We warned our paying subscribers about the potential of a French bank run over a month ago and described the process in illustrative detail. See:

1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
2. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! (see the free links below at the end of this article for more)

We also named the most at risk bank in question, and offered explicit trade setups to monetize the situation. What is happening now in France is basically a foregone conclusion and was easily foreseen if one was paying attention, or even if one was just reading BoomBustBlog. Now comes the next step in the saga, and that is the debunking of misinformation and disinformation.

Contrary to what some European bank officials have to say, the current crisis is and EXACT mirror of 2008. Reference this excerpt from On Your Mark, Get Set, (Bank) Run! The Dominos of Serial Lehman 2.0 (x 4) In The EU Are Falling Into Place At A Quickening Pace:

Here are a few updates supporting my thesis of the potential of a serial bank run (another one, that is) in Europe and the Eurozone. As was the case with Lehman Brothers and Bear Stearn (two of the biggest bank collapses that I have called during this "ongoing crisis), counterparties and funding sources get gun shy in the face of overvalued collateral and signs of insolvency - as well they should. Remember, we have identified banks that are at risk of Lehman 2.0, and for the exact same reasons that Lehman was at risk of such. Reference The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!, which I consider to be a must read!

Focusing on the most pertinent and contagious of the issues at hand leads us back to the initial premise of a European bank run. I laid the foundation for said topic discussion last Thursday in "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style" and the fear du jour is a European version of the Lehman Brothers or Bear Stearns style bank run. The aforelinked at explanatory piece is a must read precursor to this illustration of what can only be described as the anatomy of a European bank run - before the fact. Remember how the pieces of the puzzle were perfectly laid together for a Bear Stearns collapse in January of 2008, two months before the bank's actual collapse? Reference "Is this the Breaking of the Bear?"(January 2008) in which Bear Stearns collapse was illustrated in explicit, graphic detail. Lehman Brothers wasn't impossible to see either (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008).

Yes, I did capitalize on the collapse of Bear Stearns and Lehman by identifying their failure and fall many months before it was every mentioned in the market or analysts reports. May I also add, they both had investment grade ratings from all three major purveyors of that... "stuff", and the management of both banks swore the market was simply exaggerating the problems when things did surface publicy. Using the archival power of the Web, let's reminisce, as excerpted from Four Facts That BANG JP Morgan That You Just Won't Hear From The Sell Side!!!

 The reason why I went into such an indepth recollection of the events of the rather recent past is to draw distinct parallels between Bear Stearns and Lehman Brothers, both banks whose problems I recognized ahead of the pack - and the French banks, whose problems I outlined for subscribers early on as well. Bear and Lehman underwent a liquidity crisis that was the result of solvency issues. Basically, assets purchased on leveraged basis for the balance sheet dramatically devalued, leaving a gaping equity hole. This equity hole scared off counterparties who gave liquidity, or forced them to raise collateral calls, calls which Bear and Lehman didn't have the money to pay due to asset/liability mismatch. Somebody let me know if this sounds familiar...

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As excerpted from Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such:

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.

 And here's the assets that were devalued and the games being played to hide the gaping equity hole on the European end...

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

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

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

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

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

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

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

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

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

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

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

Just in from Reuters, by way of Zerohedge:

Reuters continues:

 That sudden rise in risk perception, combined with sharp share price falls in French banks, prompted some banks in Asia to speed up reviews of counterparty risk and look at whether they should cut exposure to European lenders, sources at each of the six banks in Asia said. Contacted about the moves by the banks in Asia, a spokeswoman for top French lender BNP Paribas <BNPP.PA> in Paris said: "We never comment on market rumours."

Societe Generale <SOGN.PA> had no immediate comment to make while a spokeswoman for Credit Agricole <CAGR.PA>, which will publish its second-quarter earnings later in August, said the bank would not make any comment.

The banks in Asia and the sources -- a mix of risk officers, senior traders and loan bankers -- could not be identified because of the sensitive nature of the information.

The head of treasury risk management for Asia at one bank in Singapore said their credit lines to large French banks had been cut because of the perceived risks in lending to these counterparties.

"We've cut. The limits have been removed from the system. They have to seek approval on a case-by-case basis," the treasury risk official said. The bank official declined to name the French banks.

A senior credit trader in Singapore said that when a bank's shares fall that sharply their risk officer will automatically look at how much exposure they have to that lender.

And more:

 Banks' heightened responses could exacerbate the market strains if they all acted simultaneously with portfolio-at-risk modelling, analysts said.

"The thing is if they all use it at the same time they will all sell at the same time when risk goes up, and that will drive prices down and it is like a snowball because then the prices go down and then your value-at-risk ratio will tell you 'oh, I must reduce my risk even more'," said Mark Matthews, head of research at Julius Baer.

Several of the traders and bankers in Asia said that while they had not cut all exposure to any particular institution, they were very cautious about taking on new trading positions with them.

A senior risk officer at a bank in Singapore said "obviously we are having a review", when asked if they were reassessing their positions with European counterparties.

Bankers and risk officers at the five institutions in Asia that were still dealing with French banks said that while short-term lending of up to 30 days was still taking place, they were conducting a thorough review of longer-term credit lines regardless of the type of transaction.

"It's all in relation to (our) take on a French bank's credit risk, regardless of whether it's a swap or interbank lending transaction," said a senior loan banker at a Japanese bank.

Hopefully, I have given a clear enough picture of the parallels between the French banks and Bear Stearns and Lehman Brothers from a historical perspective. Now, let's hear what French bank management has to say...

Bloomberg reports SocGen Denies Rumors About Credit as Shares Tumble

Societe Generale (GLE) SA, France’s second-largest bank, denied “all market rumors” and asked the nation’s market watchdog for an investigation after speculation France’s creditworthiness was in doubt sent the shares tumbling.

The lender’s performance in July and early August shows it will be able to post “solid” results in the future, Paris- based Societe Generale said in a statement after the market closed yesterday. The bank asked France’s Autorite des Marches Financiers to open a probe into the origin of speculation that is “extremely harmful to the interests of its shareholders.”

1. Game Over For The European Ponzi Scheme?…
2. France, As Most Susceptble To Contagion,…
3. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
   1. What Happens When That Juggler Gets Clumsy?
4. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
   1. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
5. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
   1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
6. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
   1. Observations Of French Markets From A Trader's Perspective

On Your Mark, Get Set, (Bank) Run! The D…

Let's see hear... It didn't work during the last market crash. Actually, I don't think there was ever a time when it DID work. Nevertheless, let's try it anyway. You can't sell insolvent companies short! As anticipated last week in our post Didn't Anyone Notice The Seemingly Irreparable Damage To The Eurozone Last Week? Global Short Ban, Here We Come!

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If you search the archives of my site, you will find that I made a small fortune off of the spike in the value of my puts as the short ban had several unintended (for those who never bothered to think it through) consequences. Of course, once the ban was lifted, the once protected financial institutions were summarily MASSACRED! Enriching the very same short sellers that were sought to keep at bay. See:

My initial analytical take on what we know so far of the "Man's" Master Plan September 2008

I am now targeting US banks in coordination with the Europeans. My analysts have jumped into the lab as of last night, Asian time. To all of my subscribers, prepare for a wild rolleroaster ride that will make 2008 look tame in comparison. Get ready, get set, ADAPT!!!!

