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For those who do not know, I was a real estate investor between 2000 and 2006. By 2006, I came to the realization that there were no longer profitable deals to be had on a sound risk/reward basis, and the entire Ponzi scheme looked to be ready to do the Humpty Dumpty thing. So, I took a year off to raise my brand new baby girl, and came back to pursue plans to start a hedge fund that focused on shorting the FIRE sector and European banks - basically any and everybody who ever did business with me and my colleagues in real estate - the writing was evidently on the wall for anyone who bothered to look at walls.

Those who have followed me for a few years know my mantra, and for those that don't, review my early thoughts and calls on Europe and the global FIRE sector. At a fundraiser that MF Global threw in Rockefeller Center's rolling skating rink, I sat down with the then CEO of MF Global and his wife and informed them of my plans. They sincerely wished me luck and told me to let them know when I got started (I would speak to them on and off annually at the skating rink event or over lunch). I said nothing then, but I was highly suspect of the firms prospects going into what I saw was a risky asset firestorm of a correction. As it turned out, it appears I may have had a point. Even more interesting is the fact that I was the only one that I knew of who proclaimed that Fed ZIRP policy was truly poison laced in Myrrh. Contrary to that espoused by ink stained ivory towers of academia and those who so often correct in the Sell Side, ZIRP is killing the banks while regulatory capture is hiding the metastizing tumors. I also now a few who used to work in the risk departments of MF (yes, they did have one) and they said that Goldman/governer guy was the one that ran MF into the ground. Accordingly, MF was a good brokerage, but he came in and tried to make them bankers and traders, which they were not (at least they weren't good ones, anyway). By forcing the firm to carry inexperienced proprietary risk, he doomed the firm (according to this insider).

Hmmmm... Up is down, and down is up, I bendeth you over if you spilleth my cup! Again, as excerpted from There’s Something Fishy at the House of Morgan":

Again, I have warned of this occurrence as well. See my interview with Max Keiser below where I explained how the Fed's ZIRP policy is literally starving the banks it was designed to save. Listen to what was a highly contrarian perspective last year, but proven fact this year!

Provisions and charge-offs: I have been warning about the over-exuberant release of provisions to pad accounting earnings since late 2009!

Declines in provision was one of the major contributors to bottom line. JPMorgan reduced its provision for loan losses to $1.2bn (0.7% of loans) in Q1 2011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% of loans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans) in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9% of loans) in Q4 2010. Although banks delinquency and charge-off rate has declined, the extent of decline in provisions is unwarranted compared to decline in charge-off rates. As a result of higher decline in provisions compared to charge-offs, total reserve for loan losses have decreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At the end of Q1 the banks allowances to loan losses is lowest since 2009.

Although the reduction in provisions has helped the banks to improve its profitability it has seriously undermined the banks’ ability to absorb losses, if economic conditions worsen. As a result of under provisioning for the past five quarters, the banks Eyles test, a measure of banks’ ability to absorb losses, has turned to a negative 7.7% in Q1 2011 compared with +6.4% in Q1 2010. A negative Eyles test has serious implications to shareholders – the losses from banks could not only drain entire allowances for loan losses which are inadequate but can also wipe off c7.7% of shareholder’s equity capital. The negative value of 7.7% for JPM’s Eyles is the lowest in this downturn.

MF Global Files for Bankruptcy; Shares Remain Halted

MF Global Holdings filed for Chapter 11 bankruptcy protection in New York on Monday morning, after an effort to sell itself to Interactive Brokers Group failed.

MF Global [MF 1.20 --- UNCH ] had a tentative deal to sell assets to Interactive Brokers [IBKR 15.55 0.33 (+2.17%) ] as of late Sunday, but the agreement fell apart as talks continued overnight, said people familiar with the matter. Discussions ended around 5 a.m. ET, one of these people said.

MF Global had been considering filing just its holding company for bankruptcy protection and then executing the sale. That plan is now off the table, one of the people said.

This person said MF Global's parent company would be included in the bankruptcy filing. Voluntary bankruptcy petitions for MF Global Holdings and MF Global Finance USA hit the docket in a U.S. bankruptcy court in Manhattan mid-morning on Monday.

The Chicago Mercantile Exchange said on Monday that customers of broker-dealer MF Global were limited to liquidating their positions. The exchange, which owns the Chicago Board of Trade, said it would no longer recognize MF Global, which has filed for Chapter 11 bankruptcy protection, as a guarantor for floor trading.

... "It was quite difficult to get our money out on Friday, because they had a lot of redemption calls," a trader, whose firm used MF Global as a brokerage said. "The company is not initiating any new position. They are trying to close down positions that they already have with clients that are open."

At MF Global's London office, in Canary Wharf, staff were coming and going from the office as normal at Monday lunchtime.

There was a tense atmosphere and most declined to speak to CNBC.com.

"We're not allowed to speak to you; so you can probably read into that what you will," one MF Global worker told CNBC.com.

The last set of statements are teiling, indeed. MF Global is a mini-Lehman, and while many may not be taking MF Global's demise as seriously, it definitely is. They died from the same disease that afflicts much of Wall Street, and most of European banking. They are smaller, that's the only real difference - and the asset management company that they were spun off is doing just as bad. I said it before, and I'll say it again, Europe is housing Lehman Brothers x 4!

From ZeroHedge: Presenting The Bond That Blew Up MF Global

Reaching for yield (and prospectively capital appreciation) while shortening duration had become the new 'smart money' trade as we saw HY credit curves steepen earlier in the year (only to become the pain trade very quickly). The attraction of those incredible yields on short-dated sovereigns was an obvious place for momentum monkeys to chase and it seems that was the undoing of MF Global. The Dec 2012 Italian bonds (in which MF held 91% of its ITA exposure), as highlighted in today's Bloomberg Chart-of-the-day, appears to be the capital-sucking instrument of doom for the now-stricken MF. As if we need to remind readers, there is a reason why yields are high - there is no free lunch - and while some have already leaped to the defense of the bet-on-black Corzine risk management process with comments such as 'He was simply early and will be proved correct' should remember that only the central banks have bottomless non-mark-to-market pockets to withstand the vol. It also sets up a rather useful lesson for those pushing for EFSF leverage to buy risky sovereign debt - but given today's issue demand, perhaps that is moot.

