On Monday, 25 June 2012 I penned "No Capital Controls In The EMU? Liar Liar Pants On Fire". Let me excerpt the first paragraph so as to bring those who have not read it up to speed before we jump into current events...

I have outlined the upcoming EU bank runs up to two years in advance (see the many links below). Whenever one expects a bank run, the first things TPTB do is institute capital controls to stem said bank run - which of course makes the bank run that much more necessary to get your capital out - wash, rinse, repeat! Remember, by treaty, no country in the EMU may use capital controls without automatically being removed from the union. Well, do you believe that to be fact that will last? Yeah, I don't either. Simply watch as the money bleeds from the banks and the bumbletrons attempt to staunch the flow using mechanisms that will simply exacerbate the flow. Even more incredible is the fact that even to this date, with the existence of publications such as BoomBustBlog, entire nations as well as their financial advisors, leaders, regulators and politictians STILL DO NOT EVEN COMPREHEND the nature of the modern bank run. You cannot stem the tide with capital controls, you can only exacerbate it. 

Now, As Predicted Last Year, The French and the Greeks Are In A Race For The Biggest Bank Run!

 On Saturday, 23 July 2011 I penned "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" wherein I went through both the motive and the mechanism of a European bank run, focusing on Greece and France as impetus.

Okay, I'm writing this on 3/23/2013, referring to the events of yesterday. I apologize to my paying subscribers for being 9 months and a few miles/kilometers off, but as the more intellectually capacitive among you know, this stuff is not an exact science. Now, yesterday's headlines...

Cyprus passes laws for capital controls

Lawmakers in Cyprus passed legislation to impose capital controls on its banks and create a "solidarity fund" to pool state assets, according to media reports late Friday. The measures will help fulfill conditions for Cyprus to get a euro-zone bailout. With a Monday deadline, Cypriot lawmakers still need to vote on measures needed to restructure banks in Cyprus and possibly place levies on deposits.

I appeared on the Max Keiser show in London yesterday, and broke down the Cyprus issue as simply as could be done. In essence, "What is a bank???!!!"

In "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" I detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

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You see, the problem with this bank holiday thing is that the real damaging bank run will not be staunced by the conventional bank holidays, et. al. because it is a counterparty run that will cause the damage, not depositors. TPTB in Europe don't have the chops to stem this one, at least not from what I've seen. As for how that institutional bank run thing works, we excerpt "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

 

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

 

 

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

 

And Yes!!! The fodder for bank rungs are ALL OVER THE EUROPEAN SPACE!!!!

Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series). 

A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Model that we developed in 2010. Long story short (if it's not already too late), my next extensive series of posts on this topic will likely spark bank runs throughout the periphery and the core of Europe, for much of the assets that depositors think are there are simply not, and I proffer ample proof for all to see. For the banks, it's too late to pull the evidence down from your various web sites, for I already have it safely stored and distributed. Keep in mind, once the fissures form in one section of the already weakeed EU, cracks widen in the other sections... 

Description: foreign claims of PIIGS

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Reading a Bloomberg article on the topic of ass-backwards EU area government moves this morning caused me to query, "What is the extent of the fear the European (and US) governments have of the financiers?" In Cyprus, we have a case of a government that would actually rape the depositors of a bank rather than the investors who voluntarily, directly and explicitly accepted the risk of bank failure through speculative investment (ex., the bondholders). 

The bank tax was the alternative to imposing losses on investors in a so-called bail-in, a step opposed by the Cypriot government, the European Commission and the ECB, German Finance Minister Wolfgang Schaeuble said on ARD television last night.

So, you will bend the mom and pop depositors over, but leave the monies of the institutional guys who should have known better sacrosanct?

“It’s up to them to explain it to the Cypriot people,” Schaeuble said. “Clearly, the taxpayer should not be asked” to rescue banks from insolvency, he said, adding that Cyprus faced a “very difficult time” unless it accepts the tax.

Bullocks! The taxpayer should be hit before the depositor to maintain the confidence in the banking system, but they should all stand behind the bondholders who accepted the investment risk in the first place. Yes, I'm aware that the banking system of Cyprus is about 9 times the size of its real economy, but that's pretty much the case with much, if not all of the EU, as clearly delineated 3 years ago in Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe:

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

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

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This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

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Of course, this boneheaded move will backfire tremendously because it appears as if the members of the Cyprus government are not aware of the true financing structure of the banking system. DEPOSITORS SHOULD REMAIN SACROSACNT! They are the most important source of funding, not to mention the most liquid (as in potential for capital flight) in the entire banking ecosystem! I reviewed this structure and the inevitability of European bank runs two years ago in The Anatomey of a European Bank Run!

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

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. 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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I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence.

I'm currently preparing the release of a report that will make the Cyprus affair look like peanuts as this contagion reinfects the core and I produce so much evidence of apparent fraud as to make your nose bleed. Stay tuned, and follow me:

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The following is a guest post by a very bright individual whom I've had the pleasure of building with on several occasions, Mr. Mordechai Grun. This is what he's had to say on the topic of Europe, with ample commentary from me along the way.

_______________________________________________________

Human behavior predications usually follow the ‘least resistance, least painful, and self serving’ path in spite of its being harmful in the long run. This disposition is even more truly said of politicians and bureaucrats. "Will is the origin of all thought." Flowing from such will we have the intellectual analysis and arguments to justify those behaviors. We will therefore look at Europe through this lens and see where it takes us.

The next major crisis in Europe is lurking just beyond the bend.

Reggie’s note: the last crisis has actually never left, so this is not the next one, just a continuation of the same. I called this exactly three years ago, in explicit detail (The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one)

It will take form as either the comeback of Bond vigilantes or as a political calamity, where some peripheral country finally votes for a party that is seriously proposing to forsake the Euro.

Reggie’s Note: The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

Or… As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

Some smart politician will certainly test the ECB’s resolve and do away with austerity and call their bluff. The consensus of the population can only be subjected to so much strain before it turns on itself and they vote for radical (read: costly) change. While the case can be made that the government bond-funding crisis has subdued, the economic pain of the general public has not.

Reggie’s note: Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

The likeliest scenario is that both of these crises will play out at the same time, thus creating a Lehman-type crisis.

