Today's lead story on Bloomberg and the primary theme throughout the financial MSM is Merkel’s Isolation Deepens As Draghi Criticizes Strategy. This is general pressure to force Merkel to succumb to extreme short term thinking that will most assuredely bring the EU to its knees and potentially end the hegemony of what use to be the European empire - that is unless... You know.... This time is different! Yes, these are strong words, strong words are necessry for a dire situation. Let's consder this a massive economic changing of the guard, shall we. And as such, these occurrences portend the potential for MASSIVE speculative investment gains as those financial bastions of faux capitalism come toppling down amidst massive short positiions that the majority simply didn't have the foresight, temerity (or balls) to impliement and hold on to. At the end of this article, I will review FIRE sector (see Reggie Middleton Sets CNBC on FIRE!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set and Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!) entities that I feel are primed to pop as this plays out, yet are not priced accordingly.

On Thursday, 29 September 2011 I penned Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again, wherein I queried:

"If I were able to show in this article that it really ISN'T different this time, would it change any decision maker's path or actions? We all know the answer to that question. Time to get those outlier event short positions ready, it's going to be a rough ride!!! A complete recap of recent events..."

This is a very important post, for it will lay out the outline of the impetus behind the 450+% gains I achieced in 2008/9. As queried in the afore-linked article, "So, at what point do we ever learn the basic lesson that "You can't solve an indebted nation's debt problems with more debt"?" 

The original "Sophisticated Ignorance" post was made in response to Germany being lauded for voting to nearly double the size of the then largest EU bailout fund ever...  

German lawmakers approved by a wide margin legislation to boost the scope and size of the euro zone's rescue fund, in a major step toward tackling the bloc's sovereign-debt crisis.

Lawmakers passed the reform of the European Financial Stability Facility with 523 'yes' votes, while 85 lawmakers voted 'no' and three abstained. The vote was seen as a test of Chancellor Angela Merkel's center-right coalition.

All 17 euro-zone governments have to approve the expansion, which will boost the fund’s lending capacity to €440 billion ($595.94 billion) from €250 billion and expand its powers to allow it to extend credit lines to banks and buy bonds on the secondary market.

To conitnue to quote from "Sophisticated Ignorance"...

This was the problem that I had with Paulson's original TARP idea. It just won't work because it doesn't solve the problem. Instead, it attempts to conceal the problem in fashion that pretends it never existed. Let's walk through this so a 5 year old can understand it.

Of course EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts (this is rather a trick question, since the soveriegn states simply cannot afford to bailout their banks any more than a 100 lbs man can lift a 400lbs man). The fact of the matter at hand is that they simply can't afford to bail them out. The banking system is just too big. 

image015.png

As BoomBustBlog's above average prescience (see Pan-European sovereign debt crisis) and Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly have clearly demonstrated, the source of the sovereigns debt problems is related DIRECTLY to the attempt to bailout insolvent banks, taking private sector losses upon public balance sheets, and eventually bankrupting the public state while doing nothing to fix the problems of the private banks, and ulitimately witnessing the private banks fail anyway.

I have predicted FIRE sector (including banks) failure at a commendable rate (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall

Streets Best of the Best?). It's not rocket science, though. It's simply (and actually quite simple, since my 10 year old can do it) math, coupled with a pliable understanding of human nature couped in grasp of history. Listen, it was the (attempted) bailing out of the banking system that got these countries in this situation to begin with. Bailing out the banks just two years later??? Do you really thing that will help the sovereign debt situation or hurt it? If the bailout goes through, you eat the small losses (relative to the big gains that BoomBustBlog delivered subscribers) and roll your gains directly into bearish positions on the bailing sovereigns. It's really just that simple. Don't believe me, let's look at history, and remember that that is Germany being referenced in the graphic below, G-E-R-M-A-N-Y!!!

image022

On that note and after a quick education on how this time is no diffeent than any other time in the past 800 years, let's revisist today's MSM headline, ala Bloomberg... 

picsay-1338542900

Merkel’s Isolation Deepens As Draghi Criticizes Strategy 

German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.

Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.

Calling himself a devotee of German-style budgetary rigor, Monti told a Brussels conference yesterday that Merkel’s vision of a stable economy “risks being undermined because of lack of promptness in setting up the necessary instruments to limit the contagion.”

And therein lies the rub. You see, creating a direct conduit to zombie banks from teh ECB and bailout mechanisms will not limit contagion, it will materially exacerbate it by allowing the financial pathogens direct access to the mothership - the ECB! Look at the history of the western world for over 800 years. THE BAD BANK BAILOUT IDEALOGY SIMPLY HAS NOT WORKED, EVER!!!

Financial markets offered a snapshot of Europe’s stresses after more than two years of crisis, with the euro close to its weakest in two years against the dollar. German two-year note yields fell below zero today as investors paid for shelter from the market mayhem afflicting Italy and Spain.

“Countries that are at the core of the system and which have had the huge merit of instilling the culture of stability to the European Union in the first place, most notably Germany, should really reflect deeply but quickly,” Monti said via video link to the Brussels conference. “Europe should really accelerate the efforts, as the European Commission is doing, in order to limit the contagion.”

Oh yeah, I've commented on this in the past as well. What happens to a net export nation's economy when all of its export partners are in recession, depression, war and socio-political unrest while the banking system unfolds around them? The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

As Germany goes, so does the insurance industry's magically levitating FI porfolio. You see, German gains offset periphery losses. What happens when everyone realizes Gemany may be in the penthouse suite, but still resides in the same overindebted roach motel?

