Here's the rub upfront for those who desire quick summaries:

  1. We had a massive CRE bubble which bust - See The Commercial Real Estate Crash Cometh, and I know who is leading the way.
  2. The CRE bubble bust, even as disguised and manipulated as it was, claimed some serious retail casualties. See GGP and the type of investigative analysis you will not get from your brokerage house.
  3. A public-private partnership of misdirection allowed the popping bubble to be disguised. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
  4. Even with the "kicking the can down the road mentality", fundamental and macro realities are bound to rear their heads. See The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance and then see Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate 
  5. ... and will do so both in the US and abroad, see The "American Realist" Says: Past as Prologue - Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!!
  6. Those who truly believe that the more conservative EU nations will skate past this are sorely mistaken. See "Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?" Then see The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History
The fact of the matter is that there is a very fundamental, and sparsely recognized reason for retail real estate to take a tumble.
When discussing the proposed Dutch real estate short release to my subscribers a couple of weeks ago (see The Real Estate Recession/Depression is Here, Eurocalypse Style and The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History), I asked my analysts if there was evidence of increeased retail web activity affecting European mall sales. I know that was the fear in the Netherlands (see the last two videos at the bottom of the post here) and the reality in the states (see below). After all, doesn't pull in all of those hypergrowth billions of retail online dollars through physical malls. And if Amazon is making it, some mall store is losing it. Now, said mall store could open up its own website and potentialy successfully compete with Amazon (think, etc.) but exactly where does that leave the overbuilt, and probably over leveraged mall operator???
Exactly! Fu@ked! Professional subcribers can see the rapid growth of online retailing in Europe via this document -File Icon Online Retail Sales Penetration, as excerpted...

Online retail sales in Europe - Source: comScore Media Metrix

               In 2010, the online retail sales penetration increases noticeably among all major European nations, reaching an average 74.5% in Jan 2011 versus 66.0% in Jan 2010. This is a sharp increase. 

The UK recorded the highest Retail site penetration at 89.4% of the total online audience (up 6.3 points from last year). The Netherlands was ranked fifth with penetration of 80.2 percent (up 4.9%). The average minute per visitor for Europe was 52.4, close to 50.2 for Netherlands. For UK and France, this figure is above 80 minutes. This could imply that online spending would increase more sharply in the Netherland than in the UK, France and Germany. 

You see, during the bubble, a massive amount of retail space was built - much more than could possibly be effiiciently utilized. This is particularly true in the US, but also valid in Europe and even Asia as well (re: Ordos of empty cities fame). According to Howard Davidowitz, "We have 21 sq. ft. of retail selling space for every man, woman and child in this country." That's a tad bit much, eh? Do you know what makes it even worse? That selling space is becoming even less valuable, becuase more and more (and more) sales are being done online versus in a physical mall. I commented on Davidowitz's take, which is lockestep with mine this time last year: Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past 

In December of 2009, I posted and article and accompanying research titled, "A Granular Look Into a $6 Billion REIT: Is This the Next GGP?" The following are excerpts from it:

The results of these activities have been congealed in our analysis of Macerich’s entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).image001.pngimage001.pngimage001.png

Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV’s above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis. Even if we were to assume that we are still in the midst of the credit bubble and REITs can still refi at 70LTV (both assumptions patently wrong), rents, net operating income and cap rates have moved so far to the adverse direction that MAC STILL would not be able to rollover the debt in roughly 37 properties (31% of the portfolio) whose LTVs are above the 70% mark – and that’s assuming the credit bubble returns and banks go all out on risk and CMBS trading. Rather wishful thinking, I believe we can all agree.

For those of you who didn't catch it in the table above, I'll blow it up for you...

Notice anything familiar??? There is a very strong chance that every single property on the list detailed in the forensic reports will be taken over by the lenders, that's a lot of properties. Subscribers should reference MAC Report Consolidated 051209 Retail MAC Report Consolidated 051209 Retail 2009-12-07 03:46:49 580.11 Kb , MAC Report Consolidated 051209 Professional MAC Report Consolidated 051209 Professional 2009-12-07 03:48:11 1.03 Mb, those who don't subscribe should download my  CRE 2010 Overview CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. For those who want access, click here to subscribe!

