX, imbalances keep on growing to an unsustainable state.

Reggie here: and the constant manipulation by politicians and central bankers that have all but destroyed the concept of true, market-based price discovery. See Do Black Swans Really Matter? Not As Much as the Circle of Life.

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the "Peak" phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality...

The result of this "Great Global Macro Experiment" is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.

- Financial assets are not worth what we think they are. One should include deposits in the financial assets category.
The only way is for everybody to acknowledge that. Now Italian bonds are trading 87 of par, it won’t help at all to recapitalize banks with public money for the 13 missing points as the gov’t will need to borrow this money which those banks will buy. Nonsense!

So it’s either better to assume they will be reimbursed to par with direct printing by the ECB, and magically, the need to recapitalize banks disappears (true, there is private debt to account for as well) or to default.
When defaulting, well shareholders will be wiped out and bank debt holders will be wiped out. If we keep the analysis to banks and gov’ts only, we see that interbank debt doesn’t hurt anymore if we let every bank fail!

The ZH/Mish camp or others claim that banks should fail. This omits to say that yes, probably billionaires or rich investors who necessarily have big assets will lose a lot if that happens, but Mr. Smith’s pensions, life insurance plans are wiped out too, and his deposits as well.
Owners of banks are not a group of mysterious people with big cigars living like Dr. No in some far islands. It’s mostly us.

Instead of disorderly defaults, if we really want the rich to pay for the mess, the best is to tax assets heavily, not to let the market default disorderly. I think also people up there should really think about closing banks and a debt jubilee plan, thinking how much people will lose and in what proportion, because now it’s all about that. The loss is in front of our eyes. The more we delay the situation, the more money will try to run out of the system.

I don’t think there is a unique solution. It involves a mix of  defaults, restructuring , heavier taxes not only on revenues but on assets, austerity from the gov’t, whatever works; and bigger focus on real production and wealth - making stuff, developing technologies, solving real problems as opposed to financial problems. Financial problems should be among the easiest to solve, it’s just math and 0s on computers, after all !

Also just a remark, It’s just an aberration a lot of people become homeless and poor in the US or Spain for example with all the overbuilding ! There must be a lot of empty homes, even the poorest should/could have a roof! If nationwide values of houses are divided by 2, will that make people poorer? The contribution to GDP of house building and anything related to it would be divided by 2 but who cares? GDP is not a good, nor anywhere near perfect, indicator of wealth creation. The stupid focus on GDP is also one of the many explanations why we’re having so many bad economic policies everywhere in the world. People would have more money to spend...

The 2 major problems, house prices (because mortgages account for so much debt), and gov’t spending (because gov’t spends more than it takes in) and thus assets related to those, need to be solved, and everything I believe can jump start again, better than ever before, without the need for revolutions, conflicts...

Other than that, I have to mention, that tomorrow is 11-11-11. only once every 100 years if you think of it. If you believe in numerology ( i think it DOES affect markets, as well as TECHNICAL ANALYSIS that some people think is VOODOO), a trader friend of mine says there is a very rare BUYING signal in Italian bonds, coming from BOTH weekly and daily DEMARK sequentials.  Not the end of the story, but a return to 6.25% for example would NOT change the major trend, not even a return to 5.75%. Shorts beware.
Also I’m still bearish on the EUR as I’ve been for a while, but stock markets I believe are heavy but trading like the markets want to be long. The 1220-1240 breakout zone on SP is holding for the moment, and even on European indexes, were not seeing new lows despite all the negative headlines. I believe stocks are technically bullish and for longer than many people think, because investors fear missing any rally (look how in October many HFs underperformed), and because there is a strong probability of ECB in full QE mode, monetizing heavily gov’t debt.

