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On Saturday, 23 July 2011 I penned "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" wherein I went through both the motive and the mechanism of a European bank run, focusing on Greece and France as impetus.

Fast forward nearly one year later and the WSJ reports Crédit Agricole Girds Greek Unit for Greece Euro Exit, as excerpted:

PARIS—Crédit Agricole SA ACA.FR +3.49% is making contingency plans to abandon its Greek bank or merge it with a conglomerate of domestic banks in the event of Greece leaving the euro zone, according to a person with direct knowledge of the plans.

The admission offers the starkest evidence yet of international companies preparing for the worst in Greece, just days ahead of elections that could set it on a path to leave the currency union. It also underscores the lengths to which France's third-largest listed bank will potentially go to draw a line under its disastrous foray into Greece.

... Crédit Agricole Chief Executive Jean-Paul Chifflet has said publicly he doesn't see a Greek exit as the most likely scenario. But the bank is pressing ahead with contingency planning focusing on two possible options, the person familiar with the matter said: consolidating its Emporiki Bank of Greece SA unit into a larger conglomerate of Greek banks, in which the French lender's stake would get diluted down to 10%, or simply walking away and letting Emporiki fail.

"Politically, if Greece were to exit the euro zone, Crédit Agricole would have no obligation to stay," said this person. The Paris-based lender is also considering plans to transfer some "good" assets from Emporiki to Crédit Agricole, the person said, without disclosing details

Abandoning Greece's largest foreign-owned retail bank could expose Crédit Agricole to legal and reputational risks and would echo its abrupt departure from its Argentine bank units 10 years ago after the Latin American country defaulted on its debt.

Analysts estimate a Greek exit from the euro zone would cost the bank at least €5.2 billion. Crédit Agricole's direct funding to Emporiki stood at €4.6 billion in March. 

...Crédit Agricole has been scrambling over the past year to stem the red ink at its Greek operations. Its acquisition of Emporiki in 2006 saddled the French lender with billions of euros in losses and is one of the reasons its shares have plunged more than 70% over the past year, sparking uproar among shareholders. Emporiki is Greece's sixth-largest bank.

Last week, the bank secured a small bit of breathing space when Emporiki finally succeeded in getting funding from Greece's central bank, the Crédit Agricole spokeswoman said. Crédit Agricole had lodged numerous similar requests to borrow from the Greek central bank's so-called Emergency Liquidity Assistance program, and was repeatedly turned down because Emporiki is foreign-owned. According to the person close to the matter, Greece's central bank finally agreed to the request, after Crédit Agricole said it would otherwise leave the country.

This is essentially the specific institutional bank run that I warned about last year. In addition, I gave my paying subscribers plenty of notice on this particular bank back in 2010 - reference File Icon Greek Banking Fundamental Tear Sheet. As for how that institutional bank run thing works, we excerpt "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

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

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

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

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

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

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

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

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

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

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

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

This assertion is backed by today's WSJ reporting:

A host of international companies have admitted they are working on contingency plans in the event of Greece exiting the euro, with many concerned about how to retrieve cash in the country under such a scenario. But none have disclosed potentially walking away from assets in Greece.

... Greek government officials have long pointed to the need to merge local lenders in order to help them withstand mounting problems that include huge losses arising from Greece's debt restructuring, and soaring nonperforming loans in the recession-ravaged economy.

Despite several failed past attempts, analysts now say the government could finally force this process through after it takes over a majority stake in Greece's four largest commercial banks—National Bank of Greece SA, NBG +5.99% EFG Eurobank Ergasias SA, EUROB.AT +8.04% Alpha Bank AE and Piraeus Bank TPEIR.AT +2.87% SA.

The state's bank bailout fund, the Hellenic Financial Stability Fund, is expected to underwrite about 90% of the four banks' capital increases scheduled for later this year, effectively nationalizing the banks. Emporiki could therefore be swallowed by one of the new merged entities, but it remains unclear how advanced talks are. A spokesman for the Hellenic Financial Stability Fund declined to comment.

Remember, this is why the STATE bailouts were needed in the first place. Reference BoomBustBlog archived article Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe from back in 2010:

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

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This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing.

One would think that was rather prescient, eh? Not really, just the objective use of a spreadsheet. It gets worse, though, as read in today's WSJ article...