Reference my Twitter stream for this morning as the markets start to tank once again...

ReggieMiddleton: All wide trailing stops are still in place, allowing me (barring a violent gap up) a guaranteed 300% on the SPX, although it was 800%.

ReggieMiddleton:Nearly all of them are better traders than I, but instead of selling vol, I'm buying further up the ladder of risk at cheaper prices.

ReggieMiddleton: I'm taking this rally & reduced volatility to allow some of my stingily priced OTM put bids to get hit in contravention to BBB traders

This is an indepth piece that addresses my subcribers inquiries into trading the fundamental/forensic research I offer. The topic du jour is the US Treasury downgrade.

Attention subscribers: time sensitive, actionable research available at the end of this document.

Illustrative Trade Setups & Opinions For Retail Subscribers of BoomBustBlog

Instrument of choice for retails subscribers: The Proshare ETFs track the total return of an index on a daily basis with a x2 or x3 leverage. Professional and institutional subscribers would most likely trade the treasuries and futures markets directly.

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The Basics

Targeting US Federal Government Fixed Income, there are 2 available indexes, one relating to 7-10yr treasuries (PST - seeks twice (200%) the inverse [opposite] of the daily performance of the Barclays Capital U.S. 7-10 Year Treasury Bond Index), one for 20yr+ treasuries (TBT - ProShares UltraShort 20+ Year Treasury seeks  twice (200%) the inverse [opposite] of the daily performance of the Barclays Capital U.S. 20+ Year Treasury Bond Index). Because 20Y treasuries have (much) more duration than shorter ones, they tend to move more in price terms as yields move about the same.

This is almost always true of fixed income, except in case of Greece’s current situation where the perception of imminent default causes all securities to converge to the same price, and yields simply to don’t follow the convention rules, ex. 8% of nothing is no less than 20% of nothing.

For an outright play (without options) TBT will be more volatile than PST, and has arguably more leverage embedded. However for an option play, the most volatile instrument is not of paramount importance, what’s most important is the return on the premium invested. A distinct, yet oft overlooked nuance.

Fundamentally Speaking…

From a fundamental play, our traders are not confident the market is ripe for THE BIG FIXED INCOME SELLOFF which would make the 10Y UST look like the Greeks. Actually there’s still a plausible case for 10Y UST moving sub-2% and to begin speaking Japanese ! (JGB yields currently 1% and have touched only a very few times and very briefly 2% in the last 10 years, averaging more 1.3%-1.4%...). Why? Because the FED like the BOJ could just monetize the debt and print money to put them on their balance sheet with a QE3, 4 etc....

The Greek scenario is a bank run scenario, which is possible (as we all know from informative postings such as On Your Mark, Get Set, (Bank) Run! The D…) but timing is everything and everything is difficult ot accomplish!!!

Caveat Emptor!

Even a guy(gal) who bought a 20Y JGB in 2003 at the lowest ever, 1% yield, if he held it through today, has made money despite the higher yield today.... The (BTFD -Buy The Fu@&ing Dip) mentality is truly firmly entrenched! To what should be no one’s surprise, the speculative longs are mostly the banks, "hedging" their ALM mismatch by buying bonds, assuming their deposits are stable.

The bank’s risk becomes a MTM risk, but accounting rules allow them to cope with that as long the deposits are there. For more strategically inclined banks (wink, wink), MtM losses would only affect their AFS (available for sale) reserves and capital (so not the net result of the bank).

Note: There is a potentially very profitable equity trade stemming from this habit, see The Mechanics Behind Setting Up A Potent… & European Bank Run Trading Supplement Ava…).

Of course because everybody is long, there are episodes of panic and risk reduction which are violent because it becomes a one-way market, but when everybody has reduced risk, it snaps back violently and a new cycle begins... so it has been.

The pain trade in FI for banks is lower yields, because high yields is how banks make easy money. Remember my comments on ZIRP killing the banks it was designed to help (reference the YouTube Video and scroll 13 minutes into the video).

On a short term basis, if anything our traders bet for higher FI prices and lower stocks again... and panic to resume.

Note how the 121 strike on the SPY were well chosen (reference subscription document SPY option strategies in violent down moves). We’ve come through, and as the market continues to sell off, you could continue to adjust your delta buying back (and locking actual profits because even if the market doesn’t move anymore your puts are in the money) when the market sells off and when it bounces towards 121 again, you can unload it. We saw 116 at the lows... gamma is how you make a killing with options.

With the aforementioned limitations, caveats and market behaviors in mind, I'm pleased to present to BoomBustBlog subscribers the following detailed, illustrative trade setups...

• Actionable Note on PST & TBT Options Strategies - Retail: A very informative guide to options trade setups based upon the viewpoints ascribed above.
•  Actionable Note on PST & TBT Options Strategies - Professional: A more indepth, document including technical and volatility skew opinion

If today's broad market actions is confusing you, it shouldn't be.

SPX_8-5-11_flip_flop

What you are experiencing is the effects of global central planning on the financial markets. I just went into this in detail, and regular readers/subscribers have seen this several times this week alone (and for good reason): Do Black Swans Really Matter? Not As Much as ...

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable?

The ECB is now full on taking the Fed's position of buying up junk assets in order to manipulate prices. The Fed is bigger than the ECB and afters years of QE and tens of trillions wasted, we're worse off than when we started. The ECB should have taken notes, alas, they didn't. CNBC reports:

ECB Ready to Buy Italian, Spanish Bonds: Sources -The ECB has agreed in principle  to buy Italian and Spanish bonds if key structural reforms are brought forward, according to people familiar with the matter.

Of course this occurs after Italy figures out it can't sell its own bonds... It Just Got Worse: Italian Treasury Just Announced It Will Not Sell 3 Month Bills At The August 10 Auction:

Of course, it's not just Italy (or Greece, or Portugal, or Ireland) either. From ZH: News Just Keeps Getting Worse: Spain To Cancel August 18 Auction As Bundesbank President Says Opposes ECB Bond Buying

These actions by the ECB are a waste of capital and resources, and when applied to Greece, simply allowed Greek debt to literally freefall afterwards (and haircuts are being passed around anyway). Ditto for Portugal and Ireland, sans government sanctioned haircuts - at least so far (but they're coming, rest assured). Never one to allow good money to fail to be chucked after bad, they do the same with Spain and Italy, apparently failing to notice that it hasn't worked the last three times they tried. Alas, this time is really different. Spain and Italy are truly too big to save in such a fragrant bailout fashion, and if Italy succumbs it will cause the French banking system implode - plain and simple, see France, As Most Susceptble To Contagion,…

This has recently been admitted by Germany, as per Speigel:

Hamburg - Growing up in the federal government, according to SPIEGEL information doubts whether Italy could be rescued by the European EFSF rescue - even if the fund tripled. An economy like Italy was not to support, to being too large, it is said to justify.

The financial needs of the country is huge. According to government experts from the other partner countries may also not lift the guarantee of the entire Italian public debt of over € 1.8 trillion. By then the markets would suspect that Germany was overwhelmed.

Therefore, there is the Federal Government that Italy is through savings and reforms itself from the crisis. The bailout was opposed only designed to catch small to medium-sized countries.