Hmmmm! I remember over the summer, when MF probably put these trades on, I warned about Italy sparking France while NEARLY EVERYONE ELSE was still focusing on Greece! Reference the following excerpt from Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

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

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

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

So, how accurate was I? Well, we'll see in a few... In this morning's headlines:

• Treasuries Climb as Japan Sells Yen, Italian Bonds Drop on Europe Concern 
• Stocks, Italian Bonds Retreat Amid European Bailout Concern; Yen Tumbles
• JC Flowers Fund Is Said to Have $47.8 Million Loss on Its MF Global Stake

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

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

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

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...

image014image014

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

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. 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
2. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
   1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

And the BNP results????

bnp_haircut_exposure_bank_runbnp_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).

On Derivatives Implosions and Debt Destruction...

Just like the US banks and EU leaders have somehow gamed (or at least tried to game) the CDS market into a sham, they look to do the same in the discorporation of those entities who have been destroyed by the highly deflationary forces taking hold. To wit: MF Global Creditors Led By JPMorgan

The following are MF Global Holdings’ largest unsecured creditors and shareholders, according to the company’s bankruptcy filing and related court papers submitted today in U.S. Bankruptcy Court in Manhattan.

Unsecured creditors rank behind secured lenders in getting repaid in a bankruptcy, and are ahead of preferred and common shareholders.

Unsecured Creditors:

JPMorgan Chase & Co. (JPM)’s JPMorgan Chase Bank, bondholder trustee, $1.2 billion.

Deutsche Bank AG, trustee for $1.02 billion in bonds:

Deutsche Bank Trust Co., bondholder trustee for 6.25% notes, $325 million bondholder trustee for 3.375% notes, $325 million bondholder trustee for 1.875% notes, $287.5 million bondholder trustee for 9% notes, $78.6 million.

From ZeroHedge, we are sourced the ISDA "determinations committee":

Americas Voting Dealers
Bank of America / Merrill Lynch
Barclays
Citibank
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale
UBS

EMEA

Voting Dealers
Bank of America / Merrill Lynch
Barclays
BNP Paribas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale
UBS

More from Reggie Middleton...

The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!

This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

lauren_icon_twitter__2__reasonably_smallLauren Lyster, the enticing Russian TV/Capital Accounts host gave me the rare opportunity yesterday to sit down and run my mouth for 15 minutes straight. This is a format which is most conducive to true conveyance of knowledge and information, at least in my not very humble opinion. I'm just not the 8 second soundbite type.

In viewing the interviews below, compare and contrast to the other two similar but large channels at large, Fox Business News and CNBC, I am quite curious to get your opinions and feedback.

I also query, why is the bond market so much more fundamentally astute than the equity markets? Is it becuase it is truly too deep and wide to manipulate? In today's headlines (and right after this world saving 5th European bailout):

• Fitch Says Greece Deal to Result in Temporary Default
• Italian 10-Year Yield Tops 6% in Auction, Setting Record

Let's view the interview before we go any farther...

Interview w/Reggie Middleton: Is Bank of America going Bust? (Part 1)

Interview w/Reggie Middleton: Is Bank of America going Bust? (Part 2)

I addressed the CDS issue in detail in yesterday's blog post, which should be read by any who have not already: The Banks Have Volunteered (at Gunpoint) To Get 50% of Their Money Taken - No Credit Event???. Why is this credit event issue pertinent? Well, if the Europeans succeed in shamming the CDS market, rates skyrocket (duhh, didn't think of that???) and all banks that state they are hedged via CDS truly aren't? I delved into this in detail in 2009, with the blog post And the next AIG is... (Public Edition)... Think about it! If there is a credit event then the fireworks start. If there is no credit event, then what does that say about Goldman, who swears to high hell they are adequately hedged? Hedged with CDS that won't get triggered upon a 50% loss? Let's take a closer look with excerpts from recent BoomBustBlog posts and subscriber research...

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

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

Click to expand!

 bank_ficc_derivative_trading.png

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

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 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...

image009

And back to Bank of America Lynch(ing this) CountryWide....

Subscribers, if the Europeans mess this up (and a gambling man would probably be best served casting his bets in that direction) expect the subject bank of this article, and the most recent forensic download ( Haircuts, Derivative Risks and Valuation) to go "BOOM!" See the blog post This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

Lauren asked a very good question regarding why I'm the only pundit making such dire observations...

picsay-1319726495Note to registered users and subscribers: If you are getting the "invalid token" error when you attempt to login, please clear your browser cache and history, close the browser then reopen it back to this site. That should solve the problem.

So, the European joke has come full circle. Indebted nations borrow more money to bail out other indebted nations who ask insolvent banks to cut a 50% off deal on the loans that were given to them, but the insolvent banks will then have to raise capital which the will of course borrow from the over-indebted nations whom they just gave money to. Get it? Problem solved - BTMFD!!!

The rally is based off of bullshit and an inability to count. After the voluntary haircut (volunteered at gunpoint, may I add), Greece will still have roughly 120% debt to GDP ratio with a declining economy. Unsustainable still. I would fade this rally with careful stops.

I have went over the Greek debt tragedy in detail with subscribers and things are unfolding exactly as I had anticipated. Before we get to the Greek default rehash, let's peruse an email I received from one of my many astute BoomBustBloggers.