I’m pessimistic, I think debt monetization is not a good idea, if we go this way, I’d prefer to see pure monetary printing (equivalent to CB buying a perpetual gov’t debt with 0% or little interest) as at least accounting for that is simpler and doesn’t add debt, but I think it’s a real possibility that cannot be discounted. Furthermore if monetization is not accompanied by real reforms, it’s just can kicking and the problems will get much worse later.

the most important developments is the Eurocalypse in full panic mode and Italy blowing up. The inferno machine is now running full speed and there is little way back now for it to stop. When Italian bonds yields rise 70bp a day, roughly getting hit 4% in price, worse than stock indexes, its game over. VAR is too high, all traders, portfolio managers MUST exit, ECB is the only real bid in size (for how long ?); and sooner or later Italy has to show the white flag and ask for a bailout, but we know how big the problem is so what can happen from here short term and long term ?

Well, looking at the short term dynamics, the Run must be in full mode. simply put the confidence is gone, basta. everybody is trying to take its chips off the table, selling brings in more selling, no more bids means auctions failing or getting filled at higher and higher yields. France will inevitably get hit.

what are the levels to watch to see how close we are from the end ? i think the bond market is again the thing to watch. well 3.30 on 10Y french bond would break an intermediate downtrend line. as bunds are still in a bull market, that w3ould signal the total end of french bank seen as fly-to-quality bonds, though they still keep some of that status with yields still in the low 3% handle. then wed go rather quickly to 3.75% or even 4%.
breaking 4.8% the highs of 2008 means total chaos and signals for good the bailout/default scenario French bonds.

so we still have some time (but probably not much)

Italy is too big to fail, the only possible plan at this stage, which would be quick enough to implement is for ECB to adopt heavy "QE" and buy bonds seriously, i mean 2x, 5x or 10x more than they do. fast printing. pure monetization of debt; and all the problems that might go with it. problem, germans do seem they want to agree on that. neither do French.
think of what the impact could be to European financial stocks if that happens. very bullish potentially.

EFSF and adding more debt to sustain insolvent borrowers never worked and wont work. the EFSF cant even borrow decent amounts on the market, if the ECB would be the only one to buy it, why simply not buy Italian bond instead ? much simpler and not adding more debt to the system (but adding more phony "money")

I think your blog and ZH and so forcefully and perfectly demonstrate that the whole system is insolvent with minimal haircuts from sovereigns. because banks are too leveraged, and because (govt but also private) debt in the system is too much. The whole evidence is here, and youve demonstrated as well that runs are possible, and the rational things for investors to do to try to escape for the chaos by removing their money from the weakest banks and countries, but thats a prisoner dilemna here. if everyone does the same, then were sure it will happen ! the weakest is finished, but then, like in 10 little indians or any slasher movie, the 2nd weakest is soon the next victim and so on. Italy or banks are not (much)more (really or potentially) insolvent today than a few months or years ago, there is no magical number like 100%, 120% debt to gdp ratio that makes things SUDDENLY unworkable, its the realization of all this by investors, individuals, bankers alike.

Actually i am must more pessimistic than you. Ive been thinking for a while USSR 1989, Capitalism 2012. In USSR in 1988 nobody had a real clue that everything would be over in less than 1 year later. i think its the same here. People dont disappear, all factories dont close, but a massive change and chaotic transition occurs. I expect the same in Europe, with some revolution or coups in some countries, big institutional changes, massive defaults and bankruptcies in both banks and (the leveraged) corporate sector, returning to some state-nations, or forming of several blocs, but EMU wont exist as it is even in 1 year (most realistic analysts say 5 years..). but as you demonstrated, i think it goes further than EMU and we can include UK, US and perhaps even Japan, all the western world with it, with a short 1-2 year lag at the very most. Im not forecasting (neither hoping) war as well. but thats become my main scenario.

However saying everythings fucked up, its the banksters faults etc... misses the point and isnt really constructive. and thats what id like people to discuss more on blogs. For example whats good of saying gold will go to 5000$ and making fun of fiat money ? who will it help ? what will it fix ? if tomorrow gold was 5000$ would the crisis be over ? it will only help those who have gold, or those who are buying now, taking money away from the fools who sell.

the only thing about gold and fixed (no) money supply system, is that there SHOULD be some discipline, but in a gold system, one who owns GOLD initially is squeezing the money supply, and manipulates it in its favour, accumulating in time more and more of it, to the expense of other nations/people and dominating them. no wonder that just the TALK of returning to some gold system entices central banks to accumulate more than its neighbour just in case this happens. the bubble stage is only starting there.