European banks are (in addition to borrowing on a secured basis from those customers they usually lend to) also paying insurers and pension funds to take their illiquid bonds in exchange for better quality ones, in a desperate bid to secure much-needed cash from the ECB, which only provides cash against collateral. This may not be as safe a measure as it sounds. Below is a sensitivity analysis of Generali's (a highly leveraged Italian insurer, subscribers see  Exposure of European insurers to PIIGS) sovereign debt holdings.

image004image004

As you can see, Generali is highly leveraged into PIIGS debt, with 400% of its tangible equity exposed. Despite such leveraged exposure, I calculate (off the cuff, not an in depth analysis) that it took a 10% hit to Tangible Equity. Now, that's a lot, but one would assume that it would have been much worse. What saved it? Diversification into Geman bunds, whose yield went negative, thus throwing off a 14% return. Not bad for alleged AAA fixed income. But let's face it, Germany lives in the same roach motel as the rest of the profligate EU, they just rent the penthouse suite! Remember, Germany is not in recession after a rip roaring bull run in its bonds, and I presume the recession should get much deeper since as a net exporter it has to faces its trading partners going broke. Below you see what happens if the bund returns were simply run along the historical trend line (with not extreme bullishness of the last year).

image005image005

Companies such as Generali would instantly lose a third of their tangible equity. This is quite conservative, since the profligate states bonds would probably collapse unless the spreads shrink, which is highly doubtful. Below you see what would happen if bunds were to take a 10% loss.

image006image006

That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out. The same situation is evident in banks and pension funds as well as real estate entities dependent on financing in the near to medium term - basically, the entire FIRE sector in both European and US markets (that's right, don't believe those who say the US banks have decoupled from Europe).

thumb_Reggie_Middleton_on_Street_Signs_Fire

If you ddin't put your short on Generali back in 2010 when I first brought it to subscriber's attention, then it's too late now. It's not too late to jump on our latest insurance industry subject, though. The last forensic report was centered around an insurer - see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! and Our Next Forensic Analysis Subject Is In The Insurance Industry. The actual report is available here:

•  Insurance short candidate report_122511 - Professional/Institutional edition
•  Insurance short candidate report_122511 -Retail edition

Bank runs are invevitable! 

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

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

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

Yes, European bank runs are inevitable, but the causes of the bank runs are not. That's the problem. Instead of addressing the root causes of the bank runs, EU decision makers opt to throw more paper money into a gaping furnace to be burned as fast as it can be shoveled. 

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

image014

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

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

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

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

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

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

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

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

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

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

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

Here is the most recent Capital Account interview on the Facebook fiasco wherein I called the investment banking industry out for what it actually is, presented in the raw - no additional commentary necessary, except for the fact that you will probably never hear this level of rhetoric and analytical fact anywhere else!!!

Recent and related opinion and analysis:

Facebooking The Chinese Wall: How A Blog Has Outperformed Wall Street For 5 Yrs 

Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?

Shorting Federal Facebook Notes Are Not Allowed Today 

As I Promised Last Year, Facebook Is Being Overpriced and Overhyped… 

All paying subscribers (click here to subscribe) have access to the FaceBook IPO & Valuation Note Update February 2012. You may review the original analyses here FB note final 01/11/2011. Again, as Facebook continues to fall in price, sooner or later it will be fairly valued and most assuredly after that undervalued. Speculators and value investors should be prepared for such an event. 

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for our reports, available for immediate download - Facebook Valuation Model 08Feb2012. It is strongly recommended that subscribers download the file and input their own assumptions into said model.

Wall_Streets_Chinese_Wall_copy_copy

I will be taking the gloves off and going over this gangster style on Lauren Lyster's Capital Account Show on RT, tomorrow at 4:40pm. In the meantime, let's lay some groundwork.

As those who follow me reguarly probably already know, BoomBust bests ALL of Wall Street's sell side research. For evidence of such, reference "Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?". For the quick story behind how we are able to do what the lay muppet may consider nigh impossible, reference my piece on the Practitioners Of Muppetology…

For those of you who may have not heard as of yet, Reuters Alistair Barr reported Facebook's lead underwriters Morgan Stanley, JP Morgan, and Goldman Sachs, all cut their earnings forecasts – and did so in the middle of the IPO roadshow. This is a rarity and quite frankly an event that I don’t ever recall happening in the past. Adding fuel to the fire, this downgrade was disseminated only to a select few institutional clients, basically leaving the mom and pop crew (aka, MUPPETS) out to dry.

What makes this such class action fodder (see Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?) is that sell side analysts tend to have greater access to corporate management than regular investors or even the better equipped, more experienced guys such as myself. That being the case, the analysts of the actual underwriting companies have an even better position in regards to corporate management - arguably more so than any other financial entity. So, what happens when all of the underwriting companies suddenly downgrade their forecasts simultaneously?

As per Reuters:

The change in Morgan Stanley's estimates came on the heels of a May 9 Facebook filing of an amended prospectus with the U.S. Securities and Exchange Commission, in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. Mobile advertising to date has been less lucrative than advertising on desktops.

"This was done during the road show - I've never seen that before in 10 years," said a source at a mutual fund firm who was among those called by Morgan Stanley.

