Anglo Irish Bank/IBRC bondholders will actually get some of their money back!

April Fools!!!

As if on cue, a day after my expose on Anglo Irish Bank and its shenanigans (see Global Banking Crisis - How & Why YOU Will Get "Cyprus'd" As This Bank Scrambled For Capital!!!), The Irish Business Post announces senior bondholders will get wiped out. That's right, a 100% loss! Zilch! Zero! Nada! Now, that's investing. That's getting "Cyprus'd", plus some!!! From businesspost.ie: IBRC senior bondholders to be burned

 

anglobondwipeout copy

If you thought this was interesting, you ain't seen nothing yet. This was just the preamble, I have a whole list of banks, each with a story more ludicrous than the last, each still taking deposits, and yes.... for the US centric Americans, with operations in the US and securities trading on our exchanges. Paying subscribers (at this point, I don't see why most of you aren't paying, you'll let these banks take your money for .7% interest, but you won't pay a few dollars for a hardcore educational analysis???) can access the first of these banks right now - File Icon EU Bank Capital Confusion, Potential Failure. You may click here to subscribe...

businesspost.ie

Published in BoomBustBlog

 

It is my opinion that banks worldwide are simply not safe anymore, and we are on the precipice of a banking crisis that will make the Lehman fiasco look like a test run. For one, interest rates will definitely have to rise. Yes, I know Bernanke is running ZIRP, the ECB is QE to infinity and beyond, yada, yada... But these entities are not the end all and be all for market rates. They can manipulate rates, but they can't ultimately control them for the long term. After 6 years, it's been long term...  With banks failing and taking depositor's and bondholder's funds with them, there's simply not enough people stupid enough to accept .7% returns in exchange for the very likely possibility of losing a large chunk of (the majority of, or possibly all of) their principal to go around!!! This central bank Ponzi scheme of printing more money to pay for the debt that you couldn't afford to pay back because you didn't have the money relies on the "Greater Fool Theory". Common sense dictates that this theory is predicated on an ample supply of "Greater Fools". What you will read below should shake the foundations of your belief in the EU banking system, and hopefully will start a dearth in "Greater Fools"! Even more alarming, it actually gets worse from here. Oh yeah, if you have believe that the information below actually identifies a gross misrepresentation of fact, omission or outright fraud, simply contact the SEC and let them know that Reggie Middleton suggested they look into it. You can actually use this form to convery my message.

First Off Let's Make Bank Collapse Real...

To begin with, let's make this Cyprus thing real, by showing a live example of what happens when to a real small business that had the gall to bank with Laikie Bank, from the Bitcoin forum I excerpt a post that puts things into perspective, re: bank account confiscation:



Most of the circulating assets on our business Current Account are blocked. 
Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years.
I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation.
The business is definitely ruined, all Cypriot workers to be fired.
We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.
Special thanks to:
- Jeroen Dijsselbloem
- Angela Merkel
- Manuel Barroso
- the rest of officials of "European Comission"

Laiki Bank has offered details...DecreeEN Page 1DecreeEN Page 2DecreeEN Page 3

Next, Let's Realize That Cyprus Is Not A "Special Case", It Is Like The Template For Future Actions

Just the fear of another wave of bank collapse has government officials and regulators in fear. Why are they afraid? I made the cause of such fear clear to all at the ING Valuation Conference in Amsterdam.

With the knowledge contained in the video above, it's not hard to see the Infection spreads to North America as The Canadian Government Offers "Bail-In" Regime, Prepares For The Confiscation Of Bank Deposits To Bail Out Banks! Hold on, before you start worrying about your Canadian bank, you should be aware that the EU banks are still much, much, much worse off. Let's forget Cyprus for a minute and look deeper into the EU, into a larger country with more globally interconnected banks.

On Thursday, 29 April 2010 I warned my subscribers to Beware of the Potential Irish Ponzi Scheme! Shortly thereafter, the BoomBustBlog Irish Research Became Reality. That same month, I warned again with the post, "Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!" Five months later, I went back at Ireland again with "If the World Knew What BoomBustBlogger's Know, Would Ireland Default Today?" This post was the clincher, to wit:

The Farce!

The government has set up an asset management agency – NAMA, which will buy toxic assets from banks at a discount and will in turn issue government-guaranteed securities. NAMA was expected to buy about $81 billion of toxic assets at a price of $43 billion and issue government-guaranteed securities in return. Since these securities have collateral backing and are likely to be repaid through the pay back of underlying loans, these securities are considered off-balance-sheet and are not part of general government debt by Eurostat. According to Davy research, while the projected gross government debt excluding the impact of promissory notes and NAMA bonds is 84.8% in 2012, including the impact of promissory notes and NAMA bonds (in other words, including the truth), the gross government debt can rise to 117.4% of GDP. This either competes with or bests Greece, 2010's poster child of flagrant spending.

