First, pardon my tardy response to this JP Morgan news. I'm currently in Europe and was jet-lagged asleep when this popped. Of course, BoomBustBloggers know that I will be on the case. To begin with, a summary as pulled from ZeroHedge

In Corporate, within the Corporate/Private Equity segment, net income (excluding Private Equity results and litigation expense) for the second quarter is currently estimated to be a loss of approximately $800 million. (Prior guidance for Corporate quarterly net income (excluding Private Equity results, litigation expense and nonrecurring significant items) was approximately $200 million.) Actual second quarter results could be substantially different from the current estimate and will depend on market levels and portfolio actions related to investments held by the Chief Investment Office (CIO), as well as other activities in Corporate during the remainder of the quarter.

Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO's synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO's AFS securities portfolio. As of March 31, 2012, the value of CIO's total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.

The Firm is currently repositioning CIO's synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm's overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.

Accordingly, net income in Corporate likely will be more volatile in future periods than it has been in the past.

The Firm faces a variety of exposures resulting from repurchase demands and litigation arising out of its various roles as issuer and/or underwriter of mortgage-backed securities (“MBS”) offerings in private-label securitizations. It is possible that these matters will take a number of years to resolve and their ultimate resolution is currently uncertain. Reserves for such matters may need to be increased in the future; however, with the additional litigation reserves taken in the first quarter of 2012, absent any materially adverse developments that could change management’s current views, JPMorgan Chase does not currently anticipate further material additions to its litigation reserves for mortgage-backed securities-related matters over the remainder of the year. 

All of this is coming form the just filed 10-Q. The full link is here. 

Now, just so those who have not followed me for some time don't get it twisted, I want all to know that I'm a longer term strategist. I'm not a trader! As such, I don't focus on daily stock prices or live my life quarter to quarter. What I do is paint the big picture over time. I'm not magic, I'm not always right, but I am honest. In addition, although I'm not always right, I have been right over 90% of the time since the beginning of the credit bubble in 2000 to date. To wit regarding JP Morgan, on September 18th 2009 I penned the only true Independent Look into JP Morgan that I know of. It went a little something like this:

Click graph to enlarge

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

This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent - particularly if that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent). I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.

    1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
    2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
    3. As the markets climb on top of one big, incestuous pool of concentrated risk...
    4. Any objective review shows that the big banks are simply too big for the safety of this country
    5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish.

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

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.

Reggie Middleton with Max Keiser on the Keiser Report and RT Television - Discussing JP Morgan, Derivatives, Fraudclosure and the US Oligarchy

Here I discuss JP Morgan's suffering from ZIRP and bad mortgages (still), hence the losses that JPM's Dimon was just bitching about a year or two later - simply reference the MSM JPMorgan's DimonMortgage Woes Still Hit Earnings.

Look at the video below where I warn of JP Morgan's derivative business, and where I was just about the ONLY one warning that JPM's risk is simply a time bomb waiting to go BANG! Guess what I just heard? That's right! BANG!!!

Also, take note of how I said that JP Morgan WILL NOT be in this significant loss on its own. It's counterparties exist in a very, very small pool, and I doubt if any of them really have the truly economic capital to back these losses. They will simply turn to their counterparties who will in turn turn to their counterparties. The only problem is that this counterparty past the buck daisy chain is only 5 or 6 banks long. What do you think happens when this game of musical chairs comes to an end? Buy the MFD!!!

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

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

Click to expand!

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Again, from ZeroHedge

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

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

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

 
 

 

Published in BoomBustBlog

Reggie Middleton at Emirates Palace in Abu Dhabi

Reggie Middleton at the Emirates Palace in Abu Dhabi

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Published in BoomBustBlog

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

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

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

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

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

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

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

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

BNP_Paribus_First_Thoughts_4_Page_09

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

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

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

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

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

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

LTRO has variation margin.

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

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

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

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

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

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

The first model (all are cast in Excel 2010 format [.xlsx]), File Icon BNP Exposures - Free Public Download Version, is available to the public free of charge and is designed to spark the discussion of Whether Another Banking Crisis Is Inevitable? Here are some screen shots.

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

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

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

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

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

Income statement implications of a true bank run...