Without the French to help backstop the EU, Germany is all on its own. Reference ZeroHedge on the topic: Explaining How The Just Announced ECB Market Rescue Pledged 133% Of German GDP To Cover All Of Europe's Bad Debt

Two weeks after Zero Hedge readers were informed about it, slowly the sell side is coming to the realization that not only will the EFSF have to be expanded (that much was known), but that Germany, and specifically the outright economy, will be on the hook by an unprecedented amount of money. And expanded it will have to be: not by two, not by three, but by a cool four times, to a unbelievable €3.5 trillion which according to Daiwa's Head of Economic Research, Grant Lewis, is an act which will be necessary to convince financial markets of euro area resolve to save Italy and Spain. Says Lewis: "France, Germany contribution to EFSF’s capital would increase to 80% if Spain, Italy had to drop out of guarantee structure.  France, German contingent liabilities would be > 50% of GDP if EFSF expanded; added to France, Germany current debt may trigger downgrades to both countries." Yes... and no. As we explained when we referred to a far more accurate and complete report by Bernstein, merely a €1.5 trillion expansion in the EFSF, would mean that Germany is on the hook to the tune of €790 billion or 32% of German GDP. If France is downgraded, Germany essentially becomes the sole backstopper of the entire Eurozone, to the tune of €1.4 trillion or 56% of its GDP. Now let's assume Daiwa is correct, and the full amount under the EFSF has to increase to €3.5 trillion. That means that Germany "contin[g]ent liabilities", in the worst case scenario where France again gets downgraded, and it likely will eventually, would surge to about €3.3 trillion, or an insane 133% of German GDP

What is not mentioned by the media is that Germany's banks are coming up on a record CRE mortgage rollover, a rollover on properties which are quite underwater. Expect a(nother) real estate crash shortly.

In addition, for some obscene, arcane reason, someone, somewhere actually believes the ECB can pull off buying everything from everyone at inflated prices without an extremely negative repercussion. I disagree... Vehemently. It is interesting, though, to hear other viewpoints.  BoomBustBlogger Pieter writes...

Reggie:

A Belgian professor (University of Leuven) believes, that the only way to avoid the danger of contagion is to change the ECB into the European lender of last resort. It may print enough money to prevent an institutional bank run.

De Centrale Bank moet de eurocrisis oplossen

De uitweg uit de Europese ellende

standaard.be/.../...
Unfortunately the text in in Dutch.

Pieter has been gracious enough to translate the article for us. As many techies know, a manual translation is just that much more accurate than the Google/Babblefish renditions.

The Central Bank has to solve the euro crisis

The escape from the European misery
Monday August 1 2011  Author: Professor Economics at the KU Leuven.
 
‘Only if the European Central Bank guarantees that the bondholders will be paid, the financial contagion can be  brought to a hold’, PAUL DE GRAUWE has written.

We are getting used to it. The European Counsel is gathering in a crisis atmosphere to put out the fire in the Euro zone. At the end of the meeting the European leaders are making rock hard statements: the crisis is averted, fundamental decisions have been taken, and the euro is saved.

Yep, he's right. We have seen this movie before. Reference the following articles (all well over a year old):

• Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
• or Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!
• or even As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!.
• Then there's As I Warned Yesterday, It Appears the Market Is Calling the Europeans Bluff – It’s Now Put Up Or Get Put Down

After some days of euphoria the markets turn and the crisis starts all over again. The last European Counsel is no exception to this procedure. Two days the euphoria lasted. We are in full crisis again. The interest rates on Spanish and Italian bonds that had fallen resume their upward tendency. ‘The contagion from Greece had been averted’, the European leaders declared solemnly. Nothing is farther from the truth.
Why is it so difficult to stop the contagion from one country to another? To answer this question you need to understand one of the most essential features of a monetary union. The members of the union issue bonds in a ‘foreign’ monetary unit. With that I mean a unit that they have no control over. Consequently they cannot guarantee the bondholders that they always will have cash available to pay the bonds on maturity. The Belgian government for example cannot guarantee that it will have enough Euros to pay the bond holders. This in contrast to a country that issues its own money. Such a country can guarantee the bondholder that on maturity there will be always cash to pay for the obligations. And there is no limit on the amount of money that the central bank is issuing.
 
Deposits

This situation makes the members of the monetary union very vulnerable for the danger of contagion. It is comparable to the banking sector. If everyone runs at the same time to the bank to change the deposits into cash, the bank has not enough means to accommodate this conversion. Only one bank that has a problem with its solvency suffices for people to have doubts about other banks (the healthy ones as well) so that they will run to their banks too.

It's actually a little more in depth than that, but he definitely gets the point. For those how haven't followed my bank run series...

1. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
2. What Happens When That Juggler Gets Clumsy?
3. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
4. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
5. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
6. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
7. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
8. Observations Of French Markets From A Trader's Perspective
9. On Your Mark, Get Set, (Bank) Run! The D…

This instability of the banking system is solved by charging the central bank to be the ‘lender of last resort’, in other words to take care that the banks have the means to pay the depositors. The existence of this guarantee makes sure that the depositors do not run to the bank and that the guarantee is not (or hardly) executed.

The problem that the members of a monetary union experience is the same as the problem with the banks. It may be solved in a similar way as in the banking sector. It is sufficient that the central bank of the monetary union, the European Central Bank takes the task upon itself of the ‘lender of last resort’. In this way it guarantees that the members of the monetary union always will have the Euros to their disposal to pay the bond holders. It will suffice to take away the fear of investors and the drive of the contagion.
At first the ECB has played this part, though reluctant. Since some months it made clear that it does not want to do this any more. This change of policy of the ECB is the fundamental explanation why the danger of contagion can not be ward off.
The European leaders have tried to offer a reply to this by creating the European Rescue Fund. But this cannot and will not be able to replace the function of the ECB. The main cause is that the rescue fund does not create money and is dependent of the members for its means. And these are limited, in contrast to the means the ECB may dispose of and which are unlimited.

Permanent crisis

Strangely enough, the European leaders have decided during the last summit to allow the acquisitions of bonds directly form the market by the rescue fund, but they failed to place adequate means to its disposal. The rescue fund has no credibility any more and cannot stop the contagion. That is only possible by the ECB, but it has no desire to.
One of the arguments used by the ECB to stop its function as ‘lender of last resort’ is that the guarantee might offer a wrong signal to politicians. By the guarantee they might be tempted to allow too much debt. ‘The ECB will pay for it’. That is indeed risky. But it is a risk as well in the banking sector, in which the ECB offers the same kind of guarantee. The way to solve this problem is not to take away the guarantee because this results in permanent crisis situations, but to create legislation that limits the issuing of government debt
To take away the danger of contagion and to stabilize the financial markets it will be necessary for the ECB to take its responsibility in stead of escaping it. At the same time strong mechanisms have to be implemented to restrain the growth of government debt. All this needs more political unification. It is still a long way to the stabilization of the euro.

Note from Pieter: This translation has no other purpose than to inform Mr. Middleton about the content of an article in the Standaard of August 1 2011. The usual disclaimers apply: it is not my opinion, I offer no warranty as to its completeness, veracity or accuracy. Copyright © 2011

Ths is the problem with the professor's ECB thesis as of right now. It is a near sentient pile of toxic asses. Throughout last year I stated that the ECB's incessant buying of Greek, Irish and Portguese bonds were wiping its equity. Academics disagreed, until....Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!

