Here's a surprise that many may not have expected, Bloomberg reports Greece May Not Complete All Asset Sales

Greece’s deputy finance minister, Pantelis Economou, said the country won’t manage to sell everything on its list of planned state-asset sales and real- estate developments. “We will sell a lot less than planned,” he told lawmakers yesterday, according to a transcript posted on the Parliament’s website.

Greece aims to raise 50 billion euros ($69 billion) through asset sales and property developments by the end of 2015, part of a package of fiscal measures demanded by the European Union and the International Monetary Fund in exchange for financial support. Parliament approved the measures in two votes at the end of last month...

“Selling state holdings to reduce Greece’s debt is a necessary condition to get what we are entitled to,” Economou told lawmakers. He added that eliminating tax evasion can “buy time” for Greece and help to meet revenue targets through 2015, according to the transcript.

The Finance Ministry announced the board of the agency that’s been set up to supervise the asset sales. The program includes plans to sell stakes in Public Power Corp SA (PPC) and gambling company Opap SA (OPAP), as well as Greece’s two biggest port operators and banks.

Now, here's the kicker...

Economou said there isn’t enough investor interest in the assets for sale as “credit default swaps and spreads are the kinds of thing they have their eyes on.” Concrete assets are “riskier,” he said.

Methinks Mr. Economou (what irony is there in an name???) may be missing the forest due to tree bark irritants in his corneas.There will be plenty of investor interest in hard asset sales if said hard asset sales were priced realisitically and with true price discovery enabled. The problem is that that's just not the case. The proforma asset sales numbers proffered by the Greek government were ridiculously optimistic, and that was before said asset's market prices tumbled off of a cliff the 2nd and 3rd times. As it stands now, CDS and are easier to price than Greek assets with cooked books. How cooked? Refrerence

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

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

Now, let's reference the biting piece that directly addressed and forecasted todays Greek asset sale problems over a year ago, Greece's Circular Reasoning Challenge Moves From BoomBustBlog to the Mainstream

We initially broached this topic in the spring of 2010 after illuminating the abject fallacy of Greece forecasting asset sale prices that were greater than the prices of the assets current market price - despite the fact that Greece is widely known to be a distressed seller. Last month, I revisited the topic in Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!

Greek Reporter (hat tip to ZeroHedge) reports: Government Finalizes Privatization List

The Greek government will proceed with the acceleration of the privatization of state property and companies, setting a target of at least €15bn by 2015. [Reference the highlights of the BoomBustBlog subscription document below.]
The decisions are expected during the week, probably on Wednesday, at the meeting of the Biministerial Committee on Privatization. The government will finalize a list of companies and property for utilization, which will be presented by Prime Minister George Papandreou to the European leaders in Brussels.
Special Secretary for Privatization G. Christodoulakis and bank representatives have been preparing the content of the list at a meeting yesterday.
National Bank and London-based CC&C Advisors LTD have been assigned the task of financial servicing related to planning, monitoring, coordination and implementation of the restructuring and privatization program.
The Committee will have to approve the award of the of the utilization program to the qualified Greek banks, but also to the consultants who will carry each project.

Sources note that consultants for Athens International Airport have already appointed, while the proposed list includes:
The concession of ports and airports with long-term contracts
• The extension of concession period for Athens International Airport

• The sale of a stake of Public Gas Corporation
• The sale of a 49% stake of Casino Mont Parnes
• The privatization of state lotteries through concessions
• Finding a strategic investor in Hellenic Post
• The sale of a stake of OTE, Hellenic Defense Systems and Larko
• Renewal of OPAP’s licenses
• Licenses for online betting and “slots”
• The concession of Egnatia Odos
• The sale of TRAINOSE
The sale of state stakes in banks (Hellenic Postbank, ATEbank, Consignment and Loans Fund)
• The privatization of water supply companies (EYDAP, EYATH)

This is a tragic Greek comedy. Professional/institutional subscribers should reference the Greece Public Finances Projections Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb in its entirety. For those who chose not to subscribe, I am posting excerpts from pages 5 and 6 from said document, don't read this while eating or drinking for fear of spitting up your lunch!

 

Any subscribers who would have went heavily bearish into these banks when I first commented on the would have done quite well:

 

Reference the latest Greek exposure research released this week for subscribers File Icon European Bank's Greece exposure and stay tuned for a traipse through select French bank exposures in the very near future.

As usual, yours truly,

The wielder of the Fiery Sword of Economic Truth, cutting through investment related Bullshit in a country near you!

Published in BoomBustBlog

Deutsche Bank looks downright UGLY! Our new Forensic Analysis/Technical Trade combo called this one out about 2 weeks ago with impressive precission. Kudos to all who contributed.

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On Tuesday, 28 June 2011 I posted the first of many trade setups powered by BoomBustBlog proprietary research focusing on profting the upcoming Eurocalypse and overvaluation in the tech sector. In the post "More On Trading with BoomBustBlog Research" an illustrative Deutsche Bank equity trade set up contributed as follows:

Messages from Josef Ackermann reached the markets today:

    • GERMAN-BANK-CHIEF - AM VERY GLAD THAT WE ARE WITH GREAT CHANCE TO BE COUNTING SIFIs
    • GERMAN-BANK-CHIEF - ASSUME THAT INDUSTRY FIRST BEFORE TAXES FROM 16 TO ROE 19VH SEE IS ABOUT THE TIME AGAIN 25VH
  • GERMAN-BANK-CHIEF - BY REGULATORY CHANGES WILL RETURN ON THE BANKS GO DOWN TEMPORARILY
    • GERMAN-BANK-CHIEF - GREATER EQUITY LOANS ARE NOT FOR ALL EASY TO OBTAIN EUROPEAN BANKS START OF LOWER OUTPUT BASE
  • GERMAN-BANK-CHIEF DBKGn.DE ACKERMANN - EQUITY CAPITAL AFTER THE CRISIS IS STILL MORE TO critically important competitive factor, POSITIVE AND NEGATIVE
    • GERMAN-BANK-CHIEF DBKGn.DE ACKERMANN - BANKS OF REVENUE FROM OPERATING BUSINESS LIKELY TO REMAIN HUMBLE foreseeable future
  • GERMAN-BANK-CHIEF DBKGn.DE ACKERMANN - ROME IS CURRENTLY WITH BANKS AND EU ON PARTICIPATION OF PRIVATE CREDITORS TO GREECE RESCUE DISCUSSED

