One of my interns made an interesting observation after going over the Feds recent data dump of bailout info. It reads as follows:
Some quick observations from the data on MBS purchases:
- 8558/10007 MBS purchases by the Fed were done at par or a premium. These are only agency MBS too.
- A majority of the Maiden Lane holdings were agency MBS
- It looks like the safety net put under AIG was done to protect the agencies. If all those agency guaranteed MBS had to be liquidated, all that AAA paper would have gone down as the biggest sucker bet in the modern history of financial markets
- I have yet to find any equity collateral data for BAC, C, and AIG. AIG is what is important here though, because I have no doubt they are writing some of these CDS on European sovereigns, and I'm sure they are undercapitalized yet again, which means if they pledged equity to the Fed, that could destroy a part of the balance sheet and simultaneously blow up the CDS market since none of the sellers are capitalized adequately. I'm digressing, but I bet CDS will get moved to an exchange, because there are going to be a lot of buyers (both hedgers and speculators) who get burnt by undercapitalized counterparties.
There is a sharp drawdown coming in both MBS and sovereign CDS land if the accounting numbers and the institutional investment sheeple get even a whiff of reality. I am working on the Spain haircut numbers (and yes, Spain will have to restructure in some form or fashion, be it maturity extension, coupon reduction, haircut - or a combination of the three) and anyone who has read my work has seen the housing numbers and opinion - as well as my historical accuracy. For those who have not been reading me or don't subscribe, there's a related reading list at the bottom of this post, such as
- The 3rd Quarter in Review, and More Importantly How the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies! Wednesday, November 10th, 2010
- Banks, Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street Hustlers! Its a Sucker’s Bet, Who’s Going to Fall for it in QE2? Tuesday, November 9th, 2010
On that note, here is a snapshot the results of our digging into the monoline exposure.
The BoomBustBlog Ireland Haircut Model has been posted, and it is a doozy. For those who anticipate the Euro being a slow train wreck, it may not be so slow after all. Professional and institutional subscribers can access it here as a live, spreadsheet embedded into a BoomBustBlog web page. Users can subscribe or upgrade to gain access. The haircut model is SOOOO damn revealing that I can't keep it all to just site subscribers, thus I have pulled a few bits and pieces out for the general public.
As any who have been following me know, I believe that several European countries are bound to default, ie. restructure their debt. Ireland is in that camp. What makes me so sure about this? Well, its simple math. While I have calculated probable restructuring and haircut scenarios, I am not at liberty to put it out in the public domain just yet, but I can illustrate incontrovertible evidence that shows that Ireland is on an unsustainable path - a path made even more unsustainable by the recent bailout.
Let's take a look at the cumulated funding requirement of Ireland over the next 15 years.
As you can see, the amount Ireland would have to borrow to run the country (even after harsh and punitive austerity measures) is literally more (and substantially more) than the country's projected GDP. These GDP projections are (in part) IMF projections which I have already demonstrated to be grossly over optimistic, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!). As a matter of fact, the tab for Ireland is even greater AFTER the IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout! This is what happens when you try to save a debt laden country with more debt!
As reported by Bloomberg: Ireland Wins $113 Billion Aid; Germany Drops Threat on Bonds
European governments sought to quell the market turmoil menacing the euro, handing Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to bear some cost of future bailouts.
An oxymoronic comment in and of itself since the market turmoil stems from excessive indebtedness of sovereign states and this event marks the dumping of $85 billion of debt on said indebted state.
European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders.
If bond traders were a tad bit more fundamentally analytical in their perspective, they would realize that the Germans were simply being forthright and honest about an inevitable truth. With the current debt load, Ireland will most likely restructure its debt by 2013 anyway. The German proposal is actually a marked positive in that the restructurings (read, "haircuts") would be uniform, universally agreed upon ahead of time, standardized across the board and known by all market participants - basically a sovereign prepack bankruptcy deal. The so-called "bond traders" as referred to by the MSM, are apparently reported to prefer the anarchy of piecemeal, default as you go, restructurings with no standardized form or fashion. Argentina, here we come!
Is it that some believe that if they stick their heads in the European sand and ignore the problem it will go away in due time?
The first test of the twin decisions came as markets resumed trading after speculation intensified last week that Portugal and perhaps even Spain will require support.
If Ireland continues to have the problems that I believe they will have, not only will Spain and Portugal face their market comeuppance, but other European countries outlined in my Pan-European Sovereign Debt Crisis series as well.
I have been 100% correct year to date, much more so than the more widely publicized pundits, investment bank analysts and the IMF/EU themselves:
Summary: The BoomBustBlog contagion model easily predicted the actions of the UK and Sweden in aiding Ireland 9 months ago. The model also has some dire predictions for the near future.