JPMorgan Chase and Goldman Sachs, which were also major underwriters on the IPO but had lesser roles than Morgan Stanley, also revised their estimates in response to Facebook's SEC filing, according to sources familiar with the situation.

Morgan Stanley said in a statement that a "significant number" of analysts in the IPO syndicate reduced estimates after Facebook's May 9 disclosure. The investment bank said its procedures complied with all "applicable regulations."

Where's a damn lawyer when you need one?  Although this has been covered rather heavily in the media, I felt I had to do it again. Why? Because the media didn't cover it properly. As a matter of fact, they missed an entire forest of fraud because of a funny looking piece of tree bark in the way. Let's look at this from the BoomBustBlog perspective, shall we.

Facebook's warning to its analysts came in the form of a revenue slowdown as more and more user move to mobile device interfaces to access Facebook, and mobile revenue has historically lagged desktop revenue in terms of volume. Okay, I get that. Yet, even without that choice bit of news, Facebook's total subscriber growth had slowed substantially! This was made clear to BoomBustBlog subscribers several times, with the first time being about a year ago!

Even if we don't consider the slowing subscriber growth (which we must) there's still the blatant and obvious risks to the weak advertising model, as clearly articulated in our subscriber forensic analysis of way over a year ago -FB note final 01/11/2011, to wit from page 3:

FB_note_final_Page_03

Did I have a valid point 14 months ago that ALL of the underwriters and top Wall Street analysts somehow miss - again? Don't ask my conceited ass, ask General Motors nearly a year and a half later...  

Fri, May 11 2012 WSJ.com and Reuters report GM plans to stop advertising on Facebook:

General Motors Co will stop advertising on Facebook, a move that comes during the same week the social networking website is due to go public.

The U.S. automaker confirmed a report by the Wall Street Journal. A source familiar with the automaker's plans said GM's marketing executives decided Facebook's ads had little impact on consumers.

GM said it will still have Facebook pages marketing its vehicles, but it will drop use of paid ads. Anyone can create a Facebook page at no cost. GM pays no fee to Facebook for its pages, which allow the automaker to reach consumers directly.

... "In terms of Facebook specifically, while we currently do not plan to continue with advertising, we remain committed to an aggressive content strategy through all of our products and brands, as it continues to be a very effective tool for engaging with our customers," GM said.

GM spends about $40 million on its Facebook presence, but only about $10 million of that is paid to Facebook for advertising. The rest covers the creation of content and the agencies involved, The Journal said.

GM, the country's third largest advertiser behind Procter & Gamble Co and AT&T Inc, spent $1.11 billion on U.S. ads last year, according to Kantar Media, an ad-tracking firm owned by WPP PLC. About $271 million of GM's total ad spend last year was for online display and search ads excluding Facebook advertising.

And back to that topic of growth in February of 2012, via the full forensic opinion available to all subscribers here FaceBook IPO & Valuation Note Update, reference page 10 as excerpted...

FB_IPO_Analysis__Valuation_Note_Page_10

This all leads to the topic of valuation. A topic that no legal defense team for banks should want me to broach. As I stated in January of 2011, Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week! 

Reference these two pages from our February FaceBook IPO & Valuation Note Update...

 FB_IPO_Analysis__Valuation_Note_Page_06

FB_IPO_Analysis__Valuation_Note_Page_07

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog Analsysis. The burning question is how did I get this so right yet ALL of those ubersmart analysts get it so wrong? Seriously, ALL of the underwriting analysts had a buy on this obviously and grossly overpriced stock - and that was before the price was increased, BEFORE the supply of stock offered from management and insiders was increased, and BEFORE Goldman decided to increase their cashout - all very negative indications that increase both stocks floated and the distance between price and fundamental valuation.

Well, here's a couple of hints... Is It Now Common Knowledge That Goldman's Investment Advice Sucks?, I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks, and Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Walk Over Clients. Of course, this isn't just about Goldman. I mean, we're talking a lot of over well paid analysts! As per Reuters:

The new estimates highlighted a continued slowdown in Facebook's growth, with the banks forecasting 30.4 percent year-on-year 2012 revenue growth on average, instead of the 36.7 percent growth previously expected. In 2011, Facebook's revenue grew 87.9 percent year-on-year to $3.71 billion.

The new numbers were relayed to big investors through phone calls and conference calls, according to investors. Bank of America held a conference call on May 10 with analyst Justin Post, where the underwriter revealed the lowered estimates.

Here are the detailed figures from the four banks, according to one of the investors who received the new numbers.

Lowered full year revenue estimate for 2012

Morgan Stanley -- $4.854 bln (new)from $5.036 bln (old)

Bank of America -- $4.815 bln (new) from $5.040 bln (old)

JPMorgan -- $4.839 bln (new) from $5.044 bln (old)

Goldman Sachs -- $4.852 bln (new) from $5.169 bln (old)

Lowered estimates for second-quarter 2012

Morgan Stanley -- $1.111 bln (new) from $1.175 bln (old)

Bank of America -- $1.100 bln (new) from $1.166 bln (old)

JPMorgan -- $1.096 bln (new) from $1.182 bln (old)

Goldman Sachs -- $1.125 bln (new) from $ 1.207 bln (old)

Lowered 2013 Earnings per share estimate

Morgan Stanley -- 83 cents (new) from 88 cents

Bank of America -- 64 cents (new) from 66 cents

JPMorgan -- 66 cents (new) from 70 cents

Goldman Sachs -- 63 cents (new) from 68 cents

Hey, I'm sure it's just my imagination. After all, there's always that famed Chinese Wall Thingy, right???!!