This means that the teacher has created a very harsh austerity plan for its "learner"/student/tax paying populace that has materially lowered the standard of living - all based upon numbers that were bogus to begin with. In other words, it ain't gonna work!

Well, today we have proof and that proof will likely leave some EU bank despositors "Cyprus'd", and I don't mean just those in Cyprus either.

Introduction and Background

In 2007 Ireland had significant cross border exposure to UK and US banks through derivatives and property products. As I warned in 2007, the real estate bubble in the the US/UK popped in 2008, sending pathogenic contagion straight through the Irish banking system. The entire banking system started collapsing. On February 15, 2008, Ireland took extraordinary measures (which we will explore in depth a little later on) to mitigate said collapse, measures that many a layperson would deem misleading, if not fraudulent. RBS (Royal Bank of Scotland, one of the largest financial institutions in the countries of Ireland and the UK) was effectively nationalized by the UK and a bad bank was formed to purchase bad debt/products from the Zombie Irish banks in exchange for government bonds, backed by a country that just simply couldn't afford it.

Following my warning in February of 2008, Lehman filed bankruptcy in September sending an additional set of contagion shock through Ireland and its banking system, causing Ireland to issues bonds and further indebt itself to save its Zombie banks – again! This time through blanket bank guarantees backed by the full faith of the government.

In September of 2010, a large swath of said government guarantees for the banks were about to expire. Reference this excerpt from the book “Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy”:

In September 2010, some of Ireland's government guarantees for bank debts were about to expire, which put U.S. Treasury officials on edge. If the guarantee wasn't renewed, the banks would likely default on their bonds, triggering the next event in line: a slew of credit default swap (CDS) contracts on Irish banks' debt. U.S. Treasury officials had reason to worry - the names backing those contracts were the largest U .S. banks, and they could end up paying billions in case of default. Any more weight on U.S. banks could be a tipping point to collapse. Treasury officials made inquiries to their counterparts at the Irish finance ministry asking about the course of action the country was planning to take and indicated their concern about possible default and its CDS repercussions. A year after having issued blanket guarantees on the banks' liabilities the Irish government once again didn't dare let the bank fail. Instead it ended up asking for financial assistance from the European Union (EU) and the International Monetary Fund (IIMF): the country had been pushed to the brink of collapse.

image002

The next few posts will document details the financial shenanigans played by several EU banks (Ireland included), among others, to the tune of over €40 billion. This money was essentially double counted, or to put more simply, at least one version of it simply doesn't exist on someone’s balance sheet.

I have compiled a list of at least 6 banks which I feel are at risk of being Cyprus'd, with more being added weekly. The first bank report, whose subject is still steadily accepting deposits at measly interest rates, is available for download right now for all paying BoomBustBlog subscribers (click here to subscribe), reference File Icon EU Bank Capital Confusion, Potential Failure. Those of you who actually follow this banking stuff may very well be shocked at how bold the actions described therein actually are!

For now, let’s focus on Ireland and the Irish banks.

Anglo Irish Bank

Anglo Irish Bank which subsequently became Irish Bank Resolution Corporation (IBRC), was recently liquidated by the Irish Government. Included below are three documents executed by this bank. The first two are charge documents that the bank entered into on the 15th of February, 2008. These charges are in favor of the Central Bank and Financial Services Authority of Ireland (the ECB). They are floating charges over Secured Obligations (repo agreements) and the banks payment module account.

Anglo Irish Bank Charge Doc no2 Page 1Anglo Irish Bank Charge Doc no2 Page 2Anglo Irish Bank charge doc Page 1Anglo Irish Bank charge doc Page 2

 

So, What's So Special About These Documents???

The reasons given for the floating charges are the banks participation in Target 2, which is a interbank, cross-border EU real-time payment system. A former Group Chief Auditor of one of Ireland’s largest banks who was part of the team who conducted the stress testing for the European Banking Authority was allegedly quite shocked to see the various charge documents herein. He informed BoomBustBlog consultants that these charge documents were not included in the stress testing. For those who don’t get the gravity of this statement – the previous encumbering of the Irish bank’s assets were ignored or not known by those who conducted the stress testing for the banks. What makes things even worse was despite the fact the bank’s assets were double counted, allowing them to pass the stress tests, they promptly started failing post stress test… And I do mean promptly, as in within months.

The chief auditor was also allegedly able to inform that the reasons given for the purpose of the charges was a red herring. He allegedly advised that Target 2 is only a payment system and the description stated was a complete misrepresentation of the true reasons.

The real reasons for the charges were because the bank was completely bust. The bank had already previously entered into repo transactions (secured obligations) with the Irish Central Bank (ECB) and had run out of money. The Irish Central Bank gave further funding using these charge documents. The share price of Anglo in February 2008 was still quite high but started to collapse over the coming months. These charge documents are not disclosed in the Annual Accounts (the EU version of an annual report) for the 31st of March, 2008.