One might consider this in bad faith as a hidden profit warning. Or what would like to say the Deutsche Bank? I'm short since the 39,50 level. The German bank leaves key support zones straight down. The critical 40 level has not kept the 39 and nobody seems to buy the Pavilion. There are now potential short term losses to be expected in the area of ​​37.50/38. Under these Levels shares will lost ground to the November support the low of around 36 €.

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Near picture:

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As derived and excerpted from icon Euro Bank Soveregn Debt Exposure Final - Pro & Institutional (934.65 kB 2010-05-13 00:11:32):

image004image004

What is the result of throwing pound after pound of leveraged fiat currency meat into the hungary maw of an overweight European brown bear who is naught to give it back nor make good use of it? Let's ask one of the banks from year's report...

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The afore-linked document has Deutsche Bank's exposure to the PIIGS group oulined and detailed. There is another angle that we covered early last year as well. Reference file icon Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional or Deutsche Bank vs Postbank Review & Summary Analysis - Retail.

This is the update (dated 6/29) to the trade setup illustrated above, which I haven't even published yet due to material grammar and translation snafus, but the cat is out of the bag now...

Update:

The fact is that Greece is like a smoldering fire. Sometimes Rest, then fire again, and you never really know when the next outbreak comes. This situation is unfortunately still get us some time.

Even New York's new proposal interpreted with some relief. The just enough to avoid the worst and the default is sufficient for today made to continue the tedious summer of consolidation. Again, as long as the S & P 500 above 1,250 and the Dow Jones is the defending 11.900, the technical picture is solid enough. Even the Wall Street optimists surprise with positive approaches. Eight days ago, it was just the opposite. A survey of Intelligence, "CNN Money" is: The number of optimists is increasing. Such surveys are always provided with a question mark, but still.

The banks respond to the new proposals for Basel III surprising positive, not the stock market. The deductions for COMMERZBANK and DEUTSCHE BANK may be an exaggeration, but the technical situation is both hard hit. It looks better with the Americans, according to these rules and regulations for the core capital ratio, all of which are on the safe side. We take this note, but I do not respond to U.S. banks.

COMMERZBANK is not to hold at the moment. € 2.70, of course, are fundamentally extremely low, however: The Greece-positions of around € 2.6 billion in the subsidiary EUROHYPO are in the current situation a mad speculative fears. It can stop each, depending on your taste. It would be good if COMMERZBANK not only keeps silent, but say something constructive. There is nothing worse than uncertainty. COMMERZBANK would announce today that these positions at half Price were sold, representing the market value, then they would have € 1.3 billion actually lost.

And one should expect values to get much worse from here!!!

More precisely, the daughter EUROHYPO. Whether this with, this amount by proposing to the consolidated financial statements is an open question. In any case, would then this disgusting toad swallowed. It is a courage to ask. The GERMAN BANK fighting for every technical resistance. This is all very scarce and an assessment is not possible while also here the Greeks topic the determined mood. Breaks through the price of the 39 € sustainably, everything is up to 36 € open. Then there is the real technical test, because under 36 € there is no resistance more on the inspiration to the actors. Probably not. I expect the continuation of the sideways trend in the range of 36-48 € but the €36 are to fill!

On that note, here is the latest (released yesterday) European bank and sovereign debt exposure research recalculated to show contagion paths:File Icon European Bank's Greece exposure

Additional French bank solvency analysis will be out shortly.

Published in BoomBustBlog

Just a few snippets on currencies. This email was sent on the 8th, and should have been published then. It was actually rather prescient.

Now it could be time to look at charts on the EUR again

the natural fundamental trade is not EUR against USD or JPY, but to find a currency in a country will little or no debt.
despite their own real estate bubble, from what i read, CAD or much better AUD and NZD might be candidates.
CHF despite UBS and CSFB should be as well. notice how the Swiss authorities have tightened the management of these 2 institutions, pressing them to recapitalize as much as possible and targetting higher capital ratios than Basel III.
im thinking also of SGD and of course XAU.
but given the run in XAU, despite the trend being absolutely intact, from a fundamental point of view, i think there is more value in being long SGD or CHF than being long gold against the EUR. Gold can still go x2 from here, but then youre playing Gold, not shorting the Euro.

still for a trade, looking at EURUSD, you can see the mkt accelerated when we broke out the downtrend line
but dropped again the next month in a big reversal erasing and engulfing the previous months move to retest the downtrend line, which it held. surprisingly (to me) it was not followed by a total collapse of the EUR, we are about to retest this line again. its not clear to me what will happen from here;
on the weekly chart, it could look ugly like a reversal as well boding bad for the Eur if we close the week below 1.41 and the move continues next week. but i dont want to bet either way. it looks pretty digital to me from here.

on a long term monthly chart, USDSGD is at its lowest ever, but EURSGD is still a few % above its 2010 lows, and was trading much lower in 2000. There is no govt debt in Singapore and they have a big sov fund. it should be trading as the CHF of Asia, if not the CHF of the world, or the Gold of the World !!! 

20110707_-_EURSGD_monthly

20110707_-_EURUSD_monthly

20110707_-_EURUSD_weekly

For those who have interests in things such as currency pairs, may I refer you to our proprietary currency model available for download to all subscribers...

