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?

If Bank of America Lynch[ing this] CountryWide Goes Bust, How Much Can Bank Depositors Expect To Lose?

Now, back to the point, how much can US depositors (you) expect to get when (notice I didn't say if) Bank of America Lynch[ing this] CountryWide goes bust? Well, here's a snippet from the WSJ.com:

The group of more than a dozen investors who hold debt in Lehman’s so-called operating subsidiaries today lobbed a proposal that would pay some creditors up to 60.4 cents for each dollar of their claims, while offering senior Lehman bondholders a 16% recovery, reported Deal Journal colleague Eric Morath.

(Click HERE to read the rival plan to reorganize Lehman Brothers.)

At stake is how to repay nearly $300 billion in money owed from the collapse of Lehman Brothers, which filed for bankruptcy protection in September 2008. A judge now may be forced to decide among three different proposals to repay Lehman creditors.

Lehman’s own proposal to pay back debt holders calls for just a 21.4% recovery for unsecured creditors. Under Lehman’s plan unveiled in January, the operating company creditors would receive less than 60.4 cents on the dollar.

Lehman is also facing an additional rival plan from another group led by hedge-fund manager John Paulson. Those creditors are pushing for a 24% recovery for senior unsecured creditors at the expense of subsidiary creditors.

Whoa, a recovery of between 21 and 60%??? That doesn't sound to promising! You know why it doesn't? Because it's not accurate. The derivative counterparties of the bank get first shot at that 21 cents to 60 cents on the dollar, not the FDIC insured bank depositors. After the counterparties finish feasting at the trough, what would you think is left over for the Aunt Mabels of the US with their lifetime savings tied up in CDs paying .23%, which your aunt was perfectly willing to accept in exchange for the safety and protection of her US government and the FDIC (please excuse me as the taste of bile interferes with my ability to type this).

Let's revisit the story that Bloomberg broke on this topic.

BofA Said to Split Regulators Over Moving Merrill Derivatives to ...

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren't authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn't believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

... Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

The legislation gave the FDIC, which liquidates failing banks, expanded powers to dismantle large financial institutions in danger of failing. The agency can borrow from the Treasury Department to finance the biggest lenders’ operations to stem bank runs. It’s required to recoup taxpayer money used during the resolution process through fees on the largest firms.

Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.

I'm afraid that last statement is just not true. See 10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the US taxpayer. After that, seeBuried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!

Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

Hmmmm! As excerpted from a recent post on Naked Capitalism:

Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.

And back to the Bloomberg article...

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.

This is a very, very, very important point to BoomBustBlog paying susbscribers (see research excerpts below).

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

BoomBustBlog Subscribers, Feel Free to Indulge In Research That Will Likely Prove To Be Most Prophetic Given The Information Above

Colossal Derivative exposure

According to the latest quarterly report from the Office Of the Currency Comptroller the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Although the [subject bank] with the xth largest derivative exposure stands a significant distance behind JPM, Citi, Bank of America and Goldman Sachs (the four largest players); the exposure quoted in OCC report is only for the US entity. Overall, [subject bank]’s group derivative exposure in its balance sheet is 220% of its tangible equity, far higher in both absolute and relative terms when compared to its peers. [Subject bank]’s on balance sheet derivative exposure is higher than the combined share of Goldman Sachs ($74bn, or 115% of TEC), JP Morgan ($78bn, or 62% of TEC) and Morgan Stanley ($46bn, or 114% of TEC).  What is more worrying is the quality of these derivative assets. Of the total notional value of credit derivatives (over half trillion $US bn), nearly 60% are non-investment grade. [Subject bank] has the highest proportion of non-investment grade credit derivatives followed by Citi Group (55%), GS (52%), Bank of America (37%) and JP Morgan (32%). The tables below as well as on the following page compare [subject bank]’s on-balance sheet derivative exposure. This is the bank, apparently unrecognized by the markets, media and sell side, that will literally go boom when the match is put to the dry gunpowder (subscribers only): Haircuts, Derivative Risks and Valuation

This is the US bank that will SHOCK everybody with a most violent reaction when the excrement hits those cooling machine blades (subscribers only): US Bank Derivative Exposure

This is the European bank that either will set off the global chain reaction or end up being a very significant part of it (subscribers only): 

• European Bank Exposures - Professional
• European Bank Exposures - Retail

For those who don't follow BoomBustBlog regularly, I warned of Bank of America Lynch[ing this] CountryWide'srisks and related issues many times in the past, but this expose and research on their swap risk was most prophetic, and was dated Thursday, 01 October 2009, over two full years ago!

As excerpted, and aptly named:

And the next AIG is... (Public Edition)...

Chronology of September 2008 liquidity crisis

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permits firms with the highest credit ratings to enter swaps without depositing collateral with its trading counter-parties. When its credit rating was downgraded, the company was required to post additional collateral with its trading counter-parties, and this led to an AIG liquidity crisis. [Here's a quick glance at Bank of America's current rating as compared to AIG's, both before and after their "incident". Be aware that this is not my proprietary rating (which would be substantially lower), but that of the oh so accurate major rating agencies. I doubt if they have taken this naked and unhedged exposure into consideration!]

Click graphics to enlarge

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AIG's London unit sold credit protection in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) that had by that time declined in value.^[18] [The lower quality assets are the most likely to decrease in value dramatically. One should keep this in mind, for BAC has written $116 billion on non-investment grade (junk) credit derivatives and $3 billion in junk total return swaps. They have hedged, but not completely. My calculations and estimates have BAC with a carrying value of unhedged exposure of around $32 billion and a notional unhdeged exposure of $348 billion]. The United States Federal Reserve Bank announced the creation of a secured credit facility of up to US$85 billion, to prevent the company's collapse by enabling AIG to meet its obligations to deliver additional collateral to its credit default swap trading partners. [Keep in mind that BAC just gave up its government guarantee on the JUNKY assets acquired with the Merrill Lynch acquisition. Merrill Lynch was one of the, if not the LARGEST writer of CDS on Wall Street! BAC also bought Countrywide, arguably the most wretched pool of subprime and under-performing mortgage assets in this country.] The credit facility provided a structure to loan as much as US$85 billion, secured by the stock in AIG-owned subsidiaries, in exchange for warrants for a 79.9% equity stake, and the right to suspend dividends to previously issued common and preferred stock.^[16][19][20] AIG announced the same day that its board accepted the terms of the Federal Reserve Bank's rescue package and secured credit facility.^[21] This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.^[22][23] [Well, we shall see, since Bank of America is currently the largest bank in America. We still have time to set a new record.]

AIG's share prices had fallen over 95% to just $1.25 by September 16, 2008, from a 52-week high of $70.13. The company reported over $13.2 billion in losses in the first six months of the year.^[24][25] [Well, green shoots is a sproutin'! AIG is currently trading at $44.33. I am at a loss as to how anyone can justify such, but hey, people are still buying Bank of America stock as well...] The AIG Financial Products division headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. [Hmmm!!! BAC has written protection $2.6 trillion notional, with $348 billion unhedged (at least according to my calculations). For those "not to use notional nitwits", that translates to $198 billion carrying value with $32 billion apparently unhedged or written naked - just like AIG, with one big exception. It appears as if BAC has one the machismo contest of "mine is bigger than yours" with AIG - congrats fellas!] Of those securities, $57.8 billion were structured debt securities backed by subprime loans.^[26] CNN named Cassano as one of the "Ten Most Wanted: Culprits" of the 2008 financial collapse in the United States.^[27][Well, Ken Lewis, the BAC CEO, is not to popular around these parts either. I am sure the upcoming Cuomo/congress investigations will be juiced when they find out that BAC is doing the AIG thing, just on a much larger scale!!! Just remember who you heard it from first!]