Ireland, like several other EMU states, is in a very difficult position. It has built up significant amount of debt on top of a crippled banking system of which it has decided to exchange taxpayer capital for private losses. Like many other EMU nations, it is overbanked, hence is literally dwarfed by both its banking system and the bad assets contained therein (see Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up??? November 22nd, 2010).
The ECB, EU, IMF and individual states UK and Sweden (in a bilateral agreement) have agreed to bailout Ireland and its mired banking system. It is interesting to note that there are actually individual countries that have volunteered (out of the goodness of their collective hearts) to assist Ireland outside the collective (UK and Sweden offer over €9bn in bailout loans). The secret of said generosity is in the charts.
I have been warning of this potential in Spain for nearly two years (January of 2009, reference Reggie Middleton on the New Global Macro – the Forensic Analysis of a Spanish Bank after a trip to the Costa del Sol by way of Málaga). I will spend the Thanksgiving holidays working on the Irish and Spanish haircut updates and fine tuning the contagion model for subscribers and I will attempt to publish the analysis in a very rich format (with dynamic models, graphics, video, etc. on BoomBustBlog, Barnes and Noble Nook/Kindle via ebook format, and through YouTube) On that note, Bloomberg reports: German Chancellor Angela Merkel said the prospect of serial European bailouts was “exceptionally serious,” sending the euro to a three-month low as officials estimated saving Ireland will cost 85 billion euros ($114 billion).
Irish bonds dropped and the premium that investors demand to hold Spanish debt over German counterparts jumped to a euro- era record as the relief rallies triggered by Ireland’s Nov. 21 aid request evaporated. Traders are now betting the turmoil that started in Greece a year ago will spread to Portugal and Spain.
“The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis,” Charles Diebeland David Page, fixed-income strategists at Lloyds TSB Corporate Markets in London, said in a note today. “With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole.”
Contagion is spreading through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to save its banking system. The European Commission estimates Ireland may need 85 billion euros, according to two officials who were on a Nov. 21 conference call of finance ministers. Of the total, 35 billion euros would go to banks and 50 billion euros to help finance the government.
The euro dropped 1.8 percent to $1.338 as of 4:55 p.m. in London. The yield on Ireland’s 10-year bond rose 35 basis points to 8.65 percent. The spread on Spanish 10-year bonds over bunds rose 28 basis points to 236 basis points.
Merkel today chose to highlight the risks facing the euro even as bailout talks destabilize Ireland’s government. Speaking in Berlin, she said while she didn’t want to “paint a dramatic picture,” it would have been hard a year ago to “imagine the debate” now taking place in Europe. The German leader is stressing the threat to the euro posed by indebted member countries and is pushing German plans to make investors help pay for any future crisis in the currency area.
“I won’t let up on this because otherwise that primacy of politics over finance can’t be enforced,” Merkel said. “It remains our task to keep calling for tough measures and tough conditions, but also to express clear support for the euro.”
Merkel’s stance has drawn opposition from European Central Bank President Jean-Claude Trichet and leaders in Spain and Greece, who say it risks derailing euro-area nations’ deficit- cutting efforts.
In other words, Merkel is being too damn honest and forthright in her public pronouncements. So be it. This is an excerpt of what we used to prep and warn paying subscribers regarding Spain since the beginning of the year (excerpted from Spain public finances projections_033010):
I have not had a chance to revisit my China thesis in a while, but it is coming once I round off the European recap and finish up my US technology thesis. China will most likely play a key portion in global financial and economic contagion that is simmering over in Europe. A commenter on another popular blog had this to say of my most recent post regarding Ireland (Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???):
Although I have no connection with financial investing or services, I read your analyses, and those of others, to be informed of events and topics of great economic importance. What strikes me as odd, is that in all the stories on European Contagion I find no mention of China's position. Given China's significant economic connection via trade with the European Union, it is puzzling we don't see more overt action from China to protect/affect the health of it's export recipient's economies. Am I to infer there is covert action (via GS, Central Banks, IMF for example), China is simply not concerned about the economic stability of the European Union, or it's just waiting for the appropriate time for action/influence?
We definitely know where China stands on U.S. trade and Fed's policies, and it's relations with the other BRIC countries.
Is there a story here that I've missed?