Questions also arise as to the validity of the asset transfer, the legality of Anglo Irish Bank and/or the ECB entering into repo agreements, and the activity of Anglo Irish Bank in regards to its trading activity… If a charge was given over ALL of Anglo Irish's assets, then exactly how did it legally engage in the MBS, derivative and trading activity? Underlying assets must be pledged to a trust in order to create many derivative structures, including MBS, but if there's a negative pledge clause in the charge and the charge covers nearly everything, then those assets don't truly belong to said trust, do they? You can imagine how far one can go with this line of thinking, no?

If you were an investor, shareholder, bondholder or regulator the information above was critical information - EXTREMELY CRITICAL INFORMATION! Anglo ADR's were also traded through brokers in the USA. I am sure that ADR holders would have liked to have been aware of this information, as well as the SEC.

I see a number of avenues which could be worth pursuing, including terms of recompense for junior bondholders who got hosed, equity shareholders who lost capital, counterparties, etc. This is, to my lay ears, tantamount to blatant fraud. Of course, I’m not an international banking lawyer, so what do I know??? Yet, I have only touched on some of the issues. There’s a lot more to come.

In relation to Anglo Irish Bank (IBRC), the 2008 charge document states that the charge covers ‘all present and future liabilities whatsoever of the company, to the Central Bank of Ireland (ECB).’ But there is no disclosure of this in the Anglo 2008 accounts (annual report). This appears to illustrate concealment of the true facts. If these charge documents have not been overridden, then a massive amount of assets in the bank have been over-encumbered. Even if the charges have been overridden in some form or fashion, the mere omission of their existence is a misrepresentation of the banks financial condition, particularly in the stress testing of the banks and regulatory financial reporting (ex. SEC).

If you believe that the information above actually identifies a gross misrepresentation of fact, omission or outright fraud, simply contact the SEC and let them know that Reggie Middleton suggested they look into it. You can actually use this form to convey my message. 

As a reminder for those who wish to ignore my banking calls as a frivolous episode of Chicken Little, BoomBustBlog is the place that was the first to reveal:

  1. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? 
  2. The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. 
  3. The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual
  4. The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton, Welcome to the World of Dr. FrankenFinance! and Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion
  5. The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010: The Pan-European Sovereign Debt Crisis
  6. Ireland austerity and the disguised sink hole of debt and non-performing assets that is the Irish banking system: I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!
The problems that plagued Cyprus banks plague banks in much larger nations within, and around the EU. From Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe you see institutions that are literally too big to be handled safely...

The Banks Are Bigger Than Many of the Sovereigns

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Definitions:

 Charge

The document evidencing mortgage security required by Crown Law (law derived from English law). A Fixed Charge refers to a defined set of assets and is usually registered. A Floating Charge refers to other assets which change from time to time (ie. cashinventory, etc.), which become a Fixed Charge after a default.

Repurchase Agreement

repurchase agreement, also known as a repoRP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as aborrower, using their security as collateral for a secured cash loan at a fixed rate of interest.

A repo is equivalent to a spot sale combined with a forward contract. The spot sale results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is effectively the interest on the loan, while the settlement date of the forward contract is the maturity date of the loan.

Target 2

TARGET 2 is an interbank payment system for the real-time processing of cross-border transfers throughout the European Union. TARGET2 replaced TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) in November 2007.

Next up is a bank that is still steadily accepting deposits at a steady clip, paying ungodly low interest rates, and setting itself up to potentially get "Cyprus'd". Paying subscribers can download the report now, before capital controls are set in - see File Icon EU Bank Capital Confusion, Potential Failure. Everybody else can subscribe or wait until either I make it public or the respective government does the Cyprus Thang! Yes it pays to be a BoomBustBlog member (click here to subscribe).

I will start posting a list of definitive bank names that I have apparently caught in some amazingly duplicitous and misleading capital schemes, at least as it appears to me and my staff. I know I wouldn't have MY money in them, particularly after reading the info above.

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Cyprus-central-bankFollowing up my latest rant on the Cypriot debacle, Economic Depression Is The New Success, I want to make perfectly clear that the EU banking system in Europe is irrevocably broken. The ECB/EU has demonstrated this through Cyprus, definitively. Let me break it down...

All investors price their investments, whether consciously and prudently or frivolously, by demanding "X" units of return for "Y" units of risk. This risk/reward ration is clearly delineated in a sound banking system, where the investments with highest (perceived) likelihood of return are priced accordingly, with the most expensive risk. The dimensions of risk run the gamut from credit risk, liquidy risk, market risk, legal risk, duration risk, etc. At the top of this risk ladder or hierarchy are products such as equities, complex derivatives, etc.

In the middle tier are often fixed income instruments such as junior and senior bonds. At the bottom of this risk hierarchy are products that have relatively little (perceived) risks and high liquidity, hence offer very little return in exchange. These products includes demand deposit accounts (checking and savings accounts), certificates of deposits, etc.