Faced with this crisis, only two options will present themselves:

  1. Massive sovereign debt defaults, bank runs and bankruptcies as many banks’ liabilities are larger than the GDP of the countries that are guaranteeing them – and a potentially resulting currency crisis

Reggie’s note: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

 

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

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  1. A truly massive QE Program that not only bails out the banks and the existing governments debt and deficit, but also sponsors an enormous stimulus program for anything that can be thought of, e.g. infrastructure, education, green energy, etc.

Following scenario B, the challenge will be this: Why would the Germans and Fins want to debase their currency to send their monies elsewhere? The answer will be a mix of ‘candy and stick’, so to speak. The QE stimulus program will be structured upon some European formula – per capita or otherwise – that sends significant amounts of newly printed money to them too, while, in the alternative, if the Euro disintegrates, Germany will have to recapitalize the Bundasbank and resort to either massive stimuli or quantitative easing so to cheapen their currency and rescue their own economy. Those countries that leave the Euro will, nevertheless, default on any external bondholders, as they are restructured and recapitalized in the new currency, their banks will default as well. Why wouldn’t Germany be gracious and monetarily benevolent with funds they would lose either way? This would blend in with the fact that even the new Mark will be too expensive for their export-driven economy, and they would be pressed to cheapen it. They also won’t have destination countries to export to in Europe, as each country will turn to hyper-protectionism, safeguarding the jobs they have from disappearing in an effort to stabilize their home currency in order to avoid hyper inflation (Argentina, anyone?).

Reggie's Note: A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina - Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get... Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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

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This turmoil will, obviously, generate widespread economic malaise as well. As a politician faced with this decision the answer is obvious. I can already picture the smiling politicians announcing their courageous decisions and courses of action, claiming that they have saved the Euro from certain demise while helping the people and creating new projects and job opportunities that will launch Europe into the future. It is possible that they will punish the instigator (Greece, presumably) and cut them out of the money party aka Lehman.

Is this feasible for Europe? I believe the answer is yes, as one significant minutia is overlooked. The Euro is way too high, even for Germany. This will become ever clearer as time clambers on. Europe can survive – even thrive – at 0.65 Euro to the dollar. I recall this precise scenario in Canada during the early 90s. The resulting inflation at the consumer level was much milder than expected, as taxes, services, rents, salaries and many consumer goods and products (including cars) are priced in the local currency. Of course, energy costs would rise. In Europe, though, lowering the high taxes on fuel can mitigate this. On the positive side, manufacturing and tourism in Canada flourished, generating a strong trade surplus (this was prior to the commodity boom). Europe can probably afford 6-8 trillion in QE over a 3-year period without hyperinflation, especially as this will be taking place while many other major currencies are orchestrating their own QE. If, as they do this, the peripherals restructure their own economies and bring down or solve their structural or primary deficits, the Euro may actually increase eventually, as they will have significantly lowered their debt to GDP ratios and positioned themselves on a financially sustainable path.

Reggie's note: This is code language for DEFAULT! The defaults will codify, quantify and solidify the capital destruction that we all know is there in the first place. I don't think the ride will be quite that easy. Greece has defaulted (exactly as I anticipated and clearly called) and is about to default again, and it's still f#@ked. For more on this, reference This Time Is Different As Icarus Blows Up & Burns The Birds Along The Way - Greece Is About To Default AGAIN! ... and then there's the contagion effect! Subscribers, see

All others, reference: 

 

    1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
    2. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
    3. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
    4. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

 

The sad reality, though, is that they will promise such changes and not deliver on their word.

Reggie's Note: WHAAAT???!!! You mean you can't trust the European oligarchs??? 

This will turn the crisis into only a short- to medium-term solution while eventually creating a fundamental currency crisis that will give way to no solutions.

Can the Euro handle that much QE? I believe the answer is yes. The ECB can forgive all the bonds they either own or collected as collateral for loans. Does anyone believe the principal on these loans will ever be paid down? The only stimulus from such a move will be the miniscule interest being saved.

Reggie's note: Moral hazard be damned, eh? What's to prevent other market participants from pushing to get a similar deal of borrowing money and not paying it back, expecting not to get punished. Massive forgiveness on this scale will fracture the market mechanism and destroy market pricing (as if it's not already wrecked as it is, does anybody really think core European bonds should yield what they do now?)

However, from a public confidence perspective, it would be huge, as it would drastically lower debt to GDP ratios.

Reggie's note: It will also bring about massively more stringent underwriting the next time around, effectively driving up rates anyway - you know, just as rates would have been driven up had the borrowers defaulted. Who in they're right mind would voluntarily make the same mistake twice in so short a period of time. As a reminder from my seminal link Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

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It is important to note that Europe will be faced with a stark choice: either deflate assets and wages or deflate the currency. And, since as discussed, the Euro needs a significant reduction anyway, why not milk it and bring it down through QE?  The crisis created by a country like Spain leaving the Euro will harm the Euro by much more than a giant QE would. There exists capacity for Europe to kick this one down a really long road and, with some discipline, actually solve it along the way.

Reggie's note: Possible, yes! Probable, Nah!!!

The challenge will be that, unlike the US, Europe has multiple players and can't turn on a dime. The crisis, when it comes, will be overwhelming, and will require solutions over a weekend or short bank holiday. Can so many politicians and central bankers on opposing sides of the language barrier figure out that their collective interests are far more in harmony than their differences? Prejudice, ego and vindictiveness – combined with an overly sensationalist media and so many involved players – stage the scene for things to easily get out of hand. If history is any guide, the answer is not very encouraging. However, Europe now shares a bureaucracy and central bank as well as a mostly shared corporate interest. So let's hope this time around is a bit different.

Reggie's note: I really liked this piece, and Mordechai is bright fellow. Of course I like it better with my commentary, which sort of... well.. Keeps it real!

In closing...

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On Thursday, 17 November 2011 I penned "When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!", basically detailing the upcoming rift between the French and German governments, led by the burgoening chasm in their respective economic performances. As excertpted:

The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue. Reference the series:

Well, today, Reuters reports...

Chasm opening between weak French and strong German economies

The schism dividing the euro zone's strong and weak economies deepened to include its core pairing in February as French firms suffered their worst month in four years in stark contrast to prospering Germany.

The gap between the two biggest economies in the euro zone is now at its widest since purchasing manager surveys (PMIs) started in 1998, the latest sounding showed. It dealt a blow to hopes the euro zone might emerge from recession soon, showing the downturn across the region's businesses worsened unexpectedly this month.