 

 

Published in BoomBustBlog

The news today continues the rumoring that Italian banks and bonds are going to see problems this year or early next year. This follows an interesting email exchange (dated the 8th) that I had concerning our European bank and soveriegn research from last year.

Of note, please look at the charts from Mish.

Italy has clearly recently broken the 5% support, and if on a tech point of view, a quick 40bp is guaranteed, to 5.4% (the previous range was 4.6%-5% so 40bp wide), given the context, and given that German yields are going DOWN, this is the sign of something much much bigger, like what happened to Spain and perhaps Portugal. Youve seen the info as well on the recent volatility in Italian banks, and headlines shifting to Italy, I now believe the big move is happening right now. The european leaders must be shitting in their pants.

Actually even the spread France vs Germany seems to be going out of its range, thats a new thing. There can be gaps if a new bond is issued, but I've noticed a much bigger than usual gap this day, so something is going on, I've asked a trader as well if something was going on with french oats, there is definitily a significant move.

And on that note, the following Monday: European Stocks Decline on Italy Debt Concern, China Inflation

European stocks fell for a second day as concern grew that the region’s debt crisis will spread to Italy and China’s inflation surged to a three-year high. Asian shares and U.S. index futures slid.

Intesa Sanpaolo SpA (ISP) retreated as Italy’s second-biggest bank was downgraded at HSBC Holdings Plc.

Page 6 of our proprietary Italian banking research - (File Icon Italian Banking Macro-Fundamental Discussion Note) reveals what we percieved to be weakness in this bank back in February of 2010 with an increasing Texas ratio and increasig proportional NPAs.

As for China, well according to 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)...

Now, it didn't take a genius to figure out this would happen. As a matter of fact a slight dose of common sense (when was the last time you got something for nothing, really?), a little historical perspective or a BoomBustBlog subscription would have sufficed.

From Bloomberg: China Inflation Accelerates as Loans Surge, Property Prices Rise by Record

May 11 (Bloomberg) — China’s inflation accelerated, bank lending exceeded estimates and property prices jumped by a record, increasing pressure on the government to raise interest rates and let the currency appreciate.

Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.

Excerpts from the HSBC forensic analysis featured in this post:

Below are the full forensic reports available for download to subscribers (click here to subscribe):

icon HSBC 170610 Professional & Institutional (554.65 kB 2010-07-07 06:23:52)

icon HSBC 170610 Retail (388.56 kB 2010-07-07 06:22:25)

Published in BoomBustBlog

As illustrated in Why The Taxpaying Populace Of Greece Better Get Some Grease, a visual representation of Greeece's gross government debt easily demonstrates that their problems are structural in nature, and not cyclical...

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What does this mean? Well, first of all, bailout loans only help in cyclical situations where the loan recipient is in a downtun in its ecconomic cycle, but expects upticks to allow it to earn its way out of both its current economc situation and the added debt service from the bailout loans. As you can see from the chart above, Greece's expenditures have literally been a permanent fixture hanging considerably above its revenue, considerably above. For twenty years, Greece has been kicking the inevitable can down the road. Now, after a global credit implosion, with:

  1. asset values plunging
  2. and economic activity stagnating
  3. with the promise of even more stagnation down the pike in the form of intense austerity programs
  4. material push back from the labor forces, unions, and the few legit taxpayers there are
  5. and collapsed asset values that were perpetually overstated in and attempt to sell to fill the void left by the credit crisis
  6. an insolvent banking system stuffed to the gills with bonds trading at 50 cents on the dollar held at par at 40x leverage, NPAs bulging and mismarked,
  7. rates about to spike
  8. trading partners undergoing their own austerity programs reducing exports and tourism
  9. and most importantly tens, if not hundreds of billions of Euro in bailout funds with collateral strings attached...

Greece is somehow expected to earn its way out of this 20 year hole that was made lethal by the Pan-European Sovereign Debt Crisis. Does anyone really think this will happen, or is Greece getting set up to have its assets confiscated at firesale prices. Is the Greek culture up for highly discunted volume sale, Walmart style?

A Quick Backgrounder

Advanced economies continue to face challenges as they deal with the juxtaposition of a huge public finances, mounting debt rollovers, a still-impaired financial sector at a time when economic growth is at snail’s pace, and unemployment levels & social unrest are at unprecedented levels. Expansionary fiscal policy in the wake of the financial crisis has helped banks repair their balance sheet and reduce leverage. Indeed, the public indebtedness has replaced private indebtedness. Current budget deficits, partly cyclical were also swollen by policy responses to the crisis, and are large in relation to GDP.

Notable decline in national incomes as a result of slower growth and increased government expenditure, thanks to huge bail out packages, have caused a dramatic deterioration of fiscal positions in many industrial economies. Growth in Public debt is unlikely to be halted any time soon as economic recovery will be slow, tax revenues will be lackluster, and expenditures are expected to continue their march north. Tax revenue is not expected to reach pre-crisis levels sooner as most of the tax revenue was windfall, thanks to the boom in financial, credit, real estate & construction markets. With aging populations many industrial countries are expected to face rising pension and health costs, beyond 2011.

 In addition, rising interest rates will exacerbate interest payments. In short, deficits are expected to remain at unsustainable levels not just in the near-term but also in the medium term posing a heightened risk of L-shaped economic scenario in the entire Western world. In addition, the deterioration of fiscal balances could also impede central banks’ task to keep inflation at stable levels. The ultimate cost of cleaning up the financial system is still unknown, but we do know this – it is significantly larger than nearly all policy makers anticipated and it morphs and transforms as if it were a sentient being attempting to avoid capture.

Banks in several large and strategically pertinent countries are still fragile while being exposed to volatile financial markets and a deteriorating commercial real estate market at the same time that global interest rates are poised to enter a nearly unprecedented period of volatility. This “perfect storm” of ingredients leave the FICC businesses of these fragile banks open to significant ruin, as detailed in our article The Next Step in the Bank Implosion Cycle???