So, at the top of the risk ladder you have products that may have nearly no liquidity and high credit and market risks, but can offer high returns. At the bottom of this ladder are uber-liquid (at least perceived to be so) products that feature very little "relative" risks, hence are often priced to offer very little return as well. For instance, in the US, you can receive a 300% return from a front month, OTM put option with several days, but receive only 1% return from your checking account over a period of a year, or 4% in Cyprus banks. 

So... What happens when the account that you are receiving payment from being the lowest run on the risk ladder yields the risk that exists at the top of the ladder? Or, in other words, what happens if you get robbed and misrepresented as to the true nature of the product that you purchased? This is what happened in Cyprus, where they paid their depositors savings account returns but made them assume front month put option risks!

The deposit accounts that you were getting just a few hundred basis points for have developed:

  1. Liquidity risks: The capital controls that weren't supposed to happen (see No Capital Controls In The EMU? Liar Liar Pants On Fire), happened! See Cyprus Banks Set To Reopen, To Serve As Glorified ATMs With A €300 Cash Withdrawal Limit
  2. Credit risks: Your so-called safe investments will suffer up to a 40% haircut! Mainstream Media Says Cyprus Salvaged By EU Deal, I Say Cyprus Is Sacrificed By Said Deal - Thrown Into Depression
  3. and Market risks: Demand depositers have forcibly purchased highly speculative synthetic call options with their haircuts that are unlikely to compensate anyone for anything!

The little app below calculates what return you should expect to receive to take on the risk of a potential 40% haircut. The second tab offers what recent Cyprus bank rates were. Do you see a disparity???

It's not just Cyprus either. The problems that plagued Cyprus banks plague banks in much larger nations within, and around the EU. From Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe you see institutions that are literally too big to be handled safely...

The Banks Are Bigger Than Many of the Sovereigns

image015.png

Of course, there's never only one roach, despite the back and forth coming from EU leaders... 

So, let there be no misunderstanding - if it can happen to Cyprus banks, it can likely happen to your EU bank as well. Go back up and adjust the app/calculator haircut to just 5% (you may have to scroll to the right) and see if your getting compensated for the risk that you are taking in your speculative bank!

Ready! Set! Bank Run!!!

Cyprus contagion raw

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I've been hard on Facebook over the last year or so, and especially hard over the last 30 days... Last month I opined on The Truth About Facebook That No Media Outlet Or Analyst Has Bothered To Notice. As its shares marched back up towards its ridiculous IPO price that I warned the entire year previous was basically a marketing/hype scam. I ended last week with It's Official, The Farcebook Ad Model Is A Sham!

One of the major reasons for being so bearish was that it was IPO'd at a multiple that was pure highway robbery, Cyprus savings account style! Now what I mean? And as  I warned throughout the year preceding the IPO...

image005 copy copy copy

Facebook is a farce even with the froth taken off of the IPO price. Why? As gleaned from Internet World Stats...

 image004 copyimage012image013

These stats are from the 2011-2012 YEAR! Growth has likely slowed more since then! Here's a tidbit for those who don't subscribe that clearly illustrates... When it sounds too good to be true, it's probably not true!

FB IPO Analysis  Valuation Note Page 01FB IPO Analysis  Valuation Note Page 02FB IPO Analysis  Valuation Note Page 03FB IPO Analysis  Valuation Note Page 04

As I ended my last article on this topic, this is simply Grouponzi 2.0 - just on a much larger scale!

The updated valuation for Facebook (which has actually has an increase in terms of value now that we have more information to deal with) is available to download for all paying subscribers (FB Q4-2012 Analysis & Valuation Note - update with per share valuation). I'm available to discuss this with professional and institutional subscribers via phone or Google+. Click here to subscribe or upgrade.

Published in BoomBustBlog
Tuesday, 26 March 2013 07:55

Economic Depression Is The New Success

Central Bank of Cyprus contagion rawThe Irish Times, through AP reports on the latest failure of Cyprus banks to reopen:

The announcement to keep the banks shut last night by the Central Bank of Cyprus came hours after it said all banks except the country's two largest lenders, Laiki and Bank of Cyprus, would open today.

Banks have been closed since March 16th to avert a run on deposits as the country's politicians struggled to come up with a plan that would raise enough funds to qualify for an international bailout.

Reference The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! It won't work.

An initial plan that would seize up to 10 per cent of people's bank accounts had spooked depositors and was soundly rejected by MPs.

All except the country's two largest lenders had been due to open today after the country clinched an 11th-hour deal with euro zone and the IMF to provide Cyprus with a bailout.

Without that deal, the country's banks would have collapsed, dragging down the economy and potentially pushing it out of the euro zone.

But last night the Central Bank of Cyprus said that "for the smooth functioning of the entire banking system, the finance minister has decided, after a recommendation by the governor of the Central Bank, that all banks remain shut up to and including Wednesday".

