ZeroHedge dutifully reports: Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely." True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?

...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. 

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Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

 Let Me Post This Paragraph ONE MORE TIME!

...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.

Super, Duper, B-I-N-G-0!!! It is so relieving to hear someone else espouse what really should be common damn sense, yet happens to be one of the uncommon commodities to be found on the Isle of Manhattan.

Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010

Mr. Middleton discusses JP Morgan and concentrated bank risk.

Hey, there ain't no concentration risk in US banks, and any blogger with two synapses to spark together should know this...

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". 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

 

Oh yeah, and while we're at it, this Morgan Stanley thing has been a concern of mine for well over a year now. The interest rate storm is coming, that is unless Europe can maintain historically low rates as several countries default. Then again, they never default, right...

Don't belive me, let's look at history...

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So, as I was saying...

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!

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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.

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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 KbGoldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb, Goldman 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.

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As a result of a surge in interest rate and Forex contracts, dependency on revenues from these products has increased substantially and has in turn been a source of considerable volatility to total revenues. As of 2Q-09 combined trading revenues (cash and off balance sheet exposure) from Interest rate and Forex for JP Morgan stood at $2.4 trillion, or 9.5% of the total revenues while the same for GS and BAC (subscribers, see BAC Swap exposure_011009 BAC Swap exposure_011009 2009-10-15 01:02:21 279.76 Kb) stood at $(196) million and $433 million, respectively. As can be seen, Goldman's trading teams are not nearly as infallible as urban myth makes them out to be.

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Although JP Morgan's exposure to interest rate contracts has declined to $64.5 trillion as of 2Q09 from $75.2 trillion as of 3Q07, trading revenues from Interest rate contracts (cash and off balance sheet position) have witnessed a significant volatility spike and have increased marginally to $1,512 in 2Q09 compared with $1,496 in 3Q07. Although JPM's Forex exposure has decreased from its peak of $8.2 trillion in 3Q08, at $3.2 trillion in 2Q09 the exposure is still is higher than 3Q07 levels. Even for Bank of America and Citi , the revenues from Interest rate and forex products have been volatile despite a moderate reduction in overall exposure. With top 5 banks having about 97% market share of the total banking industry notional amounts as of June 30, 2009, the revenues from trading activities for these banks are practically guaranteed to be highly volatile in the event of significant market disruption - a disruption aptly described by the esteemed Professor Roubini as a rush to the exit in the "Mother of All Carry Trades" as the largest macro experiment in the history of this country starts to unwind, or even if the participants in this carry trade think it is about to start to unwind.

The table below shows the trend in trading revenues from Interest rate and Forex positions for top banks in U.S.

Click to enlarge...

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Banks exposure to interest rate and foreign exchange contracts

With volatility in currency markets exploding to astounding levels (with average EUR-USD volatility of 16.5% over the past year (September 2008-09) compared to 8.9%  over the previous year), commercial and investment banks trading revenues are expected to remain highly unpredictable. This, coupled with huge Forex and Interest rate derivative exposure for major commercial banks, could trigger a wave of losses in the event of significant market disruptions - or a race to the exit door of this speculative carry trade. Additionally most of these Forex and Interest rate contracts are over-the-contract (OTC) contracts with 96.2% of total derivative contracts being traded as OTC. This means no central clearing, no standardization in contracts, the potential for extreme opacity in pricing, diversity in valuation as well as a dearth of liquidity when it is most needed - at the time when everyone is looking to exit. Goldman Sachs has the largest OTC traded contracts with 98.5% of its derivative contracts traded over the counter. With the 5 largest banks representing 97% of the total banking industry notional amount of derivatives and most of these contracts being traded off exchange, the effectiveness of derivatives as a hedging instrument raises serious questions since most of these banks are counterparty to one another in one very small, very tight circle (see the free article, "As the markets climb on top of one big, incestuous pool of concentrated risk... ").

bank_ficc_otc_exposure_and_currency_volatility.png

The table below compares interest rate contracts and foreign exchange contracts for JPM, GS, Citi, BAC and WFC.

JP Morgan has the largest exposure in terms of notional value with $64,604 trillion of notional value of interest rate contracts and $6,977 trillion of notional value of foreign exchange contracts. In terms of actual risk exposure measured by gross derivative exposure before netting of counterparties, JP Morgan with $1,798 bn of gross derivative receivable, or 21.7x of tangible equity, has the largest gross derivative risk exposure followed by Bank of America ($1,760 bn, or 18.1x). Bank of America with $1,393 bn of gross derivatives relating to interest rate has the highest exposure towards interest rate sensitivity while JP Morgan with $154 bn of Foreign exchange contracts has the highest exposure from currency volatility. We have explored this in forensic detail for subscribers, and have offered a free preview for visitors to the blog: (JPM Public Excerpt of Forensic Analysis SubscriptionJPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is free to download, and File Icon JPM Report (Subscription-only) Final - Professional, orFile Icon JPM Forensic Report (Subscription-only) Final- Retail as well as a free blog article on BAC off balance sheet exposure If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC).

bank_ficc_otc_exposure_jpm.png

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Subscribers, see WFC Research Note Sep 2009 WFC Research Note Sep 2009 2009-09-30 13:01:30 281.29 Kb, ~ WFC Off Balance Sheet Exposure WFC Off Balance Sheet Exposure 2009-10-19 04:25:53 258.77 Kb ~ WFC Investment Note 22 May 09 - Retail WFC Investment Note 22 May 09 - Retail 2009-05-27 01:55:50 554.15 Kb ~ WFC Investment Note 22 May 09 - Pro WFC Investment Note 22 May 09 - Pro 2009-05-27 01:56:54 853.53 Kb ~ Wells Fargo ABS Inventory Wells Fargo ABS Inventory 2008-08-30 06:40:27 798.22 Kb to expound on our opinions of Wells Fargo, below.