 I think we can start to see how this may end...

Yeah, right! "Surprise" , "loss". Interesting terms considering the warning was given a year and a half ago. Those damn non-BoomBustBlog subscribers... So, where goes Italy, so follows France...After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It - or  Focus on Greece? No! How About Italy? No! It's About Baguettes, Mes Amis! See also, When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

The Catch 22 is that Germany's woes are not that far detached from France's, yet it appears that they do not see this. I reiterate, then query again - Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! This is a Pan-European sovereign debt crisis, not a southern or western European sovereign debt crisis. The countries fates are inextricably linked.

And for those who believe what Fed Member Bullshitterard said, at least according to CNBC: European Debt Crisis Unlikely to Impact US: Fed's Bullard, I refer you to my extended, self-answered query, "Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably! " I place this stamp on Bullard's comments...

grade_a_bullshit_alert_transgrade_a_bullshit_alert_trans

If you really want to know the truth, simply read my post from yesterday, Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

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In 2009, Max Keiser warned interviewed the Bundesbank and uncovered the fact that much of (if not most) Germany's gold resided in NYC. Well, now as this information has become mainstream, the Bundesbank has announced that it is repatriating much of their gold to national lands, under a stated "storage plan", aka potential currency war.

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While perusing the news today, I came across this most interesting article in Bloomberg, Swaps ‘Armageddon’ Lingers as New Rules Concentrate Risk'. Before we delve into it, I want to review how vehemently I've sounded the alarm on this topic over the last 6 years. Let's start with So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?, where I've aggregated my warnings into a single article. In a nutshell, 5 banks bear 96% of the global derivatives risk. The argument to defend such ass backwards risk concentration is "but it's mostly hedged, offset and netted out". Right! You know that old trader's saying about liquidity? It's always available, that is until you need it!

Even though I've made this point of netting = nonsense multiple times, I must admit, ZH did a more loquacious job, as follows:

..Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 

Hey, there ain't no concentration risk in US banks, and any blogger with two synapses to spark together should know this... From An Independent Look into JP Morgan.

Click graph to enlarge

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Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who".

So, the Bloomberg article that got this rant started basically says that the risk is being shifted from the banks to clearing houses, who demand above board, translucent collateral for transactions. This should solve the problem, right? Hardly! You see, the Fed and US banking regulators have made it legal and acceptable for banks to outright lie about the qualit of their collateral and the condition of their finances. It all came to light with my research on Lehman (and Bear Stearns, amonst others). These mistakes are so repetitive of the ones made in the past, I literally do not have to right any new material, let's just re-read what was written several years ago:

Lehman Brothers and Its Regulators Deal the Ultimate Blow to Mark to Market Opponents

Let's get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying "How the hell did he know that?"

The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain't so and I'm not going to lie to you. The truth of the matter is I sniffed these incongruencies out because 2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating "This time is different", "There is a new math" (as if there was something wrong with the old math), etc. and so on and associated bullshit.

So, the question remains, why is it that a lowly blogger and small time individual investor with a skeleton staff of analysts can uncover systemic risks, frauds and insolvencies at a level that it appears the SEC hasn't even gleaned as of yet? Two words, "Regulatory Capture". You see, and as I reluctantly admitted, it is not that I am so smart, it is that the regulator's goals are not the same as mine. My efforts are designed to ferret out the truth for enlightenment, profit and gain. Regulators' goals are to serve a myriad constituency that does not necessarily have the individual tax payer at the top of the hierarchical pyramid. Before we go on, let me excerpt from a piece that I wrote on the topic at hand so we are all on the same page: How Regulatory Capture Turns Doo Doo Deadly.

You see, the banking industry lobbied the regulators to allow them to lie about the value and quality of their assets and liabilities and just like that, the banking problem was solved. Literally! At least from a equity market pricing and public disinformation campaign point of view...

A picture is worth a thousand words...

fasb_mark_to_market_chart.pngfasb_mark_to_market_chart.pngfasb_mark_to_market_chart.png

So, how does this play into today's big headlines in the alternative, grass roots media? Well, on the front page of the Huffington Post and ZeroHedge, we have a damning expose of Lehman Brothers (we told you this in the first quarter of 2008, though), detailing their use of REPO 105 financing to basically lie about their
liquidity positions and solvency. The most damning and most interesting tidbit lies within a more obscure ZeroHedge article that details findings from the recently released Lehman papers, though:

On September 11, JPMorgan executives met to discuss significant valuation problems with securities that Lehman had posted as collateral over the summer. JPMorgan concluded that the collateral was not worth nearly what Lehman had claimed it was worth, and decided to request an additional $5 billion in cash collateral from Lehman that day. The request was communicated in an executive?level phone call, and Lehman posted $5 billion in cash to JPMorgan by the afternoon of Friday, September 12. Around the same time, JPMorgan learned that a security known as Fenway, which Lehman had posted to JPMorgan at a stated value of $3 billion,was actually asset?backed commercial paper credit?enhanced by Lehman (that is, it was Lehman, rather than a third party, that effectively guaranteed principal and interest payments). JPMorgan concluded that Fenway was worth practically nothing as collateral.

Well, I'm sure many are saying that this couldn't happen in this day and age, post Lehman debacle, right? Well, it happened in 2007 with GGP and I called it -  The Commercial Real Estate Crash Cometh, and I know who is leading the way! As a matter of fact, we all know it happened many times throughout that period. Wait a minute, it's now nearly 2013, and lo and behold.... When A REIT Trading Over $15 A Share Is Shown To Have Nearly All Of Its Properties UNDERWATER!!!

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names. In putting a realistic valuation on PEI, we independently valued a sampling of 27 of its properties. We found that many if not most of those properties were actually underwater. Most of those that weren't underwater were mortgaged under a separate credit facility.   

PEI Underwater  Overly Encumbered Properties

What are the chances that the properties, whole loans and MBS being pledged by PEI's creditors are being pledged at par? Back to the future, it's the same old thing all over again. Like those banks, PEI is trading higher with its public equity despite the fact that its private equity values are clearly underwater - all part of the perks of not having to truly mark assets to market prices.  