As Lehman Brothers (the largest bankruptcy in U.S. history at that time) [Hey, I warned you guys about Lehman and Bear WAY in advance, just as I am doing ow with Bank of America - "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) - Is this the Breaking of the Bear? January 2008 - Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!) - Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 - Funny CLO business at Lehman Friday, 04 April 2008] suffered a catastrophic decline in share price, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the values used by Lehman which weakened investors' confidence in AIG.^[24] [If BAC is not careful, the market may have similar misgivings on how BAC values its credit card receivables and mortgages held in off balance sheet trusts. See our my findings on what may lay off balance sheet - If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, to raise cash.^[24] The Federal Reserve hired Morgan Stanley to determine if there are systemic risks to a financial failure of AIG, and asked private entities to supply short-term bridge loans to the company. In the meantime, New York regulators allowed AIG to borrow $20 billion from its subsidiaries.^[28][29] [Why ask Morgan Stanley? In 2008, they were "The Riskiest Bank on the Street". I guess it takes one to know one! I ask my readers, is one of the biggest banks in the country that then swallows the biggest brokerage and at the time the sickest brokerage in the country right after swallowing the biggest and sickest mortgage lender in the country a systemic risk if it fails? I bet a lot of you guys and gals can answer that question for a whole lot more than the government paid Morgan Stanley. I wonder, why don't these guys ask me my opinion? NY bloggers don't get enough respect :-)]

At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent.^[30] The Federal Reserve continued to meet that day with major Wall Street investment firms, hoping to broker a deal for a non-governmental $75 billion line of credit to the company.^[31] Rating agencies Moody's and Standard and Poor downgraded AIG's credit ratings on concerns over likely continuing losses on mortgage-backed securities. [Now, this is just simply hilarious. With friends like the credit rating agencies, who needs enemies? Think about the fire alarm that starts to go off just when the smoldering embers of what use to be your house begin to cool... How much money has AIG paid the credit ratign agencies over the last 10 years or so?] The credit rating downgrade forced the company to deliver collateral of over $10 billion to certain creditors and CDS counter-parties.^[32] [Well, we shall see what will happen with that "other" bank] The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17.^[33] Just before the bailout by the US Federal Reserve, AIG former CEO Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert B. Willumstad offering his assistance in any way possible, ccing the Board of Directors. His offer was rebuffed.^[34] [And why wasn't this man's assistance accepted???]

Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG could draw up to $85 billion. The loan was collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of "substantially all" of its regulated subsidiaries, and with an interest rate of 850 basis points over the three-month London Interbank Offered Rate (LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility, the U.S. government received warrants for a 79.9 percent equity stake in AIG, with the right to suspend the payment of dividends to AIG common and preferred shareholders.^[16][20] The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.^[20][35][36] AIG's board of directors announced approval of the loan transaction in a press release the same day. The announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve.^[16][21][37] AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.^[38] On September 22, 2008, AIG was removed from the Dow Jones Industrial Average.^[39] An additional $37.8 billion credit facility was established in October. As of October 24, AIG had drawn a total of $90.3 billion from the emergency loan, of a total $122.8 billion.^[40]

Maurice Greenberg, former CEO of AIG, on September 17, 2008, characterized the bailout as a nationalization of AIG. He also stated that he was bewildered by the situation and was at a loss over how the entire situation got out of control as it did.^[41] On September 17, 2008, Federal Reserve Bank chair Ben Bernanke asked Treasury Secretary Henry Paulson join him, to call on members of Congress, to describe the need for a congressionally authorized bailout of the nation's banking system. Weeks later, Congress approved the Emergency Economic Stabilization Act of 2008. Bernanke said to Paulson on September 17:^[42]

[Oh, this soap opera gets worse. Bank of America's bailouts have totaled $168 billions so thus far, and we haven't even addressed the naked swap writing issue as of yet. Then again, BAC did buyout the Merrill Lynch loss guarantee from the government after much wrangling. I don't think this was the wisest idea, for they very well may still need it. Again excerpted from Wikipedia]:

Bank of America received US $20 billion in federal bailout from the US government through the Troubled Asset Relief Program (TARP) on 16 January 2009 and also got guarantee of US $118 billion in potential losses at the company.^[45] This was in addition to the $25 billion given to them in the Fall of 2008 through TARP. The additional payment was part of a deal with the US government to preserve Bank of America's merger with the troubled investment firm Merrill Lynch.^[46] Since then, members of the US Congress have expressed considerable concern about how this money has been spent, especially since some of the recipients have been accused of mis-using the bailout money.^[47] The Bank's CEO, Ken Lewis, was quoted as claiming "We are still lending, and we are lending far more because of the TARP program." Members of the US House of Representatives, however, were skeptical and quoted many anecdotes about loan applicants (particularly small business owners) being denied loans and credit card holders facing stiffer terms on the debt in their card accounts.

According to a March 15, 2009 article in The New York Times, Bank of America received an additional $5.2 billion in government bailout money which was channeled through American International Group.^[48]

As a result of its federal bailout and management problems, The Wall Street Journal reported that the Bank of America is operating under a secret “memorandum of understanding” (MOU) from the US government that requires it to ”overhaul its board and address perceived problems with risk and liquidity management.” With the federal action, the institution has taken several steps, including arranging for six of its directors to resign and forming a Regulatory Impact Office. Bank of America faces several deadlines in July and August and if not met, could face harsher penalties by federal regulators. Bank of America did not respond to The Wall Street Journal story.^[49]

This is exactly what I am talking about when I say these institutions CANNOT hedge their large risks. The number 2 derivative holder in the country (Bank of America) and the number 3 derivative holder in the country (Goldman Sachs) had to be bailed out by the government through AIG (another large derivative holder) when AIG had just $10 billion dollars in collateral calls that it could not pay. AIG was the largest insurer in the world!!! The number 1 derivative holder in the country (JP Morgan) needed $90 billion or so in bailout monies when its major counterparty failed - Bear Stearns. See Is this the Breaking of the Bear? January 2008 for how easy that was to see coming at least 3 months in advance! That circle of concentrated risk is even smaller now then it was back then. Now 5 institutions hold 97% of the notional vale and 88% of the market value in derivatives, and they are all basically in the same business and all basically hedge with each other. It is not a true hedge when the other side can't pay, and history has clearly proven how easy it is for the other side not to be able to pay. See a sampling of my many posts on this topic:

1. 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?