So, why has Macerich and the entire REIT sector defied gravity despite the fact they are getting foreclosed upon faster than a no-doc, subprime, NINJA loan candidate who just lost his minimum wage job amongst all of these “Green Shoots”??? Well, I took the time to answer that in explicit detail... I urge all to read The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?

More hard hitting BoomBustBlog commercial real estate commentary and research from Reggie Middleton:

Archived retail research and opininion from BoomBustBlog...

This is an example of exactly what we were talking about in our subscription documents regarding the ridiculous run up in consumer discretionary shares when taken in context of  the American consumer and the stress born from the Pan-European Sovereign Debt Crisis (click the link for our detailed analysis). You can find the earlier articles in this consumer mini-series as follows:

  1. What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
  2. What We’re Looking For To Go Splat! Part 2: A list of 147 retail stocks with attributes that causes on to question their gain in prices, with a shortlist of companies who may very well go “splat”!
  3. Is the Consumer Really Back? Well, It Depends On If You Believe What the Government Tells You or Whether You’re An Indendent Thinker – The American Recovery and the North American Economic Outlook.


Published in BoomBustBlog

I've been renown for calling the housing crash in 2006-7 and the commercial real estate crash in 2007. Late in 2007, I penned a piece titled "The Commercial Real Estate Crash Cometh, and I know who is leading the way!" wherein I made it clear that the CRE party was over, the music stopped and the DJ was packing up. Part and parcel of this general CRE warning (the first of which was the introductory post to BoomBustBlog in September of 2007) was the identification of a particular short candidate whose profligate spending and excessive leverage made for what ultimately was one of our most profitable and thoroughly analyzed shorts - Generally Negative Growth in General Growth Properties - GGP Part II. This company was investment grade (AA) rated and it's common equity traded in the $65 range when I initiated my short position. Roughly twelve months later it filed for bankruptcy. It was the 2nd largest mall REIT in the US and the largest real estate bankruptcy ever although the CFO explicitly called my research and opinion "trash"! The entire story can be followed via: GGP and the type of investigative analysis you will not get from your brokerage house.

Unfortunately, many investors, the equity market, commercial, investment and morgtage banks failed to heed my admonitions. The result of which was the literal pillaging of investors by investment bank private equity and asset management arms. For those who think I'm being rather bombastic and dramatic, reference "Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!", to wit:

 Oh, yeah! About them Fees!

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost abuot 2/3rds of thier clients money. I though to myself, "Damn, now that's some bold, hubristic s@$t". So, I decided to attempt to lay it out for everybody in the blog, see "

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics.


To depict a varying impact on the potential returns via a change in value of property and operating cash flows in each year, we have constructed three different scenarios. Under our base case assumptions, to emulate the performance of real estate fund floated during the real estate bubble phase,  the purchased property records moderate appreciation in the early years, while the middle years witness steep declines (similar to the current CRE price corrections) with little recovery seen in the later years.  The following table summarizes the assumptions under the base case.


Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.




Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Under a relatively optimistic case where some mild recovery is assumed in the later years (3% annual increase in year 5 and year 6), LP still loses a over a quarter of its capital invested while GP earns a phenomenal return. Under a relatively adverse case with 10% annual decline in year 5 and year 6, the LP loses most of its capital while GP still manages to breakeven by recovering most of the capital losses from the management and acquisition fees..


Anybody who is wondering who these investors are who are getting shafted should look no further than grandma and her pension fund or your local endowment funds...

What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overses, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has littel effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks faile to roll over all of that underwater Eu mortgage debt?


Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!


Do you really think they will rollover the US debt anyway? How about the result  of the guaranteed losses that both bank and investor will take as said debt either fails to get rolled over or is forced to do equity cramdowns? Then think about EU banks going down and American banks being called to pay CDS!



Then think about those sovereign states that truly cannot afford to bail out their banks.


I made this perfectly clear as the keynote speaker at ING's CRE Valuation Confeence in Amsterdam this past April.