Even if Greece remains in the euro zone, the French lender will need to deal with rising defaults and deteriorating economic conditions. In the first quarter alone, Emporiki, which carries net loans worth €18.7 billion on its balance sheet, posted a €905 million loss.

Last week, Moody's Investor Services downgraded Emporiki's rating two notches further into junk territory.

But if we just continue reading one more paragraph down in my "Ovebanked, Underfunded, and Overly Optimistic" article from 2010:

Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

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Damn, if I saw it coming from so far back, what the hell is wrong with those French bank executives? So, back to "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!"

A full video description of how this is to happen...

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

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

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. Below is an excerpt of an email exchange that I had with Eurocalypse, the European CDS trader that contributes trade setups to BoomBustBlog (click here for his background), who happens to have ran an ALM department in a sizeable French bank.

FYI, im hearing from my well connected friends that the Chairman of the BoomBustBlog bank run candidate in question has been seeing Sarkozy everyday recently...

Im very surprised about the extent of the ALM gap from the BRC ("Bank Run Candidate"), but my guess is that balance sheet is including the trading books.
Typically the biggest chunk of the balance sheet are govt bonds, and they are refinanced with the repo market. That should explain a lot of the gap.
I dont think the ALM managers manage that gap, and I dont think they should either. Info on the ALM gap ex-trading book should be monitored.

The trading activity is monitored by a market risk group with another set of limits, and of course they would monitor liquidity, closely hopefully.

Of note, there are new official liquidity ratios put in place in Basel III (the LCR Liquidity Coverage Ratio which is a 1 month ratio, and the DFSR which is a 1 year ratio). Basically, Govt bonds are considered as the ultra liquid assets, and actually the LCR forces the banks to hold liquid assets against their 1 month gap calculated with some liquidity assumptions both on the asset and liability side) of course these liquid assets, will mostly be govt bonds in practice, because there is not anything more liquid, and not anything else in sufficient size...

The question is, exactly how liquid are the bonds of sovereign Greece, Ireland and Portugal.  Much of this stuff should rightfully be classified as level 3 assets. The 50% depreciation in the Greek long bond should really, really cause many to rethink both the logic and the strategem behind so called "risk free asset" classes!!!

I'm not saying there is no liquidity risk on the trading books. Effectively if there are signs of stress in the repo market, all players will try (at the same time...) to reduce the size of their trading books ... leaving the market bidless... but its not the intent of banks to try to make profit on the liquidity gap in that case.

Finally the big picture, I think one cannot again ignore that the banking sector and govt debt are totally intertwined as I wrote before. Ultimately, the collapse of the banking sector means the collapse of govt finances and vice versa. Its a FEATURE of a fractional reserve lending system where the eligible asset of choice is those govt bonds, and of a system where govts can freely float more and more debt (as long as there is demand), as money is created by the CB in the process, which end up in the liability side of private banks which then need to buy something etc...

On the liquidity side, many French regional banks were overextended with loan to deposit ratios over 120% (despite being deposit-rich institutions). The main reason is they boosted a lot retail mortgage activity.

Anyway, in France, were converging with Japan.

  1. Tough competition within banks, shrinking margins (consumer laws against predatory lending in France, French banks earn a lot of money from the poorer clients who have temporary deficits on their checking accounts).
  2. The housing and CRE market bubble has not exploded yet (Paris home prices are at the highest ever).
  3. Then there is the Euro crisis on top of that
  4. ...and the govts wanting to levy more banking taxes...

The sector should be a HUGE UNDERPERFORM! The only way they can make money in the future, is buying those govt bonds and sitting on them, like the Japanese banks...and pray for the bond market not to explode like in Greece!

Or Portugal, or Ireland, or...

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

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

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

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

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

I will provide additional tidbits to the public as I deem fit. In the meantime, the question du jour?

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.

Professional and institutional subscribers will have access to our contributing trader’s trade setups and opinions within a week and a half. Institutional subscribers should feel free to reach out to me via Google Plus for video chat and discussion this and every Tuesday at 12 pm (please RSVP via email). If you need an invitation to Google+ and are a subscriber, simply drop me a mail and I will give you one. Feel free to follow me on:


Published in BoomBustBlog

Note to subscribers, updated research availalble: GS Revenue Analysis Q2 12 - our opinion of the robustness of Goldman's upcoming quarter (103.95 kB 2012-06-13 10:39:33).