The current monetary system was built on the assumption govt debt was a riskless asset, debt always repaid, and more importantly that debt always could be repaid with more debt.
and in nations where the govt can tax or print the money as it wants, indeed there is no absolute need for it to default (but it could strategically be a good idea if the lenders are mostly foreigners for example; but it could just heavily tax foreign holders or default on them only which is the same). So defaulting by printing/ inflation was always possible.

so its only too natural that the answer to

Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding XXX%?


my quick answer is NATURALLY !!! any extra Euro of deposit in a bank gets marginally invested in those govt bonds, Id say its almost the analog of the law of conservation of Energy in Physics as govt debt is the biggest and most liquid debt instruments.

If the banks didnt then the states would never been able to borrow money in the first place. because if  most people dont know that their pension funds, their life insurance are invested in bonds, they ignore even more that their deposits are invested indirectly in those even most would say no if they had the choice !!!

so govts put in a lot of regulations to help this situation and extend the numbers of possible buyers of (this) debt, risk-free weightings for banks, tax-free for this or that, allowing derivatives etc...
Now with regulation asking for more capital, and volatility exploding, there is no more capital to buy debt, govt or corporate any more.

and what is the proposed solution to that ? recapitalizing banks with borrowed govt money so they can buy govt debt ? that seems stretched and very unefficient to me and adding more debt to debt makes it worse, we all know that.

I would also add that an indirect effect of recapitalizing banks, and ever-adding debt is to make banks even bigger and cannibalizing. After all, banks revenues should be proportional to their deposits and to existing debt. When this is the only thing growing faster than anything else, it is hardly surprising that banks profits (becoming acknowledged paper and virtual profits as opposed to real losses) and banksters revenues and bonuses and going higher and higher.

If people dont want bankers to be rich, dont bank ! move your money out of your bank. if you think footballers or rock stars are too well paid, dont watch football or dont listen to them ! so basically the drug addict is complaining that the drug dealer is too rich.

So my view is that gold or something else wont solve anything, what would ?
One of ZH articles that i really liked, but i must search to find it, was a chart of existing debt across countries, with who owes to who, and how looking at NET debt, how could this be solved.

The real meaning of this debt crisis is:
- the market is not working anymore because of too much debt and due to current debt dynamics and current prices of goods and FX, imbalances keep on growing to an unsustainable state.
- financial assets are not worth what we think they are. one should include deposits in the financial assets category.

the only way is for everybody to acknowledge that. Now Italian bonds are trading 87 of par, it wont help at all to recapitalize banks with public money for the 13 missing as the govt will need to borrow this money which those banks will buy. nonsense.

so its either better to assume they will be reimbursed to par with direct printing by the ECB, and magically, the need to recapitalize banks disappear (true there is private debt to account for as well) or to default.
When defaulting, well shareholders wiped out, bank debt holders wiped out. but if we keep the analysis to banks and govts only, we see that interbank debt doesnt hurt anymore if we let every bank fail !

The ZH Mish or others claim that banks should fail, omits to say that yes, probably billionaires or rich investors who necessarily have big assets will lose a lot if that happens, but Mr Smith pensions, life insurance plans are wiped out too, and his deposits as well.
Owners of banks are not a group of mysterious people with big cigars living like Dr No in some far islands. Its mostly us.

Instead of disorderly defaults, if we really want the rich to pay for the mess, the best is to tax heavily assets, not to let the market default disorderly. I think also people up there should really think about closing banks and a debt jubilee plan, thinking how much people will lose and in what proportion, because now its all about that. The loss is in front of our eyes. the more we delay the situation, the more money will try to run out of the system.

I dont think there is a unique solution. it involves a mix of  defaults, restructuring , heavier taxes not only on revenues but on assets, austerity from the govt, whatever works; and bigger focus on real production and wealth, making stuff, developing technologies, solving real problems as opposed to financial problems. financial problems should be among the easiest to solve, its just maths and 0s on computers after all !

Also just a remark, its just an aberration a lot of people become homeless and poor in the US or Spain for example with all the overbuilding ! there must be a lot of empty homes, even the poorest should/could have a roof ! if nationwide values of houses are divided by 2, will that make people poorer ? contribution to GDP of house building and anything related to it would be divided by 2 but who cares ? GDP is not a good and anywhere perfect indicator of wealth creation. the stupid focus on gdp is also one of the many explanations why were having so bad economic policies everywhere in the world. people would have more money to spend...

the 2 major problems, house prices (because mortgages account for so much debt), and govt spending (because govt spends more than it takes in) and thus assets related to those, need to be solved, and everything I believe can jump start again, better than ever before, without the need for revolutions, conflicts...

other than that, I have to mention, that tomorrow is 11-11-11. only once every 100 years if you think of it. If you believe in numerology ( i think it DOES affect markets, as well as TECHNICAL ANALYSIS that some people think is VOODOO), a trader friend of mine says there is a very rare BUYING signal in Italian bonds, coming from BOTH weekly and daily DEMARK sequentials. not the end of the story, but a return to 6.25% for example would NOT change the major trend, not even a return to 5.75%. shorts beware.

also im still bearish on the EUR as ive been for a while, but stock markets I believe are heavy but trading like the markets want to be long. the 1220-1240 breakout zone on SP is holding for the moment, and even on European indexes, were not seeing new lows despite all the negative headlines. i believe stocks are technically bullish and for longer than many people think, because investors fear missing any rally (look how in October many HFs underperformed), and because there is a strong probability of ECB in full QE mode, monetizing heavily govt debt.

Im pessimistic, i think debt monetization is not a good idea, if we go this way, id prefer to see pure monetary printing (equivalent to CB buying a perpetual govt debt with 0% or little interest) as at least accounting for that is simpler and doesnt add debt. but i think its a real possibility that cannot be discounted. Furthermore if monetization is not accompanied by real reforms, its just can kicking and the problems will get much worse later.

Published in BoomBustBlog

Bloomberg reports Goldman Traders Lost Money 21 Days in 3Q:

Goldman Sachs Group Inc. (GS), which relied on trading for 62 percent of revenue so far this year, recorded losses from that business on 21 days in the third quarter, the most since the fourth quarter of 2008.

The firm’s traders lost more than $100 million on one of the days, according to the New York-based company’s quarterly filing with the Securities and Exchange Commission. They produced more than $100 million on nine days out of 64 total days in the quarter that ended Sept. 30, the filing showed.

Well, you guys know where I stand on this, and I have warned you ad nauseum...the Squid Can't Trade!

thumb_image001_copyLearning to fly with tentacles instead of wings may prove difficult for the Squid!

Note: Subscribers can download the GS 3rd quarter review with the updated valuation opinion hereicon Goldman Sachs Q3 update Final (482.35 kB 2011-11-03 03:03:51)

In our Goldman Sachs update note, “Show me how to trade” (August 2011), we challenged Goldman Sachs’ ability to create alpha. Besides Goldman’s apparent lack of skill in generating returns in downward markets, we also presented an analysis on how its share price is driven by momentum (equity markets) instead of the commonly accepted metric of book value. Those who would have followed the traditional school of thought (sell side) by bidding the price up instead of down would have seen their capital erode by 9%; the stock is down 9% since our most recent publication. Below are some of the extracts from our previous note alongside updated charts including Q3 results to peruse before we delve further into the quarterly results the BoomBustBlog way.

Bloomberg also reports Goldman Has $2.3B ‘Funded’ Credit Exposure to Italy which is probably why they are also reporting Goldman Sachs Said to Raise $1.1 Billion From ICBC Stake Sale. Bascially, it's time to rasie some capital. After all, BoomBustBlogger subscribers saw this coming 4 months ago.

