Today's lead story on Bloomberg and the primary theme throughout the financial MSM is Merkel’s Isolation Deepens As Draghi Criticizes Strategy. This is general pressure to force Merkel to succumb to extreme short term thinking that will most assuredely bring the EU to its knees and potentially end the hegemony of what use to be the European empire - that is unless... You know.... This time is different! Yes, these are strong words, strong words are necessry for a dire situation. Let's consder this a massive economic changing of the guard, shall we. And as such, these occurrences portend the potential for MASSIVE speculative investment gains as those financial bastions of faux capitalism come toppling down amidst massive short positiions that the majority simply didn't have the foresight, temerity (or balls) to impliement and hold on to. At the end of this article, I will review FIRE sector (see Reggie Middleton Sets CNBC on FIRE!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set and Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!) entities that I feel are primed to pop as this plays out, yet are not priced accordingly.

On Thursday, 29 September 2011 I penned Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again, wherein I queried:

"If I were able to show in this article that it really ISN'T different this time, would it change any decision maker's path or actions? We all know the answer to that question. Time to get those outlier event short positions ready, it's going to be a rough ride!!! A complete recap of recent events..."

This is a very important post, for it will lay out the outline of the impetus behind the 450+% gains I achieced in 2008/9. As queried in the afore-linked article, "So, at what point do we ever learn the basic lesson that "You can't solve an indebted nation's debt problems with more debt"?" 

The original "Sophisticated Ignorance" post was made in response to Germany being lauded for voting to nearly double the size of the then largest EU bailout fund ever...  

German lawmakers approved by a wide margin legislation to boost the scope and size of the euro zone's rescue fund, in a major step toward tackling the bloc's sovereign-debt crisis.

Lawmakers passed the reform of the European Financial Stability Facility with 523 'yes' votes, while 85 lawmakers voted 'no' and three abstained. The vote was seen as a test of Chancellor Angela Merkel's center-right coalition.

All 17 euro-zone governments have to approve the expansion, which will boost the fund’s lending capacity to €440 billion ($595.94 billion) from €250 billion and expand its powers to allow it to extend credit lines to banks and buy bonds on the secondary market.

To conitnue to quote from "Sophisticated Ignorance"...

This was the problem that I had with Paulson's original TARP idea. It just won't work because it doesn't solve the problem. Instead, it attempts to conceal the problem in fashion that pretends it never existed. Let's walk through this so a 5 year old can understand it.

Of course EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts (this is rather a trick question, since the soveriegn states simply cannot afford to bailout their banks any more than a 100 lbs man can lift a 400lbs man). The fact of the matter at hand is that they simply can't afford to bail them out. The banking system is just too big. 

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As BoomBustBlog's above average prescience (see Pan-European sovereign debt crisis) and Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly have clearly demonstrated, the source of the sovereigns debt problems is related DIRECTLY to the attempt to bailout insolvent banks, taking private sector losses upon public balance sheets, and eventually bankrupting the public state while doing nothing to fix the problems of the private banks, and ulitimately witnessing the private banks fail anyway.

I have predicted FIRE sector (including banks) failure at a commendable rate (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall

Streets Best of the Best?). It's not rocket science, though. It's simply (and actually quite simple, since my 10 year old can do it) math, coupled with a pliable understanding of human nature couped in grasp of history. Listen, it was the (attempted) bailing out of the banking system that got these countries in this situation to begin with. Bailing out the banks just two years later??? Do you really thing that will help the sovereign debt situation or hurt it? If the bailout goes through, you eat the small losses (relative to the big gains that BoomBustBlog delivered subscribers) and roll your gains directly into bearish positions on the bailing sovereigns. It's really just that simple. Don't believe me, let's look at history, and remember that that is Germany being referenced in the graphic below, G-E-R-M-A-N-Y!!!

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On that note and after a quick education on how this time is no diffeent than any other time in the past 800 years, let's revisist today's MSM headline, ala Bloomberg... 

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Merkel’s Isolation Deepens As Draghi Criticizes Strategy 

German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.

Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.

Calling himself a devotee of German-style budgetary rigor, Monti told a Brussels conference yesterday that Merkel’s vision of a stable economy “risks being undermined because of lack of promptness in setting up the necessary instruments to limit the contagion.”

And therein lies the rub. You see, creating a direct conduit to zombie banks from teh ECB and bailout mechanisms will not limit contagion, it will materially exacerbate it by allowing the financial pathogens direct access to the mothership - the ECB! Look at the history of the western world for over 800 years. THE BAD BANK BAILOUT IDEALOGY SIMPLY HAS NOT WORKED, EVER!!!

Financial markets offered a snapshot of Europe’s stresses after more than two years of crisis, with the euro close to its weakest in two years against the dollar. German two-year note yields fell below zero today as investors paid for shelter from the market mayhem afflicting Italy and Spain.

“Countries that are at the core of the system and which have had the huge merit of instilling the culture of stability to the European Union in the first place, most notably Germany, should really reflect deeply but quickly,” Monti said via video link to the Brussels conference. “Europe should really accelerate the efforts, as the European Commission is doing, in order to limit the contagion.”

Oh yeah, I've commented on this in the past as well. What happens to a net export nation's economy when all of its export partners are in recession, depression, war and socio-political unrest while the banking system unfolds around them? The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

As Germany goes, so does the insurance industry's magically levitating FI porfolio. You see, German gains offset periphery losses. What happens when everyone realizes Gemany may be in the penthouse suite, but still resides in the same overindebted roach motel?

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

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

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

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

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If you ddin't put your short on Generali back in 2010 when I first brought it to subscriber's attention, then it's too late now. It's not too late to jump on our latest insurance industry subject, though. The last forensic report was centered around an insurer - see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! and Our Next Forensic Analysis Subject Is In The Insurance Industry. The actual report is available here:

•  Insurance short candidate report_122511 - Professional/Institutional edition
•  Insurance short candidate report_122511 -Retail edition

Bank runs are invevitable! 