I'm a lawyer (and investor). There is no analysis by anyone on the internet about whether the announcement last night would in fact trigger CDS payout. Rather, everyone seems to be accepting the claim by ISDA that the decision would not trigger it. Because I can't find any legal analysis worth reading on the internet I decided to do my own research. In about 5 minutes I found a case in the 2nd Circuit (USA) that explained to me what's going on with those contracts. First of all, they are unregulated private contracts between private parties. In order to know whether a trigger occurred you have to read each individual contract. As a result, what the ISDA says about whether a trigger occurred as to private contracts that are out there is totally meaningless.

There is merit to this assertion since the ISDA contract is simply a non-binding template, often marked up to accomodate financial engineering widgets designed to increase profit margin and decrease transparency to clients and counterparties. By the time all of the widgets are installed on some of these highly customized deals, the original ISDA template is a non-issue.

What seems to be the issue is whether there is considered to be "economic coercion" going on if one of the events to trigger is "restructuring." 

Whaaattt!!! Coercion? What Coercion???!!!

robbery_gun_1

 Furthermore, you have to not look at voluntariness in a vacuum but compare the (Greek) bond with the substitute being offered by EU to determine if economic coercion or true voluntariness exists. For example, if the EU will give priority in payment to the substitute it is offering and not the original bond, that is the proper analysis in determining economic coercion/voluntariness etc. My analysis here is based upon a very brief reading of the case and I would need time to analysis fully. Also I'm not a financial professional I don't understand all the implications of what the EU announced. The reason I'm contacting you is because I believe that in the coming days/weeks we will hear of entities that are buyers of the CDS protection giving notice of a credit event to their counterparties to seek to collect on the CDS contract. If payouts aren't made lawsuits will be filed. 

You had better believe it. I really don't know why everybody is glazing over this very obvious fact! Imagine if you bought protection on a bond you acquired at par and you are offered 50% of it back (NPV) to be considered whole while the CDS writer laughs at and says thanks for the premiums... You'd probably break your fingers dialing your lawyer - out of both the swap payments, the CDS payout, and 50% of your investment that you thought (but really should have known better) was protected!

I don't know what a US Court will decide as to whether a trigger has occurred but there is a 2nd circuit case (the one I mentioned above) that is the best I've found to give an inkling about this... I'm telling you all this, because if I am right and there are claims that CDS was triggered and CDS in fact gets triggered... [it should be made] public so people start analyzing whether CDS was in fact triggered instead of blindly accepting the drivel out of Europe that no trigger will occur. That claim is obviously all about perception management not necessarily truth.

As excerpted from A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina Wednesday, 26 May 2010

The restructuring of the Argentina debt in default was occurred in 2005 when the government offered new bonds in exchange of old securities. The government gave the option of either accepting A) a par bond with no haircut in the principal amount but substantially lower coupon and longer maturity or accept B) a discount bond with a haircut in principal amount to the extent of 66.3% but relatively better coupon rate and shorter maturity than in case of Par bond. If the bondholder accepted A), for each unit of bond, one unit of Par bond will be allotted. If the bondholder accepted B), for each unit of bond, 0.33 unit of Discount Bond will be allotted. The loss to the creditor, which is decline in the NPV of the cash flows, was nearly the same in both cases as the lower principal amount in Option B was offset by better coupon rate and shorter maturity. The price of the par bond in the market and the price of the discount bond multiplied by the exchange ratio (real price to the bond holder) were largely the same when they were listed in the market in 2005.

The IMF estimated the average haircut (decline in the net present value of the bond) was on an average 75% and the market priced in most of this haircut before the actual restructuring in Feb 2005. The prices of the bond in default declined nearly 65% between Feb 2001 and Feb 2005.

One should keep these figures in mind, for in the blog post "How Greece Killed Its Own Banks!"I ran through a much, much more optimistic scenario that wiped out ALL of the equity of the big Greek banks. Remember, the Greek government stuffed these banks to the gills with Greek bonds in order to created the perception of a market for them. As excerpted...

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)…

image001image001image001

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

image003image003image003

Professional and Institutional level subscribers (click here to upgrade) may access the live spreadsheet behind the document by clicking here (scroll down after for full summary, spreadsheet and charts).greek debt restructuring spreadsheet

Greek Restructuring Scenarios

There are several precedents of sovereign debt restructuring through maturity extension without taking an explicit  haircut on the principal amount, and many analysts are predicting something of a similar order for Greece. This form of restructuring is usually followed as a preemptive step in order to avoid a country from technically defaulting on its debt obligation due to lack of funds available from the market. It primarily aims to ease the liquidity pressures by deferring the immediate funding requirements to later periods and by spreading the debt obligations over a longer period of time. It also helps in moderating the increase in interest expenditure due to refinancing if the rates are expected to remain high in the near-to medium term but decline over the long term.

However, the two major negative limitations of this form of restructuring if applied to Greek sovereign debt restructuring are –

• It solves only the liquidity side of the problem which means that the refinancing of the huge debt (expected to reach 133% of GDP by the end of 2010) will be spread over a longer time period while the debt itself will continue to remain at such high levels. The sustainability of such high debt level, which is growing continuously owing to the snowball effect and the primary deficit, is and will continue to be highly questionable. Greek public finances are burdened by a very large interest expense which is approaching 7% of GDP. The government’s revenues are sagging and the drastic austerity measures need to first bridge the huge primary deficit (which was 8.6% of GDP in 2009), before generating funds to cover the interest expenditure and reduce debt.

Why the Taxpaying Population of Greece Is Still Not Off the Hook, Start Looking Into Stocking Up On Their "Greece"!

Wednesday, 06 July 2011

... Thus, even though the amount of funds required each year to refinance the maturing debt will be reduced by extending maturities, the solvency and sustainability issues surrounding Greece’s public finances, which were the primary reasons for it’s being ostracized from the market in the first place, will remain unanswered.