As excerpted from Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

So, what is the logical conclusion? More phallic looking charts of
blatant, unbridled, and from a realistic perspective, unhedged RISK
starring none other than Goldman Sachs...

 image006image006

And to think, many thought that JPM exposure vs World GDP chart was
provocative. I query thee, exactly how will GS put a real workable
hedge, a counterparty risk mitigating prophylactic if you will, over
that big green stalk that is representative of Total Credit Exposure to
Risk Based Capital? Short answer, Goldman may very well be to big for a
counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties
out there (and yes, there are a lot of y'all - GS really gets around),
expect to get burned at the culmination of that French banking party
I've been talking about for the last few quarters. Oh yeah, that
perpetually printing clinic also known as the Federal Reserve just might
be running a little low on that cheap liquidity antibiotic... Just
giving y'all a heads up ahead of time...

image009

There's plenty more where that came from....

I'm Hunting Big Game Today: The Squid On A Spear Tip

I demonstrate how the market,
the sell side, and most investors are missing one of the biggest
bastions of risk in the US investment banking industry. I will also...

 

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies


 

Published in BoomBustBlog

Summary from Barclays Capital inst sales:

1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math--growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over
5) The danger:high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out--policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
10) And rate of change in negatives not enuff to offset slow drip of positives
11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
12) At the moment ECB remains unwilling to be lender last resort on scale needed
13) But frankly will have hand forced by market given massive systemic risk

All seem to be missing the point! I have been warning since early 2010 Pan-European sovereign debt crisis! I warned of BNP in June, with very accurate reseach reports and models available to subscribers - BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. Despite all this, I fear the greater picture is being missed by most.

At the risk of sounding overbearing, Italy heard the fat lady acapella last year, it's just that no one was listening. BoomBustBlog Subscribers should reference  Italy public finances projection from March of 2010. The killer is that France is inexoriably leveraged into Italy through its banks. If Italy defaults (and it will) it literally breaks the French banking system. All BoomBustBlog followers have read this - Wednesday, 03 August 2011 - France, As Most Susceptble To Contagion, Will See Its Banks Suffer

Now when (and not if, but when) French banks fail, France will both get downgraded and be forced to bail out - once again. They will have to choose between bailing out Greece, Portugal and Ireland - or themselves. I'll leave it up to you which is the most probable path.

Once the inevitable happens, then the Faux Caucus-Franco bailout mechanism that was suppose to support the unsupportable collapses in throught as it had already collapsed in reality. The result? Everybody should then realize that those risk free Bunds are risky as hell because they are backed by a net export nation (Germany) that will have nobody to export to, and spend much of its economic output bailing out the unbailable, or running from said entities.

Things are much, much worse than many are making it out to be.

Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding

image012image012image012image012

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.

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.

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!

Published in BoomBustBlog

As promised in the post from earlier today, I have updated numbers in the BoomBustBlog BNP Paribas "Run On The Bank" Model for professional/institutional subscribers, which can be downloaded here BNP Exposures update - Professional Subscriber Download Version.

Other subscription levels and even non-paying readers should reference The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download for other goodies available to inquiring minds.

Long story short, it doesn't look good.

image022

Professional/Institiutional subscribers who have downloaded the afore-linked model should realize that this bank's Greco exposure, if realistically marked, can (and most likely will) take a much larger chunk out of TEC. This doesn't even come close to recognizing the risks and writedowns from the other soveriegns. Be sure to take a look at the potential for cash defincies in the bank run scenario tab.

And from The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download:

A very, very well timed call indeed. Now, back to the Bloomberg article...

“It’s nice to see that the risk factors coming out of Europe are abating somewhat,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in a telephone interview. “That addresses the liquidity issue that would be threatening the European banking system.”

... The cost of insuring European sovereign and corporate debt extended declines after the ECB announcement and as the prospect of default by Greece receded. The Markit iTraxx SovX Western Europe Index of swaps tied to 15 governments dropped 13 basis points to 330 as of 2:45 p.m. in London, the lowest since Sept. 9 and signaling an improvement in perceptions of credit quality. Swaps on France fell 10 basis points to 171, contracts on Italy dropped 29 basis points to 442 and Spain fell 22 basis points to 370, CMA prices show.