   6. An Independent Look into JP Morgan | Reggie ...

      1. image001.png

         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). 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 2009-09-18 00:56:22 488.64 Kb

          

Additional Bailouts of 2008

On October 9, 2008, the company borrowed an additional $37.8 billion via a second secured asset credit facility created by the Federal Reserve Bank of New York (FRBNY).^[43] From mid September till early November, AIG's credit-default spreads were steadily rising, implying the company was heading for default.^[44] On November 10, 2008, the U.S. Treasury announced it would purchase $40 billion in newly issued AIG senior preferred stock, under the authority of the Emergency Economic Stabilization Act's Troubled Asset Relief Program.^[45][46][47] The FRBNY announced that it would modify the September 16th secured credit facility; the Treasury investment would permit a reduction in its size from $85 billion to $60 billion, and that the FRBNY would extend the life of the facility from three to five years, and change the interest rate from 8.5% plus the three-month London interbank offered rate (LIBOR) for the total credit facility, to 3% plus LIBOR for funds drawn down, and 0.75% plus LIBOR for funds not drawn, and that AIG would create two off- balance-sheet Limited Liability Companies (LLC) to hold AIG assets: one will act as an AIG Residential Mortgage-Backed Securities Facility and the second to act as an AIG Collateralized Debt Obligations Facility.^[45][47] Federal officials said the $40 billion investment would ultimately permit the government to reduce the total exposure to AIG to $112 billion from $152 billion.^[45] On December 15, 2008, the Thomas More Law Center filed suit to challenge the Emergency Economic Stabilization Act of 2008, alleging that it unconstitutionally promotes Islamic law (Sharia) and religion. The lawsuit was filed because AIG provides Takaful Insurance Plans, which, according to the company, avoid investments and transactions that are"un-Islamic".^[48][49]

Counterparty Controversy

AIG was required to post additional collateral with many creditors and counter-parties, touching off controversy when over $100 billion was paid out to major global financial institutions that had previously received TARP money. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps purchased from AIG by the institutions), a number of Congressmen and media members expressed outrage that taxpayer money was going to these banks through AIG.^[50]

Had AIG been allowed to fail in a controlled manner through bankruptcy, bondholders and derivative counterparties (major banks) would have suffered significant losses, limiting the amount of taxpayer funds directly used. Fed Chairman Ben Bernanke argued: "If a federal agency had [appropriate authority] on September 16 [2008], they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now."^[51] The "situation" to which he is referring is that the claims of bondholders and counterparties were paid at 100 cents on the dollar by taxpayers, without giving taxpayers the rights to the future profits of these institutions. In other words, the benefits went to the banks while the taxpayers suffered the costs.

Well, Bank of America may very well give Ben Bernanke and the American taxpayer an opportunity to find out if we have learned our collective lessons. With the S&P pushing 1100 while practically all of the problems from the period illustrated above remain extant, and if anything exacerbated (ex. counterparty and concentration risk, credit risk and asset quality concerns, and above all, government sanctioned opacity in reporting), I doubt so very seriously.

This is what the US banks, and now you Mr. and Mrs. US taxpayer and bank depositor, have been backstopping all along...

You've been BAMBOOZLED! HOODWINKED! LED ASTRAY RUN AMOK!

I can be reached via the following channels, or directly via email:

I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.

For those that are new to the blog, these are pics of previous meet and greets...

 

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BoomBustBlog subscribers, I call you to attention. I have found a bank that literally has more derivatives risk than Citibank, Goldman, Morgan and JP Morgan - COMBINED! That's right, and on top of that if you peek under the covers (and not just follow the fodder in the annual reports) it apparently has the greatest mortgage risk in the industry. In addition to that... Okay, I'm getting ahead of myself. Let's start from the beginning or skip down to the RT Capital Account video if you're the impatient type.

Here are some quick updates before I move on to the latest subscription research (and boy, is this one a doozy!, subscribers download it here - Haircuts, Derivative Risks and Valuation). If you thought that Goldman, Bear, Lehman, BNP & Apple were good contrarian calls, you're going to wet your pants over this one - and thus far I haven't heard a peep about this company from ANYONE. I'm sure that will change forthwith as it shows signs of blowing up on both sides of the Atlantic - opps, I gave a hint. Well, here's some more...

ZeroHedge reports Italian Bonds Plunging: ECB Intervention Imminent: But if Italian bonds are tanking again, doesn't that put France at risk? See French Banks Can Set Off Contagion That'll Make Central Bankers Long For The Good 'Ole Lehman Collapse Days. Hold on, if France is suspect what does that portend for its largest bank? "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic of sovereign debt. 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 in the media.  Here I demonstrated what numbers would look like in said model...

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Okay, so if Italy and Greece cause France to go BOOM and the French banks will get caught in the blast (or vice versa, who can keep up these days), then doesn't that mean that those US banks leveraged into France and Italy will get hit? Oh yeah!!! Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss

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So, let's get to this big derivatives thing going around the web where Bloomberg blew the Bank of Lynch America Countrywide and JP Morgan spot by reporting they moved over $50 trillion notion of derivative exposure to their FDIC ensured banking arm to placate investors. What does this portend?

If Bank of America did it, and JP Morgan did, you can be rest assured most other big banks did it as well. What you ask? Hide the hot sausage, in a place that will burn... Really bad! As has been reported throughout the MSM and the blogosphere, the US banks have been caught playing hide the hot sausage, the problem is they're hiding it in mom and pop's bank accounts. Needless to say, this is going to burn the average tax payer and savings account holder where the sun don't shine...

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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This concept was further illustrated in An Independent Look into JP Morgan...

Click graph to enlarge (there is a typo in the graphic - billion should trillion)

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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.

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 2009-09-18 00:56:22 488.64 Kb

Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010, discusses JP Morgan and concentrated derivative bank risk.

If you think that's scary (and you really should) check out Is Goldmans Sachs Derivative Exposure the Squid in the Coal Mine?

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

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

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

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

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

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

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

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

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...

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As you read exactly how precarios the situation is in France (and Belgium, through Dexia, et. al.) keep in mind that although this is definitely not good news for Goldman's numbers, historically since the beginning of this crisis, GS has actually correlated more with coke laced, red bull juice powered mo-mo trader patterns than actual book value - reference The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? from just last reporting period...

... I'd like to announce to the release of a blockbuster document describing the true nature of Goldman Sachs, a description that you will find no where else. It's chocked full of many interesting tidbits, and for those who found "The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely" to be an iteresting read, you're gonna just love this! Subscribers can access the document here:

• Goldman Sachs Q3 Forensic Review - Retail
• Goldman Sachs Q3 Forensic Review - Professional

As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor.

Interested parties should click here to subscribe, cause next up we walk through several other American banks to see who's up for re-enacting 2008-9 put parade - and historically we have usually if not always been ahead of the curve, particularly when compared to Wall Street and the sells side - see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

So, in case you have yet to hear anything new (which could be the case if you're a BoomBustblog regular), try this on for size - taken off of the very first page of today's BoomBustBlog subscriber update - Banks Haircuts, Derivative Risks and Valuation.

Colossal Derivative exposure

According to the latest quarterly report from the Office Of the Currency Comptroller the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Although the [subject bank] with the xth largest derivative exposure stands a significant distance behind JPM, Citi, Bank of America and Goldman Sachs (the four largest players); the exposure quoted in OCC report is only for the US entity. Overall, [subject bank]’s group derivative exposure in its balance sheet is 220% of its tangible equity, far higher in both absolute and relative terms when compared to its peers. [Subject bank]’s on balance sheet derivative exposure is higher than the combined share of Goldman Sachs ($74bn, or 115% of TEC), JP Morgan ($78bn, or 62% of TEC) and Morgan Stanley ($46bn, or 114% of TEC).  What is more worrying is the quality of these derivative assets. Of the total notional value of credit derivatives (over half trillion $US bn), nearly 60% are non-investment grade. [Subject bank] has the highest proportion of non-investment grade credit derivatives followed by Citi Group (55%), GS (52%), Bank of America (37%) and JP Morgan (32%). The tables below as well as on the following page compare [subject bank]’s on-balance sheet derivative exposure...