To make matters worse, the financial intertwining of European economies over the past decade has only increased the costs of such spill over. The dominant theme within the credit market currently is the fears over the solvency of peripheral European sovereign.

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The market focus on $12bn debt roll over by Greece is myopic. Even if Greece is able to restructure $12bn of debt, the next trance would not be more than a year away, and an even greater need the following year, with a greater portion of debt the year after that. Overall, Greece has $55bn of debt maturing over the next 12 months and $195bn over next five years. To give a perspective, Greece has to roll over debt equating to 17% of its GDP (a number which is most likely overstated) over next 12 months compared with 14% for Spain, 12% for Portugal and 6% for Ireland. Total debt rollover over the next five years is c60% of GDP for Greece, 43% for Portugal, 34% for Spain and 24% for Ireland.

CNBC reports European Banks Increasingly Angry Over Stress Tests.

Yer damn skippy. Look what really happens when Greece needs the Grease,

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 ans 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:

File IconGreece Public Finances Projections

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

File Icon Sovereign Contagion Model - Pro & Institutional

Published in BoomBustBlog

Greece and fellow members of the PIIGS group of distressed sovereign states are considerably worse off than those tumulted by the Argentenian debt crisis of the '90s. Here's why...

CNBC reports: In Europe, an 'Argentinean Re-Run': Fund Manager

The situation facing European countries like Greece and Portugal is directly comparable to the economic crisis which hit Latin America in the late 1990s, Andy Brough, co-head of Schroders’ Pan European Small and Mid Cap team, told CNBC Wednesday. 

"I get the feeling we're having an Argentinean re-run," Brough said. "In Europe, they've tried everything to sustain the system but it's unsustainable."

Argentina, together with the region's largest country Brazil and with Uruguay, suffered a sustained economic crisis last decade after building up a huge debt pile.

Argentina in particular continued to borrow heavily from the International Monetary Fund (IMF) without repaying its debts.

Tell me about it! For those who don't know the consequences of said actions I recommend you reference How the US Has Perfected the Use of Economic Imperialism Through the European Union!

"In the end the populace is going to say we didn't go into the euro for this," the Schroders fund manager said.

Fernando de la Rúa, then president of Argentina, had to flee the country in a helicopter after the unrest grew. While the political situation in Greece and Portugal is not yet that serious, there have been widespread protests on the streets of Athensagainst austerity measures demanded by the ECB and IMF as part of a second bailout of Greece. 

It may be even more difficult for Greece and the banks supporting it to recover from its economic problems than it was for Argentina and Brazil, according to Brough.

"If you look back then, we didn't have the transparency we do now, so all the banks that were funding Latin America could smooth over what was going on," he said. "Now, everyone is in the spotlight so it's much harder for banks to smooth it over."

"The middle class in Argentina couldn't just withdraw their money, whereas the middle class in Greece or Portugal can take it out and buy anything that isn't the euro," Brough added.

In Argentina, the government slapped a $250 a week limit on withdrawals from its banks to halt massive pulling out of savings.

I would be remiss in failing to mention that we made this comparison in explicit detail this time last year - A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

In order to assess the impact of sovereign debt restructuring on the market prices of the sovereign bonds that undergo restructuring (haircut in the principal amount or maturity extension), we retrieved price data of the Argentinean bonds that underwent restructuring in 2005. The sovereign debt restructuring in case of Argentina was a combination of maturity extension and principal haircut. Argentina defaulted on its international debt in November 2001 after a failed attempt to restructure the debt. The markets priced in the risk of a substantial haircut around this time and the bond prices plummeted sharply. We at BoomBustBlog are in the habit of taking market prices seriously, and have factored historical market reactions into our analysis in calculating prospective price action in distressed and soon to be Sovereign debt. Before moving on, it is highly recommended that readers review our haircut analysis for Greece (“With the Euro Disintegrating, You Can Calculate Your Haircuts Here”) and our more likely to occur restructuring analysis for the same (What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates).

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 excerpeted...

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

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

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When I first started writing this post this morning, the only other bond markets getting hit were Portugal’s. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following:

To date, my work both free and particularly the subscription work, has shown significant returns. I am quite confident that the thesis behind the Pan-European Sovereign Debt Crisis research is still quite valid and has a very long run ahead of it.  Let’s look at one of the main Greek bank shorts that we went bearish on in January:

nbg since research

NBG since research

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

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

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

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With this quick historical primer still fresh in our heads, let's revisit our Greek, Spanish, and Italian banking analyses (the green sidebar to the right), many of which are trying to push the 400% mark in terms of returns if one purchased OTM options at the time of the research release. It may be worthwhile to review the Sovereign debt exposure of Insurers and Reinsurers as well.


 

Published in BoomBustBlog

Earlier this morning I stated Structural Problems Cannot Be Solved Though Bailouts! As A Matter Of Fact, Bailouts Make The Situation Worse in reference to the situation surrounding Portugal's downgrade to junk status and its inevitable default (in some form or fashion, most likely draped in the political nomenclature of something considerably more palatable to the sheeple). Well, the same goes for Greece, although to a much more drastic extent.

Bloomberg reports: Portugal Rating Cut on Possible Greek Follow

Europe is now inching toward a goal of getting banks to roll over 30 billion euros of Greek bonds, instead of opening a hole for the official lenders to fill. French banks, with the biggest holdings in Greece, worked out a rollover formula that is serving as an example elsewhere, with two options for bondholders to replace their maturing securities.

At the same time, Standard & Poor’s said this week the plan may temporarily place Greece in “selective default” if implemented.

Portugal this year joined Ireland and Greece in turning to the EU and the International Monetary Fund for emergency funding after their budget deficits ballooned. Moody’s yesterday said it also based its credit rating cut on risks that Portugal won’t be able to fully achieve its deficit-reduction target.