Yes, "The Real Estate Recession/Depression is Here, Eurocalypse Style". We have already identified a Dutch real estate short candidate - subscribers (click here to subscribe), please download Northern Europe CRE short candidate #1. This company is suffering from a variety of maladies that, on an individual basis, may not seem that bad but once aggregated put it on the same path that GGP was on. The difference? This is after the so-called economic recovery, in the conservative EU state of the Netherlands, and right before the massive rate storm that will be the Pan-European Sovereign Debt Crisis that I have warned about since 2009. The result, many properties that will either be difficult or impossible to refinance or roll over. Again, subscribers, reference Dutch REIT Debt Analysis, Blog Subscriber Edition. This is a succinct illustrtion of how this company will not be able to rollover much of its debt, and the absolute lack of recognition of such by the markets. Of interest is the fact that the number 3 short candidate on our short list is over 50% owned by this company  (which came in as #!). With friends such as that, who needs enemies!

Yes, this company's share price does not reflect its financial condition. Hedgies, macro speculators, and those looking to generate alpha - this is the opportunity for you!

For those who have not followed my CRE forensic analysis in the past, below is an excerpt of the full analysis that I included in the updated Macerich (a large US developer/REIT) forensic analysis from several years ago. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).


Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV's above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis

The same is the basic case over in Europe.

Click the following pages to englarge...




 Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

I have actually discussed the Dutch market in depth at the ING conference

Keynote presentation

Q&A and discussion, part 1

Q&A and discussion, part 2

As usual, I can be reached via the following (or directly via email), and urge all who rely on the perenially wrong sell side to subscribe to BoomBustBlog:

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Published in BoomBustBlog

Endgadget report, by way of BGR: Android leads US market share, iOS may have stopped growing, RIM is still falling

NPD just published its latest plotting of the great American smartphone OS rivalry, and although the report covers annual rather than quarterly trends, it's perhaps more interesting to hold it up against the previous set of figures we saw -- those for Q2 2011. Back then, Google's OS had a 52 percent share, but these new figures suggest a marginally better performance of 53 percent between January and October. Meanwhile, iOS's 29 percent share is identical to what we saw in Q2, hinting that its growth has slowed right down or even stopped. RIM's share of the pie is 10 percent, compared to 11 percent in Q2, showing that the Summer flurry of new BB7 handsets like the Bold 9930 and Torch 9810 had little immediate impact. WP7 obstinately refuses to overtake Windows Mobile, although these figures are pre-Titan, while the doomed Symbian and webOS are barely clinging to life. Aside from all that, perhaps the only stats that are genuinely still shocking are those at the top of the column for 2006.
Remember who was first to warn of this occurrence a year and a half ago.
Published in BoomBustBlog

I have been a staunch critic of the National Associaton of Realtors (NAR), their various renditions of Chief Economists, and the laughable jokes that they attempt to pass as objective analysis. What is alarming is the fact that the joke that is the NAR gets constant MSM airplay and front page print exposure - credibility be damned. For a glimpse of my real opinions on the matter, see below then reference the nuggest of truth that actually fell out of the MSM yesterday. 

Peruse each link below, for they contain more than enough info to identify the NAR for the joke that it is...

Now reference excerpts from this story ran by CNN/Money yesterday - Existing home sales to be revised lower:

 If you thought the U.S. housing market couldn't get much worse, think again.

Far fewer homes have been sold over the past five years than previously estimated, the National Association of Realtors said Tuesday.

NAR said it plans to downwardly revise sales of previously-owned homes going back to 2007 during the release of its next existing home sales report on Dec. 21.

NAR's existing home sales numbers, released monthly, are a closely followed gauge of the health of the housing market.

While NAR hasn't revealed exactly how big the revision to home sales will be, the agency's chief economist Lawrence Yun said the decrease will be "meaningful."

"For the real estate business, this means the housing market's downturn was deeper than what was initially thought," Yun said.

Yun said the database NAR uses to track existing home sales, the Multiple Listing Service (MLS), has led the real estate agency to over-count existing home sales for several reasons.

The MLS database only includes home sales listed by realtors, and excludes homes listed by owners, providing a very narrow view of the market. And because more people are using realtors to list their homes instead of selling them independently, realtor-listed sales numbers have become artificially inflated, said Yun.

In addition, some of the assumptions NAR used in calculating its data have become outdated, since they were based on 2000 Census data.

...The MLS has also been expanding its geographic coverage, so it may have appeared that there were more home sales simply because data from new areas were starting to show up. Also because of this geographic expansion, the system has been double-counting sales of some homes that can be considered part of multiple regions.