Cheap dollar funding is not going to help BNP anymore than it helped Lehman. I have prepared several models to illustrate such, and are designed to go hand in hand with both our illustrative trading supplements and our forensic research on BNP - namely:

The first model (all are cast in Excel 2010 format [.xlsx]), File Icon BNP Exposures - Free Public Download Version, is available to the public free of charge and is designed to spark the discussion of Whether Another Banking Crisis Is Inevitable? I will be discussing this model, and its ramifications on Max Keiser, Russian Television - to be televised Tuesday. It should be interesting. Here are some screen shots.

The Impairment Scenarios: a very important concept that practically the entire European banking systm has somehow forgotten to address.

 image004_copyimage004_copy

Trading and HTM inventory at Level 1,2,3 or fantastical fanstasy?

image002image002

For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same - and then revisit this free model and reapply your assumptions:

The next nugget of knowledge is the File Icon BNP Exposures - Retail Subscriber Download Version. It enables users to simulate an anecdotal bank run - for retail subscribers only of course. In addition to those above, it sports...

 image005image005

 For those professional investors and institutions, namely hedge funds, asset managers, regulators, high net worth individuals with ties to BNP and family offices, heres to you. This is not a toy, but a tool that can truly communicate why you feel BNP may, or may not be a candidate for a bank run - contingent upon your inputs: File Icon BNP Exposures - Professional Subscriber Download Version. Additional screenshots above and beyond that included above...

Income statement implications of a true bank run...

image007image007

image013image013

image017image017 


 image021image021

image028image028

Let's recap the BoomBustBlog perspective before I offer my opinion for the upcoming week...

Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding

image012image012image012

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.

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.

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!

Published in BoomBustBlog

image007When French bankers gorge on roasting PIIGS...

From the NY Times:

PARIS — BNP Paribas, the largest French lender, announced a sharp decline in third-quarter profit Thursday and said it was writing off 60 percent of the value of all the Greek debt it holds, a belated acknowledgment that the loans are largely unrecoverable.

The bank, based in Paris, said it was setting aside about €2.1 billion, or $2.9 billion, of the value of its Greek sovereign debt. It is writing down about €116 million of exposure to Greek corporate bonds.

It's but so much of an acknowledgement, the write downs are woefully insufficient - alas, they do match the numbers being bandied about in the pop media so I guess management says that's sufficient "can kicking" material...

The bank said it had also moved to address its exposure to embattled euro zone government debt in the latest quarter, selling €1.9 billion of Greek sovereign debt, €8.2 billion of Italian debt and €2.5 billion of Spanish debt.

Yeah, but the question du jour (or should that be "question du trimestre") is what is the P&L hit of those sales (we all know they couldn't dump that trash without significant pain, and how much of it (my guess, none) is illustrated in the Q3 numbers???

‘‘The new Greek debt restructuring plan has adversely impacted this quarter’s net income, which, otherwise, is in line with the performances of previous quarters,’’ Baudouin Prot, the chief executive, said in a statement.

But that "new" Greek restructuring plan was old before it was even launched. Greece cannot last at 120% GDP under extreme austerity measures. I know that, and they know it too. Back to the drawing board, buddy!

Many large banks went on to write down half or more of their exposure, and when a new Greek aid deal was announced on Oct. 27, its call for a 50 percent ‘‘haircut’’ on the loans merely codified what a number of banks had already put into practice.

On with the game playing. First, there was no haircut needed. According to TPTB, there was no insolvencies, there would absolutely NO haircuts, defaults or insolvencies (see Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!). Okay, we were just joking, there weill be some haircuts, but no more than 21% (see A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina). Did we say 21%? We meant 50%, must've been something lost in the translation (see How Greece Killed Its Own Banks!). We said 60%, don't you understand. That is what the banks are writing in, even though the IMF (whom Reggie Middleton has proven to be wrong to the optimistic side nearly 100% of the time during this crisis, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!) says the haircuts need to be 75%. You don't even want to know what Reggie says they should be!

Attention professional and institutional subscribers! I will rerun the BNP numbers with the most up to date and realistic numbers and publish them within 24 hours. I will be avaialble to discuss them in the private forums, or if you wish through a Google+ video conference call if enough of you are interested.