“It’s a reminder that the sovereign debt crisis does not end with Greece and that risks remain with other nations in addition to Greece,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

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 extet 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 finanacial 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 oblications. 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 defaulte 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!

image018

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 ans sitting on 50% devaluations as we speak. You simply do the math: 40 x (-50%) = what kind of returns? Insolvency, first and foremost!

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File IconGreece Public Finances Projections

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

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Published in BoomBustBlog

This is a contributing European CDS trader's commentary on the BoomBustBlog research piece "Is Another Banking Crisis Inevitable?".

Note that this opinion was written before the rating agency vs. ECB/EU soap opera of this past weekend which essetially proves what we presented to our pro subscribers early last year - a zero coupon rollup created to restrucuture debt is..... a default! Reference Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts and What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates - both written over a year ago, and both quite prescient. In the meantime, enjoy this guests contribution, annotated as usual by yours truly!


At this stage i have a remark/question in your « the inevitability of a banking crisis »(dated when?) you were waaay too optimistic (!!) seeing 172bn of losses related to PIIGS. We may be over that only on Greece exposure!

Certainly, if we compare the fiscal trajectory of the Eurozone as a whole with the US, the US is not really on a better path. Austerity has started in Europe. US seems still in full spending spree.

I would argue as long as there is no bank run and voluntary secession, things even if shaky, will stay more on less under control by governments. Being anti-Euro can win elections, and there is a real chance that some country (Greece, Finland...) quit the Euro by themselves for not wanting austerity or not wanting to bail out other countries. But so far, its just talk. In Portugal they voted out the PM, well they still got austerity...Ireland is a total joke as well.

So if we step back, and ask ourselves who's going to buy this ever growing govt debt, well this is the banks of course !

Look (I didnt!) at the balance sheet of Japanese banks 20 years ago and now, many JGBs in their balance sheet, in place of those turned sour (real estate) loans...every $ or euro spent from the budget, ends up in a bank account, and the ALM officer of that bank, well, the only stuff he can buy with it, is a govt bond as its the only « safe » asset (what else would be ? Even if they bought all those google bonds...)

Well, if you take a look at how well that technique turned out for the Japanese banks, a widespread, long term bear trade on the banks may not be that bad an idea, despite how obvious the trade may be!

.. It is the reporting company’s responsibility to report, not to obfuscate. The big problem with this “hide the market marks” thing is that markets tend to revert to mean. Unless said market values fundamentally catch up with said market prices, you will get a snapback. That is what is happening in residential real estate now. That is what happened in Japan over the last 21 years!!! That’s right, it wasn’t a lost decade in Japan, it was a lost 2.1 decades!

This has been the first balance sheet recession that the US has ever had, but there is precedence to follow. Japan had a balance sheet recession following their gigantic real asset bust. They made a slew of fiscal and policy errors, which essentially prolonged their real asset recession (now officially a depression) for T-W-E-N-T-Y  O-N-E long years! For those that may have  a problem reading that, it is 21 long years. What did the Japanese do wrong?
  • They refused to mark assets to market
  • They attempted to prop up zombie banks
  • They failed to promptly clean up NPAs in the banking system
  • They looked the other way in regards to real estate value shenanigans

Now, for those of you who believe that the government's "pretend and extend" policy has any chance in hell of working, or better yet, that we are not following in the footsteps of Japan, let's take a pictorial trip through recent history. There are nearly no Japanese banks in the top 20 bank category on a global basis by 2003 – NONE (save potentially Nomura, which arguably survived in name, alone). As you can see, they literally dominated 90% of the space in 1990!

Click to enlarge…

top_20_banks.jpg

Source: Cap Gemini Banking M&A

... and well if the ALM officer doesnt buy those bonds, and buys something else, the money just ends up in another bank which will buy those bonds !

The system is full circle...there is no flaw as long as people keep their money in the bank.

Hmm, I'ver heard this argument before. This is not just a European perspective. Many in the states believe this is doable a well, reference FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!More importantly, let's explore this full circle theory as exerpted from Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!

As excerpted from Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!, Bernanke et. al. have snipped the chrysalis of the US markets and economy one too many times. He has interrupted the circle of life...

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

In the worst case, banks leave their money in the Central bank which will underwrite bonds.

Thats also why Greek bonds being eligible to the ECB is a key political issue. As long as they are, the ECB can provide money against those bonds... Govts havent printed money directly so far (if they did, no more need to issue bonds, just issue money with no interest...), just bonds that can be repo-ed to the CB and thats really when money is created.

Right on point, as reported by ZeroHedge over the weekend: As ECB Finds Rating Agencies Have Suddenly Found Religion, It Prepares To Flip Flop On Accepting Greek Bond Collateral

Doomsayers have been saying for 10-15 years that the Japanese financial  system would collapse, well the game is still on, and could last another 10-15 years (or more, or less, i dont know !). To me its really a game of confidence. Indeed, if there was a real Greek default and bank runs, then it would sure have a strong impact on the public, and we could have a chain reaction, and thats what i think the European politicians want to avoid #1. cause if they can, the zombified financial system can muddle through for years.

Yes, but as you can see from the charts and graphs above, the kick the can methodology or reality rendering didn't necessary work that well for real asset pricing or Japanese bank global presence, valuation or competitiveness.

So where does this leave valuations and the European banking system ?

Well, on one hand we have this insolvent system, that tries to survive. But there are institutions too weak to be saved.

Bank of Ireland, RBS, … show the way... well end up having more and more govt participation and regulation. In some countries, the whole financial sector might end up being nationalized. Financial sector is dead. It used to be 10%-15% of the equity market capitalization, went up to nearly 40%-45%. on that metric alone, there is much room for downside (perhaps another 50% with the same level in the broad index). Basel III, even if its not enforced yet (and perhaps by the time it should there wont be many private banks left in Europe...), gives a clear message: banks need to raise a lot of equity. And that needs a discount as many banks need this money, the new business model will be less profitable because of less leverage. Banks will try to hike fees, and merge to save costs.