ATMs have been functioning, but many run quickly out of cash, and a daily withdrawal limit of €100 was imposed on the two largest lenders, Bank of Cyprus and Laiki.

These are the capital controls I clearly warned of last year that are not supposed to be legal.

Under the deal reached in the early hours of yesterday morning in Brussels, Cyprus agreed to slash its oversized banking sector and inflict hefty losses on large depositors in troubled banks to secure the €10 billion bailout.

The new plan allows for the bulk of the funds to be raised by forcing losses on accounts of more than €100,000 in Laiki and Bank of Cyprus, with the remainder coming from tax increases and privatisations.

People and businesses with more than €100,000 in their accounts at Laiki face significant losses. The bank will be dissolved immediately into a bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation's biggest lender, Bank of Cyprus.

Deposits at Bank of Cyprus above €100,000 will be frozen until it becomes clear whether or to what extent they will also be forced to take losses. Those funds will eventually be converted into bank shares.

It is not yet clear how severe the losses would be to Laiki's large bank deposit holders, but the euro finance ministers noted the restructure expected to yield €4.2 billion overall. Analysts have estimated investors might lose up to 40 per cent of their money.

Speaking about the marathon negotiations in Brussels that resulted in the deal, Cyprus' president Nicos Anastasiades said "the hours were difficult, at some moments dramatic. Cyprus found itself a breath away from economic collapse".

The agreement, he said, “is painful, but under the circumstances the best we could have ensured. The danger of Cyprus' bankruptcy is definitively overcome and the tragic consequences for the economy and society are averted”.

Bullocks, Bullshit, and all that other good stuff! As I stated in Mainstream Media Says Cyprus Salvaged By EU Deal, I Say Cyprus Is Sacrificed By Said Deal - Thrown Into Depression, locking up a country's liquidity for an unspecified amount of time, then removing up to 40% of a nations small/medium/large business liquidity (permanently, they're catching haircuts) as well as that of your wealthy depositors, is tantamount to economic genocide! How in the hell do you calculate "The danger of Cyprus' bankruptcy is definitively overcome and the tragic consequences for the economy and society are averted”? 

If anything, "The danger of Cyprus' bankruptcy... and the tragic consequences for the economy and society" are just getting started! I find it amazing that the Troika has convinced so many small nations that boiling slowly in a pot of austerity flavored depression is preferable to a quick and clean exit and rebirth. Is belonging to the EU really worth undergoing an extended depression? Iceland gave the finger to the Troika and they're doing better than nearly everybody in the EU! Think about it.

From the BBC: Iceland's 'tenacity' lifts economy out of crisis

Whisper it - Iceland's economy is on its way back. The frozen island on the edge of the Arctic, which had 10 straight quarters of shrinking GDP, is suddenly on a steady run of seven quarters of growth averaging at 2.5% per annum - something that few European countries can boast. Unemployment has fallen to just below 5% and confidence is returning...

Ready! Set! Bank Run!!!

Cyprus contagion raw

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On Monday, 25 June 2012 I penned "No Capital Controls In The EMU? Liar Liar Pants On Fire". Let me excerpt the first paragraph so as to bring those who have not read it up to speed before we jump into current events...

I have outlined the upcoming EU bank runs up to two years in advance (see the many links below). Whenever one expects a bank run, the first things TPTB do is institute capital controls to stem said bank run - which of course makes the bank run that much more necessary to get your capital out - wash, rinse, repeat! Remember, by treaty, no country in the EMU may use capital controls without automatically being removed from the union. Well, do you believe that to be fact that will last? Yeah, I don't either. Simply watch as the money bleeds from the banks and the bumbletrons attempt to staunch the flow using mechanisms that will simply exacerbate the flow. Even more incredible is the fact that even to this date, with the existence of publications such as BoomBustBlog, entire nations as well as their financial advisors, leaders, regulators and politictians STILL DO NOT EVEN COMPREHEND the nature of the modern bank run. You cannot stem the tide with capital controls, you can only exacerbate it. 

Now, As Predicted Last Year, The French and the Greeks Are In A Race For The Biggest Bank Run!

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

Okay, I'm writing this on 3/23/2013, referring to the events of yesterday. I apologize to my paying subscribers for being 9 months and a few miles/kilometers off, but as the more intellectually capacitive among you know, this stuff is not an exact science. Now, yesterday's headlines...

Cyprus passes laws for capital controls

Lawmakers in Cyprus passed legislation to impose capital controls on its banks and create a "solidarity fund" to pool state assets, according to media reports late Friday. The measures will help fulfill conditions for Cyprus to get a euro-zone bailout. With a Monday deadline, Cypriot lawmakers still need to vote on measures needed to restructure banks in Cyprus and possibly place levies on deposits.

I appeared on the Max Keiser show in London yesterday, and broke down the Cyprus issue as simply as could be done. In essence, "What is a bank???!!!"