I'd like to make this perfectly clear and have absolutely no problem going on the record with it in full HD fidelity...

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There has been a large amount of capital lent to (and invested in) Greece. The collateral behind (recipient of) said capital has devalued along with popping of the asset securitization crisis bubble to such an extent that it is a mere fraction of what it was valued at when said capital was invested. What does this mean? Well, it means that no matter what financial engineering scheme you attempt to wrap around it (and I happen to be particularly skilled at financial engineering, so I should know), no matter what socio-political financial nomenclature you attempt to drape it in, and not matter how far you attempt to kick said can down the road in a "delay and pray" tactic of pushing the inevitable collapse past your particular tenure at the helm in an attempt to make it someone else's problem... The only way out of this for Greece, Portugal, Ireland and other profligate states is an old fashioned reneging on its payback obligations. A plain vanilla default. The explicit action that unequivocally informs you in no uncertain terms - You ain't gettin' your money back!

The chart above is an obvious reason why Greece not only has an inevitable default in its future, but why the faster they default the better off Greece is as a whole. Reference the test case known as Iceland whose banks default on $85 billion, from Bloomberg:

Debt Raters Miss Iceland Rebound

The credit rating companies that were too slow in predicting Iceland’s economic collapse in 2008 may be underestimating the strength of its resurrection.

Fitch Ratings said in May it may take two years for the island to shed its junk status, while Moody’s Investors Service and Standard & Poor’s give Iceland their lowest investment grades. That hasn’t deterred investors from trying to buy twice the amount offered in last month’s $1 billion bond sale as the island returned to global capital markets less than three years after its banks defaulted on $85 billion in debt.

“When you look at how successful that auction was, it’s clear that investors are now crunching the numbers themselves and that the credit grades from the rating agencies are less relevant,” Valdimar Armann, an economist at Reykjavik-based asset manager Gamma, said in a July 4 interview.

Iceland’s experience shows the rating companies may be overcompensating after failing to identify some of the risks that led to the global financial crisis, said Armann. While Moody’s kept a Aaa rating on Iceland until five months before its banks collapsed, reluctance to raise the island’s credit grade now is blocking the country’s access to a broader investor base. Debt derivatives show the low ratings may be unwarranted as credit default swaps on Iceland indicate it’s less likely to default than euro member Spain.

You see, the only true workable solution is to expunge the debt and have the original debt investors take realize their significant and material capital losses. As it stands now, for political reasons and to maintain the status quo of the existing banking oligarhcy, more debt is being piled onto these nations for the tax paying populace to attempt (and fail) to service! Thus, severe and aggressive austerity plans are being implemented to payback banks and other lenders (at what can be considered usurious terms, enter the IMF), thuse forcing recessionary pressures upon the working populace. This is a thick and heavy shaft, one that is onerous enough to quite possibly require grease for the citizens and denizens of Greece to consider palatable. On the other hand, they can do the Iceland, who is already lapping Greece in both economic growth and demand for its debt!

The situation between the 1st and 2nd Greek (and soon to be Portuguese) bailouts have essentially remained unchanged!

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As excerpted from It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Banking Crisis

If you think those charts look painful, imagine if the Maastricht treaty was actually respected. Our models haven’t pushed passed 80% debt to GDP, but if you were to put the treaty’s debt ceiling in you would see the very definition of contagion. The following chart represents the first order consequences of a 62% haircut on Greek debt…

Despite the fact that the only way out of this is a true default and destruction of the debt capital proffered during profligate times, TPTB will try their best to find a workaround, because what's best for the people of Greece, Portugal, Ireland and as we have already seen - Iceland, is absolute anathema to the bankers that binged on this stuff at 40x leverage and sitting on 50% devaluations as we speak. You simply do the math: 40 x (-50%) = what kind of returns? Insolvency, first and foremost!

Subscription Document Archive:

Greece Public Finances Projections

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

Sovereign Contagion Model - Pro & Institutional

Online Spreadsheets (professional and institutional subscribers only)

• Greek Default Restructuring Scenario Analysis
• Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
• Portugal's Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy - Professional Analysis

Here is the rub that all seem to be missing. A 50% haircut to principal is simply not enough - and it appears as if it is by extension and not solely principal - we don't even know if it is to principal yet because thus far all reports that I have come across simply referenced NPV or extensions, which could be a combination of any number of things. As explained above, without an explicit hit to principal, Greece will still be in need of excess Grease, believe it.

My next post on this topic will delve into the BoomBustBlog online subscriber model "Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts" to try and work it out...

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 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...

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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!

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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:

• Goldman Sachs Q3 Forensic Review - Retail
• Goldman Sachs Q3 Forensic Review - Professional

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:

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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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... 

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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 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 2009-12-16 07:52:36 2.85 Mb and our CRE consulting capabilities statement:  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.

jobs1984My condolences go out. It's needless to say, and redundant, but Steve Jobs was most definitely an iconic leader, a hell of a CEO and a man with one of the, if not the best tech track records of the modern tech era.

In short, Steve Jobs has proven (several times over) to be an outstanding manager and large scale entrepreneur. One of the characteristics of successful entrepreneurial managers is the ability to plan ahead, and plan ahead better than the competition. With that being said, it is highly unlikely Jobs failed to put in place a very, very competent team to take Apple to the next level in his wake. It is highly hypocritical, nonsensical even potentially offensive, to imbue Steve Jobs with such visionary accolades and ability from afar and then assume he was not competent enough to create the team to see his vision through. If he couldn't;t he would be akin to a one hit wonder, and if anything he has proven he was anything but.... Remember Apple 1.0, NeXT, his Pixar movie studio ventures, and then Apple 2.0 which brought you the sexy minimalist PC as an fashion statement, sexy laptops, the iPod, App Store/iTunes done and marketed correctly, the iPhone, IPad. That is not the track record of a man that does not know how to plan ahead.