Maybe if we see some spectacular failures, we will see a big transformation, especially with new entrants focusing just on deposits and payments. In Europe, banks are « universal » you tend have your account, your credit card your mortgage, your car loan, your brokerage account with the same institution. In my opinion it would make a lot of sense for Carrefour (for example) to open a banking operation.

Or enter Glass-Steagal - Euro edition!!!

Because of this increase for competition and diminished returns (less demand for loans)... the only « business » which will be growing in banks, will probably, their ALM !! Where they will buy more and more govt bonds (and BASEL III makes sure their risk weightings are 0% and that they have to do so for their « liquidity coverage ratios » (LCR) so they favour those bonds. This will push yields down, and bank profits down as they have to buy more and more of those bonds to try to keep the same profits. EFSF or any kind of Euro bond would definitely be bought with no problem.

And here we go again! What happens when assets held as risk free (zero risk captial weighting) at 30x to 60x levereage are truly nothing of the sort. This exacly how a tiny economic entity such as Greece (whose economy is probably smaller than that of Brooklyn, and definitely smaller than that of the NY metro area) has managed to gut the entire banking system of a plethora of 17 separate countries and much of the continent. Reference:

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

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

  3. and finally How Greece Killed Its Own Banks!

With govt yield downs the extend and pretend game can last for many more years.

That wouldnt prevent banking stocks to go further downhill, as it was the case in Japan, but it might not be a one-way street, and peripheral banks are not necessarily the ones who would suffer most from here in the long run (after all if the crisis is resolved, their underwater govt bonds will be reboosted). And both you and I know that banks know how to twist and inflate their accounting, and that theyre showing profits on what really are losses...

No!!!!! Say it ain't so!

Perhaps another nice short would be the insurance industry.

Been there, done that - Sovereign debt exposure of Insurers and Reinsurers

They might be hurt even more than banks, especially life insurers... especially it has benefited (in France) of a lot of tax rebates / subsidies, which enticed the public into it, and if there is a sovereign accident, I can smell a run there. (I myself cancelled my life insurance, and all the « smart » people around me did so as well.)

All in all, I think it was a great call so far to foresee the European debt mess. But I think its much more tricky for here to make bets. Even the EURUSD trade which looked as a no-brainer at the start of 2011 given how dire the situation was, proved to be much of a pain...( to be honest, I lost myself quite a lot on that one). that should be a warning signal to me that things arent that simple.

As I got gaffed on the artificial bank runup of 2009/2010. You see, the fundamentals have been marred by central planning of the markets on a global basis. Again, I request you reference Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!

Click here for relevant BoomBustBlog European Research from last year and here for current European opinion.

Published in BoomBustBlog

In continuing the discussion of trade setups and related strategies started with As Requested By Our Constituency: Trade Setups Based on BoomBustBlog Research, and continued in …

I bring you the next installation in the discussion of trading the Pan-European Sovereign Debt Crisis. The annotated email chain is actually quite long so it will be continuously broken up. I will also include the comments of the European equity trader in later posts. Any accomplished tradeer who wishes to join the crowdsourced debate is more than welcome to throw their hat into the ring.

Eurocalypse, the European CDS trader

At this stage i have a remark/question in your « the inevitability of a banking crisis »(dated when ?) you were waaay too optimistic (!!) seeing 172bn of losses related to PIIGS. We may be over that only on Greece exposure!

Reggie Middleton, the American Realist

For those that don't read me regularly, Eurocalypse is referring to my work below...

Is Another Banking Crisis Inevitable?

Attention subscribers: A new subscription document is ready for download File Icon The Inevitability of Another Bank Crisis

Banks NPAs to total loans

Source: IMF, Boombust research and analytics

Impact of bank’s banking books on haircuts

EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.

We have also presented an alternative scenario since we believe that EU stress test had failed not only to include banks HTM books but also the loss estimates were highly optimistic, as has much of the economic and financial forecasting that has come from the EU. It is highly recommended that readers review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for a detailed view of a long pattern of unrealistically optimistic forecasting. Here's and example...

image031.png

Revisions-R-US!

image044.pngimage044.pngimage044.png

In an alternative scenario, we have assumed weighted average haircut of 10% (exposure, haircut assumptions and writedowns for individual countries are presented in detail in the tables below) and have applied writedowns on both banking and trading books with the results available in the subscription document File Icon The Inevitability of Another Bank Crisis? Individual and more explicit haircut calculations are available for the following nations for professional and institutional subscribers:

Eurocalypse, the European CDS trader

Certainly, if we compare the fiscal trajectory of the Eurozone as a whole with the US, the US is not really on a better path. Austerity has started in Europe. US seems still in full spending spree.

Reggie Middleton, the American Realist

I disagree, in a way. The US situation is truly FUBAR, indeed, but it is a slightly differently  FUBAR'd than the EU. The US still:

  1. is the world's reserve currency,
  2. has the world's pre-eminent military and technological forces (which go hand-in-hand with number 1, hence is essentially the same thing if history is any indicator),
  3. has a much more contiguos economy than the EU,
  4. although is prone to lie about its book keeping situation, is definitely not as detached from reality as the EU states. Reference:
  5. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!,
  6. Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Believe Any Others

  7. LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?

Then there is the commercial real estate issue looming in the EU. The two strongest economies in the EU are being looked to pull the rest of the EU out of the fire through bailouts, but the ugly truth is that they are tied to the proflicate (and not so profligate, but still hampered) states by the waist. Outside of the (borderline recessionary) EU being their major trading partner(s), they have pretty much bankrolled CRE lending throughout the entire trading block. Those loans are due to be rolled over, and they are due to be rolled over on property that has materially declined in value - leaving a significant equity gap. We're talking close to 70% to 80% of CRE loans coming due in the next year and a half on properties that have significant oversupply, weakening rents, recesionary economies, sovereign debt issues and staunch austerity plans, and generally devalued properties leaving many a loan underwater. Haircuts, anyone? Inflation Misconceptions Hide A Downright U-G-L-Y Real Estate Landscape! - Part 1

You see, there is a highly reflexive relationship between overvalued sovereign debt held on a higly leveraged basis on EU bank balance sheets and CRE loans coming due on devalued and underwater real estate. The sovereign debt crisis is straining lending capacity at the same time that excess lending capacity is needed to fund underwater property loans that need to be rolled over. No one is discussing the real estate portion of the EU banking crisis to be, but it is very real!

