Yesterday, I posted The Difference Between Money and Wealth and Why You Can Easily Print One But Must Actually Create The Other, and as if on cue, global inkjet nozzles 'round the world started whizzing - to wit:

Why such rampant printing? The whole world's afraid Europe's impending implosion will engulf global economies. They very well shoud be, this was quite evident 3 years ago (Pan-European sovereign debt crisis) and the can kicking is nearing the end of its useful cycle... ECB's Draghi: We See Now a Weakening of Growth in Whole Euro Area

Here's the secret that BoomBustBlog subscribers know yet seems to be lost on much of the European powers that be: cutting rates and printing will absolutely NOT prevent the nuclear winter in Real Assets. Since loans behind real assets are anywhere between a vast chunk and the majority of bank loans, when this thing goes the European banking system goes with it. This will manifest itself stateside (see sidebox), but the Europeans will get hit harder, at least initially... The reason? Well, it doesn't really matter how low interest rates are - if banks don't lend, borrows will not gain access to capital. Banks are too weak and skittish to lend despite "so-called" record profits, billions in bonuses and compensation, and trillions in bailouts. I repeat, and I repeat again, the only solution is to let the insolvent fail.

The REIT analysis referred to in the chart can be found here forsubscribers (the property by property valuations are for Professional/Institutional subscribers only):

I have just revisited the performance of this company (last update was at least a quarter ago). If my paid subscribers recall, we valued the company at rougly 10% of its current market price (see File Icon Cashflows and Debt Preliminary Analysis), with a variety of scenarios to be played out that may affect said valuation. This was based on valuation of key properties of the company, which together accounted 78% of the total portfolio in value terms.

Since then the company has released its full year 2012 results and 1Q2012 quarterly performance. There is no visible improvement in the performance of the company. The company is struggling to handle massive leverage, industry average defying LTVs, proportionately large debt liabilities coming due - the bulk of which is expected to face the music sometime in 2012 in view of upcoming liabilities of over nearly $700 million during the remainder of the year.

Reference the quite informative post from which the graphics below were excerpted: Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE

Slide21Slide21

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 So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

image040image040 

 

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Fastforward to today, and NIEUWE STEEN INVESTMENTS N.V. - NSI (one of our shortlisted REIT) suffered the most due to revaluation of their Dutch office portfolio. It therefore witnessed 26% decline in last 4 months.

NSI

NSI is simply a microcosm of what's to come for many larger real asset investors. I have warned that the Dutch, with what many consider to be a strong and relatively stable economy, was not immune to the European contagion, reference Are The Ultra Conservative Dutch Immune To Pan-European Economic Contagion...

 

 

 

 

Published in BoomBustBlog

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.

Of course, this was apparent two years ago...

This impetus of this video stemmed from the post Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, for as France decides to to the socialist thingy, they may put themselves in the position of needing a bailout - as excerpted:

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

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

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Can the EU quasi-sovereign (they are not truly sovereign due to a lack of fiscal autonomy, and Germany is looking to limit that even more) states truly afford to bailout banking systems that are multiples of their GDP? Hell Nah!!!

I have made this quite clear in the past, namely in Watch The Pandemic Bank Flu Spread From Italy To France To ... where I simply quoted the arithmetical obvious, then in French Banks Can Set Off Contagion That Will ... where I basically did the same. Shouldn't the rating agencies start getting much rougher with France, or is the lesser of the dynamic bailout duo to sacrosant to touch with truly empirical bailout gloves???

Of course, all of this simply conforms to my F.I.R.E. thesis from the beginning of the year, a thesis which was actually aired through the MSM...

Reggie Middleton Sets CNBC on F.I.R.E.!!! Jan 4, 2012 – thumb_Reggie_Middleton_on_Street_Signs_Fire Last week I offered my susbscribers examples of the 2nd and 3rd sectors of the FIRE...

First I set CNBC on F.I.R.E., Now It Appears I've Set ... Jan 6, 2012 – burning-house Tuesday I literally Set CNBC on F.I.R.E.!!! as the only pundit/analyst/investor to warn of the FIRE (finance/insurance/real es...

Portuguese Liquidity Trap: When You Add Too ... Mar 12, 2012 – In this followup to Greece Is Trying To Convince Portugal To MakeF.I.R.E. Hot I think we should get straight to the point - Anyone who does...

Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!! Mar 9, 2012 – Minutes ago I posted So, What's Next Step Towards The Eurocalypse? wherein I illustrated the folly in believing this CAC-powered Greek bon..