 From Bloomberg: Swaps ‘Armageddon’ Lingers as New Rules Concentrate Risk

Clearinghouses cut risk by collecting collateral at the start of each transaction, monitoring daily price moves and making traders put up more cash as losses occur. Traders have to deal through clearing members, typically the biggest banks and brokerages. Unlike privately traded derivatives, prices for cleared trades are set every day and publicly disclosed.

And what happens when everybody lies about said prices? Is PEI's debt really looking any better than GGP's debt of 2007?

GGP Leverage Summary 2007

Properties with negative equity and leverage >80% 32
Properties with leverage >80% 44
% of properties with negative equity (based on CFAT after debt service) 72.7%

PEI Summary 2012

PEI Underwater  Overly Encumbered Properties

Both of these companies have debt that have been pledged by banks as collateral. Would you trust either of them? The banks then use the collateral to do other deals leading to more bubbles. What's next up in bubble land? I warned of it in 2009...

Check this out, from "On Morgan Stanley's Latest Quarterly Earnings - More Than Meets the Eye???" Monday, 24 May 2010:

Those who don't subscribe should reference my warnings of the concentration and reliance on FICC revenues (foreign exchange, currencies, and fixed income trading).  Morgan Stanley's exposure to this as well as what I have illustrated in full detail via the  the Pan-European Sovereign Debt Crisis series, has increased materially. As excerpted from "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.pngbank_ficc_derivative_trading.png

So, How are Banks Entangled in the Mother of All Carry Trades?

Trading revenues for U.S Commercial banks have witnessed robust growth since 4Q08 on back of higher (although of late declining) bid-ask spreads and fewer write-downs on investment portfolios. According to the Office of the Comptroller of the Currency, commercial banks' reported trading revenues rose to a record $5.2 bn in 2Q09, which is extreme (to say the least) compared to $1.6 bn in 2Q08 and average of $802 mn in past 8 quarters.

bank_trading_revenue.pngbank_trading_revenue.png

High dependency on Forex and interest rate contracts

Continued growth in trading revenues on back of growth in overall derivative contracts, (especially for interest rate and foreign exchange contracts) has raised doubt on the sustainability of revenues over hear at the BoomBustBlog analyst lab. According to the Office of the Comptroller of the Currency, notional amount of derivatives contracts of U.S Commercial banks grew at a CAGR of 20.5% to $203 trillion by 2Q-09 from $87.9 trillion in 2004 with interest rate contracts and foreign exchange contracts comprising a substantial 84.5% and 7.5% of total notional value of derivatives, respectively. Interest rate contracts have grown at a CAGR of 20.1% to $171.9 trillion between 4Q-04 to 2Q-09 while Forex contracts have grown at a CAGR of 13.4% to $15.2 trillion between 4Q-04 to 2Q-09.

In terms of absolute dollar exposure, JP Morgan has the largest exposure towards both Interest rate and Forex contracts with notional value of interest rate contracts at $64.6 trillion and Forex contracts at $6.2 trillion exposing itself to volatile changes in both interest rates and currency movements (non-subscribers should reference An Independent Look into JP Morgan, while subscribers should referenceFile Icon JPM Report (Subscription-only) Final - Professional, and File Icon JPM Forensic Report (Subscription-only) Final- Retail). However, Goldman Sachs with interest rate contracts to total assets at 318.x and Forex contracts to total assets at 11.2x has the largest relative exposure (see Goldman Sachs Q2 2009 Pre-announcement opinion Goldman Sachs Q2 2009 Pre-announcement opinion 2009-07-13 00:08:57 920.92 Kb,  Goldman Sachs Stress Test ProfessionalGoldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 MbGoldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb,). As subscribers can see from the afore-linked analysis, Goldman is trading at an extreme premium from a risk adjusted book value perspective.

bank_forex_exposure.pngbank_forex_exposure.png


Back to the Bloomberg article:

Disaster Scenario

The need for a Fed rescue isn’t out of the question, said Satyajit Das, a former Citicorp and Merrill Lynch & Co. executive who has written books on derivatives. Das sketched a scenario where a large trader fails to make a margin call. This kindles rumors that a bank handling the trader’s transactions -- a clearing member -- is short on cash.

Remaining clients rush to pull their trading accounts and cash, forcing the lender into bankruptcy. Questions begin to swirl about whether the remaining clearing members can absorb billions in losses, spurring more runs.

“Bank customers panic, and they start to withdraw money,” he said. “The amount of money needed starts to become problematic. None of this is quantifiable in advance.” The collateral put up by traders and default fund sizes are calculated using data that might not hold up, he said.

The collateral varies by product and clearinghouse. At CME, the collateral or “margin” for a 10-year interest-rate swap ranges between 2.89 percent and 4.06 percent of the trade’s notional value, according to Morgan Stanley. At LCH, it’s 3.2 percent to 3.41 percent, the bank said in a November note.

How Much?

The number typically is based on “value-at-risk,” and is calculated to cover the losses a trader might suffer with a 99 percent level of confidence. That means the biggest losses might not be fully covered.

It’s a formula like the one JPMorgan used and botched earlier this year in the so-called London Whale episode, when it miscalculated how much risk its chief investment office was taking and lost at least $6.2 billion on credit-default swaps. Clearinghouses may fall into a similar trap in their margin calculations, the University of Houston’s Pirrong wrote in a research paper in May 2011.

“Levels of margin that appear prudent in normal times may become severely insufficient during periods of market stress,” wrote Pirrong, whose paper was commissioned by an industry trade group.


Oh, but wait a minute? Didn't I clearly outline such a scenario in 2010 for French banks overlevered on Greek and Italian Debt (currently trading at a fractiono of par)? See The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

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

 

image012image012

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

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

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

image006image006

I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence. The risk of a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable.

You see, the risk is all about velocity and confidence. If the market moves gradually, the clearing house system is ok. If it moves violently and all participants move for cash at the same time against bogus collateral... BOOMMMM!!!!!!!

Back to the Bloomberg article...

Stress Levels

What’s more, clearinghouses can’t use their entire hoard of collateral to extinguish a crisis because it’s not a general emergency fund. The sum represents cash posted by investors to cover their own trades and can’t be used to cover defaults of other people.

Clearinghouses can turn to default funds to cover the collapse of the two largest banks or securities firms with which they do business. They have the power to assess the remaining solvent members for billions more, enough to cover the demise of their third- and fourth-largest members.

