Warning! This is going to be a highly, highly controversial post. It is long, it is thick with information, and it hits HARD! Thus if you are easily offended by pretty women, intellectually aggressive brothers in cognitive war garb, your government regulators selling you out to the highest European bidder, or the cold hard facts borne from world class research that you can't find from the sell side or the mainstream media, I strongly suggest you stop reading here and move on. There is nothing further for you to see. As for all others, please keep in mind that I warned of Bank of America Lynch[ing this] CountryWide's swap exposure through a subscriber document on Thursday, 01 October 2009, then went public with it shortly thereafter.

There has been a lot of feedback and emails emanating from the last RT/Capital Accounts interview that I did earlier this week, as well as it should be. The dilemma is that I don't think the viewership is taking the topic seriously enough. I explicitly said, on air, that the Federal Reserve endorsed this country's most dangerous bank in shifting its most toxic assets directly onto the back of the US taxpayer through their most sacrosanct liquid assets, their bank accounts. In addition, when the shit hits the fan, those very same assets will be second in line for recovery, for the derivative counterparties will get first grabs.

Now, maybe its due to the fact that the interviewer was a cutie, or my voice was too deep, or because I didn't appear in my superhero garb, but I really don' think the message was driven home by the interview that I gave on Russian TV's Capital Account introductory show last week. So, let's try this again, but this time instead of donning that suit and tie, I go as that most unlikely of financial superheroes...

To begin with, for those who did not see the Capital Accounts interview on Russian Television, here it is...

Next, we need to see just how pertinent being 2nd in line is in the liquidation of an insolvent investment bank. I do mean insolvent. Yes, I know the big name brand investors who don't look like that rather unconventional superhero standing in front of the Squid headquarters above may believe that BAC has value, but I have told you since 2008, and I'll tell you now - the equity of Bank of America Lynch[ing this] CountryWide is effectively worth less than zero! Yeah, I know, many of those name brand analysts espoused in the mainstream media disagree, and to each their own, but several of Bank of America Lynch[ing this] CountryWide's latest acquisitions, ex. Countrywide, Merrill Lynch, etc. were enough to make it insolvent. Add several negative numbers together and do you think a little financial engineering is going to give you a positive number??? A little common damn sense is all that is needed to fill the bill here.

That $6 you see quoted on your equity screens is a freebie, a giveaway, and not indicative of economic book value in my opinion. Then again, I could be wrong, but I was correct on practically every major bank, insurance and real estate co. failure in the US over the last 4 years, as well as predicting many of the European ones. See Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

If Bank of America Lynch[ing this] CountryWide Goes Bust, How Much Can Bank Depositors Expect To Lose?

Now, back to the point, how much can US depositors (you) expect to get when (notice I didn't say if) Bank of America Lynch[ing this] CountryWide goes bust? Well, here's a snippet from the WSJ.com:

The group of more than a dozen investors who hold debt in Lehman’s so-called operating subsidiaries today lobbed a proposal that would pay some creditors up to 60.4 cents for each dollar of their claims, while offering senior Lehman bondholders a 16% recovery, reported Deal Journal colleague Eric Morath.

(Click HERE to read the rival plan to reorganize Lehman Brothers.)

At stake is how to repay nearly $300 billion in money owed from the collapse of Lehman Brothers, which filed for bankruptcy protection in September 2008. A judge now may be forced to decide among three different proposals to repay Lehman creditors.

Lehman’s own proposal to pay back debt holders calls for just a 21.4% recovery for unsecured creditors. Under Lehman’s plan unveiled in January, the operating company creditors would receive less than 60.4 cents on the dollar.

Lehman is also facing an additional rival plan from another group led by hedge-fund manager John Paulson. Those creditors are pushing for a 24% recovery for senior unsecured creditors at the expense of subsidiary creditors.

Whoa, a recovery of between 21 and 60%??? That doesn't sound to promising! You know why it doesn't? Because it's not accurate. The derivative counterparties of the bank get first shot at that 21 cents to 60 cents on the dollar, not the FDIC insured bank depositors. After the counterparties finish feasting at the trough, what would you think is left over for the Aunt Mabels of the US with their lifetime savings tied up in CDs paying .23%, which your aunt was perfectly willing to accept in exchange for the safety and protection of her US government and the FDIC (please excuse me as the taste of bile interferes with my ability to type this).

Let's revisit the story that Bloomberg broke on this topic.

BofA Said to Split Regulators Over Moving Merrill Derivatives to ...

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren't authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn't believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

... Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

The legislation gave the FDIC, which liquidates failing banks, expanded powers to dismantle large financial institutions in danger of failing. The agency can borrow from the Treasury Department to finance the biggest lenders’ operations to stem bank runs. It’s required to recoup taxpayer money used during the resolution process through fees on the largest firms.

Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.

I'm afraid that last statement is just not true. See 10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the US taxpayer. After that, seeBuried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!

Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

Hmmmm! As excerpted from a recent post on Naked Capitalism:

Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.

And back to the Bloomberg article...

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.

This is a very, very, very important point to BoomBustBlog paying susbscribers (see research excerpts below).

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

BoomBustBlog Subscribers, Feel Free to Indulge In Research That Will Likely Prove To Be Most Prophetic Given The Information Above

Colossal Derivative exposure

According to the latest quarterly report from the Office Of the Currency Comptroller the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Although the [subject bank] with the xth largest derivative exposure stands a significant distance behind JPM, Citi, Bank of America and Goldman Sachs (the four largest players); the exposure quoted in OCC report is only for the US entity. Overall, [subject bank]’s group derivative exposure in its balance sheet is 220% of its tangible equity, far higher in both absolute and relative terms when compared to its peers. [Subject bank]’s on balance sheet derivative exposure is higher than the combined share of Goldman Sachs ($74bn, or 115% of TEC), JP Morgan ($78bn, or 62% of TEC) and Morgan Stanley ($46bn, or 114% of TEC).  What is more worrying is the quality of these derivative assets. Of the total notional value of credit derivatives (over half trillion $US bn), nearly 60% are non-investment grade. [Subject bank] has the highest proportion of non-investment grade credit derivatives followed by Citi Group (55%), GS (52%), Bank of America (37%) and JP Morgan (32%). The tables below as well as on the following page compare [subject bank]’s on-balance sheet derivative exposure. This is the bank, apparently unrecognized by the markets, media and sell side, that will literally go boom when the match is put to the dry gunpowder (subscribers only): Haircuts, Derivative Risks and Valuation

This is the US bank that will SHOCK everybody with a most violent reaction when the excrement hits those cooling machine blades (subscribers only): US Bank Derivative Exposure

This is the European bank that either will set off the global chain reaction or end up being a very significant part of it (subscribers only): 

For those who don't follow BoomBustBlog regularly, I warned of Bank of America Lynch[ing this] CountryWide'srisks and related issues many times in the past, but this expose and research on their swap risk was most prophetic, and was dated Thursday, 01 October 2009, over two full years ago!

As excerpted, and aptly named:

And the next AIG is... (Public Edition)...

I have posted this warning of Bank of America's naked swap writing to my subscribers a few weeks ago. Since BAC is reporting this week, I have decided to make my suspicions public. I have found evidence that this bank has $32 billion of naked (as in apparently unhedged) swaps on its books - just like AIG. The difference is this bank is bigger, probably has more exposure, and has already been bailed out - several times. Oh, did I mention the insured collateral is nearly half BBB rated or lower??? How about extreme management issues at the top, and I mean all the way to the top (the CEO may actually bring down the ex-treasury secretary and maybe even the Fed Chairman. A trunk full of junk, surrounded by drama! It should be an interesting conference call tomorrow when they report, that is if anybody decides to ask the right questions...

As many of my subscribers and readers know, I have caught many companies on the short side as they imploded. One company that I did not get was American International Group. The reason it escaped me? I was too close to it. I have met Frank Tizzio (then president), Maurice Greenburg (then CEO and Chairman), and a several of their upper management to collaborate on deals, and was impressed with the way they ran their shop. Because of this, I didn't apply the same critical, skeptical eye that I used with the other prospects. Alas, because of such, I overlooked the inevitable, and in retrospect, the blatantly obvious. Well, I have learned my lesson. The lesson learned from AIG was not wasted on me, but does seem to have been wasted on many others. With this thought in mind, let's review the net, unhedged swap exposure of a few of our analysis subjects. I think a few of my readers may have their eyebrows raised. Some things are actually hiding in plain sight. I have made this short description of what I see as Bank of America, the naked swap dealer, available for free download, but you must register (I made the process very quick) to get it. I know it is a pain in the ass, but I want to be sure that the disclaimer is acknowledged by all who access the document. Thank our litigious society. See (subscribers only)BAC Swap exposure_011009 BAC Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb. I need for all to know that, in my opinion, bank reporting is quite opaque, so it is not very easy to get granular information out of it. The conclusions drawn from this post and the accompanying downloads are derived from BAC's publicly available documents and are the result of my best efforts to piece the information together. For those who do not know of me, you can reference the "who am I"section below to see how well this process has worked in the past.