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

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This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008

Yes, European bank runs are inevitable, but the causes of the bank runs are not. That's the problem. Instead of addressing the root causes of the bank runs, EU decision makers opt to throw more paper money into a gaping furnace to be burned as fast as it can be shoveled. 

Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional), read the balance of this article for perspective, then populate the assumptions and inputs with what you feel is realistic. I'm sure you will come up with conclusions similar to ours. Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)

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A detailed and accurate picture of what is happening...

1. Now That European Bank Run Contagion Has Started Skipping Across That Big Pond... US Bank Risk Stands Woefully Underappreciated!!!
2. The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download
3. BNP Bust Up: Yet Another Reason Why BNP Paribas Is Still Ripe For Implosion!
4. Most Headlines Now Show French Bank Run Has Started, And It's Happening Just As Our Research Anticipated
5. I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
6. And The European Bank Run Continues...

A step by step tutorial on exactly how it will happen....

• The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
• What Happens When That Juggler Gets Clumsy?
• Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
• The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
• The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
• Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run 
• France, As Most Susceptible To Contagion, Will See Its Banks Suffer
• Observations Of French Markets From A Trader's Perspective
• On Your Mark, Get Set, (Bank) Run! The D…
• ECB As European Lender Of Last Resort = Institutional Purveyor Of A Pan-European Ponzi Scheme

Stacy Summary: We interview Reggie Middleton about a run on French banks. I notice today that Pimco’s El-Erian is also talking about a run on French banks. He must have watched the Keiser Report when it aired from late last night PDT. We know you’re taking our shtick Mr. El-Erian, we’ve got our eye on you!

Go to 13:07 marker in the video, contrast and compare and consider watching the smaller more independent shows for the real scoop every now and then.

For some back ground on the "Kick the Can Triumvirate Three" [BBB Trademark], go to 20:50 in the video and dedicate 5 minutes to it...

My April presentation in Amsterdam as Keynote detailing the inevitable...

Again, I believe the next big thing, for when (not if, but when) European banks blow up, is the reverberation through American banks and how 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.

Note: This bank has members of its peer group who have been identified as at risk, but no one has pulled the covers off of this one as of yet. I think I may blow the whistle. It will be a doozy, and a potentially very profitable one at that since nearly 3/4 of it tangible equity is embroiled in a region that looks like it is about to blow up. As I type this, some of the puts have already doubled in price. I will be releasing additional analysis on this bank this weekend for paying subscribers.

•  Contagion Forensic Review - Retail
•  Contagion Forensic Review - Professional

Today's top MSM headline - European Commission Recommends Euro Banking Union:

The euro zone should move toward a banking union and consider recapitalizing its banks using its permanent bailout fund, the European Stability Mechanism, the European Commission said on Wednesday, in remarks that briefly boosted stocksand the euro. 

The European Union's executive arm said in documents laying out recommendations for theeuro [EUR=X  1.2422 (-0.51%)]area that the crisis had slowed the financial integration process and "ambitious steps to accelerate and deepen financial integration may be needed."

"More specifically, a closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a 'banking union' would be an important complement to the current structure of [the Economic and Monetary Union]," the European Commission said in the documents.

"In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM might be envisaged," it added.

Hmmmm... BoomBustBloggers crossed this intellectual Rubicon over 2 years ago. I was explicit in explaining that the bulk of the sovereign nations' debt woes stem from thier feeble and failed attempts to prop up their banking systems. I posted a refresher to this thesis a few weeks ago in So, Can Europe Nationalize All Of Its Troubled Banks? 

In a discussion that I had over at ZeroHedge there came the topic of whether bank runs are possible in Europe. Well, I believe we've already had some devastating one's (ex. Northern Rock) but if one takes the continent only or the EZ in particular, we still have a significant systemic threat. The gist behind the argument is that if the true economic capital is weakened to the point that depositors/creditors/counterparties make a run for it, the sovereign nation in which it is domiciled will simply nationalize it. Hmmm... Let's take a look at how that might work out, as excerpted from Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

Literally years later, the sell side is now chiming in: Banks No Longer 'Float Above Their Countries': Deutsche

Banks' countries of origin have become important again. 

No shit, Sherlock!!!

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 Most of the developed EU nations don't stand frozen raindrop's chance in hell of bailing out banking systems that are literally multiples of the GDP of the domiciles themselves. 

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The problems is getting worse over time, not better, as risk, leverage and unrecognized NPAs continue to pack the banking system. 

I warned heavily last year about the connection between overleveraged, garbage laden banks and over-indebteded sovereigns...

Just as in the case of my call on the fall of Bear Stearns (again, I believe I was the only to make such a call so far in advance), this situation consists of something you NEVER hear in the media or investment circles. This is not merely a liquidity crisis of even a solvency crisis. For the first time in recent history, it is BOTH!!! As a matter of fact, it's not just both. There is a another problem that came into play, and it is the direct result of tomfoolery at the hands of the sovereings themselves. The games that they played to assist the banks in hiding thier problems has materially weakened the entire financial system by sowing rampant mistrust. Plain and simple, government endorsed lying has made the entire system afraid to do business with itself. Let's walk through this step by step.

The Liquidity Issue 

From The BoomBustBlog BNP Paribas "Run On The Bank" series...  "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!

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The solvency issues

From the research note to subscribers,  The Inevitability of Another Bank Crisis followed by the free blog posts on the same, see Is Another Banking Crisis Inevitable?

Impact of bank’s banking books on haircuts

EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.

And last but not least...

The credibility crisis, whose sole responsibility lies dead center on the sovereigns themselves...