The F.I.R.E. Is Set To Blaze! Focus On Banks, part 1 - Jun 13, 2012 – Note to subscribers, updated research availalble: GS Revenue Analysis Q2 12 - our opinion of the robustness of Goldman's upcoming quarter

No Capital Controls In The EMU? Liar Liar Pants On Fire 3 days ago – 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 

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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:

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:

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Published in BoomBustBlog

On Monday, 18 June 2012 I penned "Is Morgan Stanley Once Again The "Riskiest Bank On The Street"?". You see, MS has more than a few skeletons in the closet an d the upcoming market volatlity and dearth of revenues isn't going to help the situation any. Yesteday, Moody's chopped two notches off of the MS ratings belt, albeit in the usual too little too late faschion. 

Via ZH: Here We Go: Moody's Downgrade Is Out - Morgan Stanley Cut Only 2 Notches, To Face $6.8 Billion In Collateral Calls

  • MOODY'S CUTS 4 FIRMS BY 1 NOTCH

  • MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES

  • MOODY'S CUTS 1 FIRM BY 3 NOTCHES

  • MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S

  • MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3

  • MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S

  • MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S

  • BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG

Remember, it was collaeral calls that put the nails in Bear Stearns and Lehmans coffin. I made this very clear in both cases - The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? 

Am I right about the Bear?

Despite the Bear Stearns negative developments, and my opinion of its value, Bear Stearns has managed to find investors as was mentioned earlier in the insider transaction section. These are accomplished and wealthy investors to boot. My concern is that so many astute, accomplished and economically powerful investors have failed to realize and fully appreciate the depth and breadth of the current real asset recession, burst bubble, and quite possibly asset depression we have recently entered. This has destroyed the value of many bottom fishing value investors, both intitutional and retail.

image018.gifimage018.gifimage018.gifA brief perusal through my site reveals a fairly decent track record of recognizing the potential damage to be done by this "devaluation diaspora". Only time shall tell the tale of Bear Stearn's contribution to this list. Twelve months to date, BSC has lost over 50% of its share value and it near ground zero of the housing bubble burst. Observing the share price patterns of the companies who were actually at ground zero shows that a 50% is far from the midway mark when tracking from the peak of the bubble. I am certain their may be financial concerns such as well capitalized investment funds, foreign firms/funds, and/or stateside banks who have, and are considering a buyout. Yet, as I have stated with Ambac Financial, MBIA, Beazer Homes, and Countrywide during similar institutional forays into attempted vulture investing - Caveat Emptor: Seeking the bottom of a bottomless pit is a hazardous venture, indeed.

To date, I have been blessed with a modicum of accuracy in my research. As always, I am short any company that I am bearish on, and will be long any company that I am bullish on.

There was also the warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “Can they monetize those hedges?”

Those damn 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_agencies
Published in BoomBustBlog

The latest Q2 qualitative observations for JPM are now available for all paying subscribers to download: JPM June 20 2012 Observations. This document contains a few interesting tidbits that, of course, you will get from nowhere else. For instance, did you know that the Q1 2012 financial results have many hidden secrets? We have looked at the Bank’s Q1 2012 financial results and have the following observations:

  • The Bank reported Q1 2012 revenues of $26.7 billion , an increase of $1.5 billion , or 6% , from the prior-year quarter. That sounds decent for a big bank in tough recessionary times, eh? However, the increase was primarily driven by a $1.1 billion benefit from the Washington Mutual bankruptcy settlement. Excluding this benefit, the revenues were almost the same as that in Q1 2011. With flat revenues like these, just imagine what could happen to the bottom line when a multi-billion dollar trading loss occurs.
  • The Bank had booked a loss on fair value adjustment of Mortgage Service Rights (MSR) in Q1 2011 of $1.1 billion. Hey, you know they just don't make those ephemeral, totally contrived 2nd order derivative products like they used to, eh?

Excluding the effect of the MSR loss along with the impact of gain from Washington Mutual bankruptcy, the bank’s Q1 2012 revenues actually decreased compared to Q1 2011.

Combine these secrets, derivative trading (oops, I mean hedging) losses and that bland ZIRP sauce that sucks profits in an increasingly expensive compensation landscape and you'll get one hell of a safe return for your 401k, right Mr Bove, et. al.? 

From the 2009 BoomBustBlog "I told you so" archives...

To wit regarding JP Morgan, on September 18th 2009 I penned the only true Independent Look into JP Morgan that I know of. It went a little something like this:

Click graph to enlarge

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Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide. 

This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent...