For the sake of nostalgia, here is an old post of Bank of America's estimated ABS inventory (subscribers only): BAC ABS Inventory ABS Inventory 2008-02-25 06:48:09 0 bytes. I will be releasing similar analysis of other banks and insurers to subscribers over the next day or two, and then to the public a day or two before their respective earnings announcement.

The following is the bailout AIG story as excerpted from Wikipedia and annotated the BAC way by your friendly neighborhood blogger, Reggie Middleton, in bold, italic font:

Chronology of September 2008 liquidity crisis

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permits firms with the highest credit ratings to enter swaps without depositing collateral with its trading counter-parties. When its credit rating was downgraded, the company was required to post additional collateral with its trading counter-parties, and this led to an AIG liquidity crisis. [Here's a quick glance at Bank of America's current rating as compared to AIG's, both before and after their "incident". Be aware that this is not my proprietary rating (which would be substantially lower), but that of the oh so accurate major rating agencies. I doubt if they have taken this naked and unhedged exposure into consideration!]

Click graphics to enlarge

aig_credit_rating.jpgaig_credit_rating.jpgaig_credit_rating.jpg

bac_credit_rating.jpgbac_credit_rating.jpgbac_credit_rating.jpg

AIG's London unit sold credit protection in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) that had by that time declined in value.[18] [The lower quality assets are the most likely to decrease in value dramatically. One should keep this in mind, for BAC has written $116 billion on non-investment grade (junk) credit derivatives and $3 billion in junk total return swaps. They have hedged, but not completely. My calculations and estimates have BAC with a carrying value of unhedged exposure of around $32 billion and a notional unhdeged exposure of $348 billion]. The United States Federal Reserve Bank announced the creation of a secured credit facility of up to US$85 billion, to prevent the company's collapse by enabling AIG to meet its obligations to deliver additional collateral to its credit default swap trading partners. [Keep in mind that BAC just gave up its government guarantee on the JUNKY assets acquired with the Merrill Lynch acquisition. Merrill Lynch was one of the, if not the LARGEST writer of CDS on Wall Street! BAC also bought Countrywide, arguably the most wretched pool of subprime and under-performing mortgage assets in this country.] The credit facility provided a structure to loan as much as US$85 billion, secured by the stock in AIG-owned subsidiaries, in exchange for warrants for a 79.9% equity stake, and the right to suspend dividends to previously issued common and preferred stock.[16][19][20] AIG announced the same day that its board accepted the terms of the Federal Reserve Bank's rescue package and secured credit facility.[21] This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.[22][23] [Well, we shall see, since Bank of America is currently the largest bank in America. We still have time to set a new record.]

AIG's share prices had fallen over 95% to just $1.25 by September 16, 2008, from a 52-week high of $70.13. The company reported over $13.2 billion in losses in the first six months of the year.[24][25] [Well, green shoots is a sproutin'! AIG is currently trading at $44.33. I am at a loss as to how anyone can justify such, but hey, people are still buying Bank of America stock as well...] The AIG Financial Products division headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. [Hmmm!!! BAC has written protection $2.6 trillion notional, with $348 billion unhedged (at least according to my calculations). For those "not to use notional nitwits", that translates to $198 billion carrying value with $32 billion apparently unhedged or written naked - just like AIG, with one big exception. It appears as if BAC has one the machismo contest of "mine is bigger than yours" with AIG - congrats fellas!] Of those securities, $57.8 billion were structured debt securities backed by subprime loans.[26] CNN named Cassano as one of the "Ten Most Wanted: Culprits" of the 2008 financial collapse in the United States.[27][Well, Ken Lewis, the BAC CEO, is not to popular around these parts either. I am sure the upcoming Cuomo/congress investigations will be juiced when they find out that BAC is doing the AIG thing, just on a much larger scale!!! Just remember who you heard it from first!]

As Lehman Brothers (the largest bankruptcy in U.S. history at that time) [Hey, I warned you guys about Lehman and Bear WAY in advance, just as I am doing ow with Bank of America - "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) - Is this the Breaking of the Bear? January 2008 - Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!) - Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 - Funny CLO business at Lehman Friday, 04 April 2008] suffered a catastrophic decline in share price, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the values used by Lehman which weakened investors' confidence in AIG.[24] [If BAC is not careful, the market may have similar misgivings on how BAC values its credit card receivables and mortgages held in off balance sheet trusts. See our my findings on what may lay off balance sheet - If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, to raise cash.[24] The Federal Reserve hired Morgan Stanley to determine if there are systemic risks to a financial failure of AIG, and asked private entities to supply short-term bridge loans to the company. In the meantime, New York regulators allowed AIG to borrow $20 billion from its subsidiaries.[28][29] [Why ask Morgan Stanley? In 2008, they were "The Riskiest Bank on the Street". I guess it takes one to know one! I ask my readers, is one of the biggest banks in the country that then swallows the biggest brokerage and at the time the sickest brokerage in the country right after swallowing the biggest and sickest mortgage lender in the country a systemic risk if it fails? I bet a lot of you guys and gals can answer that question for a whole lot more than the government paid Morgan Stanley. I wonder, why don't these guys ask me my opinion? NY bloggers don't get enough respect :-)]

At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent.[30] The Federal Reserve continued to meet that day with major Wall Street investment firms, hoping to broker a deal for a non-governmental $75 billion line of credit to the company.[31] Rating agencies Moody's and Standard and Poor downgraded AIG's credit ratings on concerns over likely continuing losses on mortgage-backed securities. [Now, this is just simply hilarious. With friends like the credit rating agencies, who needs enemies? Think about the fire alarm that starts to go off just when the smoldering embers of what use to be your house begin to cool... How much money has AIG paid the credit ratign agencies over the last 10 years or so?] The credit rating downgrade forced the company to deliver collateral of over $10 billion to certain creditors and CDS counter-parties.[32] [Well, we shall see what will happen with that "other" bank] The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17.[33] Just before the bailout by the US Federal Reserve, AIG former CEO Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert B. Willumstad offering his assistance in any way possible, ccing the Board of Directors. His offer was rebuffed.[34] [And why wasn't this man's assistance accepted???]

Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG could draw up to $85 billion. The loan was collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of "substantially all" of its regulated subsidiaries, and with an interest rate of 850 basis points over the three-month London Interbank Offered Rate (LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility, the U.S. government received warrants for a 79.9 percent equity stake in AIG, with the right to suspend the payment of dividends to AIG common and preferred shareholders.[16][20] The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.[20][35][36] AIG's board of directors announced approval of the loan transaction in a press release the same day. The announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve.[16][21][37] AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.[38] On September 22, 2008, AIG was removed from the Dow Jones Industrial Average.[39] An additional $37.8 billion credit facility was established in October. As of October 24, AIG had drawn a total of $90.3 billion from the emergency loan, of a total $122.8 billion.[40]

Maurice Greenberg, former CEO of AIG, on September 17, 2008, characterized the bailout as a nationalization of AIG. He also stated that he was bewildered by the situation and was at a loss over how the entire situation got out of control as it did.[41] On September 17, 2008, Federal Reserve Bank chair Ben Bernanke asked Treasury Secretary Henry Paulson join him, to call on members of Congress, to describe the need for a congressionally authorized bailout of the nation's banking system. Weeks later, Congress approved the Emergency Economic Stabilization Act of 2008. Bernanke said to Paulson on September 17:[42]

[Oh, this soap opera gets worse. Bank of America's bailouts have totaled $168 billions so thus far, and we haven't even addressed the naked swap writing issue as of yet. Then again, BAC did buyout the Merrill Lynch loss guarantee from the government after much wrangling. I don't think this was the wisest idea, for they very well may still need it. Again excerpted from Wikipedia]:

Bank of America received US $20 billion in federal bailout from the US government through the Troubled Asset Relief Program (TARP) on 16 January 2009 and also got guarantee of US $118 billion in potential losses at the company.[45] This was in addition to the $25 billion given to them in the Fall of 2008 through TARP. The additional payment was part of a deal with the US government to preserve Bank of America's merger with the troubled investment firm Merrill Lynch.[46] Since then, members of the US Congress have expressed considerable concern about how this money has been spent, especially since some of the recipients have been accused of mis-using the bailout money.[47] The Bank's CEO, Ken Lewis, was quoted as claiming "We are still lending, and we are lending far more because of the TARP program." Members of the US House of Representatives, however, were skeptical and quoted many anecdotes about loan applicants (particularly small business owners) being denied loans and credit card holders facing stiffer terms on the debt in their card accounts.