In "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" I detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

image015

 

You see, the problem with this bank holiday thing is that the real damaging bank run will not be staunced by the conventional bank holidays, et. al. because it is a counterparty run that will cause the damage, not depositors. TPTB in Europe don't have the chops to stem this one, at least not from what I've seen. As for how that institutional bank run thing works, we excerpt "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

 

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

 

 

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

 

And Yes!!! The fodder for bank rungs are ALL OVER THE EUROPEAN SPACE!!!!

Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series). 

A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Model that we developed in 2010. Long story short (if it's not already too late), my next extensive series of posts on this topic will likely spark bank runs throughout the periphery and the core of Europe, for much of the assets that depositors think are there are simply not, and I proffer ample proof for all to see. For the banks, it's too late to pull the evidence down from your various web sites, for I already have it safely stored and distributed. Keep in mind, once the fissures form in one section of the already weakeed EU, cracks widen in the other sections... 

Description: foreign claims of PIIGS

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Last month I opined on The Truth About Facebook That No Media Outlet Or Analyst Has Bothered To Notice. As its shares marched back up towards its ridiculous IPO price that I warned the entire year previous was basically a marketing/hype scam engineered to confiscate one's hard earned capital, sell side analysts and mainstream media types ignored basic yet blatant cracks in this media darlings armor yet again. For one, we know this high growth company is already experiencing negative growth in active users...

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We also know that Google has essentially caught up to Facebook as a social media platform, reference I Don't Think Facebook Investors Will "Like" This!!! Google Has Already Caught Up In Terms Of Active Users. Despite these pertinent (and quite negative) facts, FB shares have been on the rise, although recently have last some of their froth. Why did the shares pop? Irrational exuberance! The sell side marketing analysis has it that Facebook is perfecting the marketing and mobile business model, and as a result is able to monetize its massive, yet shrinking user base. 

The counter to this argument is basically that it's not true. For one, the shrinking user base is real. The school age youth, once a mainstay of Facebook, is moving on. Simply ask the one's that you know. More importantly, it's ad model is basically a Sham! Any sell side analyst who attempted to value this company based on ad revenues without actually trying out its ad system is not worth postage used to send his bonus check. I tried the ad system out. While the click through rates were actually about 2/3rds that of Google's comparable ad model, the actual sales from the ads were less than abysmal - and this is for a rather interesting product. Even worse, the delivery of the ads proved to be highly intrusive, causing a significant and material amount of negative feedback from the Facebook community. Here are some examples of the feedback received from the so-called Facebook 'ads" that I paid for...

  • "Hey, I don't like this post. Please remove it."
  • "Please remove me from your list"
  • "I am getting unsubscribed advertisements and friend request that say I approved them"

There's actually a lot more than that, this just what was sitting in my inbox before it was deleted. Here's a screenshot of a conversation I had with on of the recipients of the so-called Facebook ads which are essentially paid for placements on somebody's wall...

Facebook ad failure

"I am getting... friend request that say I approved them"??? Does that sound like a sustainable business model to you? This is simply Grouponzi 2.0, just on a much larger scale!

The updated valuation for Facebook (which has actually has an increase in terms of value now that we have more information to deal with) is available to download for all paying subscribers (FB Q4-2012 Analysis & Valuation Note - update with per share valuation). I'm available to discuss this with professional and institutional subscribers via phone or Google+. Click here to subscribe or upgrade.

Published in BoomBustBlog

picsay-1363698572Following yesterday's highly analytical rant on Cypriotic bank nonsense, I present an interesting analysis on the value of the gas assets pledged to those who's bank accounts may be clipped by the Cypriotic government/ECB. For those who don't know, the proposal was to compensate those who were subject to the tax/levy on their bank accounts with bonds linked to the output of Cyprus natural gas mines. Of course, the first question anyone should ask is "Why not simply pledge the gas assets directly to the ECB vs stealing from the bank depositors?" I think we can all ascertain the answer to that question. I was tweeted an analyst by wherein he delved into the fundamental value of the exchange. I would like to reproduce a portion of it here. The balance can be found on his site.