In the beginning of the year, I appeared on CNBC extolling the risks of the F.I.R.E. sector, Reggie Middleton Sets CNBC on F.I.R.E.!!!

The day after the warning on the insurance portion of F.I.R.E it was announced that Insurers’ 2011 Catastrophe Losses Hit Record. I was the only one in the mainstream media warning of the multi-sector risk that I know of. As a matter of fact, there were several personalities stating the exact opposite of the main man (and I don't mean Lobo).

banks_12_copy

 Now, as you can see, there is a one quarter trading pop where the banks did well, but looking at the big picture and factoring in today's macro climate, I think it's easy to see where banks are bad news. Just ask Mr. Dimon. Where I believe Mr. Bove went wrong in the moderate term analysis is he, again, severely underestimated both the macro outlook for the banks, the fundamental risk of the trash on the balance sheets (almost none of which we are truly privy to) not to mention the extreme risk of the trading practices of these entities. These are the primary reasons why I have been so bearish on them. Time will tell who is right, and I believe I have time on my side.

Now, Dick Bove and I (with all due respect to Mr. Bove, this analyzing and predicting stuff is not easy!) have disagreed in the past, and more than once or twice - see CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!! For those not familiar with Mr. Bove, he made an interesting bullish call on Bear Stearns which was essentially antithetical to my research - which essentially said Bear Stearns was done for back in Jaunary of 2008, see Is this the Breaking of the Bear? By March of 2008, Bear Stears was essentially done for. We also disagreed on Lehman Brothers, where Dick was bullish and I was quite bearish (see ). Karl Deninger's post from the Market Ticker explains the story explicitly, but of course from Karl's perspective, so to be fair to Dick all should keep that in mind: Dick Bove, Bear Stearns, And Controversy

Now, Dick Bove not withstanding, the sell side followed my lead for the big investment banks, albeit materially later. As excerpted from First I set CNBC on F.I.R.E., Now It Appears I've Set Sell Side Wall Street on F.I.R.E. As Well!!!:

If you remember, I also gave explicit warnings on the media's favorite bank, the "untouchable" Goldman Sachs! Well, it looks as if I've actually set the Wall Street Brokerage house on F.I.R.E as well. Lookee here: UBS, Goldman, Morgan Stanley Earnings Estimates Cut By JPMorgan Cazenove

JPMorgan Cazenove analysts cut their earnings outlook for investment banks for 2011, 2012 and 2013, citing worsening conditions in fixed income and equities.

Hmmmmm.... Where have we heard that befre???

UBS AG (UBSN) had its 2011 earnings-per-share estimate trimmed by 4 percent and the 2012 estimate by 11 percent, JPMorgan analysts including Kian Abouhossein said in a note to clients today.JPMorgan also curbed its Goldman Sachs Group Inc. (GS) forecast for 2011 by 37 percent and the 2012 figure by 19 percent.

Copycats???

The earnings downgrades of banks including Goldman and UBS “reflect weaker investment banking client activity and lower volumes across the board than previously anticipated,” JPMorgan’s analysts said. “Consensus needs to come down to reflect the weaker-than-expected environment” in 2011’s fourth quarter, they said.

JPMorgan also cut forecasts for other banks including Morgan Stanley (MS), whose estimates were reduced by 5 percent for 2011 and 17 percent for 2012.

From what I understand, Wells Fargo also issued a similar report on Goldman! Quite timely, fellas! Although this is not the First Time The Vampire Squid Get's Outed On TV!, I do believe it was the first time it was outright outed on the big MSM stations such as CNBC. Of course the sell side follows suit, after the fact. To wit, CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!! I would like all to remember that Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies! This is proof positive that the BoomBustBlog Forecast Pan-European Bank Run Has Breached American Soil!!! Investors, pundits and analysts can sit idly by while Squids, Morgans & Counterparty Risk Blow Up The World One Tentacle At A Time or they can actively do something about it. The decision is yours to make.