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You see, as you bend the rules to reporting, you resuce the banks for a day, but doom them for a decade (or in the case of Japan, 2.4 decades!!!). Now, the counterparties simply CANNOT trust each other!

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... and why should the counterparties trust each other when all are privvy to the games that they are playing on each other! 

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Before government officials start crying innocent, remember the tricks that you youreselves have played to bring use where we are now. In case your memory is failing, simply review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! 

Now, I ask all... How in the world will grouping all of these increasingly unmanageable individual soveriegn problems cure the overall problem. By gathering all of the roaches into a big pile, you don't get less roaches - you just get a big pile of roaches! The bank failures will increase in both speed and intensity as time progresses and the drag will simply engulf the EU as a whole versus engulfing the states individually. At least individually, the better run states will recieve less pressure, and suffer through crossborder and financial contagion and counterparty risk rather than through this pooled method wherein direct pipes of contagion are being engineered to transmit the problems deep within each country. Does it sound like a good idea to you? I have my own ideas, of course....

How To Prevent Bailouts, Bank Runs & Other Fun Things To Do With Your Hard Earned Dollars

Subscribers, see 

BNP Exposures - Professional Subscriber Download Version

BNP Exposures - Retail Subscriber Download Version

BNP Exposures - Free Public Download Version

 French Bank Run Forensic Thoughts - Addendum and Update 

The  day before yesterday I posted Who Will Be The Next JPM? Simply Review The BoomBustBlog Archives For The Answer. It was actually a very, very instructional post for although I run a subscription research service, there are troves of extremely insightful information buried in the archives - much of it available for free. It is actually ironic that one could have used the actual paid product to have predicted the events of this year with unerring accuracy two years ago, and using much of the same names from the 2008/9 archives profited heavily from the financial names that gave up 20% of the last few weeks. The more things change, the more they remain the same, eh? Which brings us to one of the first big warnings published on BoomBustBlog way back on Thursday, 08 May 2008: Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)

Creation of colossal US$45 trillion CDS market may unfold into trouble larger than that of the subprime (really to be read as imprudent underwriting) crisis

The creation of the massive US$45 trillion CDS market in the last few years, which faces some unique problems, can unfold into a massive bubble collapse that would easily dwarf that of the subprime crisis. The CDS are supposed to cover the losses of banks and bondholders in the event of default by companies. However, the CDS market has evolved from being primarily a means to hedge credit risk to a speculative and trading platform for a large number of banks and hedge funds. If the corporate defaults surge in the coming quarters (as Reggie Middleton, LLC expects them to) or there is default in payments of coupon and principal amounts, this could lead to a crisis far worse than what we have seen so far in the current “asset securitization crisis” and quite possibly in the recent history of the financial system. The high yield default rate has increased significantly (125%) in the last few quarters from 0.4% in 1Q 07 to almost 0.9% in 1Q 08. In addition, the monolines which are under considerable stress and play the role of both counterparty as well as the reference entity in the CDS market could spell major trouble for the market participants.

Spectacular growth of credit risk transfer instruments

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Fastforward five full years, and has anybody learned there lesson? Well, prance through the recent BoomBustBlog headlines to find the answer:

• Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably!

If you don't trust the thoroughly researched, high end alternative info sources such as BoomBustBlog, realize that today Bloomberg reports U.S. Banks Sold More Insurance on Europe Debt, as annotated and excerpted: 

U.S. banks increased sales of protection against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the last quarter of 2011 as the European debt crisis escalated.

Well you can't say they didn't see this coming, for I warned throughout 2010 via the Pan-European sovereign debt crisis series.

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose 10 percent from the previous quarter to $567 billion, according to the most recent data from the Bank for International Settlements. Those guarantees refer to credit-default swaps written on bonds.

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc., two of the top CDS underwriters in the U.S., say they have bought more protection than they sold, indicating they may benefit from defaults in the region. That outcome is called into question by JPMorgan’s $2 billion loss on similar derivatives, which shows that risks don’t vanish when offsetting bets are taken, said Craig Pirrong, a finance professor at the University of Houston. “All these hedges trade one risk for another,” said Pirrong, whose research focuses on derivatives markets.

EXACTLY!!!! Risk doesn't disappear when you buy a hedge, it's simply shifted and transformed. In the case of the aforementioned 2008 article and my ramblings about the banks and insurers, naked credit (and market, depending on how the hedge was constructed) risk was simply traded for counterparty risk. With 96% of notional derivative exposure concentrated in just 6 banks - all with excessive leverage, opaque VouDou accounting (Sak Passe'), and tummy full of hidden NPAs amongst one of the worst macro environments of several lifetimes , one must question, "Is the counterparty risk one just assumed greater than the credit/market risk sold, combined?"

“The banks say they’re flat on European risk, but that’s based on aggregated positions. We don’t know how those will hold off if the European crisis blows up.”

JPMorgan Chairman and Chief Executive Officer Jamie Dimon said last week that the bank was trying to reposition a portfolio of corporate credit derivatives and used a flawed trading strategy. The lender, the largest in the U.S. by assets, is believed to have sold protection on an index of corporate debt and bought protection on the same index to hedge its initial bet, according to market participants who asked not to be identified because their trading strategies aren’t public.

The two bets moved in opposite directions this year, causing losses and proving that even hedges that look perfect can break down, Pirrong said.

Once again for the unitiated, shall we?

Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010

Mr. Middleton discusses JP Morgan, bank risk and technology and is the only pundit in the financial media that we know of that called Apple's margin compression issues and did so successfully just hours before they reported! Click here or click below to see the video.