Well, there you go. If things were to kick off and the bovine excrement hits the fan blades, look for [subject bank] to stink worse than most! This is exactly how we isolated Bear and Lehman back in 2008! More importantly, just imagine [subject bank] stuffing all of those high quality, leveraged, about to implode liabilities into your Aunt Gertrude's CD and retirement savings! Yep, if Bank of American and JP Morgan did it, is anybody truly naive enough to believe that nobody else is doing it as well? As my Aunt Eva used to tell me, there is never just one roach!

I can be reached via the following channels, or directly via email:

I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.

For those that are new to the blog, these are pics of previous meet and greets...

 

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The graphic below pretty much sums up Goldman's most recent quarter...

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An unmitigated disaster, and worse than practically everybody on the Street anticipated, save that brash-ass blogging dude brandishing those old fashioned analytical weapons of choice... Two months or so ago (Monday, 22 August 2011), I penned the public blog post that also relased my most recent research on Goldman Sachs - The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? -  as excerpted:

The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don’t call Goldman the world’s most expensive federally insured hedge fund for nothing!

And for those who haven't been following my Squid Hunting series, there's a lot more to come from those boys at 200 West Street. If you want to know what will happen next, just look at the first few pages of the lastest Goldman subscription docs (click here to subscribe):

• Goldman Sachs Q3 Forensic Review - Retail
• Goldman Sachs Q3 Forensic Review - Professional

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

I'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? 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!	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 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...
I actually show up in person!	Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies

My next post should also include research on the next bank that we have found that has been (again) overlooked by the market, the media and the sell side. Can we expect the same that we saw in BNP, Bear, Lehman, etc.? Well, paying subscribers shall find out forthwith.

I can be reached via the following channels, or directly via email:

I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.

For those that are new to the blog, these are pics of previous meet and greets...

The Motherland on the Atlantic Ocean, just outside NYC

The Motherland on the Hudson, NYC

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79st Boat Basin, NYC

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79st Boat Basin, NYC

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BuddhaKahn, NYC

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I took the weekend off and all types of nonsense occurs in my wake. Well, I'm back with some fresh research. Subscribers, we have found another bank at risk (and you know how well the other banks that we targeted fared in the past - Bear, Lehman, the entire French banking system, etc.) and will be releasing the research in the next 24 hours. In the meantime, I would like to address the massive bear market rally/short squeeze that probably created many a draw down. First, a little misdirection and disinformation as reported by CNBC: Greek 'Haircut' No Threat to French Banks: Noyer 

French banks could cope with a significant Greek "haircut"—a private sector writedown of Greek bonds—but it is still possible that the country's financial institutions may have to be recapitalized, Christian Noyer, governor of the Bank of France, told CNBC.

"Greece is not a problem for the French banks," Noyer said. "The total (exposure) of the French banks to Greek sovereign debt is significantly smaller than the first half of profits for the French banking system."

That exposure amounts to roughly 8 billion euros, while French banks' first-half profits totaled about 11 billion euros.

Still, Noyer would not rule out recapitalization for banks in France, given that all of Europe's banks' could face mandatory increases to their required capital base, depending on a decision by the European Bank Authority (EBA), the European Union's banking regulator.

Where shall I begin? Well, Reuters reports German Finance Minister Insists Greek Debt Haircut Should Be At Least 50-60%, as excerpted:

Greece's debt crisis cannot be solved without larger write downs on Greek debt and governments are trying to persuade banks to accept this, German Finance Minister Wolfgang Schaeuble said on Sunday, just days ahead of a key EU summit.

Asked in the interview with ARD whether there could be a Greek debt write-down of as much as 50-60 percent, Schaeuble said: "A lasting solution for Greece is not possible without a debt write-down, and this will likely have to be higher than that considered in the summer."

In July, private creditors agreed to a voluntary write-down of 21 percent on their Greek debt, a figure which now looks insufficient. Euro zone officials said last week losses are now likely to be between 30 and 50 percent.

"Of course we would like, if possible, to agree together with the banks. That is why we will be discussing things with them. But it is clear, there must be a level of participation which is enough to bring about a lasting solution for Greece. That is enormously difficult," Schaeuble said.

The market has an even higher implied actual haircut! Analysis - Greek debt enters Argentina-style twilight zone

I also explained the situation in public, and for free, early in 2010: Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! The situation with the Greek banks is the same situation with the French, German, etc. banks. Leverage piled upon depreciating assets simply wipes out equity. Period! How Greece Killed Its Own Banks!

...These downgrades are going to cause people to increase their risk weightings,” Yelvington said.

Well, the answer is.... Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)...

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The same hypothetical leveraged positions expressed as a percentage gain or loss...

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I even went so far as to compare Greece to Argentina, complete with online models. No matter which way you slice it, a 50% haircut would be akin to a snowy Christmas in the summer of a devout Muslim country - highly unlikely! A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get...

Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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On that note, ZeroHedge has come out with a blockbuster explanatory article: Credit Suisse Buries European Banks, Sees Deutsche Bank And 65 Other Bank Failing Latest Stress Test, €400 Billion Capital Shortfall

A day after Credit Suisse killed the Chinese bank sector saying that the equity of virtually the entire space may be worthless if NPLs double, as they expect they will to about 10%, the Swiss bank proceeds to kill European banks next. Based on the latest farce out of Europe in the form of the third stress test, which is supposed to restore some confidence, it appears that what it will do is simply accelerate the flight out of everything bank related, but certainly out of anything RBS, Deutsche Bank, BNP, SocGen and Barclays related.

I'd like to add that I've ridiculed all of these stress tests, US and European, although the European stress tests were by far the biggest joke. Dexia passed with a grade of A (or so), and will be nationalized momentarily. 'Nuff said!

To wit: "In our estimation of what could be the “new EBA stress test” there would be 66 failures, with RBS, Deutsche Bank, and BNP needing the most capital – at €19bn, €14bn and €14bn respectively. Among the banks with the highest capital shortfalls, SocGen and Barclays would need roughly €13bn with Unicredit and Commerzbank respectively at €12bn and €11bn. In the figure below we present the stated results. We note RBS appears to be the most vulnerable although the company has said that the methodology, especially the calculation of trading income, is especially harsh for them, negatively impacting the results by c.80bps." Oops. Perhaps it is not too late for the EBA to back out of this latest process and say they were only kidding. And it gets even worse: "We present in this section an overview of the analysis which we published in our report ‘The lost decade’ – 15-Sep 2011. One of our conclusions was that the overall European banking sector is facing a €400bn capital shortfall which compares to a current market cap of €541bn." Said otherwise, we can now see why the FT reported yesterday that banks will be forced to go ahead and proceed with asset firesales: the mere thought of European banks raising new cash amounting to 75% of the entire industry's market cap, is beyond ridiculous. So good luck with those sales: just remember - he who sells first, sells best.