... You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish. JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

Recent Articles on JPM

Who Will Be The Next JPM? Simply Review The BoomBustBlog Archives For The Answer

Who Caused JP Morgan's Big Derivative Bust? The Shocker - Ben Bernanke!!!

Published in BoomBustBlog

On February 10, 2008, I created an extensive blog post, explicitly labeling Morgan Stanley as "The Riskiest Bank on the Street!" To my knowledge, I was the only one to make such a blatant accusation. Of course, months later Morgan Stanley and all of its brethren started collapsing.

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Many attributed this to the overall market malaise, I didn't.

In September of 2008, 7 months after the first bearish report, I penned "As I said, the Riskiest Bank on the Street", which essentially compared my opinion, analysis and most importantly accuracy, to that of the Street's sell side, as excerpted...

For all of those who had/have a buy on Morgan Stanley, contact me for a special institutional subscription to the blog. I have said Morgan Stanley is a very strong short candidate (for about 9 months now)

Well, now is the time to pose the question again. "Is Morgan Stanley once again 'The Riskiest Bank on the Street?". Subscribers (click here to subscribe) are asked to download our newest outlook on this bank -icon MS 2Q12 qualitative review (432.08 kB 2012-06-18 09:57:10). Remember, we believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research - simply reference "Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?"

As excerpted from the aforelinked MS 2012 link:

  1. Debt Valuation Adjustment of USD 2.0 bn in 1Q2012 raises some concerns

Morgan Stanley reported Q1 2012 consolidated net revenue of USD 6.93 bn, down nearly 8% from USD 7.57 bn in Q1 2011. The Bank disclosed that the results for Q1 2012 and Q1 2011 included negative revenues of $(1,978) mn and $(189) mn, respectively, related to the movement in Morgan Stanley's credit spreads and other credit factors on certain long-term and short-term debt (termed hereinafter “Debt Value Adjustment or DVA”). Excluding DVA, net revenues were USD 8.9 bn and USD 7.76 bn for the two quarters, respectively.

Since I, personally, think the logic behind DVA hits/additions to revenue is unrealistic, this in and of itself is not much of an issue from a valuation perspective. However, the amount of DVA in 1Q2012 draws special attention for it is an issue. The figure increased from USD 189 mn in Q1 2011 to almost 10 times to USD 1,978 mn in Q1 2012.

Debt Value Adjustments – Q1 2011 to Q1 2012 (USD Million)

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The adjustment accounts for nearly 25% of Q1 2012 revenues which on gross basis increased 14.7% (Y-on-Y). That is a very, very significant chunk and it’s alarming that it hasn’t drawn more attention from investment and analytical practitioners.

The timing of the write down raises the following suspicions:

1) Was the adjustment postponed in preceding quarters to be recorded in the books of a quarter which witnessed healthy growth in revenues?

2) Exactly what caused such a huge loss in Q1 2012? The macroeconomic environment in Q2 2012 is not any better than that of Q1 2012. Are we going to see a similar write down again in Q2 2012? Or more accurately put, will the drivers of said writedown manifest themselves in Q2 2012, just to pop up in public reporting sometime in the future when most appropriate from an accounting perspective?

Continue reading to find what we feel is the cause of this gap in the subscriber document File Icon MS 2Q12 qualitative review. In other news...

Morgan Stanley, Citi lead financial stock slump

MarketWatch - 27 minutes ago
StreetInsider.com - 2 hours ago
Published in BoomBustBlog

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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 File Icon 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!

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.

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:


Published in BoomBustBlog

Note to subscribers, updated research availalble: GS Revenue Analysis Q2 12 - our opinion of the robustness of Goldman's upcoming quarter (103.95 kB 2012-06-13 10:39:33).

In the beginning of the year, I appeared on CNBC extolling the risks of the F.I.R.E. sector, Reggie Middleton Sets CNBC on F.I.R.E.!!!

The day after the warning on the insurance portion of F.I.R.E it was announced that Insurers’ 2011 Catastrophe Losses Hit Record. I was the only one in the mainstream media warning of the multi-sector risk that I know of. As a matter of fact, there were several personalities stating the exact opposite of the main man (and I don't mean Lobo).

banks_12_copy

 Now, as you can see, there is a one quarter trading pop where the banks did well, but looking at the big picture and factoring in today's macro climate, I think it's easy to see where banks are bad news. Just ask Mr. Dimon. Where I believe Mr. Bove went wrong in the moderate term analysis is he, again, severely underestimated both the macro outlook for the banks, the fundamental risk of the trash on the balance sheets (almost none of which we are truly privy to) not to mention the extreme risk of the trading practices of these entities. These are the primary reasons why I have been so bearish on them. Time will tell who is right, and I believe I have time on my side.