"Colorado Springs has their own database, but because the Denver market is nearby they may also list that home in the Denver database, so when the home gets sold, both Denver and Colorado Springs will say sales rose -- so that's genuine double-counting," said Yun.

Yun said NAR realized this upward "shift" in data during its most recent re-benchmarking process this year. With the help of the government, economists and other real estate groups, NAR has now taken these factors into account and will issue revised numbers on Dec. 21 at 10 a.m.



Published in BoomBustBlog

In April, I warned of and impending real estate crash in Europe - much of Europe. At the time, the headlines were occupied with the spectre of Greek and Portuguese sovereign defaults, but failed to see the bigger picture. The stresses put on the banks by devalued sovereign bonds purchased with high leverage puts the banks and their respective domiciles at risk, but the risks are vastly exacerbated as the banks shy away from rolling over CRE loans coming due on devalued (and potentially underwater) mortgage loans. You see, the less liquidity devaluing properties have access to, the less they are worth - further devaluing said properties in a vicious cycle of who gets to lose the most money first. We have started releasing preliminary BoomBustBlog research along these lines and a few of the companies found have not been recognized by the market yet, most likely because we are still in the earlier stages of the CRE decline/crash.

Subscribers, please download Northern Europe CRE short candidate #1

Contrary to popular belief, this  malady is no just the purview of Greece, Portugal and the more profligate nations, but is actually concentrated in what was (and still is by much of the uninformed) the stalwart economic base of the EU! Below is a chart derived from the research in the document above. Even better managed companies are coming to face with the reality of true Pan-European real estate recession cum depression.


Yes, this includes the Netherlands, Belgium and Germany


Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!


Below are the articles and keynote presentation from Europe where I laid out these scenarios with explicit candor. Now, here we are just about there.





Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Published in BoomBustBlog


About 48 hours ago, I was part and parcel to a documentary on rating agencies and their effectiveness (or lack thereof) in ascertaining risk in investment opportunities on a timely basis. IT was an interesting interview in my (see pic of the perpetually smiling pundit in his office, to the left) about an interesting topic that was heavy in the headlines during the subprime debacle days, but a slap on the wrist from congress and a couple of years of disinformation does wonders for the American short term memory. Of course, the Europeans may still be a little salty, but likely for the wrong reasons. After all, EU officials actually believe the rating agencies are being too tough on the faux sovereign states of the want to be union. The fact of the matter is that rating agencies are STILL moving in slow motion and using kids gloves, as was articulated in the piece Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? In said piece, I included excerpts from the presentation given to a large banking audience in Amsterdam that literally proved to be a template of rating agency downgrades and negative watches - just 7 to 12 months in advance!

Pray tell, how can a small time entrepreneurial investor and blogger consistently outrun ALL THREE of the rating agencies and virtually of sell side Wall Street over a period of nearly 5 years? Reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Rhetoric question for those in the know. Now, let's turn to the front page headlines in the MSM, carried by both:

CNBC: Moody's Downgrades Three French Banks

and Bloomberg: Biggest French Banks’ Ratings Cut by Moody’s -as excerpted...

BNP Paribas SA (BNP), Societe Generale SA and Credit Agricole SA (ACA) had their credit ratings cut by Moody’s Investors Service, which cited funding constraints and deteriorating economic conditions amid Europe’s debt crisis.

Moody’s cut the long-term debt ratings for BNP Paribas and Credit Agricole by one level to Aa3, the fourth-highest investment grade. Societe Generale’s rating was cut to A1, the fifth highest. Moody’s also cut the standalone assessments of financial strength of the three banks, while saying there’s a “very high” chance they will get state support if needed.

“Liquidity and funding conditions have deteriorated significantly,” the ratings company said in a statement. The likelihood that they “will face further funding pressures has risen in line with the worsening European debt crisis.”

The banks’ woes put at risk France’s AAA rating. Standard & Poor’s warned this week that the country’s top credit rating risks being downgraded, citing banks’ funding constraints among the reasons. French banks have been forced to borrow from the European Central Bank as their access to U.S. money-market funds has dried up on concerns about their holdings of European debt.

“The stress comes from the closing of the dollar taps, which constitute a part of the banks’ needs,” said Francois Chaulet, who helps manage 250 million euros ($333 million) at Montsegur Finance and owns the three banks’ shares.