 There has been a lot of noise in both the alternative and the mainstream financial press regarding potential risk to the ECB regarding its exposure at roughly 48 to 72 cents on the dollar to sovereign debt purchases through leverage, and at par at that. This concern is quite well founded, if not just over a year or so too late. In January, I penned The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults. The title is self explanatory, but expound I shall. Before we get to the big boy media's "year too late" take, let's do a deep dive into how thoroughly we at BoomBustBlog foretold and warned of the insolvency of both European private banks and central banks, including the big Kahuna itself, the ECB! The kicker is that this risk was quite apparent well over a year ago. On April 27th, 2010 I penned the piece "How Greece Killed Its Own Banks!". It went a little something like this:

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Relevant subscription material for BoomBustBlog paying members:

1. 1. Greece Public Finances Projections
   2. Banks exposed to Central and Eastern Europe
2. Greek Banking Fundamental Tear Sheet

Online Spreadsheets (professional and institutional subscribers only)

• Greek Default Restructuring Scenario Analysis
• Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts

Several months later I posted several followup pieces along the same vein:

To Cut or Not to Cut, The Irish Threaten To Play Rough With Those Clippers: Threats of Haircuts Rattle the ECB! Thursday, March 31st, 2011

• A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina Wednesday, May 26th, 2010
• For our professional and institutional subscribers, the Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts are available online. All subscribers have access to the  Irish Bank Strategy Note which adequately warned before Irish banks dropped 85% in value. The  Ireland public finances projections is also available to all paying members.

I also made it very clear that haircuts and restructurings were on the table for Portugal.

• Introducing the Not So Stylish Portuguese Haircut Analysis Wednesday, June 2nd, 2010
• The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog Monday, December 6th, 2010

The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History Tuesday, December 7th, 2010

• The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults Monday, January 10th, 2011

Long Story, Short - The ECB Will Need Close to Infinite Funding To Pull The Whole EU Out Of This Whole Intact

It has been written about extensively:

1. With Greek Debt Yielding 20%+ and Trading at Half Par Value, European Banks Are Trapped!
2. It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Banking Crisis

In the meantime, contagion spreads...

My last couple of posts have been focused on monetizing this amazingly sharp break in the world equity markets.

• Trading Tips For 8/4/2011
• Game Over For The European Ponzi Scheme? Monetizing Pan-European Sophisticated Ignorance Via US Options, Part 1 For Retail and Professional Realists

I urge all not to forget what has caused this, because if you fully grasp the cause you know that this is now 1 week affair. A LOT of unwinding needs to be done. I'm not saying their won't be short squeeze induced rallies or TPTB won't start QEing use again, but at the end of the day, this shit really must (and will) fall apart at the seams. It's the only path to true economic growth. In the meantime, the contagion spreads:

RBS Posts Wider-Than-Expected Loss on Greek Writedowns, Insurance Payments

Royal Bank of Scotland Group Plc (RBS), Britain’s third-biggest bank, swung into loss in the first half after writing down the value of its Greek debt and setting aside funds to compensate insurance customers.

The net loss was 1.4 billion pounds ($2.3 billion), compared with a profit of 9 million pounds in the year-earlier- period, Edinburgh-based RBS said in a statement today. Analysts had estimated the bank would have a 571 million-pound loss, according to the median estimate of five surveyed by Bloomberg. The lender wrote down its Greek debt by 733 million pounds.

RBS, the last of Britain’s five biggest banks to report results, set aside 850 million pounds to compensate clients who were improperly sold personal-loan insurance. It followed France’s BNP Paribas SA, Credit Agricole SA and Germany’s Deutsche Bank AG in writing down Greek debt after signing the Institute of International Finance’s rescue plan last month.

I have been preaching Pan-European Bank Run for some time, based primarily off of the inevitable writedowns that will need to be taken on profligate state debt. It started as:

• a keynote speach in Amsterdam,

• then a research note to subscribers, The Inevitability of Another Bank Crisis,
• followed by blog posts on the same, see Is Another Banking Crisis Inevitable?
• then a full fledged, step by step tutorial on exactly how it will happen....

1. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
2. What Happens When That Juggler Gets Clumsy?
3. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
4. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
5. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
6. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
7. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
8. Observations Of French Markets From A Trader's Perspective
9. On Your Mark, Get Set, (Bank) Run! The D…

Well, it has begun, as both banking counterparties and sovereigns pull liquidity, exactly as described in The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style! and The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

Reference this Bloomberg article, after taking into consideration that UK and German banks have already pulled back exposure (read liquidity)... Denmark Forcing Liquidity Crisis on Banks

The Danish state’s refusal to extend guarantees on bank debt beyond 2013 means even healthy lenders will suffer the fallout of a liquidity squeeze that could be avoided, the head of the Local Bankers Association said.

“There’s nothing wrong with helping banks out with their liquidity, it won’t cost the taxpayer,” Bent Naur, the chairman of the Copenhagen-based group, said yesterday in a phone interview. “The state should prolong the guarantee, not for troubled banks, but for those that meet solvency requirements. That will avoid a liquidity squeeze when everybody needs to refinance at the same time.”

He appears to be missing the point. Insolvency is contagious when the entire pool of banks in question hold similar assets that are devaluing. What the Denmark state is essentially saying is that it will no longer use taxpayer capital to float the solvency of insolvent banks. If said banks were truly healthy and solvent, then they will cater to their own liquidity needs. Alas, they can't because of ALM mismatches (see The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style! and The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!) and assets erroneously being carried on the books for materially less than they can be liquidated for. Face it, the Ponzi is crashing, jump off of the boat before it sinks any farther!

Banks in Denmark, home to the European Union’s toughest resolution laws, need to refinance about $35 billion in state- guaranteed debt in the next two years. The government has rejected calls to extend its backing, arguing the industry should instead consolidate.

Read as "Accept true market pricing for your transactions and take you haircuts like men (and women) as you try once agin to add 1 + 1 to equal 3! Haircut! Recogniize Lossss! WHAAAATTT???!!!

Lenders already face higher funding costs as two regional bank failures since February triggered senior creditor losses. Moody’s Investors Service warned in May borrowing costs for Danish lenders will increase “long-term.”

“When we look at the calendar, 2013 isn’t far away,” said Naur, whose association represents 88 lenders in Denmark, Greenland and the Faroe Islands. Helping healthy banks access liquidity won’t prop up insolvent lenders, he said.

You guys haven't seen anything until you see what's under the covers we're pulling off of this French bank, very soon (France, As Most Susceptble To Contagion, Will See Its Banks Suffer). These actions forces capital flight, and guess where it flies to???

Go to 21:00 in the video below. Bernanke strategy all along 

Yesterday I said expect US rates to go negative, well... Less than a day later...

• Treasury Yields Evoke Eisenhower Era as Growth Stalls
• Money Market Rates Fall Below Zero as Bills Retain Haven Demand
• BNY Mellon Sets 13-Basis-Point Charge for Large Deposits in Safety Flight

Sixty points down on the S&P with most world markets following suit! What a day, what a day. This is what those Armageddon puts discussed Yesterday morning looked like by the end of yesterday's trading session, up 265% in profit!

image027

The SPX/e-mini options are admittedely a pain in the ass to trade for many retail investors, so I posted a useful illustrative guide on a lower cost (out of pocket) alternative - Game Over For The European Ponzi Scheme? Monetizing Pan-European Sophisticated Ignorance Via US Options, Part 1 For Retail and Professional Realists.