Wall_Streets_Chinese_Wall_copy_copy

For more on how bankers climb walls, see Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012. It is strongly recommended that said subscribers download and input their own assumptions into said model! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (FB note final 01/11/2011).

Here are the free blog posts on the topic:

1. Shorting Federal Facebook Notes Are Not Allowed Today
2. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
3. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
4. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
5. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
6. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
7. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
8. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Walk Over Clients

For Those That Want To Take A Peek Inside the Professional BoomBustBlog Paywall, Here's All of My Groupon Research - MUPPETS!!!

Apple's iPad Is Losing Market Share And Profit Margin As Apple Hits All Time High 

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

Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!

Wall Street is Back to Paying Big Bonuses. Are You Sharing in this New Found Prosperity?

Reggie Middleton vs Goldman Sachs, part 1, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks

Blog vs. Broker, whom do you trust!

Reggie Middleton Personally Congratulates Goldman, but Questions How Much More Can Be Pulled Off

No One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times…

  fb_copy

Reuters reports on Facebook:

"Morgan Stanley unexpectedly delivered some negative news to major clients: The bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company. The sudden caution very close to the huge initial public offering, and while an investor roadshow was underway, was a big shock to some, said two investors who were advised of the revised forecast."

I query, exactly why shouldn't there be class action lawsuits? Seriously! I run a very small operation with a budget smaller than Morgan Stanley’s or Goldman's postage expense. Despite such I have been able to clearly and granularly articulate that Facebook was grossly overvalued a year ago while it was a private company being hawked by Goldman Sachs as a private placement - Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!

As the IPO approached and more specific info available, the overvaluation simply became stronger and more apparent; reference Shorting Federal Facebook Notes Are Not Allowed Today. So is that I and my team are really that smart (and handsome) or are there other factors at play? A little more than a year ago Bloomberg created a list of who they considered the top performing analysts and brokers from the sell side. I was literally offended by how bad the performance actually was, especially when compared to an independent investor/analyst, reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Street’s Best of the Best?

Again, miraculously, Reggie Middleton and BoomBustBlog somehow managed to out run ALL of the big boys. As much as I would love to say  I’m simply better than ALL of those big boys, the reality of the matter is that I’m simply significantly less conflicted. The big banks have the resources and intellectual capital to run circles around me if they really wanted to. The problem is that really don’t want to. It is much more profitable to take agency commissions and principal transaction profits (as ZH often identifies as front running) from your clients than it is to wisely counsel them in investments. This is particularly true if they will keep coming back to you after getting raped, again and again.

I have written extensively on this, forming a quasi-scientific discipline of study, colloquially known as Muppetology:-) See the links below for more on this new branch of psychology/social science as it applies to finance and investments...

Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Walk Over Clients

For Those That Want To Take A Peek Inside the Professional BoomBustBlog Paywall, Here's All of My Groupon Research - MUPPETS!!!

Apple's iPad Is Losing Market Share And Profit Margin As Apple Hits All Time High 

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

Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!

Wall Street is Back to Paying Big Bonuses. Are You Sharing in this New Found Prosperity?

Reggie Middleton vs Goldman Sachs, part 1, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks

Blog vs. Broker, whom do you trust!

Reggie Middleton Personally Congratulates Goldman, but Questions How Much More Can Be Pulled Off

No One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times…

image003

Facebook is falling like a rock despite the fact that there's a short sale restriction on the stock until at least tomorrow. Why is there a short sale restriction in the first place? Exactly what is wrong with allowing market forces to find the true market price? Well, you can run but you can't hide, Mr. Market equilibrium avoider.

 image011_copy

BoomBustBlog subscribers have been thoroughly versed in Facebook's true value for over a year, As I Promised Last Year, Facebook Is Being Proven To Be Overhyped and Overpriced! Now that Facebook Finally Faces The Fact Of BoomBustBlog Analsysis, let pull out that simplified unlocked version of the valuation model used for our Facebook report (available for immediate download to pro/institutional subscribers) - Facebook Valuation Model 08Feb2012. Here is a screenshot of my personally updated version of the model.

 fb_model_output

All paying subscribers can download the addendum here - FB IPO Analysis & Valuation Note - update with per share valuation. Here's a quip from the last line of the report:

"As of the writing of this addendum, Facebook is trading at $33.83, a day after debuting at $38.This utter disappointment and gutting of the muppets is exactly what our research has anticipated. From a strictly fundamental perspective, Facebook shouldn’t see its IPO price anywhere within the foreseeable future!".

The general subscriber access full forensic opinion is still available, FaceBook IPO & Valuation Note Update in addition to the short update above. Of course, higher level subscribers should feel free to play with the model above as well. It is recommended that subscribers (click here to subscribe) also review the original analyses (FB note final 01/11/2011).

Here's where I broke it down on Capital Account

I also happened to do the same on the Max Kesier show...

I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below...