But wait a minute, the other members are only solvent because they have hedges against the insolvency of the insolvent members. If those hedges fail, then the so-called solvent members are insolvent too! Or did nobody else think of that?

After all, this circular reasoning worked out very well for Greece, didn't it? See Greece's Circular Reasoning Challenge Moves From BoomBustBlog to the Mainstream...

 

 


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Lenine Imperialisme stade supreme du capitalismeMonday, I posted As Promised, Greece Guts Naive Investors Once Again… (a must read for those who don't know my extensive history on this topic), and received some very interesting if somewhat unbelievable feedback from the muppets among my readers (for those not versed in Muppets and muppetology, see Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Rip Off Clients). As hard as it is to believe, there are actually still those who are of the mindset that the events of recent past were somehow solely or at least primarily market driven. Not trying to be facetious, or anything of the sort, but you muppets need to get a grip on reality. I'm going to reintroduce BoomBustBlog research from earlier in the year in three distinct topical sections, all in an attempt to expand the consciousness of the muppets amongst us. Professional and Institutional BoomBustBlog subscribers who don't want the brief in socio-economic theory and history can download our file iconGreek debt restructuring & maturity extension model and just get busy. Everyone else should continue on....

New Age Imperialism = Economic Colonization

As far back as 1920, Lenin explained what is happening to Greece (and likely soon Italy, Portgual, Spain and Ireland), and did so in exquisite detail may I add - as I excerpt from from Wikipedia's Imperialism, the Highest Stage of Capitalism:

In order for capitalism to generate greater profits than the home market can yield, the merging of banks and industrial cartels produces finance capitalism — the exportation and investment of capital to countries with underdeveloped economies. In turn, such financial behaviour leads to the division of the world among monopolist business companies and the great powers. Moreover, in the course of colonizing undeveloped countries, Business and Government eventually will engage in geopolitical conflict over the economic exploitation of large portions of the geographic world and its populaces. Therefore, imperialism is the highest (advanced) stage of capitalism, requiring monopolies (of labour and natural-resource exploitation) and the exportation of finance capital (rather than goods) to sustain colonialism, which is an integral function of said economic model.[3][4] Furthermore, in the capitalist homeland, the super-profits yielded by the colonial exploitation of a people and their economy, permit businessmen to bribe native politicians — labour leaders and the labour aristocracy (upper stratum of the working class) — to politically thwart worker revolt (labour strike); hence, the new proletariat, the exploited workers in the Third World colonies of the European powers, would become the revolutionary vanguard for deposing the global capitalist system.

Imperialism, the Highest Stage of Capitalism (1917), by Lenin, describes the function of financial capital in generating profits from imperial colonialism, as the final stage of capitalist development to ensure greater profits. The essay is a synthesis of Lenin’s modifications and developments of economic theories that Karl Marx formulated in Das Kapital (1867).[1]

the highest stage of capitalism, represents the stage at which a country's consumers cannot buy all the products that have been produced, and additional markets must be sought after. The dominant feature of imperialism is the repatriation of invested capital.

Cecil Rhodes and the Cape-Cairo railway project. Rhodes founded the De Beers Mining Company, owned the British South Africa Companyand had his name given to what became the state of Rhodesia. He liked to "paint the map British red" and declared: "all of these stars ... these vast worlds that remain out of reach. If I could, I would annex other planets."[4]

For those of you who don't see the connection yet, let's peruse some sample output from file iconGreek debt restructuring & maturity extension model :

So When It Comes To The Indebted, When Does 2 Euro + 24 Euro = Less Than 2 Euro, or You Can't Solve Insolvency By Piling On More Debt!

The first section of the graphic below shows Greece's funding requirement from the open market after it implements 65% haircuts across the board of its debt and reduces coupon rates in half by substituting existing debt with new debt as a Zero Coupon Bond Roll-up with 20 yr amortization. As you can see, such a plan (if it were doable) puts the country on relatively stable footing. Of course, if it were to do so the markets would extract their pound of flesh in terms of markedly higher coupon rates, which Greece presumably would not be able to afford (presumably). So, what do TPTB do? They push/offer 240B euros of bailout aid in the form of debt - debt that has to be serviced at some time in the short to medium term future since it is understood that Greece will not be able to get this funding from the market (is it understood, or presumed?). This debt is a multiple of what Greece can afford to service. It is a multiple of the debt that it has now, and this is not considering its condition after the still ongoing and draconian austerity measures forced upon it - thus cutting its GDP and revenue generating capability nearly in half (or so-ish).

Looking at the graph below, without adjusting for the austerity effect, Greece is considerably worse off after the bailout package, then before.

 BoomBustBlog Greek Debt Model sustainabilty

When observed over time, all this bailout and default/haricuts/restructuring buys Greece (in terms of time) is one year. In 2014, it's time to pay the piper and default once again as it begs for more bailouts with the overly stringent austerity price tag...

BoomBustBlog Greek Debt Model sustainabilty alt chart  

Now, who is lending this money that can easily be seen with a simple spreadsheet to be IMPOSSIBLE to pay back? It's the Troika, that's who. But these ivory tower beings who reign above us mere bloggers and investors from NYC must have supreme knowledge in the fact that they are assisting the unwashed, profligate masses, right????

Who Are These New Age Imperialists? The New Economic Colonizers Of The Globe???? 

Faithful BoomBustBlog readers should remember the empirical rant, How the US Has Perfected the Use of Economic Imperialism Through the European Union!, wherein the following was preached:

... the Euro members’ loan will be pari passu with existing sovereign debt i.e. it will not be considered senior. Although there is no written, hard evidence to support this claim, it is our view that otherwise there will be no incentive for investors to hold the debt of troubled countries like Greece, which will ultimately defeat the whole purpose of the rescue package. Moreover, there are indications that support this idea. As per Dutch Finance Minister Jan Kees de Jager, “We are not talking about a special preference for the eurogroup loans, that’s not possible because then you would have the situation that already-existing rights of creditors at the moment would be harmed.” (reference http://www.businessweek.com/news/2010-04-16/netherlands-excludes-senior-status-for-greek-aid-update1-.html). Of course, if more investors did their homework and ran the numbers, that same disincentive can be said to exist with the IMF's super senior preference given the event of a default and recoverable collateral after the IMF has fed at the trough.

The ramifications:

IMF’s preferred creditor status coupled with the expensive Euro members’ loans which are part of the rescue package can create a public debt snowball effect that could push the troubled countries towards insolvency when the IMF debt becomes repayable in three years time.