Things were moving so fast that the market was breaking literally as I was posting it. Long story, short - if you believe that the Circle of Economic Life is about to come back to the forefront, you should still be stocking up of volatility. If not, then hedge up and sell of for full profit.

As excerpted from the afore-linked post:

What It Takes To Actually Make Money

ATM (annualized) vol (125) is around 24% on Aug, 23% on Sep, 22% on Oct and 21.5% on Nov. (these are approximations, rule of thumb: the implied daily move (in %) is (annual) volatility / sqrt (250) if we count 250 biz days every year). So 24% is roughly a 1.5% move a day. More adequately speaking, roughly, an options trader who is delta hedged and long options, needs the mkt to move more than 1.5% a day to make money. As implied is, because of risk premia, often 10% or 15% more than (expected) realized vol you see vol is not cheap against recent history, but compared to 2009 early 2010 it is quite cheap. So if you are of the mindset of our last few posts (see list at end of this article), there is upside there.

image025_copy

Any reversion to bank collapse volatility makes even today's option prices look cheap. You have to be careful, though. The global financial planning cartel has other plans.

Reference Do Black Swans Really Matter? Not As Much as ...

...

image017_copy

All subscribers are welcome to download this full document This is the introductory post to a series of trade setups for European Bank at Risk, complete with sample trade setups.

The following is a quick note from Eurocalypse on the topic...

Hi Reggie

This is terribly impressive, and I am in admiration with the timing of your call.

He is referring to the timing/macro/fundamantel call - I recommended he put together a vega trade via SPX/SPY opition setups last week, but a day or two delay combined with a rapid plunged gave scant time to take advantage of it

I deeply hope your readers and yourself have benefited from the options strategies, market has been so quick; I dont know if it could be published in time.

...I'd recommend to take partial profits. Premiums have probably doubled or morewith the move and probable increase in vol. at this stage even the move is so violent we should have a very bad day at least until the opening of the US market today,waiting at least 1 hour after the opening seems wise.

I'd recommend to take some profits, after that because theta becomes expensive at this level especially with the weekend coming!

There are several ways to do it:

1. Take off X% of the initial strategy to make it 0 cost,
2. Delta hedge, and increase the delta hedge when market continues to sell off (thats the benefit of gamma) for naked options.
3. If vol jumped already to stupid levels, sell some put spreads below the strong support levels indicated in the previous trade setups to make up for the initial premium with the increase of vol, you sell less options and you end up with a nice structure which can end in the money on both sides.

The probability of a total meltdown is here though so I'd keep some downside but no one ever lost booking some profits.

I'm actually quite confident it's going to happen, the issue is timing is everything, hence OTM longer dated puts.

Longer term down the road im even more pessimistic than you are.USSR 1989, EURO 2012 and put US, UK and Japan with it probably as well.

Beyond that chaos anarchy wars? I hope not but terra incognita!

The decision of BNY Mellon to tax big deposits is a prelude to financial repression, freezing accounts to prevent a bank run.

See BNY Mellon imposes fee on rapidly growing deposits, in short, the bank will punish anyone who does not invest their money in risk assets of some sorts. That's right, a bank that is trying to discourage you from saving in cash. What the hell??? This is probably just the beginning as the TPTB attempt to force capital into the Ponzi pool in order to keep the facade of value on devalued assets...

... having a max of money "voluntiraly" invested into debt instruments which wont be repaid...
What things like this will do is ensure the reverse will happen. The smart money will exit first en masse which will make sure they end up NEEDING to freeze these accounts.

Anyway, its a pleasure contributing to your blog

thanks

Bloomberg reports Stocks Tumble Two-Year Yield Drops to Record Low. It looks as if the short to medium term goals of Geithner and Bernanke may have paid off as the world's capital runs from one Ponzi scheme to another - exactly as I anticipated. image029

Go to 21:00 in the video below. Bernanke strategy all along 

Reference Do Black Swans Really Matter? Not As Much as ...

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.

Here's how to play it via options -Game Over For The European Ponzi Scheme?…

As the Pan-European ponzi scheme starts to unravel, I would like to take this time to remind all of the value of this new media, this medium of reporting and opinionated analysis known as the blogosphere. To my knowledge, there are very, very few public sources where one can the granular information that would allow one to not only identify, not only circumvent, but actually profit from global banking collapse. Yes, the mainstream media has its placed, burned permanently in the psyche of content consumers, but it is nigh time the blogosphere moved several rungs up the evolutionary ladder. If you recall, it was a (BoomBust)blog that warned of the pending collapse of Bear, Lehman, WaMu, and Countrywide.

And so it begins...

Last year I was invited to give the keynote speech at ING's Commercial Real Estate Valuation seminar in Amsterdam. The keynote was delivered in April, and let there be no mistake - I pulled no punches.

To give you an idea of the tone that I set in this very large European financial insitution, this was the opening slide to the presentation...

ing_preentation_opening_slide_copy_copy

Although this was a real estate valuation seminar, the premise was consistent throughout: A dearth of available financing through a weak banking system coming off of a real asset and credit bubble burst spells big trouble. The "big trouble" is much worse than many make it out to be. You see, the one thing that nearly all banks lend against is real estate, and the less banks lend against said real estate, the less said real estate is worth. A vicious, self-reinforcing circle of real asset price correction in an attempt to reach equilibrium.

So, what does this have to do with French Banks?

Well, the big thing in the media nowadays is the sovereign debt crisis. But this crisis is but one part of the solvency puzzle, albeit a big one. Basically, the banks are saying we have XX billion Euro on our balance sheets, when in actuality they have 80% of XX billion euro, at the same time asset values are steadily declining, chewing up equity along the way. I illustrated this in detail in the video above. You see, the concerted efforts of global financial central planners world wide have distorted the valuation and pricing of real asset markets. This distortion has led many to believe that the crash/correction of 2008 is over without us ever having to face true reversion to the mean. Let me be the one to tell you, that just ain't happening... Reference Do Black Swans Really Matter? Not As Much as ...

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.

 I will go into the impending continuation of the real estate debacle in a later post, but the impetus behind the debacle is the topic du jour, Is Another Banking Crisis Inevitable?In said piece I made it clear that the global banking lie that the so called "risk free" assets carried on the books are not only far from "Risk free" but have wiped much, if not most of the tangible equity from banking books. When, not if, but when, these banks are forced to make a market price transaction, hell will break loose. My post last month, Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par Using 30x+ Leverage: Bank Collapse is Inevitable!!! basically says it all.

Referencing the material from the ING presenation..

Eurocalypse Cometh! Principal Haircuts, Serial Bailouts, ECB Insolvent! Disruptive Sound Of Dominoes In Background Going "Click, Clack"! BoomBustBloggers Instructed To Line Up Bearish Positions Again! 

If one were to even come close to marking the EU banks books to reality, market prices, or anything in between, the Lehman situation would look tame in compariosn! As excerpted from the subscriber document:  The Inevitability of Another Bank Crisis

(click to enlarge) Even using overly optimisitic and much too rosy Eurostat numbers, the banks are sitting on top of a huge equity hole. The blue box below covers what we feel are the real numbers - a truly gaping hole!

And in the End, What Does It All Mean?

LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?