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Published in BoomBustBlog

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

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

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

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

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

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

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

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

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

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

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

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

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

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

file iconBNP Exposures - Professional Subscriber Download Version

 


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

 

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

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

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

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

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

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

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

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

 Greek Bank Deposit Outflows Soar In January, Third Largest Ever

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

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

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

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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!

Published in BoomBustBlog

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

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

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

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Imagine the Swiss nationalizing just UBS and Credit Suisse, whose assets constitute 500% of the Swiss GDP. THAT'S JUST TWO BANKS!!! Imagine if the entire banking system got into trouble from daisy chaining European defaults??? 

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

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If BoomBustBloggers remember, I went on a tear with my theory of European bank runs last summer. Reference:

I strongly suggest that any interested in the topic peruse the links above if they haven't already done so. They drive the point home. And on the topic of Greece and bank runs, ZH runs Greek Bank Deposit Outflows Soar In January, Third Largest Ever

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

 

Were the big Greek banks effectively nationalized already? Don't the depositors and counterparties/creditors know that Bank of Greece and the ECB have their backs. I mean, come on now. Paranoia is simply going too far. MG Global account holders may be getting some of their monies back, as is somebody who had an account somewhere in Lehman. I remember when I made this warning about Bear Stearns back in January of 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies). Nobody wanted to listen: Is this the Breaking of the Bear?

 

Once again, do I have a crystal ball??? Or just a spreadsheet??? After all, the ECB just injected a record amount of junk collateral backed, near ZIRP liquidity into the European banking system - Helicopter Ben style - a half trillion Euro worth, or 3/4 trillion dollars or so. And to think, many believe Hip Hop music and iPhones to be one of the biggest US exports:-) Of course, everybody on the sell side sees this as bullish - reference Cascade is to Domino as Greece is to Por… and Does Anyone See This Emergency As An Eme… for a more common sense approach to this ECB bailout of bailouts. As for just why such a massive liquidity injection was necessary? Well, as this excerpt from the subscriber edition of the BNP Paribas report is marked...

 

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'Nuff said! Subscribers, as (not if, but as) this breaks, these are the companies trading at the valuations that are most shortable/profitable in my opinion...

US CRE

European Insurance

Published in BoomBustBlog

Today's big headline from Bloomberg: Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash

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

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

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

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

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to hear, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks? Is the "pass[ing] it on the the economy" the reason why there is now so much liquidity in European CRE? Here's a quick reminder of where I stand on this...

So, it's safe to say that all of those European REITs and real estate concerns with property mortgages coming up for renewal while underwater will definitively see most of that LTRO 2 money, right? Let's all take a deep breath and hold it as we wait for that one to happen. Ready? One... Two... Three...

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?

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

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

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

Published in BoomBustBlog

In continuing with my rant on the absurdity of even pretending the Greek situation is salvageable or that Greece will somehow be bailed out without a near complete absolution of their debts, I  bring forth from the BoomBustBlog archives the Sovereign Contagion Model. For those who haven't read my most posts on this topic, please review The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media and Grecian Tragedy Formula, Bailout Number 3.

It is my contention that Greece's significant default is a forgone conclusion. It is also my contention that media attention should be much more focused on the damage to be done by a Greek default - considerably more so than whether Greece will ultimately default of not or what type of bailout it may or may not recieve. I have been of this mindset for several years which is why I had my analyst team create the Sovereign Contagion Model below.

foreign claims of PIIGS

I've decided to go through a portion of the model and subset of its output to spark a real, realistic discussion in the media (I will discuss this on Capital Account via RT [Russian Television] live, today at 4:30 pm, re-airs at 7:30pm).

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.

What happens when you take the raw public debt exposure and you massage it for reality? Well, BoomBustBlog subscribers already know. Here's a sneak peak of just one such scenario...

(Click to enarge)

 thumb_Sovereign_Contagion_Model_-_Pro__Institutional_demonstration_of_Greek_default

This is a scenario of a 96% chance of a Greek default, which naturally daisy chains along the EU corridor. Why do I say "naturally daisy chains" you query? Well, to begin with, the leveraged holdings of Greek bonds will take a massive, mark to market recognized loss - except for possibly the ECB who holds the most since that institution feels it can rewrite the rules. Bond investors levereaged 10 to 60 percent taking a 75%+ loss on an unlevered basis are not just underwater, they are deep sea fishing.