And the scary charts:

1. Capital Shortfalls under Stress Test part Trois (9% min. CET1 ratio)

If anyone over there has two synapses to spark together, I would fully expect them to take my research over much of the anecdotal drivel passed around the Street as research. For instance, from the outside looking in, the Greek writedowns (yes, even the mark to myth Greek writedowns) will most likely wipe RBS profit for the year. Now, try applying what the real losses will be... Okay, after you do that, try realizing that no Greek default will occur in a vacuum and all peripheral assets will suffer in solidarity, not to mention their own solvency issues. Then add to that that RBS is an insolvent ward of the state to begin with, after passing stress tests itself then being nationalized. Okay, now that we've dispensed with the most of the optimism and good news (I'm going to skip over DB, since much of the market appears to be doing in assuming that Germany cannot be touched despite the fact that it is already very much "touched") and head on to the bank that I warned my paying subscribers about in late August - in time to see its share price halved despite not a damn peep of a warning from the sell side of the pop media. May I please be allowed reminisce, as excerpted from Small Independent, Bombastic Financial News Show Dramatically Scoops the Financial Times On French Bank Run Story :

 Post Note: BNP management is now shopping around for capital investment.

On that note, let's review my post last week, "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely  Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers. It outlined some very telling reasons why BNP's share price appears to be spillunking, namely:

1. 1. Management is lying being less than forthcoming with the valuation of toxic assets on its books.
   2. The sheer amount of these assets on the books and the leverage employed to attain them are devastating
   3. BNP has employed the proven self destructive financing methodology of borrow short, invest in depreciating assets long!
   4. BNP management lying being less than forthcoming about reliance on said funding maturity mismatch, despite the fact it handily dispatched Bear Stearns and Lehman Brothers in less than a weekend!

      ---

Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

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

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

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

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So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipe out, or is it? On to page 10 of said subscription document...

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Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

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

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

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

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

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

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

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

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

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

Now, let's refresh the output from And The European Bank Run Continues...and more importantly BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional, I strongly urge those who haven't to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP.  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)This scenario was run BEFORE the Greek bonds dropped even further in price...

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Using more recent market inputs (you know, assuming this stuff was Level 1), we get the following...

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Notice here the base case TEC impairment is now approaching the adverse case from just a few weeks ago - and this is using market pricing, not some pie in the sky model!

I have not recalculated the adverse scenario in this example, but you can simply use your imagination, or download the model and run it for yourself.

A Greek default with haircuts somewhat inline with market prices will wipe out 13% of BNP TEC, with a more severe cut (quite likely) taking out nearly 20%. This is not even glancing upon the many problems we discussed in our forensice reports ( French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers, Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers).

Now, if the ZH referenced report above is accurate (and I believe it is) the banks are going to try to delever by selling assets in the open markets (all at the same time, selling the same assets to the same pool of potential buyers at the same bad times). This means that the prices used to populate this model are probably still too optmistic. Even if they weren't, look at the capital short fall the Greek default will leave BNP with assuming our institutional bank run thesis holds true and they see a slight withdrawal of liquidity of 10% this year and 15% next (knowing full well the numbers for Lehmand and Bear were much, much higher than that before they collapsed). First, a refesher on our European bank run theory expoused 5 months ago...

1. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
3. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
4. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

And the BNP results????

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Half trillion euros here, half trillion euros there... Sooner or later, we'll be talking about some real money! 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).

My next post should also include research on the next bank that we have found that has been (again) overlooked by the market, the media and the sell side. Can we expect the same that we saw in BNP, Bear, Lehman, etc.? Well, paying subscribers shall find out forthwith.

I can be reached via the following channels, or directly via email:

I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.

For those that are new to the blog, these are pics of previous meet and greets...

 

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Here is an interesting video that illustrates the extreme vulnerability of the banks if the "Occupy Wall Street" movement truly gets organized with direction from someone with a deep understanding of the system. You know, someone tall, brown, charismatic and not afraid to really speak the truth...

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This video touches upon many taboos in society, business and Wall Street finance... Right up my alley. One of the more interesting topics is that of social class, and how the little naked woman in the video just doesn't have the same impact as Carl Icahn. Careful, now. Don't laugh prematurely. The lightning fast distributed method of communal communication commonly known as social media is truly changing the way thing get done around here. Think about how you are reading this message and who you're reading it from.

One concept that I would like to dwell on this post, but unfortunately will not be able do due to time constraints, is the very real fact that there is NO MIDDLE CLASS! I believe it is a construct created by the capitalist class and their managers to placate the masses and muffle would be insurrectors who would dare attempt to move up the ranks. The reality is everybody is a member of the working class who is not a member of the capitalist class and needs to work for a living. That's right, if you cannot live off of your capital, then you are a working class citizen. Middle class and upper middle class monikers, are just that... monikers. That goes for you doctors, lawyers, accountants and well educated PhDs. You know the old saying about the friends walking down the street in Greenwich. One saw a neighbor and immediately urged the other to hustle across the street. When his friend asked what the rush was, the 1st man replied, I heard that Biff over there is starting to live off of his principle. Long story short, many more of you are members of that 99% than may have been led to believe by those in charge.

As excerpted from Super Brokers form to push Super Broken products to make those with High Net Worth Super Broke

Social Mobility: Unlike the Jefferson's, We're moving on down!

Social class is defined (on this blog) as the amount of control one has over one's socio-economic environment. It is much more than money, although money is a large component. For instance, Barack Obama is in a higher class than Robert DeNiro or Michael Jackson, although Robert DeNiro and Michael Jackson are most likely wealthier (although that is quite debatable after taking into consideration the value of Obama's campaign contribution list and membership database from his social networking site!). Obama's higher class stems from his ability to exert more control over his socio-economic environment. The factors that this author uses to determine class combine (with the associated weights) to create a "socioeconomic index":

There is a handy dandy BoomBustBlog class model (based loosely upon the Index of Status Charcteristics) available for download for anyone interested in delving  into this further. See boombustblog.com_social_class_model v.7.3 156.00 Kb.

As you can see, wealth is the largest contributor to the class standing, and coincidentally it is the factor
that is the most at risk in this current economic climate. I believe that there will be a significant entry into the upper middle class by those who were once firmly entrenched into the upper classes! While that may not seem like a big deal to many, it is damn big deal to those who are moving down the ladder. This also means, that there will be some space for others to move (relatively speaking) up the ladder. One man's (or woman's) misfortune is another's opportunity. I believe this blog can not only be used to insure and proof against downward mobility
for those in the upper strata, but can also be used by those in the lower, middle and lower upper strata to rise upward a notch or even two. Social Mobility is the name of the game in times of severe dislocation - times like we are experiencing now.

Now, in term of wealth (not social class and influence, just wealth) we can split the upper strata into three different categories (there are only two above because of the other factors that come into play when social class or socioeconomic standing is taken into consideration).
There is the poor wealthy, those guys and girls that are just a hair's breath from being pulled into the upper middle class strata due to marginal wealth. This would be the $1m to $10m net worth crowd, who rely on business profits, salary and investment returns for income. The next would be the middle strata of the wealthy, hailing between $10 to $100 million in Net Worth, and then there is the upper strata wealthy at above $100 million. Each of these three strata of wealth represent, in my opinion, distinct behavior tranches in terms of discretionary expenditures, investment, and politics and (what passes as, this is a story for another post) philanthropic activities.

A trip to practically any decent sized yacht club or recreational vehicle port reveals the relatively stark differences in discretionary spending behavior. The first strata can be found in the 36 ft. to 68 ft. yacht docks (where a captain is optional, but not mandatory and you really don't need a crew). The second strata can be found 50 ft to 120 ft docks, where captains, crews and semi-custom fiberglass boats abound. The third strata are almost exclusively in the super yacht category, where the carrying cost alone for these (basically waste of money) fully custom built hulls and vehicles are about million a year to start with. You can also see the other social economic strata as well, upper middle class in the 20 to 35 ft boats, the middle and working class in the considerably smaller fishing boats - as opposed to the ultra fast Viking and Hatteras deep sea fishers, etc. It is an interesting and instructional study in social studies and anthropolgy just walking along your local docks! Once you are aware of how these things break down, you will see many settings in a different light.