Cyprus Bank Deposit Levy and Natural Gas Bonds

Cyprus' president has pledged to cover the value of its imminent savings deposit levy with an equivalent value of natural gas bonds. It's hard to say whether Cypriot savers should take this promise seriously without some analysis of its viability.
Let's use the European bailout sum for Cyprus of US$13B as a proxy for the amount of savings about to be confiscated from Cyprus' resident depositors.  I need a proxy because I have no idea how much the government of Cyprus will actually collect from this levy.  The natural gas revenue needed to back the bonds that would make savers whole would likely come from the Aphrodite field.  Title to this field is unclear; Turkey has made a competing claim for the sovereign right to control drilling.
This is the likely answer to the quetion above. If the ownership and rights to the mine are in question, then it is essentially an encumbered asset. As such, how is it Cyprus's to pledge to anybody? May I add that Turkey actually has a functional military, and Cyprus has???
There is currently no pipeline from Cyprus to either Turkey or Crete which could deliver the gas to market; that would cost US$1B to build and Cyprus has no money.  Building a $10B LNG terminal is ten times as unlikely, because Cyprus is still broke.  The energy supermajor that ends up building it will get the lion's share of the revenue from the gas field as compensation for its costs and will have to deal with the likelihood of being shut out of other projects in Turkey. 
Again, exactly how will this gas asset be monetized? I have not verified the facts and calculations behind this article, but if they ring true, then it appears that Cyprus is pledging the option of future development to a gas asset that it MIGHT own in exchange for actual cash in terms of what is being offered to bank depositors. So, the most valuable asset possible (actual cash denominated in a major currency) is being exchanged for an option on an undeveloped asset whose ownership and right to pledge/transfer is undetermined. Does this sound like a good deal to you? And we haven't even started to glean the actual fundamental value yet?
The lack of drilling and delivery infrastructure means that no Aphrodite gas will go to Europe until 2018 at the earliest.  A lot can happen with the price of natural gas in five years.  The wide availability of shale gas in the U.S. will keep the price down in North America.  Europe's need for gas is met mainly by Russia, and Gazprom can adjust its rates at will to pressure Russia's neighbors. 
And such pressure is guaranteed if Russian citizens are to lose the 2 billion or so euros to the Cyprus bailout levy that is being bandied around.
There is more to Mr. Alfidi's analysis, and I urge you to visit his site to read it. In the meantime, keep this chart from yesterday's post on Cypriotic bank nonsense in mind...

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I'm currently preparing the release of a report that will make the Cyprus affair look like peanuts as this contagion reinfects the core and I produce so much evidence of apparent fraud as to make your nose bleed. Stay tuned, and follow me:

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Reading a Bloomberg article on the topic of ass-backwards EU area government moves this morning caused me to query, "What is the extent of the fear the European (and US) governments have of the financiers?" In Cyprus, we have a case of a government that would actually rape the depositors of a bank rather than the investors who voluntarily, directly and explicitly accepted the risk of bank failure through speculative investment (ex., the bondholders). 

The bank tax was the alternative to imposing losses on investors in a so-called bail-in, a step opposed by the Cypriot government, the European Commission and the ECB, German Finance Minister Wolfgang Schaeuble said on ARD television last night.

So, you will bend the mom and pop depositors over, but leave the monies of the institutional guys who should have known better sacrosanct?

“It’s up to them to explain it to the Cypriot people,” Schaeuble said. “Clearly, the taxpayer should not be asked” to rescue banks from insolvency, he said, adding that Cyprus faced a “very difficult time” unless it accepts the tax.

Bullocks! The taxpayer should be hit before the depositor to maintain the confidence in the banking system, but they should all stand behind the bondholders who accepted the investment risk in the first place. Yes, I'm aware that the banking system of Cyprus is about 9 times the size of its real economy, but that's pretty much the case with much, if not all of the EU, as clearly delineated 3 years ago in Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe:

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

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

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

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Of course, this boneheaded move will backfire tremendously because it appears as if the members of the Cyprus government are not aware of the true financing structure of the banking system. DEPOSITORS SHOULD REMAIN SACROSACNT! They are the most important source of funding, not to mention the most liquid (as in potential for capital flight) in the entire banking ecosystem! I reviewed this structure and the inevitability of European bank runs two years ago in The Anatomey of a European Bank Run!

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

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

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.

I'm currently preparing the release of a report that will make the Cyprus affair look like peanuts as this contagion reinfects the core and I produce so much evidence of apparent fraud as to make your nose bleed. Stay tuned, and follow me:

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 software collage

Friday, the Wall Street Journal ran a piece that essentially channeled BoomBustBlog. It was quite controversial, Why spend six figures on a business degree? Students would do better to train and network on their own.

Imagine that you have been accepted to Harvard Business School. The ivy-covered buildings and high-powered faculty whisper that all you need to do is listen to your teachers, get good grades and work well with your peers. After two years, you'll emerge ready to take the business world by storm. Once you have that degree, you'll have it made.

But don't kid yourself. What matters exponentially more than that M.B.A. is the set of skills and accomplishments that got you into business school in the first place. What if those same students, instead of spending two years and $174,400 at Harvard Business School, took the same amount of money and invested it in themselves? How would they compare after two years?

If you want a business education, the odds aren't with you, unfortunately, in business school. Professors are rewarded for publishing journal articles, not for being good teachers. The other students are trying to get ahead of you. The development office is already assessing you for future donations. Administrators care about the metrics that will improve your school's national ranking. None of these things actually helps you learn about business.