Additional Facebook analysis, valuationa and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Here are the free blog posts on the topic:

1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

The  day before yesterday I posted Who Will Be The Next JPM? Simply Review The BoomBustBlog Archives For The Answer. It was actually a very, very instructional post for although I run a subscription research service, there are troves of extremely insightful information buried in the archives - much of it available for free. It is actually ironic that one could have used the actual paid product to have predicted the events of this year with unerring accuracy two years ago, and using much of the same names from the 2008/9 archives profited heavily from the financial names that gave up 20% of the last few weeks. The more things change, the more they remain the same, eh? Which brings us to one of the first big warnings published on BoomBustBlog way back on Thursday, 08 May 2008: Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)

Creation of colossal US$45 trillion CDS market may unfold into trouble larger than that of the subprime (really to be read as imprudent underwriting) crisis

The creation of the massive US$45 trillion CDS market in the last few years, which faces some unique problems, can unfold into a massive bubble collapse that would easily dwarf that of the subprime crisis. The CDS are supposed to cover the losses of banks and bondholders in the event of default by companies. However, the CDS market has evolved from being primarily a means to hedge credit risk to a speculative and trading platform for a large number of banks and hedge funds. If the corporate defaults surge in the coming quarters (as Reggie Middleton, LLC expects them to) or there is default in payments of coupon and principal amounts, this could lead to a crisis far worse than what we have seen so far in the current “asset securitization crisis” and quite possibly in the recent history of the financial system. The high yield default rate has increased significantly (125%) in the last few quarters from 0.4% in 1Q 07 to almost 0.9% in 1Q 08. In addition, the monolines which are under considerable stress and play the role of both counterparty as well as the reference entity in the CDS market could spell major trouble for the market participants.

Spectacular growth of credit risk transfer instruments

image003.jpg

Fastforward five full years, and has anybody learned there lesson? Well, prance through the recent BoomBustBlog headlines to find the answer:

• Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably!

If you don't trust the thoroughly researched, high end alternative info sources such as BoomBustBlog, realize that today Bloomberg reports U.S. Banks Sold More Insurance on Europe Debt, as annotated and excerpted: 

U.S. banks increased sales of protection against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the last quarter of 2011 as the European debt crisis escalated.

Well you can't say they didn't see this coming, for I warned throughout 2010 via the Pan-European sovereign debt crisis series.

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose 10 percent from the previous quarter to $567 billion, according to the most recent data from the Bank for International Settlements. Those guarantees refer to credit-default swaps written on bonds.

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc., two of the top CDS underwriters in the U.S., say they have bought more protection than they sold, indicating they may benefit from defaults in the region. That outcome is called into question by JPMorgan’s $2 billion loss on similar derivatives, which shows that risks don’t vanish when offsetting bets are taken, said Craig Pirrong, a finance professor at the University of Houston. “All these hedges trade one risk for another,” said Pirrong, whose research focuses on derivatives markets.

EXACTLY!!!! Risk doesn't disappear when you buy a hedge, it's simply shifted and transformed. In the case of the aforementioned 2008 article and my ramblings about the banks and insurers, naked credit (and market, depending on how the hedge was constructed) risk was simply traded for counterparty risk. With 96% of notional derivative exposure concentrated in just 6 banks - all with excessive leverage, opaque VouDou accounting (Sak Passe'), and tummy full of hidden NPAs amongst one of the worst macro environments of several lifetimes , one must question, "Is the counterparty risk one just assumed greater than the credit/market risk sold, combined?"

“The banks say they’re flat on European risk, but that’s based on aggregated positions. We don’t know how those will hold off if the European crisis blows up.”

JPMorgan Chairman and Chief Executive Officer Jamie Dimon said last week that the bank was trying to reposition a portfolio of corporate credit derivatives and used a flawed trading strategy. The lender, the largest in the U.S. by assets, is believed to have sold protection on an index of corporate debt and bought protection on the same index to hedge its initial bet, according to market participants who asked not to be identified because their trading strategies aren’t public.

The two bets moved in opposite directions this year, causing losses and proving that even hedges that look perfect can break down, Pirrong said.

Once again for the unitiated, shall we?

Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010

Mr. Middleton discusses JP Morgan, bank risk and technology and is the only pundit in the financial media that we know of that called Apple's margin compression issues and did so successfully just hours before they reported! Click here or click below to see the video.

Here's a subscription dump of our archives for JPM to placate the insatiable thirst of the BoomBustBlog paid subscriber: JPM Q1 2011 Review & Analysis   JPM 3Q 2010 Forensic Update  JPM Public Excerpt of Forensic Analysis Subscription JPM Restricted Stock scheme JPM 2Q10 review  JPM 1Q 2010 Valuation Review   JPM 4Q09 review  JPM Report (092209) Final - Professional09/24/2009 JPM Forensic Report (092209) Final- Retail JPM Option Analysis

For those who have not read my seminal piece on Dimon's house of Morgan, JPM Public Excerpt of Forensic Analysis Subscription published nearly three years ago, allow me to take the liberty to excerpt it for you...

JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_01JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_01

JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_02JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_02

JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_03JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_03

JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_04JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_04

JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_05JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_05

JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_06JPM_Public_Excerpt_of_Forensic_Analysis_Subscription_Final_092209_Page_06

 

JPMorgan, Goldman Sachs

JPMorgan said in a regulatory filing that it purchased $144 billion of CDS related to the five European countries as of the end of the first quarter, while it sold $142 billion. Goldman Sachs (GS) bought $175 billion of protection and sold $164 billion, the firm said in its filing.... Bank of America Corp., Morgan Stanley (MS) and Citigroup Inc. (C) report only net CDS exposures. The five banks together account for 96 percent of the credit-derivatives market in the U.S., according to the Office of the Comptroller of the Currency. JPMorgan has written a quarter of the total, the OCC data show.