If you look at the output from our BoomBustBlog model, that event is clearly illustrated and articulated using simple (not complex) addition and subtraction (and some minor bond math).

This could be seen particularly in case of Greece (subscribers, please reference Greece Public Finances Projections). Even if all the spending cuts and revenue raising are achieved as planned for Greece, its debt will peak to 149.1% of the GDP in 2013. Please keep in mind that these numbers are based on what we perceived (as does simple math) to be pie in the sky optimism.

Being that this article is well over a year old, that pie in the sky optimism proved to be just that as we now Greek debt to GDP will break 200%!!!

I urge all readers to reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!.

image005.png

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic.

 image018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad…

image013.png

Many of my readers have inquired as to why the IMF has been so inaccurate in their estimates throughout the crisis. I doubt very seriously that it is a case of ineptitude. If one were to be a skeptic, and realize that the IMF charges stringent rates and can (and does) usurp the hierarchy of the claims upon assets upon its entrance, then one can clearly see a motivation in undershooting certain estimates. I am not saying that this is the case, but I would be remiss in failing to broach the topic. Remember, this is not your typical mainstream media publication, It's BoomBustBlog, and nothing is off limits.

IMF Economic Forecasts (%) 2010 2011 2012 2013 2014
Economic Growth 04 -2.6 1.1 2.1 2.1
Debt as % of GDP 133.3 145.1 148.6 149.1 144.3
Budget Deficit 8.1 7.6 6.5 4.9 3

The year 2013, with a IMF-proclaimed debt ratio of a tad under 150%, is the time when Greece will have to refinance the debt to pay the IMF (remember the charts above that show how optimistic the IMF has been historically). However, since the current debt raised by Greece is at fairly high rates, new debt will only be available at much higher rates (as markets should price-in the risk of high debt rollover) unless there is some saving grace of a drastic plunge in world wide interest rates and a concomitant plunge in the risk profile of Greece. At a 150% debt ratio, historically low artificially suppressed global interest rates that have nowhere to go but higher and prospective junk ratings from the US rating agencies, we don' t see this happening. Thus, the cost of borrowing for in 2013 is likely to be much higher in the market than the nearly five percent for the existing debt. Greece will either be unable to fund itself in the markets at all, and will have to convince the Euro Members and the IMF to extend the three-year lending facility just announced (reference What We Know About the Pan European Bailout Thus Far) or, it will get the debt refinanced at very high rates. In both cases the total debt as a percentage of GDP will continue to rise, and this is not a sustainable scenario over the longer-term. In addition, if it accepts the EU/IMF package and there is an event of default or restructuring, the IMF will force a haircut upon the private and public debtors beyond what would have normally been the case. This essentially devalues the debt upon the involvement of the IMF, a scenario that we believe many sovereign bondholders (particularly Greek, Spanish and Irish) may not have taken into consideration. This also leaves the possibility of a significant need for many banks to revalue their sovereign debt - particularly Greek sovereign debt - holdings.

As illustrated above, there is a higher probability for a Greek sovereign debt restructuring in 2013, which will definitely not hurt IMF (since it has a preferred right) but the Euro Members and other investors who will be holding the Greek debt.

So, now that we know who loses, who actually benefits?

image021

Members' quotas and voting power, and Board of Governors

Major decisions require an 85% supermajority.[19] The United States has always been the only country able to block a supermajority on its own.[20]

Table showing the top 20 member countries in terms of voting power (2,220,817 votes in total):[21]

IMF member country↓Quota: millions of SDRs↓Quota: percentage of total↓Governor↓Alternate Governor↓Votes: number↓Votes: percentage of total↓
United StatesUnited States 37149.3 17.09 Timothy F. Geithner Ben Bernanke 371743 16.74
JapanJapan 13312.8 6.12 Naoto Kan Masaaki Shirakawa 133378 6.01
GermanyGermany 13008.2 5.98 Axel A. Weber Wolfgang Schäuble 130332 5.87
United KingdomUnited Kingdom 10738.5 4.94 Alistair Darling Mervyn King 107635 4.85
FranceFrance 10738.5 4.94 Christine Lagarde Christian Noyer 107635 4.85
People's Republic of ChinaChina 8090.1 3.72 Zhou Xiaochuan Hu Xiaolian 81151 3.66

And there you have it. An encapsulated lesson on global imperialism (or how the US in now colonizing Europe, unlike the first time around during those pre-Boston tea party days). Is this or is this not an interesting way to introduce the concept of Greek bond defaults???

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Last week I warned if readers were tired of hearing me say "I told you so", they should ignore the topic of Greece, and a month ago I warned "As The Year Comes An End The Ability Of Greece To Kick The Can Mirrors The Chances Of A Man With No Feet". Eleven months ago, I publicly displayed the relatively simple mechanics behind a SERIAL Greek default (that's right, multiple bacl to back defaults), both on CNBC and on my blog... This situation will simply get worse, considerably worse, before it get better. I demonstrated in the post The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. The aforementioned link has an embeeded spreadsheet that walks you throught the scenario as well as my opinion on CNBC.

February 11, 2012, S&P at 1358, (roughly where it is right now on Dec. 3rd)

Yes, it's that easy to see coming - yet..... Here we are after a bond swap and a default, and a stern warning from BoomBustBlog that any who bought the new bonds in the bond swap would be facing redefault in less than three years and we have the following from Bloomberg: Greece Makes $13 Billion Buyback Offer as Merkel Floats Writeoffs

Greece offered 10 billion euros ($13 billion) to buy back bonds issued earlier this year as the bailed-out nation attempts to cut a debt load that may threaten future international aid.

Greek bonds rallied after the so-called modified Dutch auction was announced today by the Athens-based Public Debt Management Agency. PDMA offered an average maximum purchase price for the bonds maturing from 2023 to 2042 of 34.1 percent, based on information in the statement. The offer runs until 5 p.m. London time on Dec. 7.

Success of the buyback is crucial to releasing aid that’s been frozen since June. The offer was part of a package of measures approved by euro-area finance ministers last week to cut the nation’s debt to 124 percent of gross domestic product in 2020 from a projected 190 percent in 2014.

... The bid to ease Greece’s debt curden underscores a move away from austerity-first measures European leaders have embraced since the financial crisis began in 2009.