At $681 billion as of June, French banks have the highest holdings of public and private debt in the five crisis-hit countries of Greece, Ireland, Italy, Spain and Portugal, according to data from the Bank for International Settlements.

But.... Wait a minute! Didn't a blog warn of liquidity and capital issues in the French banks in EXPLICIT detail about... Uhmm.... SIX MONTHS AGO? To wit...

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

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

I also made the effort that the rating agencies are trying to drive home, that France itself is very susceptible to contagion through its banks. There go those agencies again, running up to a smoldering pile of ashes with a fire hose to spray profusely yet wondering why they couldn't save the house!

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. See also The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

I then provided a deep dive of the French bank we feel is most at risk. Let it be known that every banke remotely referenced by this research has been halved (at a mininal) in share price!

Okay, back to our regularly schedule MSM...

Capital Shortfall

BNP Paribas doesn’t need new capital, spokeswoman Carine Lauru reiterated. Societe Generale (GLE) said it was “surprised” by the Moody’s decision, adding that it was “confident” it can meet regulatory capital goals through its own means. Credit Agricole spokesman Denis Marquet declined to comment.

BNP Paribas, France’s biggest bank, slid as much as 4.9 percent before rebounding 2.7 percent to 31.95 euros as of 3:03 a.m. in Paris. Societe Generale, the No. 2 bank, fell as much as 4.9 percent and was trading 1.5 percent lower at 18.84 euros. Credit Agricole, which tumbled as much as 4.5 percent, was up 3.1 percent to 4.75 euros.

Before today, BNP Paribas had fallen 35 percent this year, Societe Generale 53 percent and Credit Agricole 52 percent. That compares with a 33 percent drop in the 46-company Bloomberg Europe Banks and Financial Services Index.

... The European Banking Authority said yesterday that France’s four largest lenders have a 7.3 billion-euro shortfall in capital, less than its 8.8 billion-euro estimate in October. The new capital is needed to reach a 9 percent core Tier 1 capital ratio by mid-2012, after marking their sovereign bonds to market, it said.

...The Moody’s downgrade today follows reviews the ratings company began in June and extended in September, when it cut the long-term credit ratings of Credit Agricole and Societe Generale while leaving BNP Paribas unchanged. Standard & Poor’s placed ratings of European banks, including BNP Paribas, Societe Generale, Groupe BPCE and Credit Agricole, on watch Dec. 7 for a possible downgrade amid a similar review of 15 countries in the region.

ECB Funding

French banks’ liquidity woes have intensified as their U.S money-market fund access has dried up. The eight largest prime U.S. money-market mutual funds cut holdings in French banks by 68 percent in November, shifting investments to Swiss, Swedish, Canadian and Japanese banks.

French bank holdings declined by $11.7 billion to $5.56 billion, according to an analysis of fund disclosures by the Bloomberg Risk newsletter. The eight funds have reduced French bank debt by $76.8 billion in the past 12 months.

The decline in short-term lending by U.S. funds has forced French banks to increase their borrowing from ECB more than four-fold over the last four months.

Hmmm.... I heard of this dilemma before. Let me think. It's right on the tip of my tongue. Oh yeah! That's right, I remember now. It was a reserarch report that I issued to my subscribers 6 whole months ago and described in the public portion of BoomBustBlog for all to read. It was aptly titled...

The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

As excerpted:

Below is a chart excerpted from our most recent work showing the asset/liability funding mismatch of a bank detailed within the report. The actual name of the bank is not at issue here. What is at issue is what situation this bank has found itself in and why it is in said situation after both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM!

Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).


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


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

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

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


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

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

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

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

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

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

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

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

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

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

As for BNP management's proclamations that all is find in Franco bankingville...

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:


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... image008image008image008

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


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...


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)...

What makes the rating agency moves, and the fact that the MSM carries it so much more fervently than my own more timely, relevant and useful research, is that explained this in detail to bankers and investors in Amsterdam in April - yes, months even further in advance.

And if that is not enough of an advanced warning, there are my proclamations from the spring of 2010 - a year and a half ago via the Pan-European sovereign debt crisis series.

As you can see from the many links below, any prudent investor or entity who has an economic interest in the outcome of the events of the quasi-sovereign nations of Europe, the banks domiciled within them, or the entities that do business with them, is literally out of his/her damn mind if they subscribe to the rating agencies opinion in lieu of, or even ahead of that of BoomBustBlog proprietary research. That's right, I said it, and dare... No Double Dare, anyone to prove otherwise.