And here's the BoomBustBlog version of events:

I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & IntroductionI'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction	I'm Hunting Big Game Today: The Squid On A Spear Tip Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?	Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...
Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!	Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...
Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!	Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty! Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Matched Protection

Not all protection sold by banks is matched exactly by protection bought. CDS purchased and sold on Spanish sovereign debt can have different expiration dates. Banks also can net a swap on a Spanish bank with one on another lender. Even if those two firms are in a similar condition at the time of the trades, one could deteriorate faster, increasing the cost of CDS.

Some of the swaps sold by U.S. banks were bought by European lenders trying to reduce exposure to the five so-called peripheral countries. Since it’s considered insurance, a German bank can subtract the value of the contracts it purchased on Spanish debt from the total value of its holdings, with the understanding that if Spain doesn’t make good on its payment, the CDS underwriter will pay instead.

British, German and French banks’ loans to the five countries were reduced by 5 percent in the fourth quarter to $1.33 trillion, according to the BIS data. That was a $73 million decrease compared with the $53 million increase in U.S. banks’ CDS exposure to the periphery.

... Bank Losses

More than half of the CDS related to Spain, Italy and Portugal were to protect defaults by companies in those countries, not the government, according to data compiled by the Depository Trust and Clearing Corp., which runs a central registry for over-the-counter derivatives. About a quarter of the total in each country was protection on bank debt.

As banks in the five countries face mounting losses and funding strains, it’s impossible to model accurately how the risk on different institutions will change, Rowady said. Government and central bank interventions in markets can also upset correlations in those models, he said.

Now, I wouldn't go so far to say that it's impossible. After all, we did it and BoomBustBlog subscribers benefitted from it. Reference The BoomBustBlog Contagion Model: How We Predicted 9 Months Ago That The UK and Sweden Would Rush To Bail Out Ireland, and Why and Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!.

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

foreign claims of PIIGSforeign claims of PIIGSforeign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

I.          Summary of the methodology

• We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
• In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors - a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
• Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
• The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.
•  Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings
•  Sovereign Contagion Model - Pro & Institutional - contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.

Latest Pan-European Sovereign Risk Non-bank Subscription Research

• Ireland public finances projections_040710
• Spain public finances projections_033010
• UK Public Finances March 2010
• Italy public finances projection
• Greece Public Finances Projections

Back to Bloomberg...

Last week, Spain’s government took control of Bankia SA (BKIA), the country’s third-largest lender, and asked banks to increase provisions for souring real estate loans. Losses of Spanish banks could top 380 billion euros, according to the Centre for European Policy Studies. Moody’s Investors Service downgraded the credit ratings of 16 Spanish banks yesterday and 26 Italian lenders earlier this week.

Oh yeah, we caught Spain too - as far back as 2008/9/10. Yes, the Spain pain was apparent 4 years ago. Follow the BoomBustBlog archives, starting with a post from this month The Spain Pain Will Not Wane: Continuing the Contagion Saga and going back to '09 - The Spanish Inquisition is About to Begin... and even farther back to '08 - Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank. Back to the Bloomberg article...

Counterparty Failure

Counterparty failure is another risk for banks selling insurance on the debt of the five counties. When a swap is triggered by default, a bank could find that a client who sold the protection can’t pay. The firm still has to make good on its promise to pay whoever bought protection.

Lenders try to mitigate this risk by asking for collateral from their counterparties as the value of CDS or other derivative changes. Dexia SA (DEXB) failed in October when the bank faced 47 billion euros of such margin calls on interest-rate swaps it sold. If Dexia hadn’t been bailed out by Belgium and France, it wouldn’t have been able to put up the collateral, causing losses for its unidentified counterparties.

U.S. banks didn’t suffer losses when swaps on Greek sovereign debt were paid out in March because prices of CDS had surged and collateral was collected in advance, according to Francis Longstaff, a finance professor at the University of California Los Angeles. While collateral protects middlemen from counterparty risk, there could be unexpected losses if the price of CDS doesn’t rise to reflect an imminent default, he said.

“Sudden defaults would shock the market because then you wouldn’t have the collateral to cover the full payment,” Longstaff said.

Banks also may discover that collateral they hold might not be worth as much, said University of Houston’s Pirrong. That happened in 2008 when banks saw the value of mortgage-related securities held as collateral plummet.

“Collateral is a great way to protect yourself,” Pirrong said. “But when the financial system is in a crisis, you might end up holding an empty bag.”

All of the afore-linked articles and info should lead one to do as I did, and query Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably! Of course, I could always be more direct and simply state, Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time. Honestly, though, how is it that so few banks (five or six) can attain and allegedly hedge hundreds of trillions of dollars of exposure, yet assert they only have billions of dollars of risk? Asked in a more laymen, ex. common sense fashion, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

On Monday, 23 April 2012 I posted "It's Official & As I Foretold Years Ago, Greece Is Now In A True Depression As Reality Hits Greek Banks", roughly 2 years after penning 

How Greece Killed Its Own Banks!. Well, guess what!? The Wall Street Journal’s report, “Greek Depositors Withdrew $898 Million From Banks Monday”:

Greek depositors withdrew €700 million ($898 million) from the country's banks on Monday, fueling fears of a bank run amid the growing political disarray.

With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area.

Greek President Karolos Papoulias told the country's political leaders that bank withdrawals plus buy orders received by Greek banks for German bunds totaled some €800 million on Monday, a transcript of his comments said. A central bank official confirmed the figures.