According to a March 15, 2009 article in The New York Times, Bank of America received an additional $5.2 billion in government bailout money which was channeled through American International Group.[48]

As a result of its federal bailout and management problems, The Wall Street Journal reported that the Bank of America is operating under a secret “memorandum of understanding” (MOU) from the US government that requires it to ”overhaul its board and address perceived problems with risk and liquidity management.” With the federal action, the institution has taken several steps, including arranging for six of its directors to resign and forming a Regulatory Impact Office. Bank of America faces several deadlines in July and August and if not met, could face harsher penalties by federal regulators. Bank of America did not respond to The Wall Street Journal story.[49]

This is exactly what I am talking about when I say these institutions CANNOT hedge their large risks. The number 2 derivative holder in the country (Bank of America) and the number 3 derivative holder in the country (Goldman Sachs) had to be bailed out by the government through AIG (another large derivative holder) when AIG had just $10 billion dollars in collateral calls that it could not pay. AIG was the largest insurer in the world!!! The number 1 derivative holder in the country (JP Morgan) needed $90 billion or so in bailout monies when its major counterparty failed - Bear Stearns. See Is this the Breaking of the Bear? January 2008 for how easy that was to see coming at least 3 months in advance! That circle of concentrated risk is even smaller now then it was back then. Now 5 institutions hold 97% of the notional vale and 88% of the market value in derivatives, and they are all basically in the same business and all basically hedge with each other. It is not a true hedge when the other side can't pay, and history has clearly proven how easy it is for the other side not to be able to pay. See a sampling of my many posts on this topic:

    1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
    2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
    3. As the markets climb on top of one big, incestuous pool of concentrated risk...
    4. Any objective review shows that the big banks are simply too big for the safety of this country
    5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
    6. An Independent Look into JP Morgan | Reggie ...

      1. image001.png

        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 - particularly if that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean 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

         

Additional Bailouts of 2008

On October 9, 2008, the company borrowed an additional $37.8 billion via a second secured asset credit facility created by the Federal Reserve Bank of New York (FRBNY).[43] From mid September till early November, AIG's credit-default spreads were steadily rising, implying the company was heading for default.[44] On November 10, 2008, the U.S. Treasury announced it would purchase $40 billion in newly issued AIG senior preferred stock, under the authority of the Emergency Economic Stabilization Act's Troubled Asset Relief Program.[45][46][47] The FRBNY announced that it would modify the September 16th secured credit facility; the Treasury investment would permit a reduction in its size from $85 billion to $60 billion, and that the FRBNY would extend the life of the facility from three to five years, and change the interest rate from 8.5% plus the three-month London interbank offered rate (LIBOR) for the total credit facility, to 3% plus LIBOR for funds drawn down, and 0.75% plus LIBOR for funds not drawn, and that AIG would create two off- balance-sheet Limited Liability Companies (LLC) to hold AIG assets: one will act as an AIG Residential Mortgage-Backed Securities Facility and the second to act as an AIG Collateralized Debt Obligations Facility.[45][47] Federal officials said the $40 billion investment would ultimately permit the government to reduce the total exposure to AIG to $112 billion from $152 billion.[45] On December 15, 2008, the Thomas More Law Center filed suit to challenge the Emergency Economic Stabilization Act of 2008, alleging that it unconstitutionally promotes Islamic law (Sharia) and religion. The lawsuit was filed because AIG provides Takaful Insurance Plans, which, according to the company, avoid investments and transactions that are"un-Islamic".[48][49]

Counterparty Controversy

AIG was required to post additional collateral with many creditors and counter-parties, touching off controversy when over $100 billion was paid out to major global financial institutions that had previously received TARP money. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps purchased from AIG by the institutions), a number of Congressmen and media members expressed outrage that taxpayer money was going to these banks through AIG.[50]

Had AIG been allowed to fail in a controlled manner through bankruptcy, bondholders and derivative counterparties (major banks) would have suffered significant losses, limiting the amount of taxpayer funds directly used. Fed Chairman Ben Bernanke argued: "If a federal agency had [appropriate authority] on September 16 [2008], they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now."[51] The "situation" to which he is referring is that the claims of bondholders and counterparties were paid at 100 cents on the dollar by taxpayers, without giving taxpayers the rights to the future profits of these institutions. In other words, the benefits went to the banks while the taxpayers suffered the costs.

Well, Bank of America may very well give Ben Bernanke and the American taxpayer an opportunity to find out if we have learned our collective lessons. With the S&P pushing 1100 while practically all of the problems from the period illustrated above remain extant, and if anything exacerbated (ex. counterparty and concentration risk, credit risk and asset quality concerns, and above all, government sanctioned opacity in reporting), I doubt so very seriously.

This is what the US banks, and now you Mr. and Mrs. US taxpayer and bank depositor, have been backstopping all along...

You've been BAMBOOZLED! HOODWINKED! LED ASTRAY RUN AMOK!

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I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.
For those that are new to the blog, these are pics of previous meet and greets...

  

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DSC06310.jpg

buddhakahn2.jpg


Published in BoomBustBlog

BoomBustBlog subscribers, I call you to attention. I have found a bank that literally has more derivatives risk than Citibank, Goldman, Morgan and JP Morgan - COMBINED! That's right, and on top of that if you peek under the covers (and not just follow the fodder in the annual reports) it apparently has the greatest mortgage risk in the industry. In addition to that... Okay, I'm getting ahead of myself. Let's start from the beginning or skip down to the RT Capital Account video if you're the impatient type.

Here are some quick updates before I move on to the latest subscription research (and boy, is this one a doozy!, subscribers download it here - Haircuts, Derivative Risks and Valuation). If you thought that Goldman, Bear, Lehman, BNP & Apple were good contrarian calls, you're going to wet your pants over this one - and thus far I haven't heard a peep about this company from ANYONE. I'm sure that will change forthwith as it shows signs of blowing up on both sides of the Atlantic - opps, I gave a hint. Well, here's some more...

ZeroHedge reports Italian Bonds Plunging: ECB Intervention Imminent: But if Italian bonds are tanking again, doesn't that put France at risk? See French Banks Can Set Off Contagion That'll Make Central Bankers Long For The Good 'Ole Lehman Collapse Days. Hold on, if France is suspect what does that portend for its largest bank? "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic of sovereign debt. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted in the media.  Here I demonstrated what numbers would look like in said model...

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Okay, so if Italy and Greece cause France to go BOOM and the French banks will get caught in the blast (or vice versa, who can keep up these days), then doesn't that mean that those US banks leveraged into France and Italy will get hit? Oh yeah!!! Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss

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So, let's get to this big derivatives thing going around the web where Bloomberg blew the Bank of Lynch America Countrywide and JP Morgan spot by reporting they moved over $50 trillion notion of derivative exposure to their FDIC ensured banking arm to placate investors. What does this portend?

If Bank of America did it, and JP Morgan did, you can be rest assured most other big banks did it as well. What you ask? Hide the hot sausage, in a place that will burn... Really bad! As has been reported throughout the MSM and the blogosphere, the US banks have been caught playing hide the hot sausage, the problem is they're hiding it in mom and pop's bank accounts. Needless to say, this is going to burn the average tax payer and savings account holder where the sun don't shine...

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

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

Click to expand!

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This concept was further illustrated in An Independent Look into JP Morgan...

Click graph to enlarge (there is a typo in the graphic - billion should trillion)

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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.

I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.

  1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
  2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
  3. As the markets climb on top of one big, incestuous pool of concentrated risk...
  4. Any objective review shows that the big banks are simply too big for the safety of this country
  5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

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

Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010, discusses JP Morgan and concentrated derivative bank risk.

If you think that's scary (and you really should) check out Is Goldmans Sachs Derivative Exposure the Squid in the Coal Mine?

The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question “Has the value or the economic quantity of the underlying increased at a similar pace, and if not does this indicate that everyone on the street has doubled and tripled up their ‘bets’ on the SAME HORSE?”

Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?

Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history.  In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago. The notional amount of a derivative contract is a reference amount from which contractual payments will be derived, but it is generally not an amount at risk. However, the changes in notional volumes can provide insight into potential revenue, and operational issues and potentially the contagion risk that banks and financial institutions poses to the wider economy – particularly in the form of counterparty risk delta. The top four banks with the most derivatives activity hold 94% of all derivatives, while the largest 25 banks account for nearly 100% of all contracts.  Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.