The dark purples, deep greens and reds are most likely the general demographic to get hit hardest.
Fortunately, those who follow this BoomBustBlog closely, either personally or through their advisor, should have seen a net increase in networth rather than a net decrease. This has hurt non-BoomBustBloggers in this demographic tranche significantly, and will hurt them even farther. At the same time, let's hope that the opinion and research that I bring to the blog helps, because many will need it. Download The new BoomBustBlog.com Socio-economic stratification model

And The European Bank Run Continues...

As excerpted from the article titled above, we find corroborating evidence that the common man/woman can indeed elicit significant cooperation from Wall Street baks, for those very same banks' institutional counterparties are quite skittish as it is. As a matter of fact, we are seeing the makings of an insitutional run right now, one that will easily be exacerbated if retail depositors pull their money out as well.

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 outout 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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Bloomberg reports: Lloyd’s of London Pulls Euro Bank Deposits

Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.

“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”

European banks and their regulators are trying to reassure investors and customers that lenders have enough capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures. Siemens AG (SIE), European’s biggest engineering company, withdrew short-term deposits from Societe Generale SA, France’s second-largest bank, in July, a person with knowledge of the matter said yesterday.

Lloyd’s, which holds about a third of its 2.5 billion pounds ($3.9 billion) of central assets in cash, has stopped depositing money with some banks in Europe’s peripheral economies, Savage said, declining to name the countries or institutions.

Simply fuel to the fire... As excerpted from my bank run post yesterday: Most Headlines Now Show French Bank Run …

... As excerpted from "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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...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!

Make no mistake! And just for those who cannot catch the hint... Reuters reports:

Bank of China halts FX swaps with some European banks

The European banks include French lenders Societe Generale (SOGN.PA), Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA), and Bank of China halted trading with them partly because of the downgrading from Moody's, the sources said.

Another Chinese bank said it had stopped trading yuan interest rate swaps with European banks.

The sources declined to be identified because they were not authorized to speak with the media.

Contacted about this move by the Chinese banks, spokespeople for Societe Generale, UBS and BNP Paribas declined comment. Credit Agricole was not reachable for comment.

One of the sources said that Bank of China's decision may apply across its branches, including the onshore foreign exchange market.

"Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

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

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

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.

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

20111005_235005This is the BoomBustBlog view of the "Occupy Wall Street" protests, the view that you just won't get through the MSM... It's ironic that the police came out in force to protect the institutions whose massive bonus's were derived, in large part, from raping and pillaging professional sheeple pools such as police pension funds. That's the sound of the beast...

Here's some more evidence of the risks of journalism when cops are out to defend those who pillage their pensions...

It appears as if I may have went over the head of a few skeptical readers with the "rape the police pension" bit, so here's an indepth tutorial of how it works for those so inclined to learn...

The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?

Key excerpts... 

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Let’s take a look at another big bonus development exercise, marketing push they made into residential MBS a few years ago…

Apathy and the need to masochistally follow name brand investors is what enables this malarchy, and is what has allowed CRE prices to be artificially elevated this high for this long. Believe you me, reality will reassert itself and will do so in quite the destructive fashion. Again, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”

Believe it or not, very few institutional investors are interested in seeing the mechanics of how they have been bilked to fund Wall Street bonuses. I have been very generous with the CRE analysis on BoomBustBlog, but there have been relatively few takers for custom analysis. For those institutional investors who actually care about making money, or at least not losing 91% of it, I suggest you go through the public version of the model designed to create the analysis above. You can download it here:  Real estate fund illustration & Interactive model 2009-12-23 12:54:21 174.50 Kb. For those with even more interest, you should download our 2010 CRE outlook:  CRE 2010 Overview 2009-12-16 07:52:36 2.85 Mb and our CRE consulting capabilities statement:  CRE Consulting Capabilities 2009-12-17 14:17:01 655.48 Kb. I must say, any client of mine would have been very hard pressed to lose 91% of their money in a Goldman or Morgan Stanley fund.

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% to 500% investment gains as well (as of the posting of this message from the beginning of the month)...

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Goldman's share price went down to nearly $50 during the 2009 crisis, and I believe things are worse this time around. Of course BoomBustBlogger, you shouldn't be greedy, subscribers. Cash in your fried calamari chips now, or at the very least hedge them - while you have them and prepare for the next opportunity. There will be plenty, rest assured. Remember how Goldman's stock actually trades...

.. I'd like to announce to the release of a blockbuster document describing the true nature of Goldman Sachs, a description that you will find no where else. It's chocked full of many interesting tidbits, and for those who found "The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely" to be an iteresting read, you're gonna just love this! Subscribers can access the document here:

• • Goldman Sachs Q3 Forensic Review - Retail
  • Goldman Sachs Q3 Forensic Review - Professional

As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor. Here are the first 2 pages of the 19

page professional edition, with illustrative option trade setups soon to follow.

 Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01

Is Goldman Sachs stock really the front running, Mo-Mo traders wet dream?

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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 1 & Introduction. Once one and all have caught up, we can move on to answering the question posed when we left off in The Squid On The Spear, namely So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? Condensed, Cliff Notes style hint - Goldman has the most shortable share price of all the big banks at around $100 and is quite liquid; it is more susceptible to mo-mo traders than it is to it's own book value, it is highly levered into the European debt/banking mess, and last but not least, Goldman is the derivatives risk concentration leader of the world - bar none!

Click any and all graphics in this post to expand to print quality

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As we sit at the precipice of devastating European banking failure, upon which Goldman is heavily levered into through excessive French exposure (and you've seen how prescient our French banking analysis has been, bordering the prediction of the fall of Bear Stearns and Lehman), I feel many of you should take heed when I say this bank's risk is woefully underappreciated. As in the case of Bear, Lehman, Countrywide, and a slew of other banks, the 10 minutes or so of your time to read this heavy, fact filled piece could be worth a small fortune. While we're at it, I would like to urge all paying BoomBustBlog subscribers  to (admiring the original artwork below, of course) to download and review the latest related documents on this topic:

1. Goldmans Sachs Derivative Exposure: The Canary in the Coal Mine?
2. Goldman Sachs Q3 Forensic Review - Retail or Professional levels
3. Actionable Note on US Bank/ French Bank Run Contagion

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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This concept was further illustrated in An Independent Look into JP Morgan...

Click graph to enlarge (there is a typo in the graphic - billion should trillion)

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and again the following year on CNBC...

Mr. Middleton discusses JP Morgan and concentrated bank risk.

ZeroHedge, and the market in general, appear to have a valid concern about one of these banks in particular - Morgan Stanley.

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While I'm definitely not one dismiss the risks inherent in the Riskiest Bank on the Street, see The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title?, I do believe the equity market is missing the forest due to excessive tree bark blocking its view. So, it's time to publicly pose the question that I answered for subscribers months ago, and that is...

Goldmans Sachs Derivative Exposure the Canary in the Coal Mine?

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

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

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

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

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

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

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

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

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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...

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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.