This is the rub. I  believe Apple has seen its heyday in that its business growth rate has peaked. Apple alone faces more, and the most competent, competition of any company that I know of. It was very likely Apple would have seen its core products (mobile computing) overtaken by the Android onslaught in the medium term regardless of Steve Jobs health, and/or passing. Business leaders come and go in cycles, and Apple has had a very strong run - but is facing extremely stiff and competent competition – a lot of it, and that competition is actually outgrowing it.

Unfortunately, the Android momentum is building up to a head a the same time Jobs has passed and the mantle has been passed to Cook, and it is inevitable that Cook will catch the fallout for something whose brunt should actually be felt by a much broader team, Jobs included. Then again, Jobs illness probably prevented him from performing at his best for some time now, so one could only speculate what would or could have happened.

Let's make this quick and clean. After all, a picture is worth a thousand words, and I have crowed for over a year now that Apple has been handily outgunned in the smartphone race by Google and its hardware vendors.

Click any image to expand to printer size...

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Of course, I have met more flack, resistance and general hateful rhetoric than for any opinion I have given on any company, ever. Needless to say, that doesn't negate the facts on the ground, does it? I can legitimately say I almost the only Apple skeptic, and by far the most vocal. So, on the eve of Apple's flagship iPhone 4GS announcement, we see the MSM report: Apple's New iPhone 4S Leaves Some Fans Disappointed...

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The maddening pace of Android technology development is simply too much for Apple to keep pace, or at least keep pace with while maintaining those fat margins. So what do they do? they release a marginally improved product that has yet to match the 6 month old Android flagship tech that is about to be refreshed/replaced/updated in exactly ONE WEEK!

I was the lone Apple vs Google realist that I know in the blogosphere. Go to 3:40 in the video below to hear the truth that no one else on CNBC would tell you. As a matter of fact, after you do that, go to the beginning of said video to hear more truths that no one else on CNBC would tell you, like what was said in my Hunt for the Squid!

Simple math, simple business logic, simply common sense, yet the Apple hordes attacked relentlessly. Listen, what Google has created to compete with Apple, RIM, MSFT and Nokia, was not a new technology - but a new way of doing business. Less than free was their new business model and it proved to be pretty damn effective.

Armed with such a weapon, Amazon is selling tablets (24 hours after launch) at a rate of 50,000 per DAY. That's right! Per day! Amazon is also selling them 60% cheaper than Apple's cheapest offering over a retail network that has both broader reach and matching if not more content.

Samsung has set records with their Galaxy S II phones, which are drasctically superior in nearly every way to the iPhone 4 and apparently (from what I have gleaned thus far) the iPhone 4GS. These phones are in very high demand, and if Apple does get close in functionality, Samsung is announcing a dramatic upgrade to this best of breed device... Next week!

Is that not enough margin bashing competition for you? Well HTC, Motorola (just purchased by Google, itself) and LG are coming with their own superphones, you know... The product that supplies ~ 70% of Apple's profit. Being that subsidized iPhone 3GS are being given away for free now, the margin compression theory makes sense, no?

As excerpted from Apple on the Margin:

Writing about Apple is like writing about gold, despite the fact that there is a strong fundamental argument for or against it, the emotional response and lack of empirical outlook clouds the fundamentals, ex. Apple  and the iPhone vs Android or Gold and fiat currencies/inflation. I am not a Apple hater, and I am probably one of the most advanced iPad users you know of. Apple has its pluses and minuses, but people (including many professionals) are failing to look at the facts and instead are joining their respective "fanboi" clubs. Thus, in continuing with my attempt to educate my readers on the folly of believing Apple's position to be unassailable, I am illustrating exactly how vulnerable Apple is to either a compression of margin on the iPhone or a slow down in sales. Apple is just penetrating the market and has a fertile field to conquer, it is just that it will not be able to pursue that field devoid of competition as it has over the past 3 years. This should dictate an adjustment to the highly optimistic aura attached to the multiples used in forecasting economic results.

1. 1. Look & Listen Closely As The Solitary Margin Compression Theory Slowly Bears Fruit: Apple to Drop Flagship iPad Prices?
   2. Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! 
   3. Is The Evidence For An Apple Margin Collapse Now Incontrovertible? 
   4. I Absolutely Dare Anyone To Read This And Still Not Consider The Probability (Not Possibility) Of Apple Suffering From Margin Compression 

What Google has created to compete with Apple, RIM, MSFT and Nokia, was not a new technology - but a new way of doing business, reference "Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android". Less than free is their innovative new (and old, since they simply applied their cloud services model to the smartphone OS) business model and it proved to be pretty damn effective. Armed with such a weapon, Amazon is selling tablets (24 hours after launch) at a rate of 50,000 per DAY. That's right! Per day! Amazon is also selling them 60% cheaper than Apple's cheapest offering over a retail network that has both broader reach and greater access to content and native retail shopping. Not only does this threaten the iTunes/App Store ecosystem, it threatens the iPad and itself!

Samsung has set records with their Galaxy S II phones, which are drasctically superior in nearly every way to the iPhone 4 and apparently (from what I have gleaned thus far) the iPhone 5. These phones are in very high demand, and if Apple does get close in functionality, Samsung is announcing a dramatic upgrade to this best of breed device... This Month!

That not enough margin bashing competition for you? Well HTC, Motorola (just purchased by Google, itself) and LG are coming with their own superphones, you know... The product that suppies ~ 70% of Apple's profit. Being that subsidized iPhone 3GS are being given away for free now, the margin compression theory makes sense, no?

 Check out the progress of "Google's "Negative Cost" Business Model Employed Through Android" in this table sourced from Endgadget, which displays the prowess of Apple's yet to be released flaghsip phone with the arleady dated and aging Android flagships -- the results are pretty clear cut!