I have delved deeply into this topic during my lectures in Amsterdam. Reference my featured article in Property EU, one of Europes leading real estate publicatios

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

Now, the US is in a similar situation, but we have managed to fudge the books to such an extent that some of our CRE investors have actually risen in price. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?

With the dearth of synthetic profit streams to support accounting earnings (as banks did in their supposed recover of 2009/10), Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks. I believe, due to major policy errors in dealing with our crash, that we will see our own lost decade(s) in the US...

There are those who believe US CRE is on a bullish trend, but I believe they have been mislead by accounting and regulatory shenanigans. Commercial real estate rarely thrives in high unemployment, increasing interest rates, stagflationary, sluggish economic times. Then again, maybe I'm wrong... Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

 

The US CRE situation is overshadowed (and possibly rightfully so) by the popular realization that Reggie was accurate in his 2007 assertions that we are in a residential real estate depression, further complicating any truly organica economic recovery - at least until true price discovery is allowed by the financial markets central planning cartel of government and central bankers. Reference:

  1. Reggie Middleton's Real Estate Recap: As I Have Clearly Illustrated, It's a Real Estate Depression!!!

  2. The "American Realist" Says: Past as Prologue - Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!!

  3. The Residential Real Estate Week in Review, or I Told You We're In A Real Estate Depression! The MSM is Just Catching Up

  4. There's Stinky Gas Inside Of This Mini-Housing Bubble, You Don't Want To Be Around When It Pops!

  5. Bubble, Bubble, Real Estate Toil and Trouble: Macro Climate for Real Estate Still Sucks, Despite New Bubbles

As this discussion/debate is getting rather lengthy, it will be continued in a later post. In the meantime, interested readers can follow me on twitter or subscribe to BoomBustBlog directly.

Published in BoomBustBlog

This is a conversation I am having, via email, with a European CDS trader that will be posting trade setups on BoomBustBlog based upon my proprietary subscriber research. If you recall his background fromthe post As Requested By Our Constituency: Trade Setups and Examples Based on BoomBustBlog Research Designed to Capitalize on the Coming Eurocalypse:

As I said I have traded mostly on the fixed income markets. What I mean by that is:

    • government bonds, euro-area, (or before it existed, peseta, lira, french franc,...), Sweden, Denmark, UK, US, Japan
    • short term interest futures in those markets  Euribor, Euro$ etc...
  • bond futures & options in those markets (tnotes, gilts, bunds, btps, jgb.
    • swaptions & caps & floors
  • inflation linked securities (US TIPS, Euro-CPI linked, etc.
    • G7 FX & options

In my best years, I managed more than 10 billion euros equivalent of bonds (and the corresponding derivatives). I was doing 'proprietary' trading, in contrast with 'flow trading" - flow trading is quoting to clients (pension funds, banks, insurers, hedge funds...), and basically stuffing and frontrunning them - or in contrast with exotic derivatives book where you stuff the client selling complex products he doesn't understand and he cannot price by himself ;-)

On average, I made for the firm more than 30M euros a year. Return on asset not that big! Those were the years where you had to be leveraged to make money due to low vol!  I was doing mostly "relative value", picking pennies with "hedged" strategies. So not a big trader like Brevan Howard and co, but I was not in the minor league either. I must say im quite proud of having stuffed a few times the likes of GS, JPM, DB and co.... I also ran the asset-liability department of a French bank so I saw also the other side of the business with all the accounting shenanigans, and I know how banking CEOs run their company...

Here is part one of our email exchange (annotated to add relevant blog content)...

Dear Reggie

Thanks for sending all the material. Im quite surprised at the quality of the material, which I would put largely on par or better than industry produced stuff, and at the time your analysis were written, you were certainly in the most aggressive camp, and the first to give figures with full explanations.

However the material is dated and news abound, and all this crisis has hit the tapes (as you predicted) and became mainstream, with daily articles in the press and blogosphere.

I purposely sent him some relevant material from last year to demsonstrate its prescience. Subscribers should reference the mateial from recent quarters for updates, and fresh Euro and US banking analysis is on tap for the upcoming weak.

I would tend to believe that from here, things are more double sided than before, and risk-reward much less interesting than it used to be, because there are now external factors like government intervention which can kick the can, and screw valuations for a long time.

Anyway, its been game over already for many banks:

  1. Bank of Ireland's gone from 18 euros to 0.12 euros (= peanuts)!
    1. Clearly forcasted ahead of time in our File Icon Irish Bank Strategy Note which adequately warned before Irish banks dropped 85% in value. The File Icon Ireland public finances projections is also available to all paying members.
  2. Bigger banks like SocGen moved from 140+ to 38 hitting 17.5 in 2009.
  3. Credit Agricole 36 euros to 10 hitting 6 in 2009
  4. BNP went from 90 to 50 after hitting 20 in 2009
  5. French CAC40 peaked around 6000 in 2007 to 3850 today hitting 2500 in 2009.
  6. so SG and CAI have been divided by 3.5 basically while the CAC has lost 36% « only ». BNP is in line with the CAC.
    1. Clearly delineated ahead of time in our exposure reports File IconEuro Bank Soveregn Debt Exposure Final -Retail or File Icon Euro Bank Soveregn Debt Exposure Final – Pro & Institutional
  7. BAC used to be 46$, now 10$ after hitting less than 5$ in 2009 while JPM did much better 50$ to 40$ hitting less than 20
    1. [Reggie Comments] Yeah JPM is stubborn, but also digging a hole for itself. See An Independent Look into JP Morgan...
    2. image001.png

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

      This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent - particularly if that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent). I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.