Then there's the human nature reality that if/once Greece defaults and does not get absolutely obliterated, other nations will wonder why they should suffer through extreme austerity measures while Greece defaults and gets to start over without paying back its debt. Hey, if he doesn't have to honor his loans, why should I? That means Portugal and Ireland will be quite reticent to suffer through high debt service and austerity while Greece doesn't.

Even if point the point above does not come to fruition (eventhough it probably would), EU-wide austerity is the same as a great recession or depression - on topr of historically unprecedented debt service. A simple glance at history reveals default is much, much wiser than suffering through a decade of austerity. Don't believe me, ask the fastest growing economy in the EU, Iceland. Don't forget to look up why Iceland is one of the fastest growing economy in the EU block as well - and they are not even in the EU. Oh yeah, that's right! They defaulted on their debt and moved forward.

Take the above into consideration as you read this article published by Bloomberg today:

Royal Bank of Scotland Group Plc, Commerzbank AG (CBK) of Germany and France’s Credit Agricole SA booked losses on their Greek government debt two days after creditors agreed to the biggest sovereign restructuring in history.

RBS, Britain’s biggest government-owned lender, posted a wider-than-expected full-year loss after taking a sovereign-debt impairment of 1.1 billion pounds ($1.7 billion). Commerzbank, Germany’s second-biggest lender, booked a 700 million-euro ($1.1 billion) writedown on Greek debt in the fourth quarter. Credit Agricole, France’s third-largest bank, reported a quarterly loss after 220 million euros in impairments on Greek debt.

Dexia SA and Allianz SE (ALV) also announced Greek writedowns today. The nation’s private creditors agreed to a debt swap on Feb. 21, paving the way for a second bailout and averting what Deutsche Bank AG Chief Executive Officer Josef Ackermann said would have been a “meltdown” worse than the collapse of Lehman Brothers Holdings Inc.

“Earnings were hit by Greek writedowns, but at least the worst is now behind us,” said Lutz Roehmeyer, who helps oversee about 11.5 billion euros at Landesbank Berlin Investment in Germany’s capital. “By aggressively writing down their holdings, banks want to show that they can cope even if Greece defaults down the road.”

RBS, Commerzbank and Credit Agricole (ACA) have all written down their Greek debt by at least 74 percent, in line with estimated losses in the securities’ net present value from the swap.

Hmmmm! Where have we heard this before?

... RBS shares jumped 4.8 percent to 28.63 pence as of 12:06 p.m. in London on optimism that Chief Executive Officer Stephen Hester has completed the worst of the writedowns and as demand recovered at its U.S. business.

... Allianz (ALV), Europe’s biggest insurer, posted fourth-quarter earnings that missed estimates as the Munich-based company booked 1.9 billion euros of non-operating impairments on Greek sovereign debt and investments, particularly in financials, for the year.

The insurer wrote down its Greek bonds to market values at the end of 2011, representing 24.7 percent of their nominal value. Shares of Allianz were up 0.8 percent to 90.57 euros.

Dexia, the Belgian lender being broken up, reported a record loss of 11.6 billion euros today. Its writedowns on Greek sovereign debt totaled 3.61 billion euros last year, including 1.25 billion euros of impairments taken by its former Belgian bank unit before it was sold on Oct. 20. In addition, Dexia (DEXB) wrote down an additional 1.01 billion euros on derivative contracts tied to the Greek debt.

... Europe’s largest lenders and insurers are likely to accede to the Greek swap because they’ve already written down their sovereign holdings and want to avert the risk of a default, analysts said earlier this week. The success of the swap depends on how many investors participate in the transaction.

Under the deal, investors will forgive 53.5 percent of their principal and exchange their remaining holdings for new Greek government bonds and notes from the European Financial Stability Facility. The plan seeks to reduce Greece’s debt burden by 107 billion euros, the Institute of International Finance, which led negotiations, said earlier this week. The swap is meant to help reduce the country’s debt to 120.5 percent of gross domestic product by 2020.