In January of 2009 (reference Reggie Middleton on the New Global Macro – the Forensic Analysis of a Spanish Bank ), and after a trip to the Costa del Sol by way of Málaga I became highly suspicious of the spillover effects of bubble credit and excessive reliance on construction that the European nations had and absorbed from the private sector banks. At first this was focused on Spain, but then my team of analysts and I widened our scope to all of Europe, and found that there was a contagion waiting to manifest. This was a full year and a half before most even admitted there was a pandemic problem (and to this day, there are still some naysayers). Here's a quick time line and link fest of all of the misunderstandings, misinformation, disinformation and outright lies that have led us up to this point...
Around February 7, 2010, many sell side analysts and geo-political pundits stated that there was no European sovereign debt "crisis", not to mention a "pan-European" crisis. I responded with The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, , not a localized not a, not localized one. Of course, this was absolute blasphemy within the circles of those smart guys who knew what they were talking about. I then went on with What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect and followed up with:
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.
More and more "experts" on the matter explained how the situation is overblown- Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
Summary: This is an extensive post designed for those who want to truly comprehend what I perceive to be both the root causes and the practical solution to the Irish sovereign debt problems and the threat of Pan-European, or possibly global, financial and economic contagion. It contains a lot of applied concepts that veer outside of the realm of finance and economics and into human nature and psychology - alas, that is what I consider reality. For those that wish to skip to the pure financial aspects of why I believe Ireland is destined to default (and how they are hiding debt with the complicity of other parties), scroll down to "Real World Examples of the Social Science Concepts Above". To get the full gist of what is going on, continue reading below. I will continue this post within 24 to 48 hours with our calculation of Irish sovereign debt haircuts and some likely contagion effects.
We have an updated view of Ambac's bankruptcy effects on the investment banking industry- actually, two banks in particular. All paying subscribers are urged to download the summary - Investment Bank Exposure to monolines. Professional and institutional subscribers should download the accompanying addendum which actually illustrates the hundreds of insured securities in inventory of the banks in question, complete with CUSIP numbers: Ambac-MBIA Insured Model
I have taken the liberty to summarize parts of the subscription report for BoomBustBlog readers who don't subscribe. While I will not reveal the most exposed banks, I will show how this is far from a non-event for the investment banking industry, and more to the point - how the post "The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!" will be even more prophetic than Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billionn in Equity. After all, the smart money should view Banks, Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street Hustlers, particularly since the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies!
The Fallout of the Ambac Bankruptcy and Its Likely Effects On the US Investment Banking and Broker/Dealer Industry
The majority of the exposure at risk is that of AMBAC towards the investment banks, which is significantly (as of 2008) the US taxpayer through the government’s backing of the Maiden Lane assets as part of sterilized sale of Bear Stearns to JP Morgan. That is, the securities referenced in the accompanying subscription model and $31bn exposure referred to therein are the securities that were issued by investment banks, sold to other investors and backed by AMBAC and MBIA. If the investment banks offerings were to default (and given that there is no protection due to AMBAC bankruptcy), there would be loss to the holders of these securities that relied on AMBAC’s protection. This is not direct exposure to the investment bankss, but I do believe there is material indirect exposure due the very distinct possibility that the banks are now open to greater warranties and representations clause risks, as well as the impetus for investors to go after the banks directly as a result of (now uninsured) losses as a result of the purchase of these securities – many of which would most assuredly fail to pass the sniff test!
Ireland did not rule out the possibility of turning to the European Union for help, while an Irish newspaper reported that the Prime Minister may approach Brussels as early as Tuesday.
The Irish Independent said Finance Minister Brian Lenihan may ask his European counterparts in Brussels on Tuesday if it would be possible to funnel funds into Irish banks which he has already promised to pump up to 50 billion euros ($68.38 billion) into.
"There is no question about Irish sovereign debt - the question remains about the funding of the banks. The banks are having trouble getting money," the newspaper quoted the source as saying.
"We have to find out - could you go to the fund and get money for the banking sector? Lenihan at ECOFIN presents an opportunity to discuss it. It would be the banks that would have to pay it back - not the state."
The total amount of outstanding European Central Bank loans owed by Irish banks rose to 130 billion euros as of Oct 29 from 119 billion on September 24, data published on the Irish central bank's website showed on Friday.
As if BoomBustBlog subscribers didn't see this coming a mile and a year away - Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! I will be reviewing and adding to my extensive work on the Pan European Sovereign Debt Crisis this week since that situation is about to explode. I will also reveal the likely haircuts to be taken on Irish debt as well with the publication of our Irish haircut model. Remember how nasty those Portuguese haircuts looked - Introducing the Not So Stylish Portuguese Haircut Analysis???
You think those are ugly? You ain’t seen nothing yet!
In the meantime I suggest that paying Subscribers review our Irish analysis and related contagion material: