Many lay persons are misled by terms such as money printing. This misdirection is easily understood and stems from a basic misunderstanding of what money is, versus actual economic value. Let's assume we have a pie called the EU (or US?), with a 1 trillion euros of economic value. This is the European economic pie. The EU get's in trouble and the banks start to run out of money. Now, the fact of the matter is that those same banks failed to make incremental gains to their actual economic value (true profit) and everyone who's paying attention knows it, hence they faced a problem getting funding. So, they go crying to the central bank, who basically printed euros through various mechanisms in order to push new and additional little pieces of digital paper throughout the system. This is what the layperson sees as money appearing out of nowhere at the behest of the financial bailout gods of the governmental powers that be.

The problem with this viewpoint is that the money appeared out of nowhere, but said money was not backed by actual economic capital. Hence more euros (or dollars) are available in the system, but each of those euros/dollars are simply worth that much less.

This is not economic progress boys and girls. What we need to move forward is to bake bigger pies, not cut the existing and steadily shrinking economic pies into more pieces!!!

Economic pie 

Bloomberg EU Eases Spain Debt Rules as Merkel Retreats and Euro Rises After EU Leaders Renounce Spain Loan Seniority

Euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy as an outflanked German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis.
After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, chiefs of the 17 euro countries dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s blighted banks and opened the way to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. Stocks and bonds in Spain and Italy rallied and the euro posted its biggest gain this year.

Oh yeah, that's a damn good idea. Take a murky pool of depreciating, hard to value, illiquid assets and make them even murkier, harder to value, yet easier to pledge since it's now acceptable to look in the other direction as you receive said "trash assets". To make matters even worse, the Europeans are now attempting to perfect their method of throwing good money after bad by denying preferential status to the only money that can save (or at least buoy) these zombie banks. Of course, no lender will want to go in knowing that they can be instantly subordinated, but then again when the only lender that can realy make a difference goes in, why should it take a bow to anyone else. Trust me on this one... Taxpayers will offer loans and see that money disappear... Poooffff!!! Don't believe me? Reference CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?"

Bloomberg also reports  Spain Gets Relief as Europe Leaders Outflank Merkel in Bid to Blunt Crisis. Listen, pressuring Germany, the one remaining relatively stable/robust large economy in the union is a recipe for disaster. There's no wonder why 16 or so failing economies are in opposition to the wants and desires of the 1 or so successful economies. See any common threads here. Germany is far from bulletproof, as the same MSM page sports this headline...

German Retail Sales Unexpectedly Fell for a Second Month in May on Crisis
German retail sales unexpectedly fell for a second month in May as the sovereign debt crisis worsened, damping the economic outlook.

Germany is a net export nation whose primary trading partners range from extremely hard landing to recessionary to outright depression. Exactly where is all of the economic growth going to come from to fund the world, or at least the European version of the world. I have written extensively on this... Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream

Things are so predictably dead beat that I don't even have to write new material anymore. Seriously! Let's just cut and paste from the BoomBustBlog archives: Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead

I have broached the argument in the past that the ECB is not god, or even close to it, and that it can only play the bond buying ponzi for but so long before negative consequences occur. Reference: 

• ECB As European Lender Of Last Resort = Institutional Purveryor Of A Pan-European Ponzi Scheme 
• Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!

 

Below is my mini-debate with Doug Kass on Twitter. Let it be known that I have respect for Doug, for he called the market turn in 2009 with precision, an did it publicly. Of course, I can't agree with him on this latest proclamation though...

Douglas Kass ‏@DougKass
The EU initiatives reduce tail risk (a crash) but dont address the deep structural issues - buy the rumor, sell the news. What I will do.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass How does the EUinitiative reduce risk/crash? Still not funded? Simply shifts dirt from 1 hole to the next, much dirt still missing

Douglas Kass ‏@DougKass
@ReggieMiddleton yes reggie... and it worked in the U.S. four years ago. Dont be dogmatic.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Stocks did double, though. Unfortunately neither economic output or asset quality nor true economic profit bothered to follow suit

ReggieMiddleton ‏@ReggieMiddleton
@DougKass It all depends on how you define "worked". US banking system is still a mess. Lending is sparse. We never really left recession..

ReggieMiddleton ‏@ReggieMiddleton
@DougKass ex. of how well it worked for banks: BAC,/C/MS/Manfinancial, soon GS, JPM, et. al. Its anathema to say, prices aren't everything.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass In essences, that means that stock prices went one way, and actual value failed to follow.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Stocks did double, though. Unfortunately neither economic output or asset quality nor true economic profit bothered to follow suit

ReggieMiddleton ‏@ReggieMiddleton
@DougKass It all depends on how you define "worked". US banking system is still a mess. Lending is sparse. We never really left recession..

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Taxpayers will offer loans without which banks will fail, yet don't get preferential status. that money will disappear

And a supplementary tweet from Tyler: Last Night's Critical Phrase "No Extra Bailout Funds" tinyurl.com/7nstlg2

Anyway, back to the Bloomberg story. So, now taxpayers will cough up and additional several hundred billion euro to be absolutely incinerated and vaporized once it hits that gaping oven of insolvency needing at least 500 billion euro to make a difference. Translation: Central banks will take another very big hit and not get paid for it. 

Speculators should have alreday started selling French and German bonds because they are the major contributors to the ECB. I've discussed France in detail earlier this week in Now Is The Time To Prepare For The (Next) French Bailout Of Their Banking System & Potential Bailout Of France. The French are not particularly well situated. I also took a find toothed comb to Germany as well, as archived... The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... You see, as you read through this last link, if Germany's Bunds so much as return to trendline, it absolutely wrecks EU insurance, bank HTM and pension portfolios. I mean negative equity everywhere.

Finally, check this out. If you don't want to watch the whole thing then start at 2:38...

An update of "shortable" (as in still having some meat on the bone) French banks is available for download to subscribers - French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian exposureFrench bank Italian Exposure: As Italy pops with outrageous funding yields (just like Greece), France will be forced to bailout its banks once again, leaving the socialist country facing the dilemma of potentially having to ask for a bailout itself. As you may know from my previous writings, the French banking system is bigger than France itself so a true bailout cannot practically come from within.

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.

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!!!!

Today's MSM headlines make this quite clear, but before we get to them, just remember how obvious this was two and three years ago and why NOBODY should be shocked or surprised! See Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe from Wednesday, 31 March 2010 and Is Another Banking Crisis Inevitable? from Feb 4, 2011 and a complete video tutorial based on early 2010 work that has yet to be even one iota inaccurate... 

Now, why would anyone be concerned about a bank run today? Oh yeah...

 CNBC reports Spain Officially Requests Cash for Bank Bailout From Europe, right after I made it clear that CNBC is asking the wrong questions - to wit: CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?" 

You also have CNBC reporting that Fitch Cuts Cyprus to Junk as Greek Exposure Hits (exactly as the Greek bailout constructionist lawyer from Gottlieb in the video above said it would last week). Exactly one year ago today I claimed Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par at 30x+ Leverage: Bank Collapse is Inevitable!!! I wasn't joking. Bank collapse is INEVITABLE!!!

If you remember, Greece was supposed to be in the clear right? Let's bring back Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! All said Greece would never default while I made it clear multiple defaults were literally guaranteed as far back as 2010:

The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino 2010

Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! 2010

and the list goes on...

1. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?

2. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

As I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!

How Greece Killed Its Own Banks!

Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

Spain was even called as an unrecognized problem back in 2010: As We Have Warned, the Fissures Are Widening in the Spanish Banking System

So what's the purpose of all of this reminiscing? Well, the contagion trade is on and popping my friend. Those BoomBustBlog Armageddon Puts That Became Fashionable At Goldman are ready to be strategized. My next post on this topic will be on that big EU bank that was the last to be priced for contagion. In the meantime, remember (subscriber only - click here to subscribe) contagion model research:

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

Next up is an updated take on that big bank hooked to deep into Greek and Italian exposure. I'll try to have the subscriber document and a free preview opinion up in a few hours on BoomBustBlog. In the mean time and in between time, follow me:

Goldman's strategy desk just came out with a recommendation that mirrors my guidance to subscribers, a 3 weeks later, reference Armageddon Puts Versus Truly Busted CRE REITS: Looking for that 5x-10x ROI 

Yesterday, I received a couple of emails along the lines of the one displayed below...

"Hi Reggie,

Can you please put out any guidance on your Armageddon Puts for your lowly retail subscribers?

Thanks"

Well, I would like all to know that I'm not a typical mo-mo type trader. I'm a strategist. With that being said, I'm also not the one to look a strong risk/reward proposition in the face and do nothing. Below is a set of charts that should drive the mindset home.

SPX_puts

The actual chart with the series and strike of the puts can be found in the retail investor's discussion forum. I will also be available to chat there as well.

If one would have averaged small OTM put purchases with with ample time value attached over the last week and a half, one would have amassed a neet little collection of Armageddon puts that will start popping into the money today. They were cheap enough to throw away in the rallying market, and if things go awry (quite likely) three digit returns are virtually guaranteed. The following is Goldman's note from this morning...

Published 10:46 AM Thu Jun 21 2012 ________________________________

Noah Weisberger

Aleksandar Timcenko

We are recommending a short position in the S&P 500 index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390. This morning, the Philly Fed print of -16.6, down sequentially and worse than expected, provides further evidence that weakness has extended into June. Although yesterday's FOMC delivered easing as expected, with a dovish statement, positive risk sentiment ahead of the FOMC had already buoyed markets. And we now think, with incremental US monetary policy on hold, the market will need to confront a deteriorating growth picture near term. The risk to our recommendation is that the data soon reverts to the 2-percent growth path our economists expect, that China growth turns, or that European policy-makers' rhetoric buoys risk sentiment further from here, with the upcoming end-of-June summit a focal point on this count.

The MSM headline barrage continues to confirm my multiple warnings on the increasingly ugly macro situation both here and abroad...

• US Mid-Atlantic Factories Slow; Leading Indicators Rise The US never really left recession
• Manufacturing, Jobs Reports Add Up to More Bad News Ditto
• Spanish Banks Need Up to $79 Billion in Capital: Auditors Yeah, right - that's before you mark assets to market, right?
• Beware the Looming 'Monetary Cliff': Hatzius yep!
• Europe May Have Found a New Use for Its Bailout Fund This is dangerous. The ECB wants to lax collateral rules to assist southern banks (read Italy, Greece and Spain) in obtaining funding. That means the ECB will be filled with even more trash than before. Reference my work on this topic 
  • You Have Not Known Pain Until You've Tried To Limit The Borrowing Costs of Spain!!!
  • Is Morgan Stanley Once Again The "Riskiest Bank On The Street"?
  • CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?"

This is how the European banks were killed in the first place -  Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead. The ECB will become the world's largest insolvent hedge fund (sans the hedges, of course) if it is not so already...  Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What.

More MSM headlines to drive the point home

• ECB Mulls Scrapping Sovereign Rating Rules: Sources - See what I mean? And the rating agencies have been much, much to soft and slow to rate the soveriengs accurately, to boot. What in the world would happen if you really had a thorough analytical force in there to guide clients in the clients (not the sovereings or the banks) best interests? Reference Rating Agencies vs Reggie Middleton, Part 3 and the Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts
• China's Factory Activity Shrinks for 8th Straight Month - Uh Huh! Reference A Quick Note On China's Rate Cut and Reggie Middleton Speaks On China, Greece Playing Chicken and US Ponzinomics, then Will China Hit That Inflation Deer In The Global Macroeconomic Headlights Anyway, Despite The Fact They Are Slamming On The Brakes?
  
  

Follow me:

 The MSM reports Spanish Short-Term Debt Costs Reach Alarm Levels:

Spain paid a euro era record price to sell short-term debt on Tuesday, pushing it closer to becoming the biggest euro zone country to be shut out of credit markets. The soaring borrowing costs highlight the shortcomings of a June 9 euro zone deal to lend Spain up to 100 billion euros ($126 billion) for its banks.

Last week CNBC Asked, "So Why Are Spanish Bond Yields Falling?". I Asked The Better Question, "Why Are Spanish Banks Considered Solvent?" That's because by now everybody knows that the bank's problems are the sovereign's problems and vice versa. Reference Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead..

They also illustrate how Europe's problems run much deeper than Greece, brought back from the brink of default in Sunday's parliamentary election. 

Spain, the euro zone's fourth largest economy, had to pay 5.07 percent to sell 12-month Treasury bills and 5.11 percent to sell 18-month paper - an increase of about 200 basis points on the last auction for the same maturities a month ago.

And this was AFTER the bailout! With friends like those, who needs enemies, eh?

While Spain's 10-year bond yields eased slightly to around seven percent after the sale, the auction underscored the government's increasingly shrill pleas for help from the European Central Bank, two days before Madrid tries to sell three-to-five year bonds.

If you remember, I warned that Spain was effectively ignoring some very large, bank related and budgetary problems as far back as 2009/10.... Reference The Spain Pain Will Not Wane: Continuing the Contagion Saga:

In the general our analysis Spain public finances projections_033010, the first four (of 12) pages basically outline the gist of the Spanish problem today, to wit here are the first two:

Spain_public_finances_projections_033010_Page_02   

Over the last two months, as the MSM and sell sides have underplayed the importance of Spain's problems, I have repeatedly underscored the threat that Spain actually presents to the EU and the world economy...

• The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain Thursday, 26 April 2012 21:06
• S&P Downgrades Spain (After I Did) Two Notches, Near Junk... About Time

About those rating agencies... Of course, we all know how reliable and timely the rating agencies are, right? See Rating Agencies vs Reggie Middleton, Part 3 and the Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts

Reggie_VPRO_Ratings_agenciesReggie_VPRO_Ratings_agencies

The only rating agency that even remotely mirrors my realistic perpsective on financial risk is Egan Jones, and you can just imagine what they sound like...

• Full-Scale Bailouts for Italy, Spain in 6 Months: Egan-Jones

Hey, I've heard some smart guys say something along those lines... Bank Run Italiano Style!!!

• Spain Credit Rating Slashed by Moody's, Egan-Jones

And for those that don't believe the Spanish malaise can touch you, European Insurer Needs Insurance As $6B Of Its Bonds Are Instantly Subordinated Due To "Spain's Pain".

CNBC asks So Why Are Spanish Bond Yields Falling? Well, that's a good question. Short answer: Well rates spiked dramatically, and we are seeing some retracement from the psychological balm of even more liquidity thrown from the global central planning cartel, otherwise known as the central banks. Of course, this begs the question, "Should the rates go down since the 'Global Central Planning Cartel' has failed for 5 years and running to put this monster to bed with liquidity injections?" Alas, I'm already ahead of myself. Let's peruse said CNBC/Reuters article, shall we?

Spanish and Italian bond yields fell on Friday as sentiment toward riskier asset improved thanks to plans for coordinated central bank liquidity injections to help stabilize markets if Sunday's Greek elections cause turmoil.

The prospect of easy access to central bank cash helped settle nerves ahead of Sunday's Greek vote which could put Athens on a path to exit the euro zone if parties opposed to the conditions of Greece's international bailout come to power.

"It's having a good impact... on the bond side we see Spanish yields turning lower. It tells us that central banks at least won't let markets collapse on Monday," said Emile Cardon, market economist at Rabobank in Utrecht.

After reaching a euro-era high above 7 percent on Thursday, Spain's 10-year bond yield eased 12 basis points from its closing level to 6.84 percent, while Italian yields fell 10 bps to 6.06 percent.

What???!!! Isn't this still quite close to a record? Sovereign bonds spike to record yields, after being forced upon private banks, causing insolvency, then said banks request bailouts from said sovereigns who do bail them out, thus bankrupting the country and forcing said bailed out banks to lend the bankrupt countries money again. Wash, Rinse, Repeat! Remember in Dead Bank Deja Vu? How The Sovereigns Killed Their Own Banks & Why Nobody Realizes They're Dead… I have explained this nonsensical methodology in detail. I also showed how well it worked out for:

1. Greece How Greece Killed Its Own Banks!
2. the ECB Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What.
3. Italy Bank Run! Italiano Style?
4. and now for Spain, as I will demonstrate a little further on in this post.

Bund futures were flat at 141.83, recovering after a fall in after-hours trading on Thursday when Reuters reported that major central banks were ready to pump in liquidity, if needed, to prevent a credit squeeze.

Of course, as more and more investors ever so slowly start to realize that The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You.

Some of the relief in Italian and Spanish debt was due to speculative traders buying back bonds to close out short positions that profit when prices fall, traders said.

"People had probably gone quite short (on Italy) after the moves this week on Spain, so I'd expect, with the weekend coming up, people don't want to be short risk and are squaring up," the trader said.

In the medium term, Spanish debt was expected to stay under pressure despite the liquidity contingency plans, analysts said.

The agreement of a 100 billion euro ($125 billion) rescue for Spain's banks has sparked concerns about whether existing bondholders would be pushed further down the queue for repayment, denting appetite for new debt and driving borrowing costs toward unsustainable levels.

"Spain is still in deep trouble, let's not forget that. It has fundamental problems so liquidity to help hold things together doesn't really solve that," a second trader said.

On Thursday, 10-year Spanish bond yields hit 7 percent for the first time since the launch of the euro. The breach of this level raised expectations that the country would be cut off from funding markets and forced to seek a bailout for public finances on top of the agreed banking rescue.

So, as clearly articulated in Dead Bank Deja Vu? the sovereign debt shell game cum financing Ponzi of creating artificial demand through private banks simply assist in destroying both banks and sovereigns when initially you just had to worry about the banks. But in the case of Spain, there's a lot more to worry about - A lot more. Our current subsccriber update (click here to subscribe): Spanish Target Bank Update 6-2012 outlines the problems of a Spanish bank we have covered that is poised to suffer from a gargantuan issue that it simply cannot wiggle away from any longer. As a matter of fact, this issue, when coupled with its state imposed sovereign debt problem means "here comes the next big bailout!". As excerpted from the subscriber report....

KEY OBSERVATIONS

Asset / loan Portfolio deterioration off weakened macroeconomic environment

The Subject Bank, like other major Spanish banks, is being forced to buy sovereign debts as the country finds fewer international buyers for its bonds. The Bank therefore continues to struggle from an asset quality perspective, weighed down by its sovereign & toxic property loans and assets. This has been a major cause for the deterioration of Subject Bank's portfolio over the past couple of years.

The Bank derives ~70% and over 20% of its total gross revenues from net interest income and fees & commission, respectively. The quality of its asset portfolio is therefore extremely important in determining the health of the Bank.

The Bank’s value of financial assets in Spain as of Dec 31, 2011 is over quarter trillion EURO, comprising nearly 50% of the total financial assets in its balance sheet or more than 600% of its total equity (think the negative effects of leverage and gearing as you witness asset value depreciation). In addition, of the bank’s total loans and receivables, over 50% are in Spain. 

With that being said, a picture (or a chart) can be worth a thousand words (or even more Euros considering the rate of depreciation that I see ahead)! When viewing the chart below, keep in mind that the asset values used to calculate this chart are most assuredly overstated, and even then the numbers really look pretty bad. Simply imagine what happens when truth (margin/collateral call, haircut, resumptions, etc.) start calling...

Spains_Ugly_Real_Estate_Crash_Will_Wreck_Banks_and_Force_One_of_Europes_Biggest_Banking_BailoutsSpain's Ugly Real Estate Crash Will Wreck Banks and Force One of Europe's Biggest Banking Bailouts. Remember a run on one big bank causes counterparties to panic. Counterparty induced bank runs do the most damage.

 Archived subscriber reports:

Addendum - Pro

 

Professional Forensic Analysis

 Related subscriber downloads

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

Online Spreadsheets (professional and institutional subscribers only)

• The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers

iKimbgq1sbog

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.

Fast forward nearly one year later and the WSJ reports Crédit Agricole Girds Greek Unit for Greece Euro Exit, as excerpted:

PARIS—Crédit Agricole SA ACA.FR +3.49% is making contingency plans to abandon its Greek bank or merge it with a conglomerate of domestic banks in the event of Greece leaving the euro zone, according to a person with direct knowledge of the plans.

The admission offers the starkest evidence yet of international companies preparing for the worst in Greece, just days ahead of elections that could set it on a path to leave the currency union. It also underscores the lengths to which France's third-largest listed bank will potentially go to draw a line under its disastrous foray into Greece.

... Crédit Agricole Chief Executive Jean-Paul Chifflet has said publicly he doesn't see a Greek exit as the most likely scenario. But the bank is pressing ahead with contingency planning focusing on two possible options, the person familiar with the matter said: consolidating its Emporiki Bank of Greece SA unit into a larger conglomerate of Greek banks, in which the French lender's stake would get diluted down to 10%, or simply walking away and letting Emporiki fail.

"Politically, if Greece were to exit the euro zone, Crédit Agricole would have no obligation to stay," said this person. The Paris-based lender is also considering plans to transfer some "good" assets from Emporiki to Crédit Agricole, the person said, without disclosing details. 

Abandoning Greece's largest foreign-owned retail bank could expose Crédit Agricole to legal and reputational risks and would echo its abrupt departure from its Argentine bank units 10 years ago after the Latin American country defaulted on its debt.

Analysts estimate a Greek exit from the euro zone would cost the bank at least €5.2 billion. Crédit Agricole's direct funding to Emporiki stood at €4.6 billion in March. 

...Crédit Agricole has been scrambling over the past year to stem the red ink at its Greek operations. Its acquisition of Emporiki in 2006 saddled the French lender with billions of euros in losses and is one of the reasons its shares have plunged more than 70% over the past year, sparking uproar among shareholders. Emporiki is Greece's sixth-largest bank.

Last week, the bank secured a small bit of breathing space when Emporiki finally succeeded in getting funding from Greece's central bank, the Crédit Agricole spokeswoman said. Crédit Agricole had lodged numerous similar requests to borrow from the Greek central bank's so-called Emergency Liquidity Assistance program, and was repeatedly turned down because Emporiki is foreign-owned. According to the person close to the matter, Greece's central bank finally agreed to the request, after Crédit Agricole said it would otherwise leave the country.

This is essentially the specific institutional bank run that I warned about last year. In addition, I gave my paying subscribers plenty of notice on this particular bank back in 2010 - reference  Greek Banking Fundamental Tear Sheet. 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!

image006

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

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

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

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

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

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

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

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

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

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

This assertion is backed by today's WSJ reporting:

A host of international companies have admitted they are working on contingency plans in the event of Greece exiting the euro, with many concerned about how to retrieve cash in the country under such a scenario. But none have disclosed potentially walking away from assets in Greece.

... Greek government officials have long pointed to the need to merge local lenders in order to help them withstand mounting problems that include huge losses arising from Greece's debt restructuring, and soaring nonperforming loans in the recession-ravaged economy.

Despite several failed past attempts, analysts now say the government could finally force this process through after it takes over a majority stake in Greece's four largest commercial banks—National Bank of Greece SA, NBG +5.99% EFG Eurobank Ergasias SA, EUROB.AT +8.04% Alpha Bank AE and Piraeus Bank TPEIR.AT +2.87% SA.

The state's bank bailout fund, the Hellenic Financial Stability Fund, is expected to underwrite about 90% of the four banks' capital increases scheduled for later this year, effectively nationalizing the banks. Emporiki could therefore be swallowed by one of the new merged entities, but it remains unclear how advanced talks are. A spokesman for the Hellenic Financial Stability Fund declined to comment.

Remember, this is why the STATE bailouts were needed in the first place. Reference BoomBustBlog archived article Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe from back in 2010:

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.

One would think that was rather prescient, eh? Not really, just the objective use of a spreadsheet. It gets worse, though, as read in today's WSJ article...

Even if Greece remains in the euro zone, the French lender will need to deal with rising defaults and deteriorating economic conditions. In the first quarter alone, Emporiki, which carries net loans worth €18.7 billion on its balance sheet, posted a €905 million loss.

Last week, Moody's Investor Services downgraded Emporiki's rating two notches further into junk territory.

But if we just continue reading one more paragraph down in my "Ovebanked, Underfunded, and Overly Optimistic" article from 2010:

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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Damn, if I saw it coming from so far back, what the hell is wrong with those French bank executives? So, back to "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!"

A full video description of how this is to happen...

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

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

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. Below is an excerpt of an email exchange that I had with Eurocalypse, the European CDS trader that contributes trade setups to BoomBustBlog (click here for his background), who happens to have ran an ALM department in a sizeable French bank.

FYI, im hearing from my well connected friends that the Chairman of the BoomBustBlog bank run candidate in question has been seeing Sarkozy everyday recently...

Im very surprised about the extent of the ALM gap from the BRC ("Bank Run Candidate"), but my guess is that balance sheet is including the trading books.
Typically the biggest chunk of the balance sheet are govt bonds, and they are refinanced with the repo market. That should explain a lot of the gap.
I dont think the ALM managers manage that gap, and I dont think they should either. Info on the ALM gap ex-trading book should be monitored.

The trading activity is monitored by a market risk group with another set of limits, and of course they would monitor liquidity, closely hopefully.

Of note, there are new official liquidity ratios put in place in Basel III (the LCR Liquidity Coverage Ratio which is a 1 month ratio, and the DFSR which is a 1 year ratio). Basically, Govt bonds are considered as the ultra liquid assets, and actually the LCR forces the banks to hold liquid assets against their 1 month gap calculated with some liquidity assumptions both on the asset and liability side) of course these liquid assets, will mostly be govt bonds in practice, because there is not anything more liquid, and not anything else in sufficient size...

The question is, exactly how liquid are the bonds of sovereign Greece, Ireland and Portugal.  Much of this stuff should rightfully be classified as level 3 assets. The 50% depreciation in the Greek long bond should really, really cause many to rethink both the logic and the strategem behind so called "risk free asset" classes!!!

I'm not saying there is no liquidity risk on the trading books. Effectively if there are signs of stress in the repo market, all players will try (at the same time...) to reduce the size of their trading books ... leaving the market bidless... but its not the intent of banks to try to make profit on the liquidity gap in that case.