Will debt at 120% of GDP work for a country thrown into its deepest recession ever by austerity measures? Will anyone know what will happen three years out, not to mention 8 years out as declared by this story? Referencing the interactive spreadsheet published earlier this week - The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media:

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As the premise to this story goes, this is definitely not about just Greece.  Let's review the contagion chart once again...

thumb_Sovereign_Contagion_Model_-_Pro__Institutional_demonstration_of_Greek_default

  1. Australia is heavily levered into China, and any who follow me know how I feel about China. There's also speculation of an Aussi Bubble Video to Go With Your Aussie Bubble Speculation?
  2. Austria and Belgium are highly exposed, yet never mentioned in the media
  3. France, held hostage by its socialist stance to its over-leveraged banks - see "BoomBust BNP Paribas?"For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same:

  4. Ireland heavily levered into the UK whose banking system NPA's represent 9% of GDP!
  5. Germany, the penthouse suite lessor of the Roach Motel, and potentially the biggest threat to Europe? See The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...
  6. Japan: Highest debt outside of Zimbabwe, will force Japan to sell holdings to manage debt, driving up interest rates worldwide??? 

I can go on, but I think many have already got the message.

Published in BoomBustBlog

Bloomberg reports: Morgan Stanley, UBS, Goldman May Be Cut by Moody’s

Quote:

UBS AG, Credit Suisse Group AG (CSGN) and Morgan Stanley’s credit ratings may be cut by as many as three levels by Moody’s Investors Service, which is reviewing 17 banks and securities firms with global capital markets operations.

Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) are among companies that may be downgraded by two levels, Moody’s said in a statement, adding that the “guidance is indicative only.” Moody’s today cut some European insurers’ ratings based on risks stemming from the region’s sovereign debt crisis.

... Barclays Plc (BARC), BNP Paribas SA, Credit Agricole SA, HSBC Holdings Plc (HSBA), Macquarie Group Ltd. (MQG) and Royal Bank of Canada may also be cut by two levels, Moody’s said. Bank of America Corp. (BAC), Nomura Holdings Inc. (8604) Royal Bank of Scotland Group Plc and Societe Generale SA may be lowered by one grade, it said.

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!!!

 

Well, CNBC has invited me to do a full hour on their show tomorrow for the halftime report (12pm to 1pm) knowing full well I am probably the biggest contrarian that channel has ever seen. Stay tuned, it should be interesting. I will provide some downloadable valuation models companies and/or sovereigns for my readers to play with to facilitate conversation and get the tweets/emails going during the show - hopefully in my next post later on today.

Now, back to Bloomberg's report and banking, let's recap...

Goldman

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...

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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 presenation 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.)...

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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

Bank of America

Bank of America Lynch[ing this] CountryWide's Equity Is Likely Worthless and It Will Rape FDIC Insured Accounts Going Bust

Warning! This is going to be a highly, highly controversial post. It is long, it is thick with information, and it hits HARD! Thus if you are easily offended by pretty women, intellectually aggressive brothers in cognitive war garb, your government regulators selling you out to the highest European bidder, or the cold hard facts borne from world class research that you can't find from the sell side or the mainstream media, I strongly suggest you stop reading here and move on. There is nothing further for you to see. As for all others, please keep in mind that I warned of Bank of America Lynch[ing this] CountryWide's swap exposure through a subscriber document on Thursday, 01 October 2009, then went public with it shortly thereafter.

There has been a lot of feedback and emails emanating from the last RT/Capital Accounts interview that I did earlier this week, as well as it should be. The dilemma is that I don't think the viewership is taking the topic seriously enough. I explicitly said, on air, that the Federal Reserve endorsed this country's most dangerous bank in shifting its most toxic assets directly onto the back of the US taxpayer through their most sacrosanct liquid assets, their bank accounts. In addition, when the shit hits the fan, those very same assets will be second in line for recovery, for the derivative counterparties will get first grabs.

Now, maybe its due to the fact that the interviewer was a cutie, or my voice was too deep, or because I didn't appear in my superhero garb, but I really don' think the message was driven home by the interview that I gave on Russian TV's Capital Account introductory show last week. So, let's try this again, but this time instead of donning that suit and tie, I go as that most unlikely of financial superheroes...

To begin with, for those who did not see the Capital Accounts interview on Russian Television, here it is...