Times are changing, y'all. Hey, when are rating agencies going to jump into the fray? Not! Maybe its time to pose the question "What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog?" Go Ahead, I DARE You To Answer! In case I haven't delivered the hint strongly enough, let me be blunt. I'm directly challenging the the Sell Side house that is just now catching F.I.R.E. - Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss

I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & IntroductionI'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction  

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

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

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

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

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!

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

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...
 Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!  

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

Yes, this more of 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:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

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

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

Reggie Middleton vs the Squid That Can't Trade!

On that note, I post this update on our outlook for the venerable Goldman Sachs for subscribers (click here to subscribe): icon GS Revenue Analysis_Q2 12 (103.95 kB 2012-06-13 10:39:33).

I will review the other sectors of my FIRE thesis in upcoming posts, leading with CRE and European banking.

For those who are encountering me for the first time or don't know who I am, feel free to find the answer to the question "Who is Reggie Middleton?" 

 Relevant subscriber research:

icon Goldman Sachs Q3 Forensic Review - Professional (746.08 kB 2011-08-22 10:25:06)

icon Goldman Sachs Q3 Forensic Review - Retail (509.83 kB 2011-08-22 10:27:36)

 

 

Published in BoomBustBlog
Monday, 11 June 2012 13:41

Bank Run! Italiano Style?

In March of 2010, or roughly 2 and quarter years ago, I ridiculed Italy's public proclamations of austerity and fiscal responsibility. I put out a report to my paid subscribers detailing my thoughts therein... 

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Well, fast forward to today and Bloomberg reports Italy Moves Into Debt-Crisis Crosshairs After Spain (you know, the same Spain that we also warned about in March of 2010): 

Italy’s 10-year bonds reversed early gains today in the first trading after the Spanish bailout. Their yield rose by the most in a day since Dec. 8, adding 27 basis points to 6.04 percent. Shares of UniCredit SpA (UCG), the country’s largest bank, had their steepest decline in five months.
“The scrutiny of Italy is high and certainly will not dissipate after the deal with Spain,” Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London, said in an interview. “This bailout does not mean that Italy will be under attack, but it means that investors will pay attention to every bit of information before deciding to buy or to sell Italian bonds.”

Investors don't need to focus on Spain's bailout (although there are many common threads). All you need to do is look at Italy's actual numbers and the credibility of thier reporting, as excerpted from BoomBustBlog subscriber document File Icon Italy public finances projection:

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Back to Bloomberg...

Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. The Treasury has to sell more than 35 billion euros of bonds and bills per month -- more than the annual output of each of the three smallest euro members, Cyprus, Estonia and Malta.
Spanish Economy Minister Luis de Guindos said on June 9 that he would request as much as 100 billion euros in emergency loans from the euro area to shore up a banking system hobbled by more than 180 billion euros of bad assets. Mounting concern about the state of Spain’s banks and public finances drove the country’s borrowing costs to near euro-era records last month, pushing up Italian rates in the process.
Reversing Gains.

Economy Contracting
Italy’s total debt of more than twice Spain’s has given investors pause, especially in a country where economic growth has lagged the EU average for more than a decade. The euro region’s third-biggest economy, Italy is set to contract 1.7 percent this year, more than the 1.6 percent in Spain, the Organization for Economic Cooperation and Development estimates.
Italy’s debt load had traditionally led the country to be perceived as a bigger credit risk than Spain. At the start of this year, Italy’s 10-year bond yielded 202 basis points more than that of Spain. As the extent of Spain’s banking woes became more evident and the country was forced to raise its deficit target, that spread reversed and now Spain’s 10-year yields 48 points more than Italy’s.

Foreign Exodus
Debt agency head Maria Cannata last week said that fewer foreign investors were turning up at Italian auctions in recent months and that the country could still finance at yields as high as 8 percent.

Yeah, but for how long? 4 weeks????

The exodus of foreign buyers has left the Treasury more dependent on Italian banks, which in turn have been among the biggest borrowers in the European Central Bank’s three-year lending operations.

And this is the crux of the whole problem.

This why Italy is, for all intents and purposes, simply a gigantic Greece at the end of the day.

I have written about this extensively, and in plenty of time for subscribers and investors to take advantage of said advice. Simply read How Greece Killed Its Own Banks! and remember that this article was written in the beginning of 2010, when the Greek bonds were trading for much more then they were right before they defaulted! Then reference Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!