Finally the big picture, I think one cannot again ignore that the banking sector and govt debt are totally intertwined as I wrote before. Ultimately, the collapse of the banking sector means the collapse of govt finances and vice versa. Its a FEATURE of a fractional reserve lending system where the eligible asset of choice is those govt bonds, and of a system where govts can freely float more and more debt (as long as there is demand), as money is created by the CB in the process, which end up in the liability side of private banks which then need to buy something etc...

On the liquidity side, many French regional banks were overextended with loan to deposit ratios over 120% (despite being deposit-rich institutions). The main reason is they boosted a lot retail mortgage activity.

Anyway, in France, were converging with Japan.

1. Tough competition within banks, shrinking margins (consumer laws against predatory lending in France, French banks earn a lot of money from the poorer clients who have temporary deficits on their checking accounts).
2. The housing and CRE market bubble has not exploded yet (Paris home prices are at the highest ever).
3. Then there is the Euro crisis on top of that
4. ...and the govts wanting to levy more banking taxes...

The sector should be a HUGE UNDERPERFORM! The only way they can make money in the future, is buying those govt bonds and sitting on them, like the Japanese banks...and pray for the bond market not to explode like in Greece!

Or Portugal, or Ireland, or...

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 will provide additional tidbits to the public as I deem fit. In the meantime, the question du jour?

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

Professional and institutional subscribers will have access to our contributing trader’s trade setups and opinions within a week and a half. Institutional subscribers should feel free to reach out to me via Google Plus for video chat and discussion this and every Tuesday at 12 pm (please RSVP via email). If you need an invitation to Google+ and are a subscriber, simply drop me a mail and I will give you one. Feel free to follow me on:

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In March of 2010, or roughly 2 and quarter years ago, I ridiculed Italy's public proclamations of austerity and fiscal responsibility. I put out a report to my paid subscribers detailing my thoughts therein... 

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Well, fast forward to today and Bloomberg reports Italy Moves Into Debt-Crisis Crosshairs After Spain (you know, the same Spain that we also warned about in March of 2010): 

Italy’s 10-year bonds reversed early gains today in the first trading after the Spanish bailout. Their yield rose by the most in a day since Dec. 8, adding 27 basis points to 6.04 percent. Shares of UniCredit SpA (UCG), the country’s largest bank, had their steepest decline in five months.
“The scrutiny of Italy is high and certainly will not dissipate after the deal with Spain,” Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London, said in an interview. “This bailout does not mean that Italy will be under attack, but it means that investors will pay attention to every bit of information before deciding to buy or to sell Italian bonds.”

Investors don't need to focus on Spain's bailout (although there are many common threads). All you need to do is look at Italy's actual numbers and the credibility of thier reporting, as excerpted from BoomBustBlog subscriber document  Italy public finances projection:

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Back to Bloomberg...

Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. The Treasury has to sell more than 35 billion euros of bonds and bills per month -- more than the annual output of each of the three smallest euro members, Cyprus, Estonia and Malta.
Spanish Economy Minister Luis de Guindos said on June 9 that he would request as much as 100 billion euros in emergency loans from the euro area to shore up a banking system hobbled by more than 180 billion euros of bad assets. Mounting concern about the state of Spain’s banks and public finances drove the country’s borrowing costs to near euro-era records last month, pushing up Italian rates in the process.
Reversing Gains.

Economy Contracting
Italy’s total debt of more than twice Spain’s has given investors pause, especially in a country where economic growth has lagged the EU average for more than a decade. The euro region’s third-biggest economy, Italy is set to contract 1.7 percent this year, more than the 1.6 percent in Spain, the Organization for Economic Cooperation and Development estimates.
Italy’s debt load had traditionally led the country to be perceived as a bigger credit risk than Spain. At the start of this year, Italy’s 10-year bond yielded 202 basis points more than that of Spain. As the extent of Spain’s banking woes became more evident and the country was forced to raise its deficit target, that spread reversed and now Spain’s 10-year yields 48 points more than Italy’s.

Foreign Exodus
Debt agency head Maria Cannata last week said that fewer foreign investors were turning up at Italian auctions in recent months and that the country could still finance at yields as high as 8 percent.

Yeah, but for how long? 4 weeks????

The exodus of foreign buyers has left the Treasury more dependent on Italian banks, which in turn have been among the biggest borrowers in the European Central Bank’s three-year lending operations.

And this is the crux of the whole problem.

This why Italy is, for all intents and purposes, simply a gigantic Greece at the end of the day.