In absolute terms, JPM leads this list with total notional value of derivative contracts at $78 trillion, or 1.3x times the Wolds GDP. However, in relative terms, Goldman Sachs leads the list with total value of notional derivatives at 537 times is total assets compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).

So, what does this mean? Well, it should be assumed that Goldman is well hedged for its exposure, at least on academic basis. The problem is its academic. AIG has taught as that bilateral netting is tantamount to bullshit at this level without government bailout intervention. If there is any entity at risk of counterparty default or who is at the behest of a government bailout if the proverbial feces hits the fan blades… Ladies and gentlemen, that entity would be known as Goldman Sachs.

As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...

GS__Banks_Derivatives_exposure_temp_work_Page_2

Goldman is much more highly leveraged into the derivatives trade than ANY and ALL of its peers as to actually be difficult to chart. That stalk representing Goldman's risk relative to EVERY OTHER banks is damn near phallic in stature!

GS__Banks_Derivatives_exposure_temp_work_Page_3

As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... , this is not a new phenomenon. Quite to the contrary, it has been a constant trend through the bubble, and amazingly enough even through the crash as banks have actually ratcheted up risk and assets in a blind race to become TBTF (to big to fail), under the auspices of the regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture). So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just giving y'all a heads up ahead of time...

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As you read exactly how precarios the situation is in France (and Belgium, through Dexia, et. al.) keep in mind that although this is definitely not good news for Goldman's numbers, historically since the beginning of this crisis, GS has actually correlated more with coke laced, red bull juice powered mo-mo trader patterns than actual book value - reference The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? from just last reporting period...

... I'd like to announce to the release of a blockbuster document describing the true nature of Goldman Sachs, a description that you will find no where else. It's chocked full of many interesting tidbits, and for those who found "The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely" to be an iteresting read, you're gonna just love this! Subscribers can access the document here:

As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor.


Interested parties should click here to subscribe, cause next up we walk through several other American banks to see who's up for re-enacting 2008-9 put parade - and historically we have usually if not always been ahead of the curve, particularly when compared to Wall Street and the sells side - see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?


So, in case you have yet to hear anything new (which could be the case if you're a BoomBustblog regular), try this on for size - taken off of the very first page of today's BoomBustBlog subscriber update - Banks Haircuts, Derivative Risks and Valuation.

Colossal Derivative exposure

According to the latest quarterly report from the Office Of the Currency Comptroller the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Although the [subject bank] with the xth largest derivative exposure stands a significant distance behind JPM, Citi, Bank of America and Goldman Sachs (the four largest players); the exposure quoted in OCC report is only for the US entity. Overall, [subject bank]’s group derivative exposure in its balance sheet is 220% of its tangible equity, far higher in both absolute and relative terms when compared to its peers. [Subject bank]’s on balance sheet derivative exposure is higher than the combined share of Goldman Sachs ($74bn, or 115% of TEC), JP Morgan ($78bn, or 62% of TEC) and Morgan Stanley ($46bn, or 114% of TEC).  What is more worrying is the quality of these derivative assets. Of the total notional value of credit derivatives (over half trillion $US bn), nearly 60% are non-investment grade. [Subject bank] has the highest proportion of non-investment grade credit derivatives followed by Citi Group (55%), GS (52%), Bank of America (37%) and JP Morgan (32%). The tables below as well as on the following page compare [subject bank]’s on-balance sheet derivative exposure...

Well, there you go. If things were to kick off and the bovine excrement hits the fan blades, look for [subject bank] to stink worse than most! This is exactly how we isolated Bear and Lehman back in 2008! More importantly, just imagine [subject bank] stuffing all of those high quality, leveraged, about to implode liabilities into your Aunt Gertrude's CD and retirement savings! Yep, if Bank of American and JP Morgan did it, is anybody truly naive enough to believe that nobody else is doing it as well? As my Aunt Eva used to tell me, there is never just one roach!

I can be reached via the following channels, or directly via email:

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I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.
For those that are new to the blog, these are pics of previous meet and greets...

  

47b8d631b3127cce98548a67f7f900000047100Abs2TFi2ZsWWg.jpg

DSC06310.jpg

 

buddhakahn2.jpg

Published in BoomBustBlog

The graphic below pretty much sums up Goldman's most recent quarter...

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An unmitigated disaster, and worse than practically everybody on the Street anticipated, save that brash-ass blogging dude brandishing those old fashioned analytical weapons of choice... Two months or so ago (Monday, 22 August 2011), I penned the public blog post that also relased my most recent research on Goldman Sachs - The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? -  as excerpted:

The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don’t call Goldman the world’s most expensive federally insured hedge fund for nothing!

And for those who haven't been following my Squid Hunting series, there's a lot more to come from those boys at 200 West Street. If you want to know what will happen next, just look at the first few pages of the lastest Goldman subscription docs (click here to subscribe):

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

 

 I'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?

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!

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 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...

I actually show up in person!

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

My next post should also include research on the next bank that we have found that has been (again) overlooked by the market, the media and the sell side. Can we expect the same that we saw in BNP, Bear, Lehman, etc.? Well, paying subscribers shall find out forthwith.

I can be reached via the following channels, or directly via email:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
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I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.
For those that are new to the blog, these are pics of previous meet and greets...

The Motherland on the Atlantic Ocean, just outside NYC

The Motherland on the Hudson, NYC

47b8d631b3127cce98548a67f7f900000047100Abs2TFi2ZsWWg.jpg

79st Boat Basin, NYC

DSC06310.jpg

79st Boat Basin, NYC

buddhakahn2.jpg

BuddhaKahn, NYC

Published in BoomBustBlog

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I took the weekend off and all types of nonsense occurs in my wake. Well, I'm back with some fresh research. Subscribers, we have found another bank at risk (and you know how well the other banks that we targeted fared in the past - Bear, Lehman, the entire French banking system, etc.) and will be releasing the research in the next 24 hours. In the meantime, I would like to address the massive bear market rally/short squeeze that probably created many a draw down. First, a little misdirection and disinformation as reported by CNBC: Greek 'Haircut' No Threat to French Banks: Noyer 

French banks could cope with a significant Greek "haircut"—a private sector writedown of Greek bonds—but it is still possible that the country's financial institutions may have to be recapitalized, Christian Noyer, governor of the Bank of France, told CNBC.

"Greece is not a problem for the French banks," Noyer said. "The total (exposure) of the French banks to Greek sovereign debt is significantly smaller than the first half of profits for the French banking system."

That exposure amounts to roughly 8 billion euros, while French banks' first-half profits totaled about 11 billion euros.

Still, Noyer would not rule out recapitalization for banks in France, given that all of Europe's banks' could face mandatory increases to their required capital base, depending on a decision by the European Bank Authority (EBA), the European Union's banking regulator.

Where shall I begin? Well, Reuters reports German Finance Minister Insists Greek Debt Haircut Should Be At Least 50-60%, as excerpted:

Greece's debt crisis cannot be solved without larger write downs on Greek debt and governments are trying to persuade banks to accept this, German Finance Minister Wolfgang Schaeuble said on Sunday, just days ahead of a key EU summit.

Asked in the interview with ARD whether there could be a Greek debt write-down of as much as 50-60 percent, Schaeuble said: "A lasting solution for Greece is not possible without a debt write-down, and this will likely have to be higher than that considered in the summer."

In July, private creditors agreed to a voluntary write-down of 21 percent on their Greek debt, a figure which now looks insufficient. Euro zone officials said last week losses are now likely to be between 30 and 50 percent.

"Of course we would like, if possible, to agree together with the banks. That is why we will be discussing things with them. But it is clear, there must be a level of participation which is enough to bring about a lasting solution for Greece. That is enormously difficult," Schaeuble said.

The market has an even higher implied actual haircut! Analysis - Greek debt enters Argentina-style twilight zone

Reuters - Even that would be a better deal than levels of a 60 to 70 percent haircut currently priced into Greek debt. Most Greek bonds are trading at around 35 cents on the euro. For emerging market players with experience of Argentina, which defaulted on $100 ...

Of course, a little useless financial engineering can make things all good right? Yeah, right! You see, what looked like a bad deal just a week ago... EU Officials: Private Sector Bondholders Could Expect 30-50% Haircut Business Insider - ‎Eurozone officials told Reuters today that the private sector will likely see a 30-50% haircut on holdings of Greek bonds if they participate in a debt swap deal. That's far more than the 21% that had been expected under the initial terms of the July ...