It is not as if this wasn't foreseeable, for I have been warning of this hole since 2009/early 2010. In the BoomBustBlog subscriber document European Bank's Greece exposure, I gave the macro warning. I drilled down to more specifics namin the bank I felt was most at risk in this subscriber document. The follow up to this document was going to come out late today, but the CEO has let the cat out of the bag.

FT reports SocGen profit warning on Greek debt:

 Société Générale has warned that its profit target for 2012 will be “difficult to achieve” as a writedown linked to its Greek exposure weighed on quarterly results. 

...Frédéric Oudéa, chairman and chief executive, cautioned that the group’s €6bn net income target for 2012 looks hard to reach “within the scheduled time frame”.

...However, he said that second-quarter results demonstrated the “resilience” of Société Générale, despite the inclusion of a €395m pre-tax writedown due to Greek government bonds held by France’s second-biggest bank.

The writedown is due to Société Générale’s pledge to play a role in the Greek bail-out plan finalised in July in which all the Greek bond holdings of the French banks maturing before 2020 will be involved. BNP Paribas and Crédit Agricole have also made provisions concerning the loss to bondholders.

Société Générale has no bonds which mature after 2020, a spokeswoman said, adding that the writedown includes sovereign bonds held by Geniki Bank, Société Générale’s Greek subsidiary.

Net income in the three months to June 30 was below consensus analyst expectations at €747m on revenue down 2.6 per cent to €6.5bn, but including the impact of the writedown.

Net income for the first half declined 22.5 per cent to €1.66bn on revenue down 1 per cent to €13.12bn. The group posted half-year earnings per share of €2.05, down from €2.75 last year.

The bank’s shares fell 6.94 per cent to €30.25 in early morning trading.

Société Générale, which last year unveiled a plan to double net profit by 2012, said that targets had assumed a return to a normal economic environment which “has not occurred,” naming the recent eurozone and US debt crises, as well as the political turmoil in the Middle East and Africa as concerns.

I will have some more goodies along these lines that still HAVE NOT been broached by either the pop media or the sell side for BoomBustBlog subscribers very soon.

Tools for tracking the ever elusive path of contagion for BoomBustBlog subscribers:

• • Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
  • Sovereign Contagion Model - Pro & Institutional

More On My Observations Of The French!

Trading the BoomBustBlog Forensics: Observations From The Field

Unsurprisingly CAC had a plunge yesterday, one of the worst performers in all of the European markets - exactly as we have warned, reference Observations Of French Markets From A Trader's Perspective and excerpts from European Bank Run Trading Supplement Available for Download:

The Monthly chart, with only one more trading day left tomorrow [Friday] shows we are breaking the monthly trendline at 3910 THIS month (July), even though on a weekly basis, there were a few weeks this month where it was below already.

image009_copy
That’s a quite NEGATIVE new development, with the 1st natural target being around 3600 (high above the trendline was 4200, break point  3900 - so a 300 point range) that 3600 level is the Nov10 low.

 Additional posts on the topic of Bank Runs

1. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
2. What Happens When That Juggler Gets Clumsy?
3. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
4. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
5. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
6. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
7. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
8. Observations Of French Markets From A Trader's Perspective
9. On Your Mark, Get Set, (Bank) Run! The D…

Here are a few updates supporting my thesis of the potential of a serial bank run (another one, that is) in Europe and the Eurozone. As was the case with Lehman Brothers and Bear Stearn (two of the biggest bank collapses that I have called during this "ongoing crisis), counterparties and funding sources get gun shy in the face of overvalued collateral and signs of insolvency - as well they should. Remember, we have identified banks that are at risk of Lehman 2.0, and for the exact same reasons that Lehman was at risk of such. Reference The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!, which I consider to be a must read!

Focusing on the most pertinent and contagious of the issues at hand leads us back to the initial premise of a European bank run. I laid the foundation for said topic discussion last Thursday in "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style" and the fear du jour is a European version of the Lehman Brothers or Bear Stearns style bank run. The aforelinked at explanatory piece is a must read precursor to this illustration of what can only be described as the anatomy of a European bank run - before the fact. Remember how the pieces of the puzzle were perfectly laid together for a Bear Stearns collapse in January of 2008, two months before the bank's actual collapse? Reference "Is this the Breaking of the Bear?" in which Bear Stearns collapse was illustrated in explicit, graphic detail. Lehman Brothers wasn't impossible to see either (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008).

image015

As excerpted from Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such:

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.

A trader that follows my work through the social media circles reports the pulling of even more liquidity from the eurozone area. This is a note that I received from him...

"US Money Market funds are aggressively w/ding from EZ bank comm paper and there is a HUGE shortage for dollars unfolding as we speak. Congress has warned the Fed not to go down the same path as 2008 (swap lines etc) so this will get ugly. As a trader, I'm not complaining, because volatility is my friend, but this is 1000x times worse than LEH/2008 (which at the time I was genuinely worried that the system might not make it). See, what made the depression so bad wasn't the stock market crash (bubblicious) but the sovereign defaults. Look at total bonds on NYSE listed at par from '25-'35, now imagine that on a world-wide scale. There are much larger dark pools of capital now than there were in the 20s and 30s and these players are trading CDS contracts on countries like a E-minis trader scalps the ES for 5-10 handles a day. Note: I almost have to get creative with my responses to your writings because you go so in depth and cover every dimension of the issue!"

Again, as excerpted from Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such:

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.

... 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!

 I have forensically stepped through the makings of a modern day global bank run in a series of informative articles - namely:

1. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
2. What Happens When That Juggler Gets Clumsy?
3. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
4. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
5. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
6. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
7. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
8. Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par Using 30x+ Leverage: Bank Collapse is Inevitable!!! 
9. Observations Of French Markets From A Trader's Perspective

In said articles, I made clear that continual back stopping of insolvent banks makes analyzing individual banks almost a moot exercise since the banks problems will invariably be hoisted upon the tax paying populace of the sovereign state that it is domiciled in, and in the case of the EU - the taxpayers of a collective of sovereign states. Thus, one should look at not only the solvency of the banking institutions (with full market to market on assets, reference subscription document The Inevitability of Another Bank Crisis), but the solvency of the domicile sovereign state as well and any possible contagion effects, post bank bailouts -reference subscription documents:

• Sovereign Contagion Model - Pro & Institutional
• Sovereign Contagion Model - Retail

Greece, Portugal and Ireland are matters of potential contagion, but can potentially be funded by the EU for a few years. Italy and Spain simply can't be funded! Professional level subscribers can reference the debt default/restructuring worksheets online:

• Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
• Portugal's Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy - Professional Analysis
• The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers
• Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts

Again, I repeat, "Italy and Spain simply can't be funded!" BoomBustBloggers know that Italy is focal point that can quickly and quite destructively spread contagion to France, and via fiscal proximity, Germany. Reference Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such:

20110725_-_CAC_Monthly20110725_-_CAC_Monthly

CNBC reports: Italian Banks Slump After Bond Purchase Report

Italian bank shares were sharply lower in Wednesday morning trade after Reuters reported German Finance Minister Wolfgang Schaeuble said the euro zone's rescue fund should only purchase bonds on the secondary market in exceptional circumstances. Euro zone leaders agreed on a second bailout package for Greece last Thursday and said the European Financial Stability Facility (EFSF) bailout mechanism could buy bonds on the secondary market if the European Central bank recommended it do so.