Here's a subscription dump of our archives for JPM to placate the insatiable thirst of the BoomBustBlog paid subscriber: JPM Q1 2011 Review & Analysis   JPM 3Q 2010 Forensic Update  JPM Public Excerpt of Forensic Analysis Subscription JPM Restricted Stock scheme JPM 2Q10 review  JPM 1Q 2010 Valuation Review   JPM 4Q09 review  JPM Report (092209) Final - Professional09/24/2009 JPM Forensic Report (092209) Final- Retail JPM Option Analysis

For those who have not read my seminal piece on Dimon's house of Morgan, JPM Public Excerpt of Forensic Analysis Subscription published nearly three years ago, allow me to take the liberty to excerpt it for you...

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JPMorgan, Goldman Sachs

JPMorgan said in a regulatory filing that it purchased $144 billion of CDS related to the five European countries as of the end of the first quarter, while it sold $142 billion. Goldman Sachs (GS) bought $175 billion of protection and sold $164 billion, the firm said in its filing.... Bank of America Corp., Morgan Stanley (MS) and Citigroup Inc. (C) report only net CDS exposures. The five banks together account for 96 percent of the credit-derivatives market in the U.S., according to the Office of the Comptroller of the Currency. JPMorgan has written a quarter of the total, the OCC data show.

And here's the BoomBustBlog version of events:

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Matched Protection

Not all protection sold by banks is matched exactly by protection bought. CDS purchased and sold on Spanish sovereign debt can have different expiration dates. Banks also can net a swap on a Spanish bank with one on another lender. Even if those two firms are in a similar condition at the time of the trades, one could deteriorate faster, increasing the cost of CDS.

Some of the swaps sold by U.S. banks were bought by European lenders trying to reduce exposure to the five so-called peripheral countries. Since it’s considered insurance, a German bank can subtract the value of the contracts it purchased on Spanish debt from the total value of its holdings, with the understanding that if Spain doesn’t make good on its payment, the CDS underwriter will pay instead.

British, German and French banks’ loans to the five countries were reduced by 5 percent in the fourth quarter to $1.33 trillion, according to the BIS data. That was a $73 million decrease compared with the $53 million increase in U.S. banks’ CDS exposure to the periphery.

... Bank Losses

More than half of the CDS related to Spain, Italy and Portugal were to protect defaults by companies in those countries, not the government, according to data compiled by the Depository Trust and Clearing Corp., which runs a central registry for over-the-counter derivatives. About a quarter of the total in each country was protection on bank debt.

As banks in the five countries face mounting losses and funding strains, it’s impossible to model accurately how the risk on different institutions will change, Rowady said. Government and central bank interventions in markets can also upset correlations in those models, he said.

Now, I wouldn't go so far to say that it's impossible. After all, we did it and BoomBustBlog subscribers benefitted from it. Reference The BoomBustBlog Contagion Model: How We Predicted 9 Months Ago That The UK and Sweden Would Rush To Bail Out Ireland, and Why and Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!.

The BoomBustBlog Sovereign Contagion Model

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

foreign claims of PIIGSforeign claims of PIIGSforeign claims of PIIGS

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

I.          Summary of the methodology

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

Latest Pan-European Sovereign Risk Non-bank Subscription Research

• Ireland public finances projections_040710
• Spain public finances projections_033010
• UK Public Finances March 2010
• Italy public finances projection
• Greece Public Finances Projections

Back to Bloomberg...

Last week, Spain’s government took control of Bankia SA (BKIA), the country’s third-largest lender, and asked banks to increase provisions for souring real estate loans. Losses of Spanish banks could top 380 billion euros, according to the Centre for European Policy Studies. Moody’s Investors Service downgraded the credit ratings of 16 Spanish banks yesterday and 26 Italian lenders earlier this week.

Oh yeah, we caught Spain too - as far back as 2008/9/10. Yes, the Spain pain was apparent 4 years ago. Follow the BoomBustBlog archives, starting with a post from this month The Spain Pain Will Not Wane: Continuing the Contagion Saga and going back to '09 - The Spanish Inquisition is About to Begin... and even farther back to '08 - Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank. Back to the Bloomberg article...

Counterparty Failure

Counterparty failure is another risk for banks selling insurance on the debt of the five counties. When a swap is triggered by default, a bank could find that a client who sold the protection can’t pay. The firm still has to make good on its promise to pay whoever bought protection.

Lenders try to mitigate this risk by asking for collateral from their counterparties as the value of CDS or other derivative changes. Dexia SA (DEXB) failed in October when the bank faced 47 billion euros of such margin calls on interest-rate swaps it sold. If Dexia hadn’t been bailed out by Belgium and France, it wouldn’t have been able to put up the collateral, causing losses for its unidentified counterparties.

U.S. banks didn’t suffer losses when swaps on Greek sovereign debt were paid out in March because prices of CDS had surged and collateral was collected in advance, according to Francis Longstaff, a finance professor at the University of California Los Angeles. While collateral protects middlemen from counterparty risk, there could be unexpected losses if the price of CDS doesn’t rise to reflect an imminent default, he said.

“Sudden defaults would shock the market because then you wouldn’t have the collateral to cover the full payment,” Longstaff said.

Banks also may discover that collateral they hold might not be worth as much, said University of Houston’s Pirrong. That happened in 2008 when banks saw the value of mortgage-related securities held as collateral plummet.

“Collateral is a great way to protect yourself,” Pirrong said. “But when the financial system is in a crisis, you might end up holding an empty bag.”

All of the afore-linked articles and info should lead one to do as I did, and query Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably! Of course, I could always be more direct and simply state, Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time. Honestly, though, how is it that so few banks (five or six) can attain and allegedly hedge hundreds of trillions of dollars of exposure, yet assert they only have billions of dollars of risk? Asked in a more laymen, ex. common sense fashion, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

On Monday, 23 April 2012 I posted "It's Official & As I Foretold Years Ago, Greece Is Now In A True Depression As Reality Hits Greek Banks", roughly 2 years after penning 

How Greece Killed Its Own Banks!. Well, guess what!? The Wall Street Journal’s report, “Greek Depositors Withdrew $898 Million From Banks Monday”:

Greek depositors withdrew €700 million ($898 million) from the country's banks on Monday, fueling fears of a bank run amid the growing political disarray.