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

image022

Greece's default will hit an already bank NPA laden Spain quite hard: The Spain Pain Will Not Wane: Continuing the Contagion Saga and ditto with Italy "As We Assured Clients Two Years Ago, Italy's Riding The Broken Promise Express To Restructuring". Once Italy gets hit, the true bank runs will start as socialist France (the so-called half of the EU anchor) loses control of its bankinsg system. Reference "As The French Bank Runs....": 

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

image012image012image012

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

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

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

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

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

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

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

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

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

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

Reggie_Middleton_Facebooks_Valuation

With Facebook slated to start trading in a few days, I feel it is appropriate to brush off some of the BoomBustBlog research and opinion that can help subscribers wade through the sell side waters. To wit, CNBC reports Facebook Faces User Distrust, Advertising Apathy: Poll:

More than half (57 percent) of Facebook users polled said they never click on ads or other sponsored content when they use the site, according to a new AP-CNBC poll. Another 26 percent said they hardly ever engage in such activity. Only 4 percent of users say they often click on ads — results that are only slightly better than the 2-3 percent clickthrough rate some experts consider the benchmark for effective banner ads.

This doesn't sound too good does it. Well, you can't say I didn't warn you last year: 

1. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
2. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1

Facebook users have consistently cast a wary and suspicious eye on the platform: 59 percent of respondents said that they had little to no trust in Facebook to keep their information private.

That doesn't sound very good either, does it?

Yet despite those ongoing concerns, the number of users (and their engagement) continues to increase. Facebook has grown to 901 million monthly active users worldwide, with personal computer users spending six to seven hours per month on the site (compared to just 3 minutes for Google+ users), according to recent data from ComScore.

Now, this sounds very, very good. Of course, it doesn't sound as good when you look at it in context...

Slower subscriber growth...

As for Mark Zuckerberg, the wunderkind CEO who turned 28 on Monday inspires somewhat tepid confidence as a leader, with only 18 percent of respondents saying they were extremely or very confident in his ability to run a large publicly traded company like Facebook. Yet pinning down a specific reason was difficult for respondents, who neither cited his age, temperament, nor reputation as significantly affecting those abilities.

Now if one were to ask me why I would be tepid in my confidence in Zuckerberg as a leader, I would say that its not his leadership abilities that are the biggest concern, it is the fact that he can single handedly wreck the company and the weak ass board of directors and the shareholders would be powerless to do anything about it. Instead of referring to him as the leader you can refer to him as the 28 year old potential tyrant and dictator. Reference Facebook CEO Running From Investors 'Cause He IS The Only Investor Whose Opinion Actually Counts?

CNBC also included this following chart...

Hmmm. That doesn't sound too promising, does it? Well, despite all of this, Facebook is finding absolutely no shortage of suckers asses for which to place in the Facebook IPO seat.... 

• Facebook increases IPO range to raise $12.1 billion
  3:37pm EDT
• Facebook's Zuckerberg says mobile first priority
  Sat, May 12 2012
• Facebook's IPO already oversubscribed: source
  Fri, May 11 2012

Hey, it gets worse. WSJ.com and Reuters report GM plans to stop advertising on Facebook:

General Motors Co will stop advertising on Facebook, a move that comes during the same week the social networking website is due to go public.

The U.S. automaker confirmed a report by the Wall Street Journal. A source familiar with the automaker's plans said GM's marketing executives decided Facebook's ads had little impact on consumers.

GM said it will still have Facebook pages marketing its vehicles, but it will drop use of paid ads. Anyone can create a Facebook page at no cost. GM pays no fee to Facebook for its pages, which allow the automaker to reach consumers directly.

... "In terms of Facebook specifically, while we currently do not plan to continue with advertising, we remain committed to an aggressive content strategy through all of our products and brands, as it continues to be a very effective tool for engaging with our customers," GM said.

GM spends about $40 million on its Facebook presence, but only about $10 million of that is paid to Facebook for advertising. The rest covers the creation of content and the agencies involved, The Journal said.

GM, the country's third largest advertiser behind Procter & Gamble Co and AT&T Inc, spent $1.11 billion on U.S. ads last year, according to Kantar Media, an ad-tracking firm owned by WPP PLC. About $271 million of GM's total ad spend last year was for online display and search ads excluding Facebook advertising.

Hmmm... It appears as if the MSM has it out for Facebook today, in direct contravention of its historical actions pushing this company. I wonder if its because I wrote How Does Facebook Drum Up So Much Frothy Interest For Its Overpriced Shares? Help From The Media, Goldman, et. al.

I've had a few subscribers who, after reviewing the (subscription only) FaceBook IPO & Valuation Note Update and Facebook Valuation Model, have seriously queried how Facebook is managing to drum up so much froth and interest for its obviously overpriced shares? The apparent answer is the marketing machine known as Goldman, et. al. The less recognized answer is assistance from the MSM, as demonstrted by this CNBC article - Facebook’s Premium Ad Prices Still Rising:

Pricing for Facebook’s premium “social” advertisements continues to rise, two recent studies have found—a positive indicator that could offset concerns about a dip in advertising growth and help sentiment towards the Internet company’s initial public offering.

This is a net positive statement, no?

A report to be released on Monday by Marin Software, a digital marketing platform that processes more than $100 million worth of spending on Facebook, found a 26 percent increase over the last year in the cost per click for “premium” ad formats such as Sponsored Stories, which highlight friends’ “likes”, comments and other endorsements of brands’ activity on the site.