As excerpted from the link above, relevant articles posted since January of 2010.

The Asset Securitization Crisis of 2007, 2008 and 2009 led to the demise of several global banks and institutions. Central bank induced risky asset bubbles gave rise to, what was popularly considered and reported as through the popular media, a rapid recovery. The reality was that the insolvencies that marked the crisis were passed on, in part, to the sovereign nations that sponsored the Crisis, and as the chickens came home to roost the Asset Securitization Crisis has now blown into a full Sovereign debt crisis.

The Pan-European Sovereign Debt Crisis, to date (free):

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a

    localized one.

  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

  3. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.

  4. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

  5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

  6. I Think It’s Confirmed, Greece Will Be the First Domino to Fall

  7. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

  8. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!

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

  10. Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?

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

  12. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

  13. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

  14. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

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

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

  17. LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog

  18. Beware of the Potential Irish Ponzi Scheme!

  19. The Daisy Chain Effect That I Anticipated Appears To Have Commenced!

  20. How Greece Killed Its Own Banks!

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

  22. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

  23. What We Know About the Pan European Bailout Thus Far

  24. How the US Has Perfected the Use of Economic Imperialism Through the European Union!

  25. The Greek Bank Tear Sheet is Now Available to the Public

  26. BoomBustBlog Irish Research Becomes Reality

  27. PIIGSlets in a Bank: Another European Banks-at-Risk Actionable Research Note

  28. Sovereign debt exposure of Insurers and Reinsurers

  29. As We Have Warned, the Fissures Are Widening in the Spanish Banking System

  30. “With the Euro Disintegrating, You Can Calculate Your Haircuts Here”

  31. What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates

  32. The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!

  33. Introducing the Not So Stylish Portuguese Haircut Analysis

  34. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

  35. Osborne Seems to Have Read the BoomBustBlog UK Finances Analysis, His U.K. Deficit Cuts May Rattle Coalition

Related reading of interest...

Watch The Pandemic Bank Flu Spread From Italy To France To Spain: To Big Not To Fail!!!

Italy’s Woes Spell ‘Nightmare for BNP - Just As I Predicted But Everybody Is Missing The Point!!!

Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody?

French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!

Published in BoomBustBlog

insuranceNote: Subscribers can download a copy of this post with facts, tickers and figures here. Any susbcriber having access problems should email customer support so we can send you a copy directly. The new site should be open for beta testing within a week, and is aimed at eliminating the performance and access problms.

We have shortlisted an insurance company that looks to have very little chance of escaping a compression if the business in the Euro zone implodes. It is the first company mentioned in the professional subscriber document released last week (Insurance cos. EU exposure 11-2011).The company has both global macro risk and operational risk, but its operational risk did not land it on the retail subscriber short list released last week (Insurance Cos. Operational Stress). All subscribers should expect forensic report on this company within two weeks and a new short list of REITs and related companies by that time as well. I’m packing the research pipeline for the new year.
In reviewing why this company was chosen, we need to review the post that outlines the insurance business and its cyclical nature - also penned last week - You Can Rest Assured That The Insurance Is In For Guaranteed Losses…

Remember, the insurance industry is short to medium term bust because it is:

1.      extremely cyclical,
2.      prone to booms and busts (the fodder of BoomBustBlog),
3.      and relies as much, if not more, on investment income borne from bonds (primarily sovereign debt [whaaaat?] and bank/financial institution debt [whoa!!!??] for earnings as much as their core business of underwriting risk.

The combined ratio of the subject company is just under 100, which means that its underwriting profits less its expenses are nearly ZERO, as in zilch. Of course, the unique aspects of the insurance industry float allows it to profit - even in the face of negative net underwriting earnings. As a matter of fact, under the right circumstances, an insurer can post some very significant positive net income despite markedly negative underwriting profits.

Of course, this unsaid implicit leverage works both ways. Under the wrong circumstances (ex. the circumstances that we are currently experiencing) insurance companies negative underwriting profits can be exacerbated to the point where the company has to be either bailed out or shut down - ex. AIG. I implore interested parties who are not knowledgeable in the insurance industry to review the BoomBustBlog insurance primer - You Can Rest Assured That The Insurance Will Take Guaranteed Losses...