With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area.

Greek President Karolos Papoulias told the country's political leaders that bank withdrawals plus buy orders received by Greek banks for German bunds totaled some €800 million on Monday, a transcript of his comments said. A central bank official confirmed the figures.

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

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Greece's default will hit an already bank NPA laden Spain quite hard: The Spain Pain Will Not Wane: Continuing the Contagion Saga and ditto with Italy "As We Assured Clients Two Years Ago, Italy's Riding The Broken Promise Express To Restructuring". Once Italy gets hit, the true bank runs will start as socialist France (the so-called half of the EU anchor) loses control of its bankinsg system. Reference "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

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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!

•  French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
•  Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

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:  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.

•  Contagion Forensic Review - Retail
•  Contagion Forensic Review - Professional

So, in today's news we have Greek bank runs (again), remnants of JP Morgan yield grab gone bananas, and European Banks Battered As Reality Sets In. I know there has to be at at least a small contingent of you who truly don't want to hear me say "I told you so". Well, guess what I have to say to that small contingent...

Better yet guess what very popular American bank has their fingers in all three of the fires fanning above? You see, I not only warned of a European bank collapse nearly three years ago, I actually went on a European banking collapse tour throughout, of all places, Europe!

 The bank run thingy was actually a foregone conclusion. Greece is only step one, albeit a very obvious step one, but still the first step nonetheless - reference How Greece Killed Its Own Banks!, written exactly TWO years ago - Tuesday, 27 April 2010. The MSM should stop harping on Greece, its done. The real story is what will Greece's bust bring about. Well, there are quite a few banks in much 'allegedly" stronger domiciles primed to do the 'ole accelerated one-two step (that's bank run for those without a sense of humor), reference "How to Prevent Bailouts, Bank Runs and Other Fun Things To Do With Your Hard Earned Dollars". 

Now, the question for the truly big boys is what happens after the inevitable Pan-European bank runs get started. Well, the answer to that is already stored in the BoomBustBlog archives. Come on, y'all, where the strategists, the chess players, those who are able to look more than two moves ahead. I made this post so, now others may start "Hunting the Squid", looking at JPM Morgan as the sovereign entity that it wants to be and DB as the leveraged powder keg that it appears. Then there's BNP, HSBC and BofA. You heard it all here first. Despite that, the MSM has put analysts in the consistent spotlight who I feel (without intending to disrespect them, of course) have been serially incorrect on banks. I have addressed this in my blog posts, namely Question the Quality Of BoomBustBlog Bank Research, Will You? Bove and Fitch Follow "The Blog"! and CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!!

You see, with things crumbling so predictably, I don't have to do much along the lines of new content or writing. This entire mess has already been laid out in my archives, and in rather illustrious detail. Let's start archive grabbing with...

Goldman Sachs

The hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3: 

1. I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction
2. Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?"
3. Reggie Middleton Serves Up Fried Calamari From Raw Squid: Market Perceptions of Real Risk in Goldman Sachs

So, what else can go wrong with the Squid? 

Plenty! 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...

 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...

And for those who may not be sure of the significance, please review my presentation as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam, below. After all, for all intents and purposes, Dexia has officially collapsed - [CNBC] France, Belgium Pledge Aid for Struggling Dexia... and its a good chance that it's a matter of time before BNP follows suit - exactly as BoomBustBlog predicted for paying subsccribers way back in July.

A step by step tutorial on exactly how it will happen....

• The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
• What Happens When That Juggler Gets Clumsy?
• Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
• The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
• The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
• Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run 
• France, As Most Susceptible To Contagion, Will See Its Banks Suffer
• Observations Of French Markets From A Trader's Perspective
• On Your Mark, Get Set, (Bank) Run! The D…
• ECB As European Lender Of Last Resort = Institutional Purveyor Of A Pan-European Ponzi Scheme

 The European banking debacle was predicted at the start of 2010, a full year and a half before this has come to a head. If I could have seen it so clearly, why couldn't the banking industry and its regulators?

Now, back to GS, and considering all of the European falllout coming down the pike, of which Goldman is heavily leveraged into, particulary France (say BNP/Dexia/etc.)...

image009image009

Let's go over exactly how GS is exposed following the logic outlined in the graphic before this series of videos, as excerpted from subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 3,4 and 5.

GS__Banks_Derivatives_exposure_temp_work_Page_3

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...

S&P and Fitch finally downgrade JP Morgan, 3 years after my initial multimedia warnings (see Listen Carefully...  for the details). Unfortunately, despite threats and ruminations, these rating agencies again act in retrospect, failing to do anything but remind stakeholders of the losses they have already taken rather than assisting them in avoiding losses.

So, what are the rating agencies missing?  They're missing the fact that nearly all of the big money center banks are doing exactly what JPM was doing and they have no one to rely upon but themselves when things go awry from a counterparty perspective. Bennie Bernanke has instituted perpetual ZIRP, and as such has basically broken the banking business in his attempt to save it. Through ZIRP, banks simply cannot make money doing things that traditional banks do, ex. profit from lending. As such, they reach for yield, and that's just the conservative ones. The big boys take baseball bats swinging for home runs, either consciously or subconsciously sanguine in the protection of the Bernanke flavored taxpayer put under their respective businesses. With such protection, already historically proven, bank managers are getting progressively more aggressive and increasingly less aware of the term "RISK adjusted reward" as they simply seek rewards. Alas, I'm getting ahead of myself, let me explain...