Now, Dick Bove and I (with all due respect to Mr. Bove, this analyzing and predicting stuff is not easy!) have disagreed in the past, and more than once or twice - see CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!! For those not familiar with Mr. Bove, he made an interesting bullish call on Bear Stearns which was essentially antithetical to my research - which essentially said Bear Stearns was done for back in Jaunary of 2008, see Is this the Breaking of the Bear? By March of 2008, Bear Stears was essentially done for. We also disagreed on Lehman Brothers, where Dick was bullish and I was quite bearish (see ). Karl Deninger's post from the Market Ticker explains the story explicitly, but of course from Karl's perspective, so to be fair to Dick all should keep that in mind: Dick Bove, Bear Stearns, And Controversy

Now, Dick Bove not withstanding, the sell side followed my lead for the big investment banks, albeit materially later. As excerpted from First I set CNBC on F.I.R.E., Now It Appears I've Set Sell Side Wall Street on F.I.R.E. As Well!!!:

If you remember, I also gave explicit warnings on the media's favorite bank, the "untouchable" Goldman Sachs! Well, it looks as if I've actually set the Wall Street Brokerage house on F.I.R.E as well. Lookee here: UBS, Goldman, Morgan Stanley Earnings Estimates Cut By JPMorgan Cazenove

JPMorgan Cazenove analysts cut their earnings outlook for investment banks for 2011, 2012 and 2013, citing worsening conditions in fixed income and equities.

Hmmmmm.... Where have we heard that befre???

UBS AG (UBSN) had its 2011 earnings-per-share estimate trimmed by 4 percent and the 2012 estimate by 11 percent, JPMorgan analysts including Kian Abouhossein said in a note to clients today.JPMorgan also curbed its Goldman Sachs Group Inc. (GS) forecast for 2011 by 37 percent and the 2012 figure by 19 percent.

Copycats???

The earnings downgrades of banks including Goldman and UBS “reflect weaker investment banking client activity and lower volumes across the board than previously anticipated,” JPMorgan’s analysts said. “Consensus needs to come down to reflect the weaker-than-expected environment” in 2011’s fourth quarter, they said.

JPMorgan also cut forecasts for other banks including Morgan Stanley (MS), whose estimates were reduced by 5 percent for 2011 and 17 percent for 2012.

From what I understand, Wells Fargo also issued a similar report on Goldman! Quite timely, fellas! Although this is not the First Time The Vampire Squid Get's Outed On TV!, I do believe it was the first time it was outright outed on the big MSM stations such as CNBC. Of course the sell side follows suit, after the fact. To wit, CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!! I would like all to remember that Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies! This is proof positive that the BoomBustBlog Forecast Pan-European Bank Run Has Breached American Soil!!! Investors, pundits and analysts can sit idly by while Squids, Morgans & Counterparty Risk Blow Up The World One Tentacle At A Time or they can actively do something about it. The decision is yours to make.

Times are changing, y'all. Hey, when are rating agencies going to jump into the fray? Not! Maybe its time to pose the question "What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog?" Go Ahead, I DARE You To Answer! In case I haven't delivered the hint strongly enough, let me be blunt. I'm directly challenging the the Sell Side house that is just now catching F.I.R.E. - Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss

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...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies 

What Was That I Heard About Squids Raising Capital Because They Can't Trade?

Reggie Middleton vs the Squid That Can't Trade!

On that note, I post this update on our outlook for the venerable Goldman Sachs for subscribers (click here to subscribe): icon GS Revenue Analysis_Q2 12 (103.95 kB 2012-06-13 10:39:33).

I will review the other sectors of my FIRE thesis in upcoming posts, leading with CRE and European banking.

For those who are encountering me for the first time or don't know who I am, feel free to find the answer to the question "Who is Reggie Middleton?" 

 Relevant subscriber research:

icon Goldman Sachs Q3 Forensic Review - Professional (746.08 kB 2011-08-22 10:25:06)

icon Goldman Sachs Q3 Forensic Review - Retail (509.83 kB 2011-08-22 10:27:36)

 

 

Published in BoomBustBlog
Monday, 11 June 2012 13:41

Bank Run! Italiano Style?

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 File Icon 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 File Icon 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 . 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!