Sovereign entities cannot fund themselves by borrowing from the insolvent entities that they actually need to bailout, but somehow they have convinced enough holders of capital that they can. To quote from "Sophisticated Ignorance"...


Again, public states bailing out insolvent private banking institutions simply does not work. The result is simply insolvent states and insolvent banks versus simply having insolvent banks. We have 800 years of experience from which to judge from...

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In Dead Bank Deja Vu? How The Sovereigns Killed Their Own Banks & Why Nobody Realizes They're Dead… I have explained this nonsensical methodology in detail. I also warned on the Italian banks back in 2010, for there is truly no new economic profits being produced in bulk - simply a continuation of the Pan-European Ponzi scheme. Subscribers see File Icon Italian Banking Macro-Fundamental Discussion Note 

Italy returns to markets before Spain does, selling as much 6.5 billion euros of treasury bills on June 13, followed by a bond auction the next day.
“If Italy has a problem with accessing the markets because investors lose confidence in the Italian ability to do the right thing, the ECB will be drawn into the fire,” Thomas Mayer, an economic adviser to Deutsche Bank AG, said in a telephone interview. “That could pose a potentially lethal threat to European monetary union.”

At this point, the ECB must be stuffed with more shit than a broken toilet, reference . We have been through this with Greece, Portugal, Ireland, Spain and now Italy.

ECB Firepower
Given the size of Italy’s debt, only the ECB has the firepower to rescue the country and yet deploying that ammunition -- through buying back bonds or making more long-term loans -- may prove unacceptable to Germany and its allies in northern Europe, Mayer said.
“The ECB will probably have to restart buying bonds but there will be a lot of sellers into that of people who are worried that Spain is the next Greece and Italy the next Spain,” said Lex Van Dam, who manages $500 million at Hampstead Capital LLC in London.

Go figure!

Published in BoomBustBlog

A few months ago, I warned all to Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE. This warning was an offshoot of the extensive research that I did on the European banking sector, sovereign debt and CRE. In a nutshell, I said It appears as if there were a few who failed to heed said sage warning. Bloomberg reports Commercial Landlords Fail to Pay Loans Amid Crisis, Moody’s Says

Landlords of commercial properties in Europe are struggling to repay mortgages as banks pull back from refinancing the loans, according to Moody’s Investors Service.

And the reason they are pulling back has been well documented on BoomBustBlog for some time. See Is Another Banking Crisis Inevitable? 04 February 2011

Seventy-nine percent of the loans packaged into commercial mortgage-backed securities rated by Moody’s that came due in the first quarter weren’t repaid on time, Frankfurt-based analyst Oliver Moldenhauer wrote in a report. The non-payment rate more than doubled from 35 percent in 2009 and reflects “the current weak state of the lending market,” Moldenhauer wrote.

Whoa!!!! And to think everyone is worried about sovereign debt in Europe. Once all of that rapidly depreciated real estate collapses mortgages that have been leveraged 30x, you'll really see the meaning of AUSTERITY! I'm trying to make it very clear to you people, you ain't seen nothing yet!!!

The economic slowdown is hurting landlords of properties from office blocks to car parks and shopping malls across Europe. A total of 38 billion euros ($47 billion) of commercial real estate loans come due this year and next, Moody’s said.

“As banks need to deleverage due to regulatory requirements, commercial real estate financing will remain constrained,” Moldenhauer wrote. “Most loans will not be repaid.”
...“Not only can underwater loans not be refinanced, borrowers also face difficulties refinancing moderately leveraged loans that are simply too large in the current lending market,” said Christian Aufsatz, an analyst at Barclays Plc in London. “For CMBS, the situation will become worse.”

Real estate with mortgages that match or exceed the value of the property -- a so-called loan-to-value ratio of 100 percent or higher -- suffered defaults in “nearly all” cases in the first quarter, Moody’s said. About a third of borrowers with LTV ratios of up to 80 percent didn't pay up on time, according to the report.

Keep in mind that the LTV of these properties are safe in the 50-60 LTV range. We're now discussing 80 to 100+ LTVs. Think about it? Whose going to cough up the missing equity? Quick answer - bank equity investors! More thought out answer - Taxpayers the world over as their hardheaded ass government officials rush in once against to try to bailout banking systems that are too big to be bailed out, leaving what few decent sovereign nation economies left insolvent - once again!!!!