JPM Public Excerpt of Forensic Analysis Subscription Final 092209 Page 07JPM Public Excerpt of Forensic Analysis Subscription Final 092209 Page 07 copy

The JPM prop desk that held the losses which generated headlines earlier this week was marketed as a hedging operation when we all know it was anything but. What it was was a concerted grasp for yield and profit in a ZIRP environment where JPM (one of the world's largest congregations of interest bearing assets) was bearing effectively no interest.

Banks need to make money too, hence when there's no money to be made in traditional FI yields, the banks start reaching, and they tend to start reaching farther as desperation to make the next quarter mounts in the face of BoomBustBlog reading investors who may be able to see past earnings stuffing stemming from less than prudent reserve releases consistent underprovisioning.

JPM_Underprovisioning

 The BoomBustBlog subscriber document JPM Q1 2011 Review & Analysis illustrates the point of JPM's waning ability to make money by making loans and holding debt with perfect clarity, and did so a year in advance....

 JPM Public Excerpt of Forensic Analysis Subscription Final 092209 Page 09

So, what do you do if you're a bank but you can't make money lending? You gamble, that's what you do! It's not like JPM hasn't gambled before, and it's not like they haven't lost money gambling...

jpm_ficc1

I put out what I consider to be some of the best predictive research available. I also put an inordinate amount of info out for absolutely free, particularly in the case of those big names as in the employer of Voldemort. For those who have not read my seminal piece on Dimon's house of Morgan, JPM Public Excerpt of Forensic Analysis Subscription published nearly three years ago, allow me to take the liberty to excerpt it for you...

Hmmm... Tell me if you get stuff like this from the rating agencies.... This is a good time to bring up that Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts

The next post on this topic will outline and illustrate several banks whom the agencies need to downgrade NOW, as in RIGHT NOW. These banks are, of course, JPM counterparties. In the meantime and in between time, follow me:

Here's a subscription dump of our archives for JPM to placate the insatiable thirst of the BoomBustBlog paid subscriber:

JPM Q1 2011 Review & Analysis

JPM 3Q 2010 Forensic Update 

JPM Public Excerpt of Forensic Analysis Subscription

JPM Restricted Stock scheme

JPM 2Q10 review

 JPM 1Q 2010 Valuation Review 

 JPM 4Q09 review

 JPM Report (092209) Final - Professional09/24/2009

JPM Forensic Report (092209) Final- Retail

JPM Option Analysis

Of course, you know I'm going to say "I told you so!" Reference So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? and then Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? You see, in said piece, ZeroHedge dutifully reported that Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure- a very interesting refresh of what I called out two years ago through "The Next Step in the Bank Implosion Cycle???":

The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png 

Again, from ZeroHedge: 

... and just for some clarity on how this occurred. We know the positions that Iksil held were in IG9 (more likely to be tranches) but this $2bn loss comes from a tiny 12bps decompression in the index - which means the DV01 must be huge...(as we already knew given the massive rise in net notional that we warned about)...

This is the Investment Grade credit index series 9 - which is the most active tranche-related index and was the index that Iksil had driven massively rich to its fair-value...

Of course, there's more to this story. After all, there is NEVER just one roach. I will cover that in my next post on the topic, which will entail COUNTERPARTY RISK. That's right, do you really think this will effect just JP Morgan?  In the meantime and in between time, here's a subscription dump of our archives for JPM to placate the insatiable thirst of the BoomBustBlog paid subscriber:

JPM Q1 2011 Review & Analysis

JPM 3Q 2010 Forensic Update 

JPM Public Excerpt of Forensic Analysis Subscription

JPM Restricted Stock scheme

JPM 2Q10 review

 JPM 1Q 2010 Valuation Review 

 JPM 4Q09 review

 JPM Report (092209) Final - Professional09/24/2009

JPM Forensic Report (092209) Final- Retail

JPM Option Analysis

Reggie Middleton at Emirates Palace in Abu Dhabi

Reggie Middleton at the Emirates Palace in Abu Dhabi

The petrodollar rich nation of Abu Dhabi, outside of having an extremely rich and Arabic culture, is in the possession of the unique opportunity to capitalize on the plight of the EU and affected nations of the coming Eurocalypse. Fresh back from my fact finding trip through the UAE, I noticed the MSM had the headline Abu Dhabi Royals Involved in RBS Talks. In short, RBS, the 83% British taxpayer owned debacle of a bank is again in search of capital, but this time shrouded in the haze of the government selling off a portion of its stake at a significant loss. 

RBS was heavily levered in rapidly depreciating toxic assets as a result of its ABN Amro purchase, and its executives obviously failed to subscribe to BoomBustBlog, for they took a royal (pun fully intended) Greek bathing on their Greek bond investments. Remember, I warned of an explicit Greek default two years ago and like simple arithmetic dictated, defaults came:

• No Matter How Much Room Some May Think Is Available, There Is But So Long One Can Play Hide The Greco-Sausage

• Debt Swaps, Back Dated Deals Featuring Only One Party - No Matter What, Greece's Problem Is Shared By Much Of The EU & Can't Be Solved Through Parlor Tricks

As a matter of fact, I warn those who do not subscribe to the BoomBust, this song is not yet over... Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

Greece_Primary_balance 

That being said, cash rich nations such as the UAE see gold in them thar hills. Personally, I doubt if the hills are made of gold, but there is definitely some gold buried within, even if it is at $1,700 per ounce. I would instruct my clients to go on an asset buying binge from the banks, developers and asset management funds versus attempting to buy the funds directly, or better yet use structured assets to gain exposure to said troubled assets. Many banks, like RBS, will get hit more than once from borrowers such as Greece. As queried many times on this blog, "What do you think, pray tell, happens when the liquidity starved, capital deprived, over leveraged banks fail to roll over all of that underwater EU mortgage debt?"

Slide21

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

Slide22

Reggie Middleton Featured in Property EU, one of Europe's leading real estate publications

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.

Go to 14:35 in the following video for one such idea...