I have written about this extensively, and in plenty of time for subscribers and investors to take advantage of said advice. Simply read How Greece Killed Its Own Banks! and remember that this article was written in the beginning of 2010, when the Greek bonds were trading for much more then they were right before they defaulted! Then reference Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!

Sovereign entities cannot fund themselves by borrowing from the insolvent entities that they actually need to bailout, but somehow they have convinced enough holders of capital that they can. To quote from "Sophisticated Ignorance"...

Again, public states bailing out insolvent private banking institutions simply does not work. The result is simply insolvent states and insolvent banks versus simply having insolvent banks. We have 800 years of experience from which to judge from...

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In Dead Bank Deja Vu? How The Sovereigns Killed Their Own Banks & Why Nobody Realizes They're Dead… I have explained this nonsensical methodology in detail. I also warned on the Italian banks back in 2010, for there is truly no new economic profits being produced in bulk - simply a continuation of the Pan-European Ponzi scheme. Subscribers see  Italian Banking Macro-Fundamental Discussion Note 

Italy returns to markets before Spain does, selling as much 6.5 billion euros of treasury bills on June 13, followed by a bond auction the next day.
“If Italy has a problem with accessing the markets because investors lose confidence in the Italian ability to do the right thing, the ECB will be drawn into the fire,” Thomas Mayer, an economic adviser to Deutsche Bank AG, said in a telephone interview. “That could pose a potentially lethal threat to European monetary union.”

At this point, the ECB must be stuffed with more shit than a broken toilet, reference Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What. We have been through this with Greece, Portugal, Ireland, Spain and now Italy.

ECB Firepower
Given the size of Italy’s debt, only the ECB has the firepower to rescue the country and yet deploying that ammunition -- through buying back bonds or making more long-term loans -- may prove unacceptable to Germany and its allies in northern Europe, Mayer said.
“The ECB will probably have to restart buying bonds but there will be a lot of sellers into that of people who are worried that Spain is the next Greece and Italy the next Spain,” said Lex Van Dam, who manages $500 million at Hampstead Capital LLC in London.

Go figure!

So, Spain finally gets a bailout, as I pretty much guaranteed in The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain and The Spain Pain Will Not Wane: Continuing the Contagion Saga. I'd like to draw attention to an excerpt from the aforelinked article:

Subscribers, be ready. When/if Spain cracks, these two short positions will explode:

• •  Report_122511 - Professional/Institutional edition (Insurers, Insurance & Risk Management)
  •  Report_122511 -Retail edition (Insurers, Insurance & Risk Management)

Bank Haircuts, Derivative Risks and Valuation10/20/2011

Of course, in today's environ of mega banks, mega marketing, mega investment returns, white hot IPOs, it may be hard for many to appreciate the words of an entrepreneurial investor and blogger. Then again, just remember that this also coming from the same man that called Bear Stearns, Lehman, GGP, CRE, RIM, housing, the entire Pan-European Debt crisis, etc. See Who is Reggie Middleton for more. 

So, I have set up the play, now let's take a look at how its rolling out, as excerpted from ZeroHedge's morning posts via Market News:

Any aid that might come from the European Stability Mechanism, which is expected to start work next month, would enjoy a preferred creditor status second-only to the IMF, the spokesman confirmed.

Whoa! Of course, we've broached this topic in the past, over two years ago actually- How the US Has Perfected the Use of Economic Imperialism Through the European Union! Long story, short - there is no free lunch. Bailout's of indebted nations using more debt is NOT a NET POSITIVE! Anyway, back to the bailout that subordinates existing senior bondholders, guess who some of those largest bondholders are? Here's a hint, F.I.R.E.!!!. As duly predicted in BoomBustBlog published research dated 12/11...

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As you can see below, Spain and Greece have already taken big shots. Greece has already defaulted and is about to default again - exactly as we predicted...

• Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!
• Greece Gets "Corzined" In Its Fruitless Pursuit of Euro Unity, Sans Its Own Sovereignty As Simple Arithmetic Sets In Again
• Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True

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Subscriber downloads:

 Insurer Preliminary Observations (498.08 kB 2011-12-08 10:05:24)

 Insurer Report_122511 - Professional/Institutional edition (975.49 kB 2011-12-27 11:05:59)

 Insurer Report_122511 -Retail edition (876.11 kB 2011-12-27 11:04:09)

 Insurance cos. EU exposure 11-2011 (10.72 kB 2011-11-28 16:20:21)

 Insurance Cos. Operational Stress (11.92 kB 2011-11-29 10:11:51)