Click to expand...

thumb_image018

 

From Forbes.com:

Many outside of Europe ask why are government’s paying so much attention to Greece, such a small economy in EU terms, instead of focusing on larger problems, like Italy and Spain.  BNP Paribas’ third quarter earnings illustrate the case.

France’s largest bank, BNP Paribas saw its profits drop 72% to euro 541 million, after writing down an additional € 2.4 billion in Greek debt, 60% of its total exposure. 

Contagion is the name of the game in Europe, and that’s why BNP Paribas has been trying to cut its exposure and beef up its core tier 1 capital ratio.  BNP lowered its exposure to bailed out peripherals (Greece, Ireland, and Portgual) by 37.9% through the third quarter to € 3.3 billion.

Still, BNP holds those € 3.3 billion in debt from bailed out countries (€ 1.6 billion of it in Greek debt), half a billion in Spanish debt, and a whopping € 12.2 billion in Italian debt.  While the bank managed to cut its exposure to Italy almost by half from € 20.5 billion, the value of its portfolio has taken the hit.

BNP Paribas’ total assets under management fell 4.1% to € 851 billion, as a reaction to the drastic fall in asset prices, the accelerated outflow of assets, and losses on its fixed income portfolio.

Corporate and investment banking (CIB) revenues tanked 39.8% to € 1.75 billion.  It was a slaughtering at the CIB unit, with fixed income revenue down 33.4%, equities down 44%, and the financing business down 13.6%.

The bank remains leveraged 22.3 times and is struggling to lower its exposure to U.S. dollar funding... 

Through the third quarter, BNP Paribas lowered its U.S. dollar funding needs by euro 20 billion, as it moves toward a 9% core tier 1 capital ratio.

BNP’s share price action is another illustration of the dire situation in Europe.  Despite these brutal results, shares in BNP Paribas actually rallied on Thursday, up more than 7%.  The stock is still down almost 40% over the trailing 12 months, compared with a 10% drop for JPMorgan Chase and nearly 30% for Citi.

The large French bank is a perfect example of the interconnections between European nations and the exposure to peripherals.  A default by Greece would spark a domino effect, as BNP Paribas would have to go from writing down 60% of their peripheral exposure to 100%.  As credit spreads widen in Italy, Spain, and the other PIIGS, further stress would be put on BNP Paribas’ balance sheet, possibly tipping it into insolvency.

Hmmm... This article was dated 11/03/2011. 

image019_copy

BoomBustBlog susbscribers were alerted to BNP Paribas woes as far back as May 2010. We issued explicit and verbose warnings with valuation bands for BNP in June of this year. I am not aware of ANYONE on the sell side warning of BNP's woes. ANYONE!?!?!? Subscriptions, anybody? As you can see from the chart above, it has been a very profitable ride down on the short side. As excerpted from This Is Why BoomBustBlog Is THE Place To Go For Hard Hitting Research: BoomBust BNP Paribas?:

Bear Stearns/Lehman Deja vu?

Yesterday, in my post 'As The French Bank Runs....", I queried of the sell side, "What the hell took you so long to come to these rather astute observations, dude?" Well, in continuing my crusade of truth against the potential insolvency of French banks, I reference the WSJ article titlled "BNP Paribas Denies Funding Problem"

PARIS—BNP Paribas SA on Tuesday denied it is facing a dollar-liquidity problem, as reported in an opinion column in The Wall Street Journal. BNP Paribas said it is fully able to obtain U.S. dollar funding in the "normal course of business," either directly or through swaps. In a column published in The Wall Street Journal Tuesday, Nicolas Lecaussin, director of development at France's Institute for Economic and Fiscal Research, cited an unidentified BNP executive saying the bank "can no longer borrow dollars."