Because, even the most dense Eurocrat is now realizing that now matter how much you subtract something from zero, you will still get a negative number... Duhh!!!

German Chancellor Angela Merkel yesterday opened the possibility that Germany may ultimately accept a write-off of Greek debt, previously a taboo in the biggest contributor to euro bailouts.

Because the Germans have no choice but to come to grips with the fact that they are holding a bunch of zero paper (that's zero value, not zero coupon), and sooner or later they'll have to pay the piper.

Greek bonds rose for a third day, pushing the 10-year yield below 15 percent for the first time since the nation’s debt was restructured in March. The yield on the 2 percent securities maturing in February 2023 fell 151 basis points, or 1.51 percentage points, to 14.63 percent at 9:45 a.m. London time, leaving the price at 39.31 percent of face value. 

... Investors who join the buyback will receive payment in six- month bills from the European Financial Stability Facility, the Greek debt agency said.

Oh, they will get paid in that new funny munny paper that was just downgraded itself - EFSF, European Stability Mechanism Ratings Cut by Moody's, after it was downgraded before that - S&P downgrades European bailout fund. Keep in mind that these downgrades are from entities that are playing with kid gloves because, contrary to popular belief, they fear the EU states retribution - reference EU Allowing Rating Agencies To Be Sued For Errors Should Backfire Spectacularly - Cause Massive Downgrades Across The Continent!

The International Monetary Fund set the 2020 debt-cut target as a condition for continuing to fund a third of Greece’s bailout program. IMF Managing Director Christine Lagarde said after the euro-area finance ministers’ meeting that the fund will examine the results of the buyback before deciding whether to approve disbursement of additional aid.

The buyback accounts for 11 percentage points, or more than half of the 20 percentage points of the planned drop.

Yeah, right!!! Like the IMF has any idea what the hell its doing. Once again, as a reminder to the not-so-distant financially historically challenged, I bring you Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!:

Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

image005.pngimage005.pngimage005.png

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic. image018.pngimage018.pngimage018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

image013.pngimage013.pngimage013.png

The EU/EC has proven to be no better, and if anything is arguably worse!

image031.png

 While Greece has gotten pledges for 240 billion euros of aid, the funds have been blocked since June as the government tries to get its bailout program back on track after it was disrupted by two elections and a deepening recession.

 Check this out - "the government tries to get its bailout program back on track after it was disrupted by two elections". That damn democracy bullshit. Get's in the way of debt slavery a bit too much more my taste, eh??? 

Then there's " as the government tries to get its bailout program back on track after it was disrupted by... a deepening recession." Well, my friends, the recession would not be deepening so as much if the χώρα που δεν εξαναγκάζονται σε χρέος που προκαλείται από την υποτέλεια στο όνομα της λιτότητας! You can guess what that says if you don't read Greek!

Keep in mind that this is after the Greeks said they didn't have any problems (Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!), after I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!, after an actual default and after a full restructuring. Said restructuing was actually guaranteed to produce another default, as clearly articulated and illustrated in  Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth! - to wit:

By the 2nd quarter of 2010 I clearly and articulately detailed exactly how Greece would default with specific structures in play- What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates. Due to a few institutions who were skeptical, I attempted to make it a bit more real - A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

Well, Greece defaulted according to plan, despite all of the "people in the know" saying otherwise -  - from government officials to the EC and IMF - Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Even after the default, I made clear that this wasn't over for Greece, for the default actually left Greece worse off fundamentally, not better. Go wonder... I know I did, reference the warning from 5 months ago:

This will be exacerbated by a re-default of the Greek debt that was designed to bail out the defaulted Greek debt. Why will this happen? Greece has severe, rigid structural problems that simply cannot (and will not) be solved by throwing indebted liquidity at it. As a matter of fact, the additional debt simply exacerbates the problem - significantly! This was detailed in the post Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

..Subscribers can download my full thoughts on Greece's sustainability post bailout here - debt restructuring_maturity extension blog - March 2012. Professional and institutional subscribers should feel free to email me in order to receive a copy of the Greek restructuring model used to create these charts and come to these conclusions.

    • Even with the elimination of interest payments Greece will spiral downward.
    • Even with the near total absolution of its debt, as in a 90% haircut of the most recent bonds issued (which were swapped for bonds of which investors took an effective 74% haircut), Greece will spiral downward.
    • That is the likely reason why these newest bonds back by EU/IMF bailout economic capital are already trading 70 points below par and rated CCC.
    • These bonds are almost definitely slated for a 90%+ haircut by 2016

Ponder the excerpts from the news clips above as you keep these two charts in mind, the same charts that I've posted at least twice in the last 45 days. A picture is worth a thousand drachma...

Greece_Primary_balanceGreece_Primary_balanceGreece_Primary_balance

The primary balance looks at the structural issues a country may have.

Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!

Greece_Primary_deficit_copy

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Reggie_VPRO_Ratings_agenciesReuters reports that the EU now has made it easier to sue the ratings agencies for errors they have made, as excerpted:

Michel Barnier, the European commissioner in charge of regulation who helped broker a deal on the new law, said it aimed to reduce the over-reliance on ratings and establish a civil liability regime.

The new rules should make it easier to sue the agencies if they are judged to have made errors when, for example, ranking the creditworthiness of debt.

The agencies came under fire for giving top-notch AAA credit scores to debt that later unravelled and they provoked more criticism by downgrading countries at sensitive moments of the crisis.

The EU PTB need to make up their collective minds. If the agencies are to correct the (purposeful) errors made in giving entities AAA ratings that didn’t deserve them, then those very same entities will (and should’ve) been downgraded at sensitive moments in the crisis. This is the kicker, and the statement really should make the EU officials regret they did this, as well as bring back true returns on fundamental analysis realistic market pricing:

The EU's executive said that the new rules ensured that a rating agency could be held liable in cases of negligence or intent that damaged an investor.