Next, we need to see just how pertinent being 2nd in line is in the liquidation of an insolvent investment bank. I do mean insolvent. Yes, I know the big name brand investors who don't look like that rather unconventional superhero standing in front of the Squid headquarters above may believe that BAC has value, but I have told you since 2008, and I'll tell you now - the equity of Bank of America Lynch[ing this] CountryWide is effectively worth less than zero! Yeah, I know, many of those name brand analysts espoused in the mainstream media disagree, and to each their own, but several of Bank of America Lynch[ing this] CountryWide's latest acquisitions, ex. Countrywide, Merrill Lynch, etc. were enough to make it insolvent. Add several negative numbers together and do you think a little financial engineering is going to give you a positive number??? A little common damn sense is all that is needed to fill the bill here.

That $6 you see quoted on your equity screens is a freebie, a giveaway, and not indicative of economic book value in my opinion. Then again, I could be wrong, but I was correct on practically every major bank, insurance and real estate co. failure in the US over the last 4 years, as well as predicting many of the European ones. See Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

BNP Paribas

BoomBust BNP Paribas? as excerpted...

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

But wait, there's more - much more!

BNP_Paribus_First_Thoughts_4_Page_04

BNP_Paribus_First_Thoughts_4_Page_05

BNP_Paribus_First_Thoughts_4_Page_06

BNP_Paribus_First_Thoughts_4_Page_07

JP Morgan

Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:

I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.

I have warned of this event. JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011.

This piece has always been a classic: An Independent Look into JP Morgan

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

This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent - particularly if that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent). I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.

  1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
  2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
  3. As the markets climb on top of one big, incestuous pool of concentrated risk...
  4. Any objective review shows that the big banks are simply too big for the safety of this country
  5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish.

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

Traditional banking revenues: manifest destiny as forwarned - Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks

Morgan Stanley

'Nuff said! Let's move over to Morgan Stanley... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? You know, I'm still quite bearish on Asian, European and American banks. Just look at the facts as they're laid before you...

 HSBC

Subscribers, see the lastest research: HSBC Haircuts, Derivative Risks and Valuation. I prefer not to excerpt this material, but this post is lengthy and rich enough as it is. The archives are rich on this company as well...

My take on Moody's itself...

Interesting Documentary on the Power of Rating Agencies, Reggie Middleton Excerpts 

I have also warned extensively on the other nations that Moody's is just now getting to stripping, and will address them in detail in a separate post. In the meantime, this is a good time to bring up that Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts

Reggie_VPRO_Ratings_agenciesReggie_VPRO_Ratings_agencies

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

See also, What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer!

Banking problems are inevitable as long as policymakers, regulators and central bankers insist on try to control the economic circle of life.

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

Reminisce while traipsing through our real estate analysis and research:

    1. On Employment and Real Estate Recovery Monday, April 25th, 2011
    2. A First In The History Of Mainstream Media? NAR Is Identified As A Joke! Tuesday, March 29th, 2011
  1. The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011
    1. Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
  2. Further Proof Of The Worsening Of The Real Estate DepressionThursday, February 24th, 2011
    1. In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011
  3. When Will the Mainstream Media Be Ready To Call The NAR The Sham That It Really Is? Tuesday, February 22nd, 2011

Those who wish to jump on the gravy train of our next US bank analysis featuring those susceptible to this malaise can subcribe here and now!

The many ways to reach Reggie Middleton:

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

Or simply email me.

Published in BoomBustBlog

VPRO_Rating_agency_documentary_billboard

In continuing with my rant against the ratings agencies (see Interesting Documentary on the Power of the Agencies) I bring you additional evidence that their seemingly incompetent behavior leading up to the 2008 market crash is nothing compared to what is going on today... And many think the agencies have reformed!!! Subscribers, a B-L-O-C-K-B-U-S-T-E-R forensic report update based upon the banking situation described herein is currently in the works and will probably follow this post (tomorrow). Stay tuned, for I found a company that is trading at roughly 10x its intrinsic value, and that's putting it conservatively. I will release the research on this company to lenders and then the public a few weeks after I have released the details to subscribers, so be sure to download and absorb as much information as you can. As you read the following, keep in mind how many warnings you've heard from the rating agencies about those real estate concerns...

As reported this morning by FT.com:

Eurozone crisis triggers credit squeeze

The eurozone debt crisis has triggered a severe credit squeeze across the region with banks imposing significantly harsher loan terms and demand for credit tumbling, a European Central Bank survey has shown. Banks’ weakened finances and worries about the eurozone’s future led to an aggressive tightening of credit standards faced by businesses and households at the end of last year and early 2012. Demand for mortgages and loans to fund corporate investment also fell sharply, the survey showed. 