Looks like a hell of a bargain today... Greek Bond Deal: Too Good to Last

Wall Street Journal (blog) - Reason 2: As we have pointed out before, a sharp fall in Greek bond prices since July 21 makes the bond swap look like an even better deal to bondholders. The new bonds they would receive through the exchange have other benefits to investors—they ...

Pointless Greek bond swap dead — long live pointless Greek bond swap

FT Alphaville (blog) - For all we know, the terms of the current bond swap may simply be tweaked to get the “new” haircuts, for example by lengthening the maturities of the new bonds or cutting the coupons paid by Greece, while keeping other things (like collateral) much the ...

Contrary to Noyer's opinion above, both Reggie Middleton and other disinterested yet objective sources state Greek banks can withstand haircut of up to 30 percent - sources
Reuters UK - ATHENS (Reuters) - Greek banks could endure a loss of up to 30 percent on their Greek government bonds but could not stand significantly bigger haircuts, Greek banking sources said on Thursday. "Banks can withstand a haircut of up to 30 percent but a ...

Of course, those loyal BoomBustBlog readers knew this to be the case a year and a half ago!
Subscription analysis from early 2010 shows Greece was nearly guaranteed to default as its banks were stuffed with trash:

File Icon Greece Public Finances Projections
File Icon Greek Banking Fundamental Tear Sheet

Online Spreadsheets (professional and institutional subscribers only) showed that haircuts were to be multiples of the originally proposed 21% if Greece were to even have a chance of digging itself out of the hole!!!

I also explained the situation in public, and for free, early in 2010: Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! The situation with the Greek banks is the same situation with the French, German, etc. banks. Leverage piled upon depreciating assets simply wipes out equity. Period! How Greece Killed Its Own Banks!

...These downgrades are going to cause people to increase their risk weightings,” Yelvington said.

Well, the answer is.... Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)...

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The same hypothetical leveraged positions expressed as a percentage gain or loss...

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I even went so far as to compare Greece to Argentina, complete with online models. No matter which way you slice it, a 50% haircut would be akin to a snowy Christmas in the summer of a devout Muslim country - highly unlikely! A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get...

Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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On that note, ZeroHedge has come out with a blockbuster explanatory article: Credit Suisse Buries European Banks, Sees Deutsche Bank And 65 Other Bank Failing Latest Stress Test, €400 Billion Capital Shortfall

A day after Credit Suisse killed the Chinese bank sector saying that the equity of virtually the entire space may be worthless if NPLs double, as they expect they will to about 10%, the Swiss bank proceeds to kill European banks next. Based on the latest farce out of Europe in the form of the third stress test, which is supposed to restore some confidence, it appears that what it will do is simply accelerate the flight out of everything bank related, but certainly out of anything RBS, Deutsche Bank, BNP, SocGen and Barclays related.

I'd like to add that I've ridiculed all of these stress tests, US and European, although the European stress tests were by far the biggest joke. Dexia passed with a grade of A (or so), and will be nationalized momentarily. 'Nuff said!

To wit: "In our estimation of what could be the “new EBA stress test” there would be 66 failures, with RBS, Deutsche Bank, and BNP needing the most capital – at €19bn, €14bn and €14bn respectively. Among the banks with the highest capital shortfalls, SocGen and Barclays would need roughly €13bn with Unicredit and Commerzbank respectively at €12bn and €11bn. In the figure below we present the stated results. We note RBS appears to be the most vulnerable although the company has said that the methodology, especially the calculation of trading income, is especially harsh for them, negatively impacting the results by c.80bps." Oops. Perhaps it is not too late for the EBA to back out of this latest process and say they were only kidding. And it gets even worse: "We present in this section an overview of the analysis which we published in our report ‘The lost decade’ – 15-Sep 2011. One of our conclusions was that the overall European banking sector is facing a €400bn capital shortfall which compares to a current market cap of €541bn." Said otherwise, we can now see why the FT reported yesterday that banks will be forced to go ahead and proceed with asset firesales: the mere thought of European banks raising new cash amounting to 75% of the entire industry's market cap, is beyond ridiculous. So good luck with those sales: just remember - he who sells first, sells best.

And the scary charts:

1. Capital Shortfalls under Stress Test part Trois (9% min. CET1 ratio)

If anyone over there has two synapses to spark together, I would fully expect them to take my research over much of the anecdotal drivel passed around the Street as research. For instance, from the outside looking in, the Greek writedowns (yes, even the mark to myth Greek writedowns) will most likely wipe RBS profit for the year. Now, try applying what the real losses will be... Okay, after you do that, try realizing that no Greek default will occur in a vacuum and all peripheral assets will suffer in solidarity, not to mention their own solvency issues. Then add to that that RBS is an insolvent ward of the state to begin with, after passing stress tests itself then being nationalized. Okay, now that we've dispensed with the most of the optimism and good news (I'm going to skip over DB, since much of the market appears to be doing in assuming that Germany cannot be touched despite the fact that it is already very much "touched") and head on to the bank that I warned my paying subscribers about in late August - in time to see its share price halved despite not a damn peep of a warning from the sell side of the pop media. May I please be allowed reminisce, as excerpted from Small Independent, Bombastic Financial News Show Dramatically Scoops the Financial Times On French Bank Run Story :

 Post Note: BNP management is now shopping around for capital investment.

On that note, let's review my post last week, "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers. It outlined some very telling reasons why BNP's share price appears to be spillunking, namely:

    1. Management is lying being less than forthcoming with the valuation of toxic assets on its books.
    2. The sheer amount of these assets on the books and the leverage employed to attain them are devastating
    3. BNP has employed the proven self destructive financing methodology of borrow short, invest in depreciating assets long!
    4. BNP management lying being less than forthcoming about reliance on said funding maturity mismatch, despite the fact it handily dispatched Bear Stearns and Lehman Brothers in less than a weekend!

Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

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

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

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

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipe out, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trastde 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!

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.

Now, let's refresh the output from And The European Bank Run Continues...and more importantly BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional, I strongly urge those who haven't to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP.  Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price...

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Using more recent market inputs (you know, assuming this stuff was Level 1), we get the following...

bnp_haircut_exposure

Notice here the base case TEC impairment is now approaching the adverse case from just a few weeks ago - and this is using market pricing, not some pie in the sky model!

I have not recalculated the adverse scenario in this example, but you can simply use your imagination, or download the model and run it for yourself.

A Greek default with haircuts somewhat inline with market prices will wipe out 13% of BNP TEC, with a more severe cut (quite likely) taking out nearly 20%. This is not even glancing upon the many problems we discussed in our forensice reports (File Icon French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers,File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers).

Now, if the ZH referenced report above is accurate (and I believe it is) the banks are going to try to delever by selling assets in the open markets (all at the same time, selling the same assets to the same pool of potential buyers at the same bad times). This means that the prices used to populate this model are probably still too optmistic. Even if they weren't, look at the capital short fall the Greek default will leave BNP with assuming our institutional bank run thesis holds true and they see a slight withdrawal of liquidity of 10% this year and 15% next (knowing full well the numbers for Lehmand and Bear were much, much higher than that before they collapsed). First, a refesher on our European bank run theory expoused 5 months ago...

  1. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
  2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  3. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
  4. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

And the BNP results????

bnp_haircut_exposure_bank_run

Half trillion euros here, half trillion euros there... Sooner or later, we'll be talking about some real money! Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional).

My next post should also include research on the next bank that we have found that has been (again) overlooked by the market, the media and the sell side. Can we expect the same that we saw in BNP, Bear, Lehman, etc.? Well, paying subscribers shall find out forthwith.

I can be reached via the following channels, or directly via email:

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I will be releasing the date (probably this week), location and time of the NYC meet and greet within the next 24 hours or so, so we can chat, drink, debate, argue and fraternize with pretty woman together in a trendy spot in the Meat Packing District or the Bowery (I apologize in advance to all of my female readers/subscribers). Those who are interested in attending should email customer support. There has been strong interest in the London meeting, enough to warrant the venue - I simply need to get the travel and venue organized due to a change of plans.
For those that are new to the blog, these are pics of previous meet and greets...

  

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Published in BoomBustBlog

Here is an interesting video that illustrates the extreme vulnerability of the banks if the "Occupy Wall Street" movement truly gets organized with direction from someone with a deep understanding of the system. You know, someone tall, brown, charismatic and not afraid to really speak the truth...

image012_copy

This video touches upon many taboos in society, business and Wall Street finance... Right up my alley. One of the more interesting topics is that of social class, and how the little naked woman in the video just doesn't have the same impact as Carl Icahn. Careful, now. Don't laugh prematurely. The lightning fast distributed method of communal communication commonly known as social media is truly changing the way thing get done around here. Think about how you are reading this message and who you're reading it from.