Consider what you could do instead with that $174,400. The first step should be to move to a part of the country that supports your interests. If that's film, move to Los Angeles. Technology, San Francisco. Oil, Houston. You could live decently in these cities for $3,000 per month. Over the course of two years, that still leaves you $100,000 to invest in yourself.

Needless to say, I have addressed this in detail through many interviews, videos and articles over the last few months. Well, now, I offer the means to funamentally, arithmetically and convincingly prove the idealogy behind the assertion...

The Education Bubble Deflator & Valuation Software is now out of beta and available for purchase, download and use. See the end of this article for instructions on accessing the model. Here I will offer a brief overview of the model and the key findings from a hypothetical student funding his undergrad, grad and PhD studies with a 6% Sallie Mae loan. The application is designed to help individuals value their college/university education by calculating and valuing the real cash flows generated by diplomas/academic studies in addition to calculating the real world costs of obtaining said assets. 

We capture, quantify and illustrate the value of a diploma from higher education institutions across different disparate majors and give each a distinct eROI (Economic return on investment) figure for students pursuing these courses.  The app uses inputs of (1) expected salary of a student after completing a major, (2) the tuition payable for pursuing the major, (3) any loans that would be taken to finance the course fee, (4) a blended tax rate to compute disposable income, (4) interest rate for the loan, (5) household expenses that a person is likely to incur, (6) growth rates in salary, (7) Opportunity cost for pursuing a major full time, (8) and an adjustment for the unemployment rate to factor in the impact of unemployment.

The app also computes cash flows that a student is likely to earn over the life of his career after considering his installments for the loan repayment, household expenses, taxes and the opportunity cost for pursuing a course.

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Key Findings

The current weak economic environment has seriously dented the economic viability of pursuing a degree (Bachelors, Masters or a PhD) from some of the top universities in the US. The persistent decline in salaries being offered to graduates from these universities coupled with continued rise in cost of courses has resulted in a fall in economic return to students from these majors.

In the US, the trend of increasing duration of student loans and higher aggregate student loans outstanding are a matter of immediate attention. These trends have increased concern over higher student loan default in the near future, resultantly seriously raising the need for evaluation of value of securitized assets based on such loans. In essence, it’s the mortgage bubble all over again.

Return from Undergraduate Courses

Almost all universities (listed below) offer very low returns over a student’s career life if aggregated as an “all majors” category. The high cost of courses and lowering of salary being offered upon completion of courses are major drivers for lower returns.

NPV @6% p.a is negative for all schools on an aggregated basis and even on a specific, major by major basis.

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Even when looked at on a more granular basis, we get the following...

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As can be seen, the returns are middling at best, particularly when compared with other forms of investment over time. Resultantly the break-even year impractically far in most cases - after the year 2040 (assuming a start year of 2013).

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As a matter of fact, we have actually marked the cash flows from this person's education to market, benchmarking it against several other risk assets. From an undergraduate perspective, it's a dismal comparison for the most part. The returns are far lower compared with the 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%). When taking individual majors into consideration, the numbers get even more interesting for diversity comes into play. The accompanying app shows the divergence in value not only between different majors within a school, but also the same majors between different schools, thereby actually valuing both the majors and the schools themselves!

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The model conveniently allows one to actually compare returns on a specific major between schools. This is invaluable in choosing schools. Most students and their parents select schools based on nominal affordabilty and/or repuation.

Now you can compare schools based on actual economic performance upon graduation - the way it should have been done from the beginning!!!

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Things Generally Look Much Better For Graduate Degrees, But..... The Catch 22!!!

Return from Postgraduate Courses

Postgraduate degrees offer a much better return compared with other asset classes than do undergraduate degrees. The break-even year is achieved much earlier, in most cases within 12-16 years. NPV @6% is positive in all the cases. The problem is that in order to pursue a master's degree you first must obtain an undergraduate degree which has a very high probability of putting you in the hole!

Return from PhD Courses

Similar to undergraduate courses, return from PhD courses is lower compared to postgraduate courses. The returns are also lower compared to 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%). The break-even year is achieved after a very long time, after almost 26-28 years.

Download Your Copy of the Education Bubble Deflator and Valuation Software Now! 

The cost is 29.99 for 30 days of use, but the first 100 users will get a 1 year subscription.

  1. Subscribe to BoomBustBlog
  2. Pay for the software here - $29.99.
  3. Download the software model here - File Icon College & University Education Valuation Model.
  4. Optionally, download the instructions if you're not comfortable with income and cash flows: File Icon Education Bubble Deflator & Valuation Model Instructions

This file must be opened in Libre Office Portable, a free lighteweight office suite that does not leave traces or changes on the client computer. You can download Libre Office Portable for free here: PortableApps 97 MB. A portable version of LibreOffice packaged in PortableApps.com Format, so you can take all your documents and everything you need to work from a USB, cloud or local drive. See PortableApps.com for more information.

Discuss this software, its findings and collaborate with othes on Facebook.

 

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