I have been warning of this since very early 2010, to wit:

Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

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

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I also warned about a year later in Is Another Banking Crisis Inevitable? 04 February 2011

and even last month in...

The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History Monday, 19 December 2011

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

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

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

Okay, back to the FT.com excerpts...

Germany, however, remained immune.

Do you remember when I warned about GroupThink creating lopsided risks in the market? Reference The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

The results suggested December’s unprecedented injection into the financial system by the ECB of €489bn in cheap three-year loans had failed to prevent a retrenchment by banks that could hamper the region’s economic recovery. The effects of the central bank’s actions are still feeding through, however, and the ECB will be relieved that the tightening of credit conditions is not yet as severe as after the collapse of Lehman Brothers investment bank in September 2008.

Well, that' because a European bank hasn't collapsed yet. It's not as if they haven't tried, though.

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

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

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

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

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

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

And back to the FT excerpts again...

The ECB’s bank lending survey - conducted between December 19 and January 9 - followed Friday’s weak December lending data that showed the sharpest monthly fall in outstanding corporate loans since records started in 2003. The ECB said participants had “explained the surge in the net tightening of credit standards by the adverse combination of a weakening economic outlook and the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position”.

It added: “The prevalence of tightening appeared to be widespread across larger euro area countries, with the notable exception of Germany.”

... For mortgage loans to households, the balance reporting a tightening of credit standards rose from 18 per cent to 29 per cent – the highest since January 2009. Demand for mortgages slipped further, with the balance reporting a decline over those reporting increases rising from 24 per cent to 27 per cent.

Hmmmm! Mortgages? Methinks Reggie's admonitions on European CRE has come to pass, eh? Also from The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History Monday, 19 December 2011

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

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 Click the following pages to englarge...

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

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

Keynote presentation

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

Q&A and discussion, part 1

Q&A and discussion, part 2

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

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Published in BoomBustBlog

Notes of interest as I browse through the Goldman Q4-2011 earnings release...

  1. Many analysts dropped their estimates for Goldman (considerably after I warned on the firm), setting up the old Wall Street bait and switch move... Yet, despite this setup on reduced earnings, Goldman STILL MISSED on the top line! This is the most important number and has trended downward sharply.
  2. Goldman has padded earnings by slashing its compensation. For this I query my hyperintelligent BoomBustBloggers (and anyone else who has a synapse or two to spark), exactly what is that Goldman makes again? What's their prized formula? Their secret sauce? Their patented product? Oh yeah, they really don't have any thing of the sorts outside of their human capital - their employees. Those very same employees in which Goldman is not making a negative investment in order to make numbers (on earnings, they can't do anything about missing the top line). As a result, Goldman's only true product - their only real inventory, is heading for the hills. What does this bode for the future? Well, you guys are smart. You know its bullish when companies invest heavily for the future. What is it when they pare investment back significantly???
    1. The earnings pad is not even as optimistic as it seems. Revenues have decreased more than the effective reduction in compensation, thus it can be argued that effective comp as a % of revenues has increased. Should shareholders be excited about the proportion of their revenues increasing to compensate those who have underperformed so drastically???
  3. The net gain attributable to the impact of changes in the firm’s own credit spreads on borrowings for which the fair value option was elected was approximately $600 million for 2011.
    1. So, the firm's actual cash earnings decrease was materially higher than appears on the surface...
  4. During the year, the firm repurchased 47.0 million shares of its common stock at an average cost per share of $128.33, for a total cost of $6.04 billion, including 9.2 million shares during the fourth quarter at an average cost of $98.54, for a total cost of $908 million. The remaining share authorization under the firm’s existing repurchase program is 63.5 million shares.

    1. Goldman has taken a $1.3B loss on its share buybacks for 2011! Keep that in mind when taking their investment recommendations to heart! I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!! Even when they are advising themselves on share buybacks though???
  5. The MSM news organizations forgot to mention that althought Goldman's asset base is shrinking, it is shifting ever more of those shrinking (read devaluing) assets into the level three category.

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I will extend this note for subscribers if I find anything of interest in subsequent filings or the conference call notes.

Here are some links that you are unlikely to find anywhere else...

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 & 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?  

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!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 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!

Published in BoomBustBlog