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

      You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish. JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb. I discussed JPM on CNBC's Squawk on the Street - 10/19/2010

      I also illustrated the catch 22 that the European banks are in as the Keynote Speaker at the ING Annual Valuation Conference in Amsterdam last April. All should be aware that the US banks wrote most of the CDS on said European names.

Both US and European banking systems stand on the precipice: Re Click, Clack, Click: The Sound of Falling Dominoes Behind The Door of the Eurocalypse! and The Beginning of the End of the Beginning of the Gutting of the Big Banks Has Begun!

Even if the banking system is insolvent, it doesnt mean those stocks are going to go immediately to 0.1 like Bank of Ireland, that’s the problem!

If a major credit event hits (currently brewing in Europe, US, Japan and China), insolvent bank equity will do the same thing that the previous insolvent US bank equity did - even with the Fed's added equity lines. Yes, I know the big white shoe investment bank analysts never say this, but who has been more accurate over time, them or Reggie? From Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? we can find the result of the Fed's backstopping of Lehman's equity during a liquidity run on an insolvent bank during a major credit event and what the allegedly "respected" bank analyists had to say about it versus BoomBustBlog opinion...

Reggie vs Goldman Sachs

Why didn't Wall Street read my post on Lehman being a yellow lying lemon? See "Is Lehman really a lemming in disguise?" and realize that this post was made on February 20th, when Goldman Sachs had a recommended price of about $55 while this blog warned that Lehman may be done for. This very similar to when I warned about the potential demise of Bear Stearns in January, when the rest of the Street had a "buy" at about $130 per share. See Is this the Breaking of the Bear?. 7 We all know how both of these stories ended.

Please click the graph to enlarge to print quality size.

image006.png

Interesting to note that the Texas Ratio in your note European Bank Sovereign Debt from May2010 was in line with the relative performance of the 3 French bank stocks.

Those who don't subscriber should reference The Anatomy of a Serial European Banking Collapse for a preview...

Whoa!!! A 63 Texas Ratio when losses were half of what they are now????!!! As Americans, and TExans from the S&L Crisis area know, a Texas Ration of 100% generally means no more bank!

 

image010

 

Where would said Texas Ratio madness come from? Why, exposure - of course!

 

image009

 

 

Though probably other ratios would have worked as well at it is known that Crédit Agricole or SG have bigger funding problems than BNP. BNP also seemingly bought Fortis at what seems distressed prices so far (they make regret it if/when Belgium goes ballistic but thats not for today).

The sector has clearly seen winners and losers, which means stock picking (in retrospect) can produce a lot of alpha but I doubt the sovereign Texas ratio is the only factor at play and that bets should be placed on that only measure.

[Reggie Comment] We have a lot of bank analysis to pick apart opportunities. Texas ratios simply scratch the surface!

I think you will agree with me the sovereign exposure is the stuff banks can’t hide, its so obvious they have to disclose it all.

[Reggie Comment] They can’t explicitly hide it, but they don’t have to because the European regulators, central bankers and politicians are complicit in allowing the banks to declare that these « toxic » assets 1are risk free and to be carrier at par. You don’t have to hide the truth if lying is legal! Very similar to the US situation, although I believe the US has a stronger overall economc potential. That is "potential" not necessarily existing economic activity. Currently, I believe the US consumer to be economically "dead in the water" with many corporate financial statement in tow!

We can see the whole European banking sector destiny is hand in hand with the states finances, their balance sheet being so loaded with the stuff. Having worked in a bank, I can tell there are much worse things to come that’s not even in the financial reports ! Also, regarding the French banking sector, I tend to believe most of the PIIGS exposure is in the less sophisticated players.

Thats why the govts will try to prop up the banks. IMHO an analysis of a contagion effect should include not a sovereign exposure but interbank + sovereign exposure - because of the leverage.

We have attempted such an analysis with the BoomBustBlog Sovereign Contagion model, although this was more of inter-sovereign linkage than a direct interbank linkage.  

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.

If Greece defaults, Greek banks (at the very least) become instantly insolvent, and the Greek depositors would probably be on the hook. Domino effect, thats your scenario.

The Greek banks are insolvent now. There’s really no way around it. They have had multiples of their net equity invested in Greek bonds at 30+x leverage and those bonds have devalued by 50% of more. They haven’t been solvent for some time. If you remember last year when  illustrated How Greece Killed Its Own Banks!, you realize the main reason why the EU has been using the kids gloves with the Greeks. To make a long story short, let’s employ the old adage “A picture is worth a 1,000 words”…

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)…

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

Add to this the reports of incessant runs on deposits at Greek banks as depositors (wisely) move their funds to safer horizons, consequently increasing the implicit leverage upon which said Greek banks operate and eliminating any cushions provided by ECB bailout!

Who would want to leave his money in a Portuguese bank and so on, if depositors lose their money... Bank runs, the system would collapse quickly. By the way, in that doom scenario, i can't see how even US or Japanese banks can go unscathed through their interbank lending and derivatives operations.

But lets say ok, were going to have those 50haircuts on the PIIGS. According to your figures, thats a 2 trillion (50% of 4 trillion ) problem. Well we've seen trillion bailouts in the US, we can certainly do it in Europe. And also as its governement debt, there is still plenty of power to tax. All forms of taxes going up everywhere is the 100% safe bet.  Loss of liberty for citizens seems also the trend.

I will continue this conversation, as well as at least one other, later on in the day. In the mean time...

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