Published in BoomBustBlog

A few months ago, I warned all to Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE. This warning was an offshoot of the extensive research that I did on the European banking sector, sovereign debt and CRE. In a nutshell, I said It appears as if there were a few who failed to heed said sage warning. Bloomberg reports Commercial Landlords Fail to Pay Loans Amid Crisis, Moody’s Says

Landlords of commercial properties in Europe are struggling to repay mortgages as banks pull back from refinancing the loans, according to Moody’s Investors Service.

And the reason they are pulling back has been well documented on BoomBustBlog for some time. See Is Another Banking Crisis Inevitable? 04 February 2011

Seventy-nine percent of the loans packaged into commercial mortgage-backed securities rated by Moody’s that came due in the first quarter weren’t repaid on time, Frankfurt-based analyst Oliver Moldenhauer wrote in a report. The non-payment rate more than doubled from 35 percent in 2009 and reflects “the current weak state of the lending market,” Moldenhauer wrote.

Whoa!!!! And to think everyone is worried about sovereign debt in Europe. Once all of that rapidly depreciated real estate collapses mortgages that have been leveraged 30x, you'll really see the meaning of AUSTERITY! I'm trying to make it very clear to you people, you ain't seen nothing yet!!!

The economic slowdown is hurting landlords of properties from office blocks to car parks and shopping malls across Europe. A total of 38 billion euros ($47 billion) of commercial real estate loans come due this year and next, Moody’s said.

“As banks need to deleverage due to regulatory requirements, commercial real estate financing will remain constrained,” Moldenhauer wrote. “Most loans will not be repaid.”
...“Not only can underwater loans not be refinanced, borrowers also face difficulties refinancing moderately leveraged loans that are simply too large in the current lending market,” said Christian Aufsatz, an analyst at Barclays Plc in London. “For CMBS, the situation will become worse.”

Real estate with mortgages that match or exceed the value of the property -- a so-called loan-to-value ratio of 100 percent or higher -- suffered defaults in “nearly all” cases in the first quarter, Moody’s said. About a third of borrowers with LTV ratios of up to 80 percent didn't pay up on time, according to the report.

Keep in mind that the LTV of these properties are safe in the 50-60 LTV range. We're now discussing 80 to 100+ LTVs. Think about it? Whose going to cough up the missing equity? Quick answer - bank equity investors! More thought out answer - Taxpayers the world over as their hardheaded ass government officials rush in once against to try to bailout banking systems that are too big to be bailed out, leaving what few decent sovereign nation economies left insolvent - once again!!!!


Most of the loans that were repaid were for less than 25 million euros, while just one of the 15 mortgages worth 75 million euros or more was paid on time, Moldenhauer wrote.

As queried many times on this blog, "What do you think, pray tell, happens when the liquidity starved, capital deprived, over leveraged banks fail to roll over all of that underwater EU mortgage debt?" Excerpted from Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE:

So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?

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So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

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 My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Stay tuned!

My next post on CRE will show how this is not just a European phenomena. Yes, US REITS will come crashing back to reality as well. Subscribers should pay attention as I ladder puts and shorts into this REIT which we have calculated to fall roughtly 95% in value if math comes to the forefront. To date, the price has not broken out of a relatively narrow range, which means the opportunity is still there. I am considering making the research public after it is clear all long terms subscribers have attained positions.

icon Cashflows and Debt Preliminary Analysis (493.89 kB 2012-01-19 09:19:16) - compete cash flow analysis showing this REIT coming up short in every possible practical scenario.

icon Fire Sale Scenario Analysis (303.76 kB 2012-02-10 09:17:04) - illustrates the situation if a fire sale was pursued to raise cash.

icon Foreclosure Scenario Analysis (414.15 kB 2012-02-09 10:16:12) - illustrates the situation if properties were allowed to go into foreclosure to ease debt service.

icon Sample Property Valuation (360.45 kB 2012-01-26 09:03:33) - one of over 40 property valuations performed by hand, with on the ground inputs using our proprietary valuation models.

I will go over this opportunity in more detail over the next 72 hours as well as reviewing the path taken by European real estate to show what can be expected here in the US and the FIRE sector.

Please note that we independently value REIT portfolios - property by property - with independently sourced rents and expenses to ascertain a truly accurate valuation picture. This is how we called the short on General Growith Properties in 2007, a year before they were downgraded from investment grade status and still buys on them from all the major sell side houses that followed them. I rode GGP down from the $60s to about $8, the shares eventually fell to $1 and change or so. The General Growth Properties short generated returns deep into the three digits... Deep enough to come close to registering a four digit return.

Follow me on Twitter: http://twitter.com/#!/reggiemiddleton. Click here to subscribe to BoomBustBlog research!

Published in BoomBustBlog