One concept that I would like to dwell on this post, but unfortunately will not be able do due to time constraints, is the very real fact that there is NO MIDDLE CLASS! I believe it is a construct created by the capitalist class and their managers to placate the masses and muffle would be insurrectors who would dare attempt to move up the ranks. The reality is everybody is a member of the working class who is not a member of the capitalist class and needs to work for a living. That's right, if you cannot live off of your capital, then you are a working class citizen. Middle class and upper middle class monikers, are just that... monikers. That goes for you doctors, lawyers, accountants and well educated PhDs. You know the old saying about the friends walking down the street in Greenwich. One saw a neighbor and immediately urged the other to hustle across the street. When his friend asked what the rush was, the 1st man replied, I heard that Biff over there is starting to live off of his principle. Long story short, many more of you are members of that 99% than may have been led to believe by those in charge.

As excerpted from Super Brokers form to push Super Broken products to make those with High Net Worth Super Broke

Social Mobility: Unlike the Jefferson's, We're moving on down!

Social class is defined (on this blog) as the amount of control one has over one's socio-economic environment. It is much more than money, although money is a large component. For instance, Barack Obama is in a higher class than Robert DeNiro or Michael Jackson, although Robert DeNiro and Michael Jackson are most likely wealthier (although that is quite debatable after taking into consideration the value of Obama's campaign contribution list and membership database from his social networking site!). Obama's higher class stems from his ability to exert more control over his socio-economic environment. The factors that this author uses to determine class combine (with the associated weights) to create a "socioeconomic index":

Socioeconomic Index=

(Occupation X 12) + (Income source X12) + (Income X 7) + (Wealth X 14) +

(Education X 7) + (Dwelling area X 15) + (Class Consciousness X 7) +

(Housing X 12)

There is a handy dandy BoomBustBlog class model (based loosely upon the Index of Status Charcteristics) available for download for anyone interested in delving  into this further. See boombustblog.com_social_class_model v.7.3 156.00 Kb.

As you can see, wealth is the largest contributor to the class standing, and coincidentally it is the factor
that is the most at risk in this current economic climate. I believe that there will be a significant entry into the upper middle class by those who were once firmly entrenched into the upper classes! While that may not seem like a big deal to many, it is damn big deal to those who are moving down the ladder. This also means, that there will be some space for others to move (relatively speaking) up the ladder. One man's (or woman's) misfortune is another's opportunity. I believe this blog can not only be used to insure and proof against downward mobility
for those in the upper strata, but can also be used by those in the lower, middle and lower upper strata to rise upward a notch or even two. Social Mobility is the name of the game in times of severe dislocation - times like we are experiencing now.

Lower Strata

Underclass/Poor

 
 

Working Poor

 

Middle Strata

Lower Middle Class

 
 

Upper Middle Class

 

Upper Strata

Lower Upper Class

<-- 20% to 30% of BoomBustBloggers are here, roughly 1,000 of you!

 

Higher Upper Class

 

Now, in term of wealth (not social class and influence, just wealth) we can split the upper strata into three different categories (there are only two above because of the other factors that come into play when social class or socioeconomic standing is taken into consideration).
There is the poor wealthy, those guys and girls that are just a hair's breath from being pulled into the upper middle class strata due to marginal wealth. This would be the $1m to $10m net worth crowd, who rely on business profits, salary and investment returns for income. The next would be the middle strata of the wealthy, hailing between $10 to $100 million in Net Worth, and then there is the upper strata wealthy at above $100 million. Each of these three strata of wealth represent, in my opinion, distinct behavior tranches in terms of discretionary expenditures, investment, and politics and (what passes as, this is a story for another post) philanthropic activities.

 

Demographic

Source of wealth

Net Worth

Lower strata wealthy (High net worth)

Service professionals, corporate executives, entrepreneurs,
inheritors

Salaries, stock options, restricted stock, small business
profits, investment returns

$1 m to $10 m

Middle strata wealthy (Very High Net Worth)

Corporate executives, entrepreneurs, inheritors

Business ownership, investment returns, salaries, restricted
stock, stock options

$10 m to $100 m

Upper strata (the truly
Rich!)

Entrepreneurs, inheritors, very few CEOs

Business ownership, investment returns

$100 m to several $billion

A trip to practically any decent sized yacht club or recreational vehicle port reveals the relatively stark differences in discretionary spending behavior. The first strata can be found in the 36 ft. to 68 ft. yacht docks (where a captain is optional, but not mandatory and you really don't need a crew). The second strata can be found 50 ft to 120 ft docks, where captains, crews and semi-custom fiberglass boats abound. The third strata are almost exclusively in the super yacht category, where the carrying cost alone for these (basically waste of money) fully custom built hulls and vehicles are about million a year to start with. You can also see the other social economic strata as well, upper middle class in the 20 to 35 ft boats, the middle and working class in the considerably smaller fishing boats - as opposed to the ultra fast Viking and Hatteras deep sea fishers, etc. It is an interesting and instructional study in social studies and anthropolgy just walking along your local docks! Once you are aware of how these things break down, you will see many settings in a different light.

The dark purples, deep greens and reds are most likely the general demographic to get hit hardest.
Fortunately, those who follow this BoomBustBlog closely, either personally or through their advisor, should have seen a net increase in networth rather than a net decrease. This has hurt non-BoomBustBloggers in this demographic tranche significantly, and will hurt them even farther. At the same time, let's hope that the opinion and research that I bring to the blog helps, because many will need it. Download The new BoomBustBlog.com Socio-economic stratification model

And The European Bank Run Continues...

As excerpted from the article titled above, we find corroborating evidence that the common man/woman can indeed elicit significant cooperation from Wall Street baks, for those very same banks' institutional counterparties are quite skittish as it is. As a matter of fact, we are seeing the makings of an insitutional run right now, one that will easily be exacerbated if retail depositors pull their money out as well.

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

image014image014 

Bloomberg reports: Lloyd’s of London Pulls Euro Bank Deposits

Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.

“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”

European banks and their regulators are trying to reassure investors and customers that lenders have enough capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures. Siemens AG (SIE), European’s biggest engineering company, withdrew short-term deposits from Societe Generale SA, France’s second-largest bank, in July, a person with knowledge of the matter said yesterday.

Lloyd’s, which holds about a third of its 2.5 billion pounds ($3.9 billion) of central assets in cash, has stopped depositing money with some banks in Europe’s peripheral economies, Savage said, declining to name the countries or institutions.

Simply fuel to the fire... As excerpted from my bank run post yesterday: Most Headlines Now Show French Bank Run …

Siemens shelters up to €6bn at ECB: Siemens withdrew more than half-a-billion euros...matter told the Financial Times. In total, Siemens has parked between €4bn ($5.4bn) and...to deposit cash directly with the ECB. Siemens’ move demonstrates the impact of the eurozone... By Daniel Schäfer in London and Chris Bryant and Ralph Atkins in Frankfurt...

... As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

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

image006image006image006image006

...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!

Make no mistake! And just for those who cannot catch the hint... Reuters reports:

Bank of China halts FX swaps with some European banks

The European banks include French lenders Societe Generale (SOGN.PA), Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA), and Bank of China halted trading with them partly because of the downgrading from Moody's, the sources said.

Another Chinese bank said it had stopped trading yuan interest rate swaps with European banks.

The sources declined to be identified because they were not authorized to speak with the media.

Contacted about this move by the Chinese banks, spokespeople for Societe Generale, UBS and BNP Paribas declined comment. Credit Agricole was not reachable for comment.

One of the sources said that Bank of China's decision may apply across its branches, including the onshore foreign exchange market.

"Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

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

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

Published in BoomBustBlog

I recieved this in the mail from a connected media editor regarding Goldman's very recent investment advisories...

Buy calls for a likely relief rally on earnings (Oct 20th)

We see the potential for a rebound in MS shares on earnings, but the event is not without risk. We believe concerns regarding its European swap and loan exposures appear overdone, as the firm signaled its net exposures to France and the periphery are modest if not immaterial. Uncertainty generated by press reports, as well as difficult markets have driven shares below levels reached when the market was at its March 2009 lows.

Balance sheet strengthened; sell short-dated CDS as fear falls

We believe the recent widening in MS CDS spreads does not reflect actual credit fundamentals. MS appears to have enough capital and liquidity

($182 bn in global liquidity pool + its bank status) to withstand significant market duress. Its 14.6% Tier 1 common ratio is at the high end of the industry. We expect the market focus to remain on European sovereign exposures and liquidity levels, and expect management to discuss this, highlighting the strength of its cash position, hedging and collateral, and progress in reaching its strategic goals, somewhat calming fears.