Spitting the truth regarding Greek bailouts on CNBC (I'm the second guest)...

It's not just CRE and RE assets that are available via fire sale, as clearly outlined two years ago in our subscriber (click here to subscribe) report  Greece Public Finances Projections see pages 5 and 6 following...

thumb_Greece_public_finances_projections1_Page_05

thumb_Greece_public_finances_projections1_Page_06

The MSM chimed in on this concept two years later... Greece Makes Asset Sales Look Bad, but Are They?

And though all of these countries have felt the heat from the markets, Greece has become almost synonymous with the deep crisis at the heart of the euro zone, which has hollowed out its appeal to investors.

"It is not clear Greece has the luxury of doing anything in an optimal way; they are basically burning the furniture just to get by," Bill Megginson, Professor of Finance at the University of Oklahoma, told Reuters.

"But other countries, especially where the crisis seems to have abated a bit, like Italy and Spain, they could and they probably will." Greece came up with plans for asset sales to convince its lenders it was serious about reforming its uncompetitive economy and also to raise funds to pay down its debt mountain.

But the EU and IMF, which pushed Greece for bolder and more detailed plans as to how it would deliver on its promises, have become increasingly frustrated with the country's repeated failure to meet targets.

Despite a reluctance to sell assets in such poor market conditions, Greece - which aims to raise 19 billion euros ($25 billion) from privatizations by 2015 - has begun ramping up its efforts, including inviting bids for state-owned natural gas company DEPA and the management rights to its Olympic broadcasting complex.

It plans to put stakes in betting monopoly OPAP and refiner Hellenic Petroleumup for sale by May, Greece's chief privatization official said.

But its tight timeframe and ambitious targets, already scaled back from 50 billion euros, suggest it will struggle to meet its price expectations.

Funded by like minded strategic capital sources, there are a plethora of delicious assets for the picking across the EU and UK. Now may be a tad bit premature to jump, but it is a good time to start priming the pump. All who are interested in ideas such as these should feel free to contact me.

The mainstream media is still focusing its attention on leaves while ignoring the danger posed to the entire forest. A quick scan of the big headlines for the day...

ECB Sees Slower Growth, Flags Success of Money Flood - Slower EU growth directly following a devastating EU recession is a very, very bad thing. Combine this with the fact that the ECB felt the need to flood its banking system with a trillion euros of cheap liquidity collateralized by quasi-used toilet paper should make clear that they are terrified of what comes down the pike. Is or is not the writing on the wall?

Roubini: Private Sector’s Greece Deal Is ‘Sweet’ - Yeah, well, 50% is a 100% percent more than nothing - which is exactly what some bondholders may get as they hold out until this time next year. See LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?

Witching Hour: Will Enough Investors Take Greek Deal? - Does it really matter? The deal doesn't seem to be enough to put Greece on the path to sustainable economic recovery since by our calculations Greece will be forced to come back to the table within two to four years, reference The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media. As a matter of fact, what seems to be missed is the greater economic fallout of all of this free money engineering...  Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE. This gets even worse. If PSI doesn't go through and CAC is implemented then you have a credit event and CDS market does its job thereby banging those American banks that wrote the CDS. If the CAC is not implemented then the CDS didn't do its job and the premium that was absorbed by CDS will then be applied directly to sovereign debt meaning heavy debt service. The only way out of this is debt destruction, a true default. 

Furthermore, there's the common sense consequence of what the ECB has done that apparently wasn't too commonly perceived amongst those decision makers at the ECB, as reported by ZeroHedge last night:

In what could prove to be the most critical unintended consequence of the ECB's LTRO program, we note that as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties. While the hope was for any and every piece of lowly collateral to be lodged with the ECB in return for freshly printed money to spend on local government debt, perhaps the expectation of a truly virtuous circle of liquidity lifting all boats forever is crashing on the shores of reality. This 'Deposits Related to Margin Calls' line item on the ECB's balance sheet will likely now become the most-watched 'indicator' of stress as we note the dramatic acceleration from an average well under EUR200 million to well over EUR17 billion since the LTRO began. The rapid deterioration in collateral asset quality is extremely worrisome (GGBs? European financial sub debt? Papandreou's Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets - to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle - especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.

This huge increase in margin calls can only further exacerbate the stigma attached to LTRO-facing banks - and as we noted this morning (somewhat presciently) both the LTRO-Stigma-trade, that we created, and the potential for MtM losses on the carry-trades that LTRO 'cash' was put to work in could indeed start a vicious circle in European financials, just as everyone thought it was safe to dip a toe back in the risk pool.

Hmmmm... Let's take a more critical look at the potential consequences by reviewing page 9 of the subscriber forensic report for BNP Paribas (click here to subscribe).

•  French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
•  Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

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Heavy ECB margin calls on institutions that have abused the ambiguity cover provided by Topic 820 can foresee some significant pain in the near future. Having to sell something for reality's price that you carried on your books at fantasy's price has never proved to be a profitable endeavor.

Subscribers should now review pages 10, 11, and 12 of said document - which will really get your britches in a tear.

It really doesn't look to positive, but that's bullish, right!!!!

Can such a thing really happen? Here's another interesting story from ZeroHedge on the carry trade gone bad...

We know how AIG and MF ended, as of yet we don't know how LTRO will end.

AIG was the ultimate carry trade. They sold massive amounts of CDS for a very small spread. They had no funding cost, no collateral requirements(initially), and no mark to market risk for their own P&L.  The year before AIG blew up, management was spending all sorts of money buying back their "undervalued" shares. Actually they probably bought back a lot of shares in early 2008.  What could go wrong with the trade?  The only thing that could go bad was a downgrade to AIG at the same time as the assets they wrote CDS on went down, because then and only then would they have to post collateral.  Their CDS had massive negative mark to markets long before they were on the verge of collapse. It was the fact that a downgrade to their ratings could enable their CDS counterparties to call for collateral.  It was the threat of collateral calls that ended it for AIG.