You see, if you can really sue the agencies for being wrong, slow or negligent, then the Pan-European Sovereign Debt Crisis is a civil litigators 30 year capitalized Christmas present come true (even if they are Jewish). Let’s look at how this would have played out with the Greek debt and banks which should have traded as junk nearly 3 years ago as foretold by BoomBustBlog:

  1. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! It was clear all were too optimistic regarding the Greek situation.
  2. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks Moody's downgrades after the fact, and after investor losses are taken - LAWSUITS???!!!
  3. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic! Greece's default was a foregone conclusion easil seen on BoomBustBlog, yet the agencies didn't reflect this in ratings. LAWSUITS???!!!
  4. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina Greece's bond restructuring would have had to have been extreme (as in damn near no recovery) to have had a chance of being effective. Did the agencies tell us this? LAWSUITS???!!!!
  5. This Time Is Different As Icarus Blows Up & Burns Greece's redefault was clearly visible before they even competed their first default. This was not reflected in agencies' opinions, analysis or reporting. LAWSUITS anyone???!!!

Greece's primary balance went long term negative in 2004, save the bubble levitated year of 2006...

Greece_Primary_balanceGreece_Primary_balanceGreece_Primary_balance

The primary balance looks at the structural issues a country may have.

Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default! Simple addition and subtraction shows that there's no way in hell Greece can service its debt, defautled debt, or even its redefaulted debt or the round of debt after that. 

Greece_Primary_deficit_copyGreece_Primary_deficit_copyGreece_Primary_deficit_copy

We don't have to dwell in the past to prove this point either. Why hasn't Italy been dramatically downgraded? It's a wonder they finally got around to downgrading France (The Beginning Of The Great French Unwind…), after all of the evidence that I put forth - reference Italy Woes Lead To French Lows. Believe It… Let's stay on topic, about Italy? The 10 page BoomBustBlog report (subscribers, download the full report here File Icon Italy public finances projection, click here to subscribe) excerpted below is approaching 3 years old and it clearly outlined the tumult that is today's Italy and did so well in advance. My analytical staff is small in than Moody's stamp licking staff, yet somehow they fail to warn what I unequivocally cautioned on years ago. What was it did that EU official proclaim? Oh yeah... 

"The EU's executive said that the new rules ensured that a rating agency could be held liable in cases of negligence or intent that damaged an investor."

 Italy public finances projections Page 01Italy public finances projections Page 02Italy public finances projections Page 03

Subscribers (click here to subscribe) can dig in the archives for this still highly relevant and profitable Italy research:

File Icon Italy Exposure Producing Bank Risk
File Icon Italian Banking Macro-Fundamental Discussion Note

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

File Icon Sovereign Contagion Model - Pro & Institutional

Tell me, why do you have to hear this from me versus the rating agencies? Here's the reason...

What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer!

There are many areas where ratings agenceis still are not putting enough pressure, a few of which have been pointed out at the blog:

For those who haven't seen this documentary on the rating agencies by VPRO, it is more than worth your time...

Reggie_VPRO_Ratings_agenciesReggie_VPRO_Ratings_agencies

Continuing my rant on the effectiveness (not) of the ratings agencies, I bring to you an interesting documentary on the rating agencies' effect on the sovereign debt crisis in Europe, produced by VPRO Tegenlicht out of Amsterdam. You can see the full video here, but only about half of it is in English. I appear in the following spots: 4:00, 22:30, 40:00...

Reggie Middleton Discussing the Rating Agencies effect on Sovereign Europe

 

 

 

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Wednesday, 28 November 2012 05:49

Italy Woes Lead To French Lows. Believe It!

As a quick reminder, we're still looking out for the Great French Unwind, for it will start as The Pandemic Bank Flu Spread From Italy To France To ... You see, as I see it, the duopoly of those controlling the EU purse strings is far from invulnerable. As a matter of fact, from many perspectives, they have the farthest to fall. All you need to do is sit back and wait... Wait for the time when The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink! That's when the stinky brown stuff spatters from the fan blades. France will likely be the first to crack, with Italy as impetus, then recessionary Germany will stand alone, no? Not! For those hopium smoking Eurocrats who feel that Germany still will pull out of this unscathed, I reference the riddle: The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

I know all of this can get confusing, but it was easily foreseen back in 2010, and we've built a contagion model that helps track possible paths of mayhem. Of course, it's difficult to predict when things will go down or the precise route, but the how is really rather obvious. On with the concept of obvious, as stated many times in BoomBustBlog, French banks, hence the bank bailing socialist French government, is highly levered into Italy and Italian debt, among other porcine based fixed income instruments...

image008

Subscribers can reference French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian exposure

This exposure leaves France quite sensitive to Italian woes, considerably more so than your typical rating agency may lead you to believe even when downgrading France from AAA status - albeit it a year or so too late (Moody's Actions Add Pressure To The Inevitable In France?). Today, we see the MSM outlet CNBC espousing the obvious regarding Italy: Will Italy Need a Bailout in 2013? As you read this, remember they are essentially talking about France as 2nd derivative:

“We still see as our baseline scenario that Italy will likely be forced to ask for an international bailout at some point in 2013,” said Citi Analyst Giada Giani in a report on the country.

“Italian economic fundamentals have not really improved, despite some improvement in market conditions. The negative feedbacks from fiscal austerity on growth have been severe, as the ability of the private sector to absorb fiscal tightening by lowering its saving rate is limited.”

Economists at other banks and research institutions agreed that Italy’s recession will be deeper than financial markets are currently pricing in.

“The composition of austerity so far — skewed towards increases in taxation rather than cuts in expenditure — and the tight credit conditions, will weigh very negatively on the economy and the market will have to take stock of it,” said Nomura Economist Silvio Peruzzo.

“Weaker growth will have implications for fiscal plans and debt sustainability and could trigger a return of tensions.”

Mark Willis, an economist at Roubini Global Economics, said market focus on Greece’s and Spain’s economic woes had distracted investors from the structural weaknesses inherent in both Italy’s economy, and its political system.

He added that Italy suffered from three “core vulnerabilities” of weak growth, very high levels of public debt and regular bouts of political instability, the latter of which is likely to reappear in the build-up to the spring 2013 general election.

Italian woes lead to French Lows. Believe it! Subscribers are recommended to review the document icon Italy Exposure Producing Bank Risk (788.3 kB 2012-11-28 06:00:45)

As stated in the seminal pieces, The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! and The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!Bank runs are inevitable! 

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

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008image008

Yes, European bank runs are inevitable, but the causes of the bank runs are not. That's the problem. Instead of addressing the root causes of the bank runs, EU decision makers opt to throw more paper money into a gaping furnace to be burned as fast as it can be shoveled. 

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 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)

image014

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