I responded with the rant below...

A)     Goldman’s investment advice sucks, big time – see Is It Now Common Knowledge That Goldman's Investment Advice Sucks?

B)      The term “net” exposures is misleading and in many cases, make believe. The offsetting hedges used to “alledgedly” hedge the gross exposure were written off of counterparties in the same businesses, trading the same products in the same markets as Morgan. When the feces hits the cooling machine blades, everyone’s liquidity will move in the same direction – downward. There is no true diversity, hence there is no true hedge – only academic hedges written, and traded, in paper form.

a.     I have addressed this ad nauseum on the blog, but the answer to that questions has been put best by Tyler Durden, at ZeroHedge put it best: ...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky. The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

C)    There is evidence that corroborates bullet point “B” in Goldman’s own missive, and I quote “Balance sheet strengthened; sell short-dated CDS as fear falls.” Are we to believe that Goldman is only giving this advice to those clients large enough, liquid enough, solvent enough and adequately diversified from the financial services, asset management and investment industry (this can be read as absolutely no hedge funds, HNW, pension funds and family offices – Yeah, right!) so as to ensure the ability to pay out these CDS in a fat tailed event? Or is Goldman peddling this advice that is not paid for to incentivize clients act in a fashion that Goldman is paid for, ex. Market maker/broker/principal/agent in the CDS market? As Goldman pushes CDS sales onto any willy nilly who’s willing to wright them, Goldman compounds the risks already inherent in a much less than perfect system. Isn’t that why AIG had to be bailed out to the tune of over a fifth a TRILLION US dollars?

D)    As for the last comment “MS appears to have enough capital and liquidity ($182 bn in global liquidity pool + its bank status) to withstand significant market duress. Its 14.6% Tier 1 common ratio is at the high end of the industry. We expect the market focus to remain on European sovereign exposures and liquidity levels, and expect management to discuss this, highlighting the strength of its cash position, hedging and collateral, and progress in reaching its strategic goals, somewhat calming fears.” I direct you to my latest post on what Superheroes may look like in real life –  Hunting the Squid, Part 5: Sometimes You…

Published in BoomBustBlog

 Yes! I'm still hunting Squid, but the Architeuthis dux apparently has called in an ally, a benefactor, an aid befit those who master the art of regulatory capture, one who is steeped in power, authority and influence. Yes, indeed - this benefactor is no mere game warden, and his mastery over this side of the force is not minimal. As a matter of fact, his mere spoken word today has served to move this elusive member of the Architeuthis genus farther away from equilibrium in terms of fundamental valuation - at least on a risk adjusted basis while at the same time reducing the value of put contracts on it. However, sometimes there exists a counterbalance to such forces.... Actually, more often than many are led to, and probably would like to believe... Superheroes don't look like what you see on TV or in the movies. No capes, tights, or patent leather boots. Sometimes, all they wear and bring to bear is... the Truth!!!

thumb_Reggie_Middleton_as_Tribal_Truth_Seeker_At_Goldman_Sachs_HeadquartersDow Jones reports: Geithner: Morgan Stanley, Other Major US Banks, Not at Risk of Failure

WASHINGTON - Morgan Stanley (MS) and other major U.S. banks aren't at risk of succumbing to the same fate as Lehman Brothers, which fell victim to the 2008 financial crisis, Treasury Secretary Timothy Geithner assured senators on Thursday.

When asked at a Senate Banking Committee whether the euro-zone sovereign debt crisis could bring down Morgan Stanley or another major financial institution, Geithner said, "Absolutely not."

The largest U.S. firms are much stronger than they were before the crisis, and the direct exposure of the financial system to European countries under the most pressure is "very modest," he said.

However, given Europe's size and interconnectedness, Geithner said leaders there need to "move more aggressively to address this."

 Okay, so either Geither doesn't read me, or he's bluffing. Months before Bear Stearns collapsed, did Tim Geithner and/or the Office of the Treasury warn of it? Did they even know? Hey, the bearer of the Truth warned you (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) with Is this the Breaking of the Bear? There comes a time when an actual track record of accomplishment means something. So, dear readers, do you look to Tim Geithner and the Office of the Treasure as your hero, championing the cause of Truth and financial insight, or dare you risk looking somewhere a tad less conventional but a hell of a lot more reliable? Long story short, is it time for investors and the media to accept new heroes... After all, before one considers whether Geithner is to be relied upon to accurately opine upon the health of Morgan Stanley and the other banks, one should look to how well he has done in the past. Since there are a raft of incidences upon which he could have used his (super0 powers of deductive reasoning and analytical prowess, he could have very well missed the collapse of Bear Stearns (after all, most of us are merely human) but still would have (or at least should have)...

  1. Warned or know about Lehman (I warned in Is Lehman really a lemming in disguise?),
  2. The housing market crash (I warned in Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?)
  3. The commercial real estate crash (Will the commercial real estate market fall? Of course it will ~ Do you remember when I said Commercial Real Estate was sure to fall? ~ The Commercial Real Estate Crash Cometh, and I know who is leading the way!)
  4. The collapse of state and municipal finances, with California in particular (May 2008): Municipal bond market and the securitization crisis – part 2
  5. The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual
  6. The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton, Welcome to the World of Dr. FrankenFinance! and Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion 
  7. The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010: The Pan-European Sovereign Debt Crisis
  8. Ireland austerity and the disguised sink hole of debt and non-performing assets that is the Irish banking system: I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!

If you have not heard from your Office of the Treasure head or Tim Geithner months ahead (or at least in time to do something about the happenstances listed above (and there are a lot more where that came from), then I do suggest it is high time you either started looking for new heroes, or at the very least, realize that Tim Geiithner may not know what the hell he's talking about in regards to which banks are at risk and which are not. That is, unless he is defining at risk as not being on the select list upon which he is willing to bankrupt the country in order to ensure they don't fail.

On that note, let's move on so I can demonstrate that those very same banks that Geithner opines upon do have risks which he has failed to delineate. Never fear, for Reggie will fill said gaps.

If you haven't already, please do review the first four parts of this series, and if so skip past this break and into the nitty gritty--->

 I'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?

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!

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 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...

If there is any doubt as to who to believe, your favorite Blogger Superhero or Timothy Geithner, I'd gladly put my track record up against his and his whole crew in order to ascertain who holds the most credibility!

As excerpted from the Dow Jones article above - yes, we must drive certain points home!:

When asked at a Senate Banking Committee whether the euro-zone sovereign debt crisis could bring down Morgan Stanley or another major financial institution, Geithner said, "Absolutely not."

The largest U.S. firms are much stronger than they were before the crisis, and the direct exposure of the financial system to European countries under the most pressure is "very modest," he said.

Okay, so as we know I run a subscription blog service. Those who actually do subscribe have read content that flies in the face of the assertion above, and have been paid handsomely for it as I Served Up Fried Calamari From Raw Squid. As excerpted from the subscription document File Icon Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, page 3:

thumb_image024

Mr. Geithner's assertion that "the direct exposure of the financial system to European countries under the most pressure is "very modest,"" really doesn't appear to hold much water, does it? Unless, of course, he doesn't think that France is under, or will be under much pressure? Hey, maybe that's it. Well, if it is, then maybe he should subscribe to BoomBustBlog! France is facing the threat of a serial European bank run as I type this. Reference Dexia Inches Toward Breakup as States Seek to Salvage Parts: Oct. 7 (Bloomberg) -- Dexia SA inched toward a breakup as France, Belgium and Luxembourg sought to protect their local units...

And it's not as if these countries don't have a history of defaulting..,

image022

You see, Now That European Bank Run Contagion Has Started Skipping Across That Big Pond... US Bank Risk Stands Woefully Underappreciated!!! If you scan the news, you will find that Most Headlines Now Show French Bank Run Has Started, And It's Happening Just As Our Research Anticipated. I have warned of the weakness in the French banking system at least a quarter and a half ago, see France, As Most Susceptible To Contagion, Will See Its Banks Suffer. Again, where was Mr. Geithner's salient warning? Be careful who you listen to! Since Geithner wasn't available to issue said warnings, I took it upon myself to create a step by step tutorial on exactly how it will happen....

I then cam forth publicly with much of the content offered to subscribers...

  1. The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download
  2. BNP Bust Up: Yet Another Reason Why BNP Paribas Is Still Ripe For Implosion!
  3. I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
  4. And The European Bank Run Continues...