"Even in the future, such purchases should only take place under very strict conditions when the European Central Bank deems there are exceptional circumstances on the financial markets and dangers for financial stability," Reuters quoted Schaueble as saying in a letter it obtained on Wednesday dated July 26. At 9:15 London time, shares in Intesa Sanpaolo were down 6 percent, while shares in Ubi Banca and Unicredit were trading just over 5 percent lower. Banco Popolare shares were off 5 percent.

This comes a week after releasing the very informative subscritpion document Italy Exposure Producing Bank Risk and a series of blog posts leading astute followers to the inevitable conclusion...

of The Inevitability of Another Bank Crisis. And like clockwork, the FT reports DB would have sold its entire 8bn holdings of Italian govt debt:

Deutsche Bank hedges Italian risk

Deutsche Bank cut its net exposure to Italian government debt by 88 per cent in the first six months of the year in a dramatic sign of international investors backing away from the eurozone’s third-largest economy.

Germany’s biggest lender disclosed with its second-quarter results that it had cut its net Italian sovereign exposure from €8bn at the end of 2010 to €997m by the start of July. Its overall exposure to what it called the “PIIGS” – Portugal, Ireland, Italy, Greece and Spain – fell 70 per cent to €3.7bn over the same period.

... Stefan Krause, Deutsche’s chief financial officer, linked the dramatic reduction in Italy to the first-time consolidation in December of Postbank, a German retail bank that had large Italian holdings. He added that Deutsche had bought credit default swaps – a form of insurance for investors – to hedge its Italian exposure in its trading book.

We went through this scenario for subscribers in detail, last year. Reference

• Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional
• Deutsche Bank vs Postbank Review & Summary Analysis - Retail

... BNP Paribas, which has a large retail presence in Italy, expects to provide updated information on its sovereign exposures in next month’s results. But it does not anticipate them being dramatically different to the figures in the European stress tests, which revealed it increased its Italian holdings slightly last year.

Subscribers, see Italy Exposure Producing Bank Risk

UK banks are equally not expected to reveal such dramatic falls as most have already moved to reduce risk. Royal Bank of Scotland and HSBC have relatively small net positions, with less than €1bn of exposure to the country’s debt in their banking books. The comparable figure for Barclays is €2bn, according to data that accompanied the recent European stress tests.

...Deutsche’s disclosure came as it reported disappointing results, weighed down by difficult trading conditions in its investment bank.

We saw this one coming and BoomBustBloggers benefitted. Reference More On Trading with BoomBustBlog Research and the results after the face, BoomBustBlog Traders Armed With BoomBustBlog Research Caught ~10% Deutsche Bank Fall. All in all, quite prescient!

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According to data from Europe’s stress tests, Deutsche Bank had reduced its Italian government bond holdings by a third over the course of 2010 to about €5.3bn. The only bank that had reduced their holdings by more was Spain’s Santander, which cut them by 40 per cent to €261m.

As clearly articulated over a year and a half ago in Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, the banking system is bigger than Europe itself and cannot be bailed out by the entities in which they are domiciled...

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

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This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with.

The discussion of a European bank meltdown

The next major article on this topic will discuss the issue that no one in Europe is broaching. With all of the stress in the banking system and so much CRE debt rolling over in the next 2 years, who will make these loans against drastically depreciated (from bubble highs) real estate approaching a bearish environment for CRE. More importantly, the unwillingness (or inability) of banks to lend freely against depreciating assets causes them to depreciate more - and faster, thereby exacerbating the problem since the banks have mucho CRE related products on the balance sheet. I will present my solution to this dilemma in detail, soon.

Institutional subscribers should feel free to reach out to me via Google Plus for video chat and discussion or via email. If you need an invitation to Google+ and are a subscriber, simply drop me a mail and I will give you one. I am always open to speaking engagements. Feel free to follow me on:

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Although lengthy, this is a very important post that leads directly into the second of our trade setups based off of BoomBustBlog's fundamental and forensic European bank research (the first was Deutsche Bank, which paid off quite well). Please read through it in its entirety. The next post on this topic will be the actual trade setup itself.

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CNBC reports: Italian Banks Slump After Bond Purchase Report

Italian bank shares were sharply lower in Wednesday morning trade after Reuters reported German Finance Minister Wolfgang Schaeuble said the euro zone's rescue fund should only purchase bonds on the secondary market in exceptional circumstances. Euro zone leaders agreed on a second bailout package for Greece last Thursday and said the European Financial Stability Facility (EFSF) bailout mechanism could buy bonds on the secondary market if the European Central bank recommended it do so.

"Even in the future, such purchases should only take place under very strict conditions when the European Central Bank deems there are exceptional circumstances on the financial markets and dangers for financial stability," Reuters quoted Schaueble as saying in a letter it obtained on Wednesday dated July 26. At 9:15 London time, shares in Intesa Sanpaolo were down 6 percent, while shares in Ubi Banca and Unicredit were trading just over 5 percent lower. Banco Popolare shares were off 5 percent.

This comes a week after releasing the very informative subscritpion document Italy Exposure Producing Bank Risk and a series of blog posts leading astute followers to the inevitable conclusion...

1. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
2. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
3. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
4. Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par Using 30x+ Leverage: Bank Collapse is Inevitable!!!

Many are missing the contagion link between these countries and the banks that are domiciled within them. I have put out significant research in an attempt to map the path of said contagion:

• The Inevitability of Another Bank Crisis
• Sovereign Contagion Model - Pro & Institutional
• Sovereign Contagion Model - Retail

So, continuing with the thesis of EU officials attempting to ice skate uphill and consequently fostering a pan-European bank run in the process, I am posting the a followup discussion I had with Eurocalypse (click here for his background), the European CDS trader who is assisting in BoomBustBlog trade setups. This is a follow-up to the release of the subscription document  Italy Exposure Producing Bank Risk.

I would like to comment on this as I ran an ALM [asset/liabiility management] department so I'm supposed to know what this is about!! I am not to say there is no "RUN ON THE BANK RISK", there ABSOLUTELY is, but this is not a feature of your featured bank only.

And I absolutely agree. Then again, two wrongs don't make a right, either. The ALM mismatch wasn't a unique feature to Bear Stearns either, but that didn't save them in the end, nor did it save Lehman. I would like to make it clear that the borrow short/invest long problem is truly not unique to our subject bank, but certainly adds to a plethora of issues weaken its position should things pop off. As a matter of fact, the prevalance of ALM mismatches will be the cause of serial bank run, if one were to occur. As a refresher, let's excerpt The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

The subject of our most recent expose on the European banking system has a plethora of problems, including but not limited to excessive PIIGS exposure, NPA growth up the yin-yang, Texas ratios and Eyles test numbers that’ll make you shiver and razor thin provisions. Focusing on the most pertinent and contagious of the issues at hand leads us back to the initial premise of a European bank run. I laid the foundation for said topic discussion last Thursday in "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style" and the fear du jour is a European version of the Lehman Brothers or Bear Stearns style bank run. The aforelinked at explanatory piece is a must read precursor to this illustration of what can only be described as the anatomy of a European bank run - before the fact. Remember how the pieces of the puzzle were perfectly laid together for a Bear Stearns collapse in January of 2008, two months before the bank's actual collapse? Reference "Is this the Breaking of the Bear?" in which Bear Stearns collapse was illustrated in explicit, graphic detail. Lehman Brothers wasn't impossible to see either (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008).