Wow! That's pretty good growth and pricing elasticity, no? Bring on those newly public shares and let 'em rip!!! 

However, Marin’s report also found the cost per click for Facebook’s standard ads, which make up an estimated three-quarters of the social network’s advertising revenues, fell 26 percent over the last year.

Wait a minute, if 75% of the companies product dropped in price, doesn't that easily swamp the 26% of the companies premium ads that rose in price? An even more direct questions is, why isn't this being reported as the net negative that is is? Let's walk though this step by step for the more arithmetically challenged amongst us...

So, according to this MSM article, reporting a net 13% drop in revenue somehow amounts to - and let me quote this so as to be as accurate as possible - "a positive indicator that could offset concerns about a dip in advertising growth and help sentiment towards the Internet company’s initial public offering". Please excuse me as I wipe the splattered bullshit from my computer screen - it's hard to type accurately with those opaque, stinking brown stains in the way. Even worse, it goes to show what portions of the MSM actually think in terms of the intellectual capacity of its readership. 

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog Analsysis. 

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012.

It is strongly recommended that said subscribers download and input their own assumptions into said model in order for confident preparation before the IPO launch! I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (FB note final 01/11/2011).

 Here's where I broke it down on Capital Account

I also happened to do the same on the Max Kesier show...

I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below...

Additional Facebook analysis, valuationa and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Here are the free blog posts on the topic:

1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

S&P and Fitch finally downgrade JP Morgan, 3 years after my initial multimedia warnings (see Listen Carefully...  for the details). Unfortunately, despite threats and ruminations, these rating agencies again act in retrospect, failing to do anything but remind stakeholders of the losses they have already taken rather than assisting them in avoiding losses.

So, what are the rating agencies missing?  They're missing the fact that nearly all of the big money center banks are doing exactly what JPM was doing and they have no one to rely upon but themselves when things go awry from a counterparty perspective. Bennie Bernanke has instituted perpetual ZIRP, and as such has basically broken the banking business in his attempt to save it. Through ZIRP, banks simply cannot make money doing things that traditional banks do, ex. profit from lending. As such, they reach for yield, and that's just the conservative ones. The big boys take baseball bats swinging for home runs, either consciously or subconsciously sanguine in the protection of the Bernanke flavored taxpayer put under their respective businesses. With such protection, already historically proven, bank managers are getting progressively more aggressive and increasingly less aware of the term "RISK adjusted reward" as they simply seek rewards. Alas, I'm getting ahead of myself, let me explain...

JPM Public Excerpt of Forensic Analysis Subscription Final 092209 Page 07JPM Public Excerpt of Forensic Analysis Subscription Final 092209 Page 07 copy

The JPM prop desk that held the losses which generated headlines earlier this week was marketed as a hedging operation when we all know it was anything but. What it was was a concerted grasp for yield and profit in a ZIRP environment where JPM (one of the world's largest congregations of interest bearing assets) was bearing effectively no interest.

Banks need to make money too, hence when there's no money to be made in traditional FI yields, the banks start reaching, and they tend to start reaching farther as desperation to make the next quarter mounts in the face of BoomBustBlog reading investors who may be able to see past earnings stuffing stemming from less than prudent reserve releases consistent underprovisioning.

JPM_Underprovisioning

 The BoomBustBlog subscriber document JPM Q1 2011 Review & Analysis illustrates the point of JPM's waning ability to make money by making loans and holding debt with perfect clarity, and did so a year in advance....

 JPM Public Excerpt of Forensic Analysis Subscription Final 092209 Page 09

So, what do you do if you're a bank but you can't make money lending? You gamble, that's what you do! It's not like JPM hasn't gambled before, and it's not like they haven't lost money gambling...

jpm_ficc1

I put out what I consider to be some of the best predictive research available. I also put an inordinate amount of info out for absolutely free, particularly in the case of those big names as in the employer of Voldemort. For those who have not read my seminal piece on Dimon's house of Morgan, JPM Public Excerpt of Forensic Analysis Subscription published nearly three years ago, allow me to take the liberty to excerpt it for you...

Hmmm... Tell me if you get stuff like this from the rating agencies.... This is a good time to bring up that Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts

The next post on this topic will outline and illustrate several banks whom the agencies need to downgrade NOW, as in RIGHT NOW. These banks are, of course, JPM counterparties. In the meantime and in between time, follow me:

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

JPM Q1 2011 Review & Analysis

JPM 3Q 2010 Forensic Update 

JPM Public Excerpt of Forensic Analysis Subscription

JPM Restricted Stock scheme

JPM 2Q10 review

 JPM 1Q 2010 Valuation Review 

 JPM 4Q09 review

 JPM Report (092209) Final - Professional09/24/2009

JPM Forensic Report (092209) Final- Retail

JPM Option Analysis

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

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

Click to expand!

bank_ficc_derivative_trading.png 

Again, from ZeroHedge: 

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

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

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

JPM Q1 2011 Review & Analysis

JPM 3Q 2010 Forensic Update 

JPM Public Excerpt of Forensic Analysis Subscription

JPM Restricted Stock scheme

JPM 2Q10 review

 JPM 1Q 2010 Valuation Review 

 JPM 4Q09 review

 JPM Report (092209) Final - Professional09/24/2009

JPM Forensic Report (092209) Final- Retail

JPM Option Analysis