Now, back to Mr. Geithner's comments to the US Senate:

Morgan Stanley (MS) and other major U.S. banks aren't at risk of succumbing to the same fate as Lehman Brothers, which fell victim to the 2008 financial crisis, Treasury Secretary Timothy Geithner assured senators on Thursday... The largest U.S. firms are much stronger than they were before the crisis,

Okay, I'l bite. The US banks have been flooded with capital and assistance since this debacle started. Despite that, their compensation and payout has not been limited and they are essentially back where they started from apart from being in compliance with new and updated capital requirements. I beg thee, ponder hither... Weren't they also in compliance with the then current and revised regulatory capital requirements when they started dropping like flies and requiring Trillions of dollars of additional assistance. Yes! Trillions! AIG alone pulled in nearly $200 billion of aid, and that's just ONE institution! Need I remind you of the magnitude of this situation? As excerpted from Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

GS__Banks_Derivatives_exposure_temp_work_Page_2

This concept was further illustrated in An Independent Look into JP Morgan...

Click graph to enlarge (there is a typo in the graphic - billion should trillion)

image001.png

and again the following year on CNBC...

Mr. Middleton discusses JP Morgan and concentrated bank risk.

Okay, I know many of you are saying, "...but the banks ARE in compliance, right?" I'll dance.

Let's walk through WHY the banks are in compliance since the fact that they were in compliance last go around and still collapsed doesn't seem to move everyone in the room. Reason number one for the subject bank at hand, the SQUID, and reason enough to consider regulatory compliance to be a farce in and of itself in these tumultuous times...

Dilutions

To start with, Goldman Sachs regulatory ratios are adequate to meet Basel 3 norms and we expect the firm to sufficiently maintain its regulatory ratios above the minimum norms prescribed by the regulator, without any further dilution. However, given higher exposure to market risk compared to its peers which have higher weights for risk adjusted capital determination, Goldman Sachs will have the to set aside a higher proportion of capital compared to its peers which could be a source of competitive disadvantage to the firm and economic disadvantage to shareholders’.

Although, Goldman Sachs capital ratios have improved, it has nothing to do with a reduction in risk weighted assets. Risk weighted assets, to the contrary, have increased to $451bn as at end June 2011 from $384bn as at the beginning of 2009. One of the key reasons for increase in capital ratios have been dilutions. As a matter of fact, Goldman Sachs’ diluted shares outstanding have increased by c24% since beginning of 2008.

As excerpted from the subscription document file icon Goldman Sachs Q3 Forensic Review - Professional, page 6:
thumb_Goldman_Sachs_Q3_Forensic_Review_Page_06

To make matters even worse, there is a plausible argument that many of these numbers are grossly understated. Here are observation from a BoomBustBlogger who is also a trader at the CME:

My question is does DTCC capture the total amount of CDS outstanding. Lets take Greece for example I think they showed about 77.4 bln. outstanding in gross   notional amount and a net notional amount of 4.2 billion represented by 4,349 contracts (I guess that's net) I admit I have a hard time deciphering even these   basic entries from the DTCC pages. But I suspect that the numbers in the DTCC reports are not accurate.The reason is they say they report trades that are   cleared by one of their designated clearing entities. I suspect the majority of cds contracts are privately negotiated and not cleared by one of DTCC's clearers.

Those who wish to jump on the gravy train of our next US bank analysis featuring those susceptible to this malaise can subcribe here and now!

The many ways to reach Reggie Middleton:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

Or simply email me.

Meet Reggie Middleton in person in NYC and London!

I will be hosting two BoomBustBlog meet and greets, for those who aren't too put off by my truthful, fact-based style. One in the next couple of weeks in a swank, pretty people laden lounge in downtown Manhattan, and the other potentially in London in mid-November - both wherein we sit down and chew the fat about things financial, global macro and socio-economic over drinks and heated debate. I will have plenty of gratis BoomBustBlog research there as well. I have also recieved significant interest in a paid seminar. Any who would be interest in such, basically tthe ability to bend my ear for 45 minutes or so, without the benefit of drinks and pretty ladies swarming around, please let me know so I can guage interest and arrange as deemed fit. Those who are interested should email the blog Customer Support for info.

 
Published in BoomBustBlog

20111005_235005This is the BoomBustBlog view of the "Occupy Wall Street" protests, the view that you just won't get through the MSM... It's ironic that the police came out in force to protect the institutions whose massive bonus's were derived, in large part, from raping and pillaging professional sheeple pools such as police pension funds. That's the sound of the beast...

Here's some more evidence of the risks of journalism when cops are out to defend those who pillage their pensions...

It appears as if I may have went over the head of a few skeptical readers with the "rape the police pension" bit, so here's an indepth tutorial of how it works for those so inclined to learn...

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

Key excerpts... 

 

re_fund_returns.pngre_fund_returns.pngre_fund_returns.png

re_fund_returns_tables.pngre_fund_returns_tables.png

Let’s take a look at another big bonus development exercise, marketing push they made into residential MBS a few years ago…

Apathy and the need to masochistally follow name brand investors is what enables this malarchy, and is what has allowed CRE prices to be artificially elevated this high for this long. Believe you me, reality will reassert itself and will do so in quite the destructive fashion. Again, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”

Believe it or not, very few institutional investors are interested in seeing the mechanics of how they have been bilked to fund Wall Street bonuses. I have been very generous with the CRE analysis on BoomBustBlog, but there have been relatively few takers for custom analysis. For those institutional investors who actually care about making money, or at least not losing 91% of it, I suggest you go through the public version of the model designed to create the analysis above. You can download it here: Real estate fund illustration & Interactive model Real estate fund illustration & Interactive model 2009-12-23 12:54:21 174.50 Kb. For those with even more interest, you should download our 2010 CRE outlook: CRE 2010 Overview CRE 2010 Overview 2009-12-16 07:52:36 2.85 Mb and our CRE consulting capabilities statement: CRE Consulting Capabilities CRE Consulting Capabilities 2009-12-17 14:17:01 655.48 Kb. I must say, any client of mine would have been very hard pressed to lose 91% of their money in a Goldman or Morgan Stanley fund.

Published in BoomBustBlog

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: 

  1. I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction
  2. Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?"
  3. Reggie Middleton Serves Up Fried Calamari From Raw Squid: Market Perceptions of Real Risk in Goldman Sachs

So, what else can go wrong with the Squid? 

Plenty! In Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?" I included a graphic that illustrated Goldman's raw credit exposure...

So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

 image006

And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party
I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just
giving y'all a heads up ahead of time...

And for those who may not be sure of the significance, please review my presenation as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam, below. After all, for all intents and purposes, Dexia has officially collapsed - [CNBC] France, Belgium Pledge Aid for Struggling Dexia... and its a good chance that it's a matter of time before BNP follows suit - exactly as BoomBustBlog predicted for paying subsccribers way back in July.

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

 The European banking debacle was predicted at the start of 2010, a full year and a half before this has come to a head. If I could have seen it so clearly, why couldn't the banking industry and its regulators?

Now, back to GS, and considering all of the European falllout coming down the pike, of which Goldman is heavily leveraged into, particulary France (say BNP/Dexia/etc.)...

image009

Let's go over exactly how GS is exposed following the logic outlined in the graphic before this series of videos, as excerpted from subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 3,4 and 5.

GS__Banks_Derivatives_exposure_temp_work_Page_3

GS__Banks_Derivatives_exposure_temp_work_Page_4

GS__Banks_Derivatives_exposure_temp_work_Page_5

Booyah!

There you go. The markets and the media have concentrated on Morgan Stanely because Goldman has successfully hid much of its risk from those who didn't subscribe to BoomBustBlog. Of course, those who did subscribe picked up those puts ridiculosuly cheap, and are/will reap the benefits as the TRUTH goes VIRAL!

Those who wish to jump on the gravy train of our next US bank analysis featuring those susceptible to this malaise can subcribe here and now!

The many ways to reach Reggie Middleton:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

Or simply email me.

Meet Reggie Middleton in person in NYC and London!

I will be hosting two BoomBustBlog meet and greets, for those who aren't too put off by my truthful, fact-based style. One in the next couple of weeks in a swank, pretty people laden lounge in downtown Manhattan, and the other potentially in London in mid-November - both wherein we sit down and chew the fat about things financial, global macro and socio-economic over drinks and heated debate. I will have plenty of gratis BoomBustBlog research there as well. Those who are interested should email the blog Customer Support for info.

Published in BoomBustBlog
Tuesday, 04 October 2011 00:09

Eurocalypse trade opinion, 10-3-11

New trading opinion available from Eurocalypse, subscribers ony: File Icon Eurocalypse trade opinion, 10-3-11

Published in BoomBustBlog