I would also like to make it clear that it is my opinion that the EU leaders who insist on issuing "alleged" bank stress tests that assume its constituency are moronic simply add fuel to the bank run fire. The refusal to test for the concern that the entire bond market has simply feeds uncertainty in lieu of alleviating it, reference Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run.

The "alleged" stress tests did not test for sovereign default and its effect on HTM inventory, which is already priced into the system and which is the primary worry of the markets. Thus, the stress test results are largely irrelevant.

It's as if I have AIDS and I go to the doctor and pass a test for measles... Does that make my multiple partners (counterparties , lenders and customers) more or less comfortable with my condition?

We have run our own numbers and produced alternative, more realistic scenarios including exposure, haircut assumptions and writedowns for individual countries. Specifically, we have applied writedowns on both banking and trading books with the results available in the subscription document The Inevitability of Another Bank Crisis? and well as European Bank's Greece exposure. In essence, after Lehman Brothers collapse, sovereign states appear to deem themselves obligated to bail out their respective insolvent banking systems, thus real stress tests should test both the banks' distressed portfolio carried at unrealistic marks and leverage and the sovereign's ability to aid said banks. Of course, this will be very unpopular from a political perspective because you will get a lot of nasty answers to the questions asked.

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

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

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

Now, back to the Eurocalypse discussion...

If you look at how they constructed this table, their (huge) deposit base under the heading classified as "Dette Envers la Clientèle" shows they are indeed funding long term assets with their retail deposits. There is regulatory ground for it and practical experience. I cant remember the exact rules, but by experience (ie. everytime, as long as there is no run) the retail deposits are stable, and typically in an ALM.

And therein lies the rub. Liquidity is always available, until it is needed. Ask Bear and Lehman, and Merrill, and Goldman, and Morgan Stanley, and... Well, you get the picture. I explained how this happened not once, but several times in the US just 3 years ago in "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 or request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

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

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

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

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

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

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

... 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!

And back to the Eurocalypse discussion:

We would make some stress scenarios. suppose deposits for example drop by 30% and look if there is a problem for short term funding,
basically they this would amount to -180bn, they need to be able to sell 180bn assets. There are 180bn of short term assets (less than 1 month)
they can sell, plus they probably can some of their trading book.

And this appears to be a weakness of modeling real life events. You see, by modeling just the effects of a 30% drop in deposits, you are ignoring the real world effect of counterparties pulling liquidity in tandem in an effort to minimize exposure -as detailed in the excerpt above. You are also negating the fact that much of the so called "trading book" is being carried on the books at prices that are significantly above what can be fetche in the market, which I illustriously detailed in the blog post Is Another Banking Crisis Inevitable? and whose empirical evidence was laid bare in the accompanying subscription document The Inevitability of Another Bank Crisis. I also went over this in detail at the large European bank, ING, as the keynote speaker at their CRE valuation conference in Amsterdam...

It looks like the subject bank is using 170bn of its deposits to fund its trading activities (this is the gap between asset and liabilities for undetermined maturities) and the rest of it to fund longer term assets (loans bonds etc...)

I'm not so shocked at the numbers, but its true European banks, and French banks in particular make money taking this liquidity risk. Basel III is designed to reduce this gap, at least up to 1 year through the DSCR ratio (implemented in 2018, they can still change their mind about it, because this is a big game changer for the industry forcing banks to have much more stable funding, which is difficult for non-retail banks and force them to reduce their assets or change them to "liquid" govt bonds, or secure more funding, but as all banks need to do the same, long term funding cost is going up, and it can't be known if there is sufficient demand for it... We're probably speaking trillions of euros.

This gap risk IS managed, even though the assumptions may prove one day too optimistic...

I prefer the term "unrealistic" as exemplified above...

Actually ALM managers have bad incentives to take risks, as traders... One way to do it, is assume deposits are stable. in practice, with the Fractional Reserve System, and Monetary aggregates growing together with (eligible or not) Total Oustanding Debt, Deposits have grown in rapidly in most financial institutions, boosting confidence among bankers to buy assets (they may think they're good because they get more deposits, but thats just a consequence of the monetary system !)

On that note, reference Fractional Reserve is Not the Problem...

By the way, the term "stable" refers to assigning a maturity to retail deposits. you have a client, he's not going to withdraw his money tomorrow. Maybe 10% tomorrow, and then 10% the 1st year, 10% of what is left the 2nd year etc.... basically every bank uses its own assumptions, but I would guess in the typical French bank, the average duration of a retail deposit would range between 4 to 10 years.
Using these assumptions, the ALM managers "hedges" accordingly the interest risk and liquidity risk. "Fair value hedge accounting" permits to receive fixed on swaps or buy bonds against those deposits without suffering the adverse Mark to Market of the hedge. which does make economic sense as long as the deposits stays indeed for (4 to 10) years on average.

Herein lies the rub. I went to pains to describe how patently unrealisiic the logic above is in a panic. Correlation comes close to 100% as depositors move in unison, motivated by the same impetus, and that is "to get the fuck out of dodge". In "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style", as referenced:

This phenomena essentially discredits the thinking at large and currently in practice that “since individual expenditure needs are largely uncorrelated, by the law of large numbers” banks should expect few withdrawals on any one day. The fact of the matter is that in times of severe distress, particularly stemming from solvency issues (read directly as the Pan-European Sovereign Debt Crisis, and Greece, et. al. in particular), the exact opposite is the case. Individual depositor and counterparty actions are actually HIGHLY correlated and tend to move in tandem, particularly when that move is out of the target fiat bank. They tend to take heed to the saying “He who panics first, panics best!"

Asset/liability mismatch can, at the margin nearly assure a Lehman-style fiasco in the case of an impetus that sparks herding mentality, whether it be among depositors/savers or institutional counterparties.

Back to Eurocaplyse:

French banks are among the ones most guity of playing this game, and they are among the ones pushing for accounting rules which are being revised, to still allow for this accounting procedure (typically American accountants were traditionally against this).

All in All, according to their "model" the subsctiption docs subject bank probably thinks they are fine, and in a liquidity crisis, they could stand up for several months, which is the time for a miracle, or rather the govt. and CBs to intervene. Of note 2010 and 2009 numbers for their gap look similar which is a clue for me that these are the numbers they are targetting.

That doesnt prevent systemic risk of course, and something worse than the worst scenario (and we know it can happen, of course), and given the subject bank owns subsidiaries in suspect PIIGS states, if there is a panic in any one of them, they could be identified as a risky bank (or on the contrary being seen by those PIIGS banking customers [as compared to from 100% local banks] as a "safer" bank and actually benefit from it ?)

Regarding the ALM gap, i think it would be very instructive to make comparisons within banks. it could be more telling than just marvelling at the subject bank's numbers. I would like to see whether the subject bank is more or less aggressive in its ALM exposure than other European banks or not.

We have done this, although the opaque reporting makes it labor intensive. Next up, we will be coming out with plenty of charts and trade setups for the subject bank.

Disclosure: Eurocalypse has no positions in the stocks referenced above, doesnt trade CDS, and doesnt intend to take positions in those financial instruments"
"Eurocalypse actually owns a small quantity of Italian (inflation-linked) bonds at its own risk. Please do your own due diligence and trade at your own risk