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As excerpted from "Is The Evidence For An Apple Margin Collapse Now Incontrovertible?" 5/19/11:

This is going to be a much tougher fight for Apple than even that of the smartphone market, and you see how well Android did in that category as the current market leader in both footprint and growth rate. Literally98% more competition is coming down the pike this year, and products are already widely reviewed as at parity or superior in Apple's chief diversification segment (remember, derives ~70%  of its profits from the iPhone). With that, even the iPhone is supremely challenged by Apple's own parts vendors, Reference Looking at the Results of Google’s “Negative Cost” Business Model Employed Through Android:

Apple's biggest suppliers (the most important parts vendors for the products that contributes about 75% of Apple's profits) and the companies that Apples is currently embroiled in global litigation with (no wonder why) also produce similar products, ex. the LG Optimus 3D and the Samsung Galaxy S II.

Speaking of the Samsung Galaxy, this newest refresh is nearly universally thought of to be the best smartphone available, including the Apple iPhone. I haven't found a single review yet that has said otherwise. This is an impressive feat considering how "Apple-centric" the media currently is. Reference this snippet from Endgadget:

For a handset with such a broad range of standout features and specs, the Galaxy S II is remarkably easy to summarize. It's the best Android smartphone yet, but more importantly, it might well be the best smartphone, period. Of course, a 4.3-inch screen size won't suit everyone, no matter how stupendously thin the device that carries it may be, and we also can't say for sure that the Galaxy S II would justify a long-term iOS user foresaking his investment into one ecosystem and making the leap to another. Nonetheless, if you're asking us what smartphone to buy today, unconstrained by such externalities, the Galaxy S II would be the clear choice. Sometimes it's just as simple as that.

Endgadget is not the only reviewer to go head over heals over Android super-powered phones. Check it out, courtesy of onlinesocialmedia.net:

1. 1. Dan Sung of Pocket-Lint rates the phone with 4.5 out of 5 stars and calls it a “cracking experience” and like Engadget, “better than any other Android smartphone.” Very minor complaints included the 1080p DLNA streaming, which was noted could be better, plus minor quibbles with the camera lens but overall the conclusion is that “no one buying this superphone will have anything to complain about.”
   2. Chris Davies over on Slash Gear. Guess what, Davies also says, “this could well be the best Android smartphone on the market today” and noted that iPhone users that were shown the Galaxy S II said they could have their heads turned by it. There were minor criticisms, such as the keyboard, but these were said to “pale in comparison to the Samsung’s strengths.” In conclusion Davies says “we’re running out of reasons not to buy the Galaxy S II.”
   3. Electric Pig by Ben Sillis, who gave the phone a staggering 5 out of 5 star rating and says “Samsung has triumphed again with theSamsung Galaxy S 2.” There are some quibbles about software in this review but not enough to get in the way of it being a “surefire contender for phone of the year,” and again the superb display gets a special mention.

Be aware that Samsung builds the chips for Apple's iPad and iPhones, is embroiled in a 4 or 5 country IP lawsuit with Apple, and also happens to build their own proprietary chip for the phone above and most likely the chips for their new (thinner, faster, lighter and possibly less expensive) tablets as well. It appears as if the stuff they build for their own Apple-competing products are cheaper and faster than what they produce for Apple. This puts Apple in a bind as they not only compete directly and sue Samsung, but will have a problem as they cannot quickly jump to another vendor that can produce the volume and tech that Samsung does. What happens when your biggest and most valuable vendor becomes your biggest biggest competitor and you start suing them? What happens when they produce superior tech for their own competing products? Well, we're about to find out. We may also find out what happens when your second largest and most valuable supplier does the same, for LG is going full steam ahead with high end Android tablets and phones as well, supplying equal or superior screens for their devices as well.

This also begs the question, "What happens when the market tightens up on either the supply or the demand side?" I anticipated this several months ago when I penned, "Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!". Well, in the news (due largely to the issues that Japan has faced), "Component shortage to hit tablet makers". When things get scarce, whose products and enduser customers do you think LG and Samsung will cater to first? Their own or Apples?

And there you have it, logic and common sense. Lower prices and/or higher technological bars will lead to lower margins. For those that are paying attention, it is evident that it is already happening.  The disappointment felt throughout the web at the release of the iPhone 4GS was not due to Apple releasing a subpar product. It was due to Android raising the bar so high that pple simply could not match it without busting its extremely fat (72%) margins. Google knows this, hence Google is firing ahead at a technology refresh rate that is not only unprecedented and unheard of, but makes Moore's Law appear to be behind the times, Matrix style Bullet time effect.

Let's reference the model behind the subscriber document  Apple - Competition, Cost Structure and Forensic Valuation and go through the basic fundamentals, step by step for the iPad and iPhone (together nearly 80% of Apple's profits) are very strategic segments for both Apple and the industry.

Now, I've told you before, and I'm telling you again, and I'll probably have to tell you several times in the future... I'm Hunting for Squid!

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

It Should Now Be Common Knowledge That Goldman’s Investment Advice Sucks???

I'm not going to bother to mention that Goldman advised clients to by European banks in direct contravention to my Pan-European Sovereign Debt Crisis research. Hopefully, you see how that ended - And The European Bank Run Continues... An equally egregious offense is daring to go against the BoomBustBlog grain on Apple...

• “Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past?“ Tuesday, December 14th, 2010
• “Reggie Middleton Takes The Challenge To Goldman Sach’s Apple Proclamation One Step Farther, Apple’s Closed System Risks Failure!” Wednesday, December 15th, 2010

Of course, that doesn't necessarily mean that there is any credibility in said proclamations, though. Reference this priceless nugget in light of the links above...