Most of the loans that were repaid were for less than 25 million euros, while just one of the 15 mortgages worth 75 million euros or more was paid on time, Moldenhauer wrote.

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?" Excerpted from Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE:

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):

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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!

My next post on CRE will show how this is not just a European phenomena. Yes, US REITS will come crashing back to reality as well. Subscribers should pay attention as I ladder puts and shorts into this REIT which we have calculated to fall roughtly 95% in value if math comes to the forefront. To date, the price has not broken out of a relatively narrow range, which means the opportunity is still there. I am considering making the research public after it is clear all long terms subscribers have attained positions.

icon Cashflows and Debt Preliminary Analysis (493.89 kB 2012-01-19 09:19:16) - compete cash flow analysis showing this REIT coming up short in every possible practical scenario.

icon Fire Sale Scenario Analysis (303.76 kB 2012-02-10 09:17:04) - illustrates the situation if a fire sale was pursued to raise cash.

icon Foreclosure Scenario Analysis (414.15 kB 2012-02-09 10:16:12) - illustrates the situation if properties were allowed to go into foreclosure to ease debt service.

icon Sample Property Valuation (360.45 kB 2012-01-26 09:03:33) - one of over 40 property valuations performed by hand, with on the ground inputs using our proprietary valuation models.

I will go over this opportunity in more detail over the next 72 hours as well as reviewing the path taken by European real estate to show what can be expected here in the US and the FIRE sector.

Please note that we independently value REIT portfolios - property by property - with independently sourced rents and expenses to ascertain a truly accurate valuation picture. This is how we called the short on General Growith Properties in 2007, a year before they were downgraded from investment grade status and still buys on them from all the major sell side houses that followed them. I rode GGP down from the $60s to about $8, the shares eventually fell to $1 and change or so. The General Growth Properties short generated returns deep into the three digits... Deep enough to come close to registering a four digit return.

Follow me on Twitter: http://twitter.com/#!/reggiemiddleton. Click here to subscribe to BoomBustBlog research!

Published in BoomBustBlog

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

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

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

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

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

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 File Icon 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:

Bank runs are invevitable! 

As excerpted from our professional series File Icon 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....

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...

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

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.

 

Published in BoomBustBlog

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 subscribersFile Icon 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 

I really want my subscribers to focus on this European bank, for it is primed to implode between its heavy derivative exposure  AND its sovereing exposure - Haircuts, Derivative Risks and Valuation
 
Later posts today will review my recent opinions on this bank in a little more datail as well as the related insurer at risk. Tomorrow we revisit what I believe to be a near slam dunk CRE short. I post graphs and profit potential as well. 
Published in BoomBustBlog

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:

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:

 

For those who have not read my seminal piece on Dimon's house of Morgan, file iconJPM 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:

 I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & IntroductionI'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction  

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

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

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

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

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!

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

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...
 Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!  

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

Yes, this more of 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:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

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.
  • File Icon Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings
  • File Icon 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

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?

Here's a list of archives to browse through for those very few who actually give a damn... 

  1. Listen Carefully and You Can Hear the Crumbling Of The Sovereign Nation Formerly Known As JP Morgan
  2. A Few Quick Comments On Goldman's Q4 2011 Results
  3. CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!!
  4. Yes, The BoomBustBlog Forecast Pan-European Bank Run Has Breached American Soil!!!
  5. What Was That I Heard About Squids Raising Capital Because They Can't Trade?
  6. BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter
  7. Reggie Middleton vs the Squid That Can't Trade!
  8. The Greco-Franco Bank Run Has Skipped the Pond, Landed in NY/Chicago and Nobody Noticed, Exactly As I Predicted!
  9. The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications
  10. On Challenges To The Mainstream Financial Channels, BofA's (In)Solvency and Long-Only Pundits Dominating the MSM
  11. The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!
The next post on this topic will outline and illustrate subscription content concerning several banks and insurers 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:
  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

 

Published in BoomBustBlog

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...

image022

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!

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

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

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

 

Published in BoomBustBlog

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 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...

 

Published in BoomBustBlog

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, file iconJPM 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

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

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:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

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

 
 

 

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