As you read exactly how precarios the situation is in France (and Belgium, through Dexia, et. al.) keep in mind that although this is definitely not good news for Goldman's numbers, historically since the beginning of this crisis, GS has actually correlated more with coke laced, red bull juice powered mo-mo trader patterns than actual book value - reference The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? from just last reporting period...

... I'd like to announce to the release of a blockbuster document describing the true nature of Goldman Sachs, a description that you will find no where else. It's chocked full of many interesting tidbits, and for those who found "The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely" to be an iteresting read, you're gonna just love this! Subscribers can access the document here:

• • Goldman Sachs Q3 Forensic Review - Retail
  • Goldman Sachs Q3 Forensic Review - Professional

As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor. Here are the first 2 pages of the 19

page professional edition, with illustrative option trade setups soon to follow.

 Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01

Is Goldman Sachs stock really the front running, Mo-Mo traders wet dream?

Goldman_Sachs_Q3_Forensic_Review_Page_02Goldman_Sachs_Q3_Forensic_Review_Page_02 

Given the high correlation of Goldman’s prop trading desk to equity markets and taking into consideration the state of equity markets in Q2-Q3, it would be interesting to see how Goldman Sachs share perform in the coming quarters. Those who would have followed the traditional school of thought and bid the price up would have already seen their capital erode by 20% during the last quarter and by 12% over the last one month alone.

What do you think happens when word of Goldman's true exposures get out? And I'm not even half way through exposing just SOME of the dirt that BoomBustBlog subscribers had access to back in July, when those Goldman puts were nice and cheap! Interested parties should click here to subscribe, cause next up we walk through several other American banks to see who's up for re-enacting 2008-9 put parade - and historically we have usually if not always been ahead of the curve, particularly when compared to Wall Street and the sells side - see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Another BIG Reason Why BNP Paribas (France's LARGEST BANK) Is Still Ripe For Implosion!

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

BNP_Paribus_First_Thoughts_4_Page_01

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... image008

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipeout, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

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

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

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

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

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

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

Keiser Report: Troika Tanks, Junta Bots & a Run on French Banks

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...

The many ways to reach Reggie Middleton:

Or simply email me.

Meet Reggie Middleton in person in NYC and London!

I will be hosting two BoomBustBlog meet and greets, for those who aren't too put off by my truthful, fact-based style. One in the next couple of weeks in a swank, pretty people laden lounge in downtown Manhattan, and the other potentially in London in mid-November - both wherein we sit down and chew the fat about things financial, global macro and socio-economic over drinks and heated debate. I will have plenty of gratis BoomBustBlog research there as well. Those who are interested should email the blog Customer Support for info.

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 demonstrate how BoomBustBlog research not only runs circles around the big name brand bank analysts in their missing this risk (once again), but has been doing so for years, since our proclamation that Bear Stearns would collapse in January of 2008 (Is this the Breaking of the Bear?) and the fishy things at Lehman Brothers just a few days afterward (Is Lehman really a lemming in disguise?). I urge the big media to catch on as the TRUTH goes viral, delivered raw and uncut. Now let's go hunt some big Goldman game! You see, unlike some of the more meek (which is really to be read as conflicted), I am particularly well suited to go after the dangerous game...  Enjoy!

All paying subscribers are urged to download the latest forensic research: Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine? in order to get a head start on what will be publshed in parts 2 and 3 of this series!

Reggie_Midleton_The_Squid_Hunter

Friday, 9/20/11, Bloomberg reports: Morgan Stanley Seen as Risky as Italian Banks, as excerpted

Morgan Stanley (MS), which owns the world’s largest retail brokerage, is being priced in the credit- default swaps market as less creditworthy than most U.S., U.K. and French banks and as risky as Italy’s biggest lenders.

The cost of buying the swaps, or CDS, which offer protection against a default of New York-based Morgan Stanley’s debt for five years, has surged to 456 basis points, or $456,000, for every $10 million of debt insured, from 305 basis points on Sept. 15, according to prices provided by London-based CMA. Italy’s Intesa Sanpaolo SpA (ISP) has CDS trading at 405 basis points, and UniCredit SpA (UCG) at 424, the data show. A basis point is one-hundredth of a percent.

... Moody’s Analytics, an arm of Moody’s Investors Service that’s separate from the company’s credit-rating business, said in a report yesterday that Morgan Stanley’s CDS prices imply that investors see the bank’s credit rating as having declined to Ba2 from Ba1 in the last month. The company is actually rated six grades higher at A2 by Moody’s Investors Service.

By comparison, Bank of America Corp. (BAC) and France’s Societe Generale (GLE) SA, which have CDS trading at 403 basis points and 320 basis points respectively, have prices that imply a rating of Ba1, higher than the implied rating on Morgan Stanley, said Allerton Smith, a banking-risk analyst at Moody’s Analytics in New York.

... Morgan Stanley was the biggest recipient of emergency loans from the Federal Reserve during the financial crisis and also benefited from capital provided by Tokyo-based Mitsubishi UFJ Financial Group Inc., now the biggest shareholder, and the U.S. Treasury, which it repaid with interest.

... While the price of Morgan Stanley’s credit-default swaps is at the highest level since March 2009, it’s nowhere near the peak reached in 2008. On Oct. 10 of that year, the annual price for five-year protection rose to the equivalent of 1,300 basis points, according to data provided by CMA, a unit of CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market.

... Trading in Morgan Stanley credit-default swaps has risen recently to 257 contracts last week, compared with 187 for Goldman Sachs Group Inc. (GS), according to the Depository Trust & Clearing Corp. That compares with a weekly average of 73 trades in Morgan Stanley and 91 in Goldman Sachs in the six months that ended on Aug. 26, DTCC data show.

... There was a net $4.6 billion of protection bought and sold on Morgan Stanley debt as of Sept. 23, according to DTCC. Even with the higher trading volume, investor skittishness in the face of Europe’s sovereign debt crisis may be leaving few market participants willing to sell CDS protection to meet the demand for hedges, said Hintz.

“With the EU teetering, few other firms are going to jump in and write CDS on a global capital markets player like MS,” Hintz said in his e-mail, referring to the European Union and to Morgan Stanley’s stock-market ticker symbol.

... The rise in Morgan Stanley’s CDS prices may also relate to an expected decline in third-quarter trading revenue or to the company’s exposure to French banks, Smith said.

... Morgan Stanley had $39 billion of cross-border exposure to French banks at the end of December before accounting for offsetting hedges and collateral, according to an annual filing with the U.S. Securities Exchange Commission. Cross-border outstandings include cash deposits, receivables, loans and securities, as well as short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements.

‘Galloping Wider’

While Morgan Stanley hasn’t updated those figures, Hintz estimated in a Sept. 23 note to investors that the bank’s total risk to France and French lenders is less than $2 billion when collateral and hedges are included.

As of June 30, Morgan Stanley had about $5 billion of funded exposure to Greece, Ireland, Italy, Portugal and Spain, which was reduced to about $2 billion when offsetting hedges were accounted for, according to a regulatory filing. The company also had about $2 billion in overnight deposits in banks in those countries and about $1.5 billion of unfunded loans to companies in those countries, the filing shows.

“Their spreads just are galloping wider,” Smith said. “Is it rational that Morgan Stanley CDS spreads would be wider than French bank CDS spreads if the concern is exposure to French banks? I don’t think that makes perfect sense.”

I have addressed this ad nauseum on the blog, but the answer to that questions has been put best by Tyler Durden, at ZeroHedge put it best:

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

You see, despite the massive following that the big brand name bank analysts have, none of them warned on Morgan Stanley nor the banking industry in a timely fashion. That is none, except for none other...