The forensic analysis subject we shortlisted has all of the qualifications we listed to be an ideal short in times of volatility and dislocation. The model has turned out to be a bit more complicated than we expected, hence the delay in producing the report but trust me... It will be more than worth it. I should have a summary report out midweek as well as a short list of real estate exposed companies early next week. The double whammy serves to make up for lost time.

The combined ratio of the subject company is nearly 100, while its accounting book value (often par), its politically espoused market value and losses allegedly to be booked, and the actual market value of the assets on balance sheet are ALL DRASTICALLY different! We have shifted over to a duration based analysis to outline risks in its EU debt holdings and trending in its equity holdings. We have also stepped through its more arcane derivative structures as well.

As of right now, marking this company's portfolio to market will result in a 24+% drop in shareholder equity. These very same bonds are rapidly trending downward in value, not up.

Published in BoomBustBlog

In the headlines today: S&P Places EFSF's Long-Term AAA Ratings on Creditwatch Negative, May Lower Ratings by One or Two Notches

Is this truly a surprise? Does anyone truly believe this heavily financially engineered FrankenFinance monster actually deserves a AAA rating? Yes, I do mean Frankenstein assets. I implore you to delve in further - "Welcome to the World of Dr. FrankenFinance!" and .

As a matter of fact, it actually appears that those few members of S&P that do read my blog have actually found some influence in the company. If you remember, last week I challenged the rating agencies with this taunting post -Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? Now, it's not as if the agencies have went so far as to actually take heed to my warning, but those who follow me know that I have been leading my subscribers through an explicit path of "contagion to come" for two years now. Who is the major conduit of said contagion? Well, the very same nation who is the 50% of the bilateral lynchpin of the EFSF. See:

  1. When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!
  2. France, As Most Susceptible To Contagion, Will See Its Banks Suffer

  3. Focus on Greece? No! How About Italy? No! It's About Baguettes, Mes Amis! See also, When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

Of course, if France is 50% of the fire power behind the EFSF, and Reggie keeps banging the rating agencies about Frances impending fall from true economic AAA grace (as if it ever deserved such in the first place), then by default if one goes the other must follow. As a matter of fact, I even warned that the smaller, supposedly more staid countries are truly at risk - Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly? And as if by magic, Bloomberg reports: S&P Puts 15 Euro Nations on Watch for Downgrade Amid Sovereign-Debt Crisis

Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade.

The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks.

“Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement.

Back in April of 2011, I told a curious audience of several hundred bankers and institutional investors in Amsterdam exactly how this will turn out. Thus far, I'v been right on point, as has the predictions dating as far back as 2009 in the Pan-European sovereign debt crisis series.

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

S&P Puts 15 Euro Nations on Watch for Downgrade Amid Sovereign-Debt Crisis

Published in BoomBustBlog

The WSJ reports Corzine Rebuffed Internal Warnings on Risks:

MF Global Holdings Ltd.'s executive in charge of controlling risks raised serious concerns several times last year to directors at the securities firm about the growing bet on European bonds by his boss, Jon S. Corzine, people familiar with the matter said.

The board allowed the company's exposure to troubled European sovereign debt to swell from about $1.5 billion in late 2010 to $6.3 billion shortly before MF Global tumbled into bankruptcy Oct. 31, these people said. The executive who challenged Mr. Corzine resigned in March.

The disagreement shows that concerns about the big bet grew inside the company months ...

As I have hinted in "The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications" I knew the ex-CEO of MF Global, and in particular member(s) of in the internal audit staff - one of which I knew very well and trained. There is one glaring FLAW in the structure of internal risk management and audit in MF Global, and that was that it was WEAK! If internal audit answers to operational executive management, then how can it truly crack the whip on its own boss. Now, granted, this is not endemic to just MF Global, but it is truly a problem. Internal audit/risk management needs to answer to a separate entity, apart from the CEO and possibly apart from the Board itself if the CEO has had a part in selecting the board. This way there is true independence and the nonsense that you just saw with MF Global has a much less likely chance of happening.

Alas, such is life. For instance, why are you reading this through a subscription blog versus PWC's audit report of MF Global? Hmmmmmm.....

Published in BoomBustBlog