• Goldman Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client’s Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now! Friday, May 27th, 2011

And as a reminder...

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Fear not, oh ye deprived consumers of the truth! Subscribers can access unfettered, unbiased analysis on Apple's situation and prospects, by the numbers:  Apple – Competition and Cost Structure Forensic Analysis and accompanying Apple iPhone Profit Margin Scenario Analysis Model – suggested use with Apple Earnings Guidance Analysis

More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
4. Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet
5. This article should drive the point home: An iPhone 4 Recall Will Hurt Apple More By Opening Additional Opportunity for Android Devices Than Increased Expenses
6. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
7. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
8. RIM Smart Phone Market Share, RIP?
9. Android is gaining preference as the long-term choice of application developers
10. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
11. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
12. Apple on the Margin
13. RIM Smart Phone Market Share, RIP?
14. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
15. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
16. There Goes Those Fancy eBook Aspirations from Apple, Barnes and Noble, and Amazon: 100,000’s of FREE eBooks from the Public Library
17. How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue
18. Empirical Evidence of Android Eating Apple!
19. More of the Android Onslaught: Increasing Handset Revenues and Growth
20. Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion
21. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
22. The Complete, 63 pg Google Forensic Valuation is Available for Download
23. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
24. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
25. As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
26. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?

I urge everyone to get your respectve models (contingent upon your subscription level, ranging from free to institutional) from the post BoomBustBlog BNP Paribas "Run On The Bank" Models Are Available For Download and plug in your assumptions BEFORE Europe's Lehman Moment arrives - for if when it does, most nations will be powerless to do anything about it. "Why?" you ask! Well, as so adroitly articulated in Reinhart and Rogoff's "This Time Is Different: Eight Centuries of Financial Folly", for 800 years one of the primary reasons for the monumental structural indebtedness of nations is the bailing out of their respective financial systems. This massive debt then becomes too much to service, and then bang... Default! This time around, it really just may be different, though.

I say this because the developed nations of the world and their leading economic superpowers (EU/China/US) have either goosed their financial systems (China) or allowed them to leverage out of control, collapse, then bailed them out by breaking the taxpaying populace either now or by mortgaging their future (EU/US). The problem is that in each case of the "Kick the Can Triumvirate Three" [BBB trademark], none of the core, structural or even nominal banking problems have been rectified nor addressed, despite the fact that the massive depreciatng toxic assets, leveraged to the hilt and massively mispriced due to regulatory capture are growing in both threat and stature. For more on this topic, reference How Regulatory CaptureTurns Doo Doo Deadly and Lehman Brothers Dies While Getting Away Wiht Murder: Introducing Regulatory Capture.

In the US its the housing market's fall out, being fed by ever depreciating housing prices. For those with short memories, the housing prices that collapsed in 2008 that caused the crash are significantly higher than the housing prices now. If the banks were in trouble then, I query... What are they in now? See:

1. Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn
2. The Residential Real Estate Week in Review, or I Told You We're In A Real Estate Depression! The MSM is Just Catching Up
3. Reggie Middleton's Real Estate Recap: As I Have Clearly Illustrated, It's a Real Estate Depression!!!
4. and There's Stinky Gas Inside Of This Mini-Housing Bubble, You Don't Want To Be Around When It Pops!

In the EU, it's the sovereing debt thingy (see my pan-European sovereign debt crisis series, which anticipated this from January of 2010). I haven't had the opportunity to address in complete detail what this sovereign debt crisis will do to European CRE yet, American 'Realist' Reggie Middleton Paints a Sombre Picture for European Real Estate Amid Fears of Stagflation

And as stated above, in China, it's massive NPAs being built up in an artificially goosed up banking system designed to hide and conceal the effects of economic slowdown under the auspices of expansionary growth, when in fact it is truly a debt fueled bubble, just like in the EU and the states. See Will China Hit That Inflation Deer In The Global Macroeconomic Headlights Anyway, Despite The Fact They Are Slamming On The Brakes? and China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You Don't Get Something (Growth Through Stimulus) For Nothing (No Economic Consequences).

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)

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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 …

... 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!

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...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....

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

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.

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

Does anyone truly wonder why so many seemingly smart people in such high places of power fail to see the obvious difference between a lack of liquidity and true insolvency? I don't! Everyone knows what time it is, they just don't want to admit that they looked at their watch! Its_a_liquidity-trap

It appears that we have successfully hit another home run with out BNP short call in the beginning of the third quarter (Bank Run Liquidity Candidate Forensic Opinion, over 50% decrease in price), and apparently timed the bull run with underpriced call options to the upside as well (Trading Opinion and Analysis 9-14-2011) as BNP rallies on nonsense news adding puff and premium to those cheap calls. This post is a constructive followup to the quite popular piece earier this week wherein I took the wraps off of our prime French bank run candidate. If you haven't read it yet, I strongly suggest you peruseThis Is Why BoomBustBlog Is THE Place To Go For Hard Hitting Research: BoomBust BNP Paribas?

The media has been awaken to the BNP situation a little more than a quarter after we prepped BoomBustBlog subscribers, as is exemplified by the following:

1. BNP Launches Restructuring Plan‎ Wall Street Journal
2. BNP Paribas Bonds Tumble Amid U.S. Money Market Funding Concerns‎ San Francisco Chronicle
3. BNP Paribas Bonds Tumble Amid Concerns Over Funding in U.S. Money ...‎ Bloomberg

Now, that the perception of panacea is being traded upon, that is panacea in the form of liquidty attempting to solve solvency issues, we will now attempt to illustate the folly of such...

Stocks Jump as ECB Offers Loans to Banks [Bloomberg]

Stocks and the euro rose, while Treasuries slid, as the European Central Bank and international policy makers coordinated to lend dollars to banks to help tame the credit crisis. Energy and metals led commodities higher.