LTRO has variation margin.

What happened at MF?  Massive positions in short dated bonds to earn the "carry". All was fine until the size concerned people. They had trouble financing the position. The position was so large the market pushed against them. With so much leverage they couldn't meet the margin calls and selling the bonds would wipe them out.

LTRO has variation margin and the banks have disproportionately large positions in the debt of their country.

Lots of "carry" trades have worked out well, but when they don't, the result is pretty ugly. Many argue that LTCM was also just a giant "carry" trade that unwound when vol and mark to market blew through their ability to post collateral.

In closing, I urge all subscribers to play with the BNP bank run model once again. Remember my admonitions from last summer? 

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

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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:

•  French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
•  Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

The first model (all are cast in Excel 2010 format [.xlsx]),  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? Here are some screen shots.

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

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

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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:

• a research note to subscribers,  The Inevitability of Another Bank Crisis,
• followed by blog posts on the same, see Is Another Banking Crisis Inevitable?

The next nugget of knowledge is the  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...

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 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:  BNP Exposures - Professional Subscriber Download Version. Additional screenshots above and beyond that included above...

Income statement implications of a true bank run...

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I think I will recap this week in BoomBustBlog postings early since a comment from the British sell side bank Barclay's literally irked the shit out of me. First the comment, then the recap. In my post yesterday, "Does Anyone See This Emergency As An Emergency, Or Is A Half Trillion Euro Pay Day Loan Bullish?", I inquire as to whether the Barclay's strategist weed is actually stronger than ours.

... headline from Bloomberg: Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash

Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.

The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.

So, basically, nearly twice as many banks are in trouble now as compared to just three months ago. This is bullish, right???!!!

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to heart, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks?

Now, to answer that question, let's jump to a post earlier in the week introducing my interview regarding Greece on RT's Capital Account, Why Greece Bailout Games Will Cause The Rest of the EU to Break Out the Grease…

... If you didn't have a job, you wouldn't be able to pay back your loans. Then again, one way to solve this problem is simply not to give anybody a loan, eh?

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Alas, we don't have to worry about that since the money spigots are just so turned on to the Greek corporate sector you don't have to worry about a scarcity of jobs. With all of that capital sloshing around the system, Grecian companies are bound to start going on a hiring binge ANY MINUTE NOW!

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Now, look very carefully at the last two charts, take a big toke, and re-read what that Barclays Bloke had the nerve to speak in a major business rag... 

 ...it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Damn.... Okay, maybe we are taking this guy out of context. After all, he also said, "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money". Hmmm, let's take a look at some of the smaller banks, wait a minute... Aren't the Greek banks relatively small???

Then there's the issue of the run on the banks. With all that is going on, I made very clear that multiple runs are imminent, hence the need for 100 bp, junk collateral funding from the ECB. The Barclay's bloke says differently in that the money will not go to cushion runs, but will go to the greater [sic real] economy. Yeah... Pass the blunt! As excerpted from the following reports...

BNP Exposures - Professional Subscriber Download Version

BNP Exposures - Retail Subscriber Download Version

BNP Exposures - Free Public Download Version

 French Bank Run Forensic Thoughts - Addendum and Update

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I have explored European bank runs in depth, see The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

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

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

Overnight and on demand funding is at a 72% deficit to liquid assets that can be used to fund said liabilities. This means anything or anyone who can spook these funding sources can literally collapse this bank overnight. In the case of Bear Stearns, it was over the weekend.

In reviewing my post on this topic in January predicting the fall of Bear - "Is this the Breaking of the Bear?", it is actually scary how prescient it actually was...

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Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back

Okay, I’ll admit it. I watch CNBC. Now that I am out of the confessional, I can say that when I do watch it I hear a lot of perma-bulls stating that this and that stock is cheap because it is trading at or below its book value. They then go on to quote the historical significance of this event, yada, yada, yada. This is then picked up by a bunch of other individual investors, media pundits and other “professionals,” and it appears that rampant buying ensues. I don’t know how much of it is momentum trading versus actual investors really believing they are buying on the fundamentals, but the buying pressure is certainly there. They then lose their money as the stock they thought was cheap, actually gets a lot cheaper, bringing their investment down the crapper with it. What happened in this scenario? These investors bought accounting numbers instead of true economic book value. Anything outside of simple widget manufacturers are bound to have some twists and turns to ascertain actual book value, actual marketable book value that is. This is what the investor is interested in, the ECONOMIC market value of book, not what the accounting ledger says. After all, you are paying economic dollars to buy this book value in the market, so you want to be able to ascertain marketable book value, I hope it sounds simplistic, because the premise behind it is quite simple – How much is this stuff really worth?. The implementation may be a different matter, though. I set out to ascertain the true book value of Bear Stearns, and the following is the path that I took...

I urge all to review that post of January 2008 and realize that negative equity is negative equity, and no matter how you want to label it, account for it, or delay and pray, broke is broke! This lesson should not be lost on the Europeans, but unfortunately, it is!

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 So, is this just theory, or do I have a point? Well, I had a point when I applied the theory to Bear Steans in 1/08, three months before they collapsed. It also seemed to work as I warned about the collapse of the Greek banks in 2010, see How Greece Killed Its Own Banks! and the subscription-only  Greek Banking Fundamental Tear Sheet. Was I right regarding large equity drawdowns causing masiive bank runs? Well in "So, Can Europe Nationalize All Of Its Troubled Banks? Place Your Bets Here" I quoted an article from ZH:

 Greek Bank Deposit Outflows Soar In January, Third Largest Ever

According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.

So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?

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So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

•   Debt Analysis, Blog Subscriber Edition
•  Preliminary Download

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 My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Stay tuned!