• When bank shares were flying and the sell side passed out buy recommendations on each other like cheap candy on Halloween... Monday, 29 August 2011 The Banking Industry Still Looks Dismal Despite Rising Share Prices
• When the opportune time to short Morgan Stanley actually arrived, starting in early 2008... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? Notice the price movement since this BoomBustBlog refresh article.

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• In early August, when the French banking system was ripe for implosion and not a peep was available from any of the big brand names, who instead focused on Italy but apparently failed to inform clients that Italy fed contagion directly into the French banking system... The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

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

 French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers

 Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

• This was culminated in the piece, BoomBust BNP Paribas? - a must read!

Herein lies the rub, though. The Bloomberg article above rightfully states that Morgan Stanley has more gross exposure to France then its peers, but it totally leaves out the aggregate risk that its peers face. Is the media, led by the market, ignoring the squid canary in the coal mine?

A month or so ago (Monday, 22 August 2011), I penned the public blog post that also relased my most recent research on Goldman Sachs - The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? -  as excerpted:

The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don’t call Goldman the world’s most expensive federally insured hedge fund for nothing!

As you can see above, volatility ramped up in 2008 and Goldman reacted like any other beta-chasing, long only hedge fund (although they aren't long only) - they lost money!

Now, with the benefit of BoomBustBlog hindsight, I'd like to announce to the release of a blockbuster document describing the true nature of Goldman Sachs, a description that you will find no where else. It's chocked full of many interesting tidbits, and for those who found "The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely" to be an iteresting read, you're gonna just love this! Subscribers can access the document here:

• • Goldman Sachs Q3 Forensic Review - Retail
  • Goldman Sachs Q3 Forensic Review - Professional

As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor. Here are the first 2 pages of the 19

page professional edition, with illustrative option trade setups soon to follow.

 Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01

Is Goldman Sachs stock really the front running, Mo-Mo traders wet dream?

Goldman_Sachs_Q3_Forensic_Review_Page_02Goldman_Sachs_Q3_Forensic_Review_Page_02 

Given the high correlation of Goldman’s prop trading desk to equity markets and taking into consideration the state of equity markets in Q2-Q3, it would be interesting to see how Goldman Sachs share perform in the coming quarters. Those who would have followed the traditional school of thought and bid the price up would have already seen their capital erode by 20% during the last quarter and by 12% over the last one month alone.

This warning given to both to my paying subscribers (in explicit detail) and my blog followers two months ago. Over the last few days, the sell side has followed suit, unfortunately not in enough time to capture much of the downward share price movement. Compare the difference between the two time frames from the perspective of catching/avoiding the sharp share price drop and it is clear that the BoomBustBlog one and a half month or so headstart/prescience had its advantages...

• om: Goldman Sachs estimates cut at Meredith Whitney AdvisoryMeredith Whitney is slashing Goldman Sachs September quarter EPS estimate to 31c vs. consensus $1.45 and FY12 EPS estimate to $7.85 vs. consensus $15.14. Shares are Hold rated. :theflyonthewall.com

• Bernstein cuts Goldman, Morgan Stanley estimates
  

  Bernstein Research analyst Brad Hintz cut price targets and earnings estimates for Goldman Sachs Group Inc and Morgan Stanley on Monday, saying a capital ...
• Goldman Sachs: Earnings Estimates Get Whacked - Deal Journal ...blogs.wsj.com/deals/2011/.../outlook-shrivels-for-goldman-earnings/ 5 days ago - According to FactSet, the average of analyst estimates for Goldman's third-quarter earnings has been cut in half in just three weeks. At the end of August, the ...
• Goldman Bracing for Yet Another Weak Quarterly Earnings Report ...www.advancedtrading.com/infrastructure/231602136 1 day ago - In a note to clients, Barclays analyst Roger Freeman cut his earnings forecast for Goldman to a loss of 35 cents a share after a prior prediction of a $2.40 per

If one were to click through on the links above this chart leading to the various sell side downgrades, the main focus is on accounting earnings diminishing primarily as a result of potential trading issues. These issues were covered in our report two months earlier, yes, but there are several things we covered that the sell side missed, and apparently is continuing to miss. It is these "misses" that will be the focus of the next two articles on. As a teaser, I urge all to read (or reread) the controversial piece: So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? and stay tuned as I post part two of this documented virtual squid hunt over the next few hours.

Related reading and media:

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Summary: 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...

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"?  WSJ.com reports:

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.

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.

Interestingly enough, Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly fame contend "that historically, significant waves of increased capital mobility are often followed by a string of domestic banking crises". If that is actually the case, then the very goal of the Euro project was bound to bring about a sting of banking crises and all of this was actually inevitable. As excerpted:

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The forgotten history of domestic debt has important lessons for the present. As we have already noted, most investment banks, not to mention official bodies such as the International Monetary Fund and the World Bank, have argued that even though total public debt remains quite high today (early 2008) in many emerging markets, the risk of
default on external debt has dropped dramatically, especially as the share of external debt has fallen. This conclusion seems to be built on the faulty premise that countries will treat domestic debt as junior, bullying domestics into accepting lower repayments or simply 12 defaulting via inflation. The historical record, however, suggests that a high ratio of domestic to external debt in overall public debt is cold comfort to external debt holders.

Default probabilities probably depend much more on the overall level of debt. Reinhart and Rogoff (2008b) discuss the interesting example of India, who in 1958 rescheduled its
foreign debts when it stood at only1/4 percent of revenues. The sums were so minor that the event did not draw great attention in the Western press. The explanation, as it turns out, is that India at this time had a significant claim on revenue from the service of domestic debt (in effect the total debt-to revenue ratio was 4.4. To summarize, many investors appear to be justifying still relatively low external debt credit spreads because “This time is different” and emerging market governments are now relying more on domestic public debt. If so, they are deeply mistaken.

If this is actually the case, then what does it portend for China, whose markets have seen unprecedented capital mobility and flows, and whose banking system is tantamount to a hidden NPA factory sitting on top of an inflationary economy teetering on the precipice of a deflationary canyon?

Inquiring minds may want to know, but proactive minds have been following BoomBustBlog all along.

The Complete Pan-European Sovereign Debt Crisis, forecast from the 1st quarter of 2010, complete with a detailed Greek, Portuguese and Irish default scenario(s).

Forewarning of the French banking debacle, complete with prescient call of the Franco bank run - culminating with the French bank most at risk:

I have no doubt the French government along with the other 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. The fact of the matter at hand is that they simply can't afford to bail them out. I have predicted FIRE sector (including banks) failure at a commendable rate (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?). It's not rocket science, though. It's simply (and actually quite simple, since my 10 year old can do it) math, coupled with a pliable understanding of human nature couped in grasp of history. Listen, it was the (attempted) bailing out of the banking system that got these countries in this situation to begin with. Bailing out the banks just two years later??? Do you really thing that will help the sovereign debt situation or hurt it? If the bailout goes through, you eat the small losses (relative to the big gains that BoomBustBlog delivered subscribers) and roll your gains directly into bearish positions on the bailing sovereigns. It's really just that simple. Don't believe me, let's look at history...

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 So, as I was saying...

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

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

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

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

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

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

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

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

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

Again, I believe the next big thing, for when (not if, but when) European banks blow up, is the reverberation through American banks and how it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

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

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