A Wall Street Journal representative wasn't immediately available to comment. BNP Paribas said its has abundant euro short-term funding and has a net dollar short-term funding with maturity shorter than a year worth €60 billion. The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks. The bank also said it is using foreign-exchange swaps to more than offset the recent reduction and "shortening" of funding from U.S. money market funds. French banks, in particular BNP Paribas and Société Générale SA, have been hurt by a perception that they face difficulties in tapping short-term funding in the U.S., as money-market funds cut their exposure to the banks amid fears about potential contagion from the Greek and broader European sovereign debt crisis. Shares of BNP Paribas were down 8.3% at €23.97 recently, the biggest loser on the Paris stock exchange, where the benchmark index was down 1.8%. SocGen was down 3%."

Hey, Big Wall Street Bank Execs Always Tell the Truth When They're in Trouble, RIIIIGHT????

Here's more of Alan Schwartz lying on TV in March of 2008

Like I said above, it's not as if upper management of these Wall Street banks would ever mislead us, RIGHT????

Erin Callan, CFO of Lehman Brothers Lying giving an interview on TV in March andagain in June of 2008.

Even if the big Wall Street banks would lie to us, we have expert analysts at hot shot, white shoe firms such as Goldman Sachs, who of course not only are "Doing God's Work" but also happen to be the smartest of the smart and the "bestest" of the best, RIIIGHT!!!??? Below we have both Erin from Lehman AND Goldman lyingon TV in a single screen shot. Ain't a picture worth a thousand words???

We even had the inscrutable Meredith Whitney say "To suggest that Lehman Brothers is going out of business is a real stretch!" (She OBVIOUSLY DOESN'T READ THE BOOMBUST) as well as Erin Callan, the CFO of this big Wall Street bank on TV lying interviewing again...

But that damn blogger guy Reggie Middleton put his "put parade"short combo on Lehman right about that time, and had all of these additional negative things to say...

Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008

 

So, does BNP have a funding problem, or is it at risk of the same?

BoomBustBlog subscribers know full well the answer to this question. I'm also going to be unusually generous this morning being that our prime French bank run candidate has approached my "crisis" scenario valuation band. So, as to answer the question as to BNP, let's reference File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers, and otherwise known as BNP Paribas, First Thoughts...

The WSJ article excerpted above quotes BNP management as saying: "The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks."

OK, I'll bite. Excactly how did BNP get to this €135 billion figure? Was it by using Lehman math? Methinks so, as clearly delineated in my resarch report on the very first page:

BNP_Paribus_First_Thoughts_4_Page_01 

The following two pages of this report go on to reveal the games being played to potentially come up with a figure such as the 135 billion quoted above. Boys and girls, I fear those may be Lehman bucks! 

For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same:

But wait, there's more - much more!

BNP_Paribus_First_Thoughts_4_Page_04

BNP_Paribus_First_Thoughts_4_Page_05

BNP_Paribus_First_Thoughts_4_Page_06

BNP_Paribus_First_Thoughts_4_Page_07

This document is 19 pages full of stuff that BNP management may have forgotten to tell you, as well as valuation for both "crisis" and bailout scenarios. What you have before is an anecdotal 5 pages. To put this in perspective particularly since no on the sell side warned about French bank risk before the fact, let's look at the chart as of the day this research was released and I'll let you tell me if it was worth the subscription...

image004

Roughly 50% and falling as Vol and gamma explode! 

Just to add a sense of chronological depth to this post, let's revisit the timeline from yesterday's piece, "As The French Bank Runs....": 

Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding

image012image012

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.

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.

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!

I also provided a very informative document for public consumption which clearly detailed exactly how this French bank collapse thing is likely to go down: File Icon French Bank Run Forensic Thoughts - pubic preview for Blog - A freebie, to illustrate what all of you non-subscribers are missing!

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.

Other reading of interest...

  1. The Anatomy of a Serial European Banking Collapse
  2. Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!
  3. The French Banks Are The First To Accept a Voluntary Greek Restructuring
  4. Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
  5. Click, Clack, Click: The Sound of Falling Dominoes Behind The Door of the Eurocalypse!
  6. LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?
  7. Eurocalypse Cometh! Principal Haircuts, Serial Bailouts, ECB Insolvent! Disruptive Sound Of Dominoes In Background Going "Click, Clack"! BoomBustBloggers Instructed To Line Up Bearish Positions Again!
Published in BoomBustBlog