... The ECB said it coordinated with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to extend three-month loans to euro-area banks in an effort to ensure they have enough cash for the rest of the year. The announcement added to optimism that policy makers were containing the European sovereign debt crisis after the leaders of France and Germany yesterday confirmed they will support Greece’s continued participation in the shared euro currency.

“It is about protecting the liquidity of the European banks,” Howard Ward, a money manager who helps oversee about $36.1 billion for Gamco Investors Inc. in Rye, New York, wrote in an e-mail. “The private sector has pulled back from funding these banks. So central banks are stepping in to make that dollar funding available. Good news is the banks get their dollar funding. Bad news is that the situation has gotten this dire.”

... The Stoxx 600 advanced for a third day, climbing 2 percent, as banks led gains in all 19 industry groups. BNP Paribas SA surged 12 percent in Paris and Italy’s Intesa Sanpaolo jumped 8.4 percent.

May I take this time to congratulate resident trader Eurocalypse on a most wonderful call, referencing the trading opinion from9/13 and 9/14 - Trading Opinion and Analysis 9-14-2011

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A very, very well timed call indeed. Now, back to the Bloomberg article...

“It’s nice to see that the risk factors coming out of Europe are abating somewhat,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in a telephone interview. “That addresses the liquidity issue that would be threatening the European banking system.”

... The cost of insuring European sovereign and corporate debt extended declines after the ECB announcement and as the prospect of default by Greece receded. The Markit iTraxx SovX Western Europe Index of swaps tied to 15 governments dropped 13 basis points to 330 as of 2:45 p.m. in London, the lowest since Sept. 9 and signaling an improvement in perceptions of credit quality. Swaps on France fell 10 basis points to 171, contracts on Italy dropped 29 basis points to 442 and Spain fell 22 basis points to 370, CMA prices show.

Cheap dollar funding is not going to help BNP anymore than it helped Lehman. I have prepared several models to illustrate such, and are designed to go hand in hand with both our illustrative trading supplements and our forensic research on BNP - namely:

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

The first model (all are cast in Excel 2010 format [.xlsx]), BNP Exposures - Free Public Download Version, is available to the public free of charge and is designed to spark the discussion of Whether Another Banking Crisis Is Inevitable? I will be discussing this model, and its ramifications on Max Keiser, Russian Television - to be televised Tuesday. It should be interesting. Here are some screen shots.

The Impairment Scenarios: a very important concept that practically the entire European banking systm has somehow forgotten to address.

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Trading and HTM inventory at Level 1,2,3 or fantastical fanstasy?

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For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same - and then revisit this free model and reapply your assumptions:

• a research note to subscribers,  The Inevitability of Another Bank Crisis,
• followed by blog posts on the same, see Is Another Banking Crisis Inevitable?

The next nugget of knowledge is the BNP Exposures - Retail Subscriber Download Version. It enables users to simulate an anecdotal bank run - for retail subscribers only of course. In addition to those above, it sports...

 image005

 For those professional investors and institutions, namely hedge funds, asset managers, regulators, high net worth individuals with ties to BNP and family offices, heres to you. This is not a toy, but a tool that can truly communicate why you feel BNP may, or may not be a candidate for a bank run - contingent upon your inputs: BNP Exposures - Professional Subscriber Download Version. Additional screenshots above and beyond that included above...

Income statement implications of a true bank run...

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Let's recap the BoomBustBlog perspective before I offer my opinion for the upcoming week...

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

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

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

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

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

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

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

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 contianing all types of juicy details...

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

CNBC reports: Conflict at Europe Central Bank Over Stimulus Rattles Markets

eu_europe_logoECB Executive Board Member Juergen Stark resigned on Friday, apparently because of opposition over the central bank's bond-buying program. "That makes ECB policymaking more difficult," said one analyst.

The euro extended losses against the dollar [EUR=X  1.3732    -0.0149  (-1.07%)] following the news.

"It's a sign that ECB policymaking is controversial even within the board. Clearly the German representatives have a position that differs from other central bankers. That makes ECB policymaking more difficult," Lothar Hessler, analyst at HSBC Trinkaus told Reuters.

A former finance ministry official and Bundesbank vice-president, Stark, known for his tough, no-frills style, has been a member of the ECB executive board since June 2006. His eight year term was due to run until May 31, 2014.

Manfred Neumann, economics professor at the Bonn University said: "This is remarkable. Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president. It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB."

From Eurocalypse, one of the resident BoomBustBlog traders:

In the trading tips on the 6th [ Eurocalypse Trading Update 9-6-2011 (Global Macro, Trades & Strategy)], I wrote this may be the long awaited drop in EUR following the weekly reversal and worsening technicals.

The ECB is expected to make a UTURN and cut rates, that will add fuel to the fire. At the time of writing EURUSD was 1.41 and oversold, we sold even more to 1.40 then sawbriefly 1.42 on the EURCHF unwinding. That bounce proved the opportunity to sell as the oversold condition was removed... and now were down to 1.38. This move can go much further, EURUSD is headed for 1.20 rather quickly I think.

Only the technicals (which one should always respect) kept it bid, the fundamental story is horrible.

It's a total mess in Europe...beware though of massive govt intervention at some stage which could/will squeeze this markets fiercely...even if in the long (or not so long) run Euro is doomed.

For those of you who have not had the opportunity, register for and download the BoomBustBlog Currency Trend Model, along with the accompanying instructional video.

I have made an FX trend model available for all to download. Its 10 mb, containing a lot of data, but you'll definitely get your money's worth. The model is available here: BoomBustBlog Complimentary FX Index model

And on that note, the French banks who're so at risk due to Italian contagion are dropping like flies - 4% to 7% in a matter of minutes after NY opening. The US banks on the hook for all of that French exposure look set to follow suit as well, with puts starting to fatten on higher IV. For those who just don't know...

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