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bank_ficc_otc_exposure_ms.png

Subscribers, see MS Simulated Government Stress Test MS Simulated Government Stress Test 2009-05-05 11:36:25 2.49 Mb and MS Stess Test Model Assumptions and Stress Test Valuation MS Stess Test Model Assumptions and Stress Test Valuation 2009-04-22 07:55:17 339.99 Kb

Published in BoomBustBlog

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

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

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

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

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

Stocks Jump as ECB Offers Loans to Banks [Bloomberg]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Income statement implications of a true bank run...

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

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

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

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

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

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

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

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document contianing all types of juicy details...

Published in BoomBustBlog

As of late, I have been on a tear regarding the French banking system - having warned my paying subscribers at least a full quarter ago (and 50% in equity depreciation ago) that this was a house of cards ready to collapse. Well, now the chickens are coming home to roost and the sell side of Wall Street, the pop media, and the ratings agencies have all come around to this conclusion espoused in the BoomBustBllog archives, as was illustrated in the post As The French Bank Runs.... Of course, French bank management denies any and all financial and funding issues. As clearly ridiculed explained in This Is Why BoomBustBlog Is THE Place To Go For Hard Hitting Research: BoomBust BNP Parisbas?:

"Chief Executive Officer Frederic Oudea said in an interview with Bloomberg Television in New York that the bank’s exposure to European sovereign debt was “manageable” and that it could do without access to U.S. money-market funds.“For our bank, the exposure to sovereign debt is low, absolutely manageable,” Oudea said. “We have plenty of buffers of liquidity and we are adjusting to the reduction in the money- market fund exposure.”"

Note: For clarification, Oudea is the CEO of SocGen, but the the point remains as illustrated by a statement released by Bank of France governor Christophe Noyer, which said that French banks had no liquidity or solvency problems, and were recapitalizing.

Well, in the afore-linked piece, I published some choice tidbits from the Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers (click here to subscribe), and otherwise known as BNP Paribas, First Thoughts, with interesting page titles such as the following...

BNP_Paribus_First_Thoughts_4_Page_04

Not even 24 hours later, what do we see in the pop financial media? BNP Paribas to Sell $95.4 Billion in Risk-Weighted Assets (CNBC) and BNP Paribas to Boost Capital Ratio, Cut U.S. Assets (Bloomberg).

(CNBC) France's top bank BNP Paribas announced a plan to sell 70 billion euros ($95.7 billion) of risk-weighted assets to help ease mounting investor fears about French bank leverage and funding, two days after smaller rival Societe Generale unveiled a similar plan.

So, who do you believe, bank CEOs or Reggie Middleton. Again borrowing from yesterday's post This Is Why BoomBustBlog Is THE Place To Go For Hard Hitting Research: BoomBust BNP Parisbas?, I offer a hint to those that may be in doubt by channeling my warnings of Bear Stearns in 2008, via Is this the Breaking of the Bear? (January 17, 2008) which I quote, "Bear Stearns is in Real trouble - Bear Stearns will soon be, if not already, in a fight for its life."

The forensic adjustments that led to a null economic book value in the case of Bear Stearns above are the same that need to be made to BNP Paribas, as illustrated from my post yesterday:

OK, I'll bite. Excactly how did BNP get to this €135 billion figure? Was it by using Lehman math? Methinks so, as clearly delineated in my resarch report on the very first page:

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

Of course, and eerily, like Alan Schwartz (Bear Stearns then CEO), BNP Paribas CEO denies any problems and actually says the bank is handling its issues (that they don't have) rather well. Let's channel 2008 again for a moment, shall we?

Hey, Big Wall Street Bank Execs Always Tell the Truth When They're in Trouble, RIIIIGHT????

Here's more of Alan Schwartz lying on TV in March of 2008

I query thee, why sell $96 billion dollars of assets when there is NO liquidity problem? When I was a child I would often question my rather disciplinarian father's contradictory actions. He would then reply in his gruff, deep, masculine voice, 'Boy, do as I say not as I do!" Is BNP Paribas CEO channeling both the elder Middleton and Alan Schwartz of Bear Stearns' fame simultaneously?

On a separate, yet related note: Moody's Downgrades Credit Agricole, SocGen Ratings. BoomBustBloggers, you can't say you didn't see this coming...

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

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

Published in BoomBustBlog
Monday, 12 September 2011 02:24

As The French Bank Runs....

The BoomBustBlog forensic research combined with illustrative trade setups have literally enabled subscribers to profit, and profit significantly from the carnage going on in Europe - and by extension the carnage quickly heading across the pond to US banks. I would like to take the time to catalog the success of both the research and the trading strategies, but first l want to call attetion to FT Alphaville's most interesting article that basically calls SocGen out on its Lehmanization of its apparent liquidity woes - ingeniously titled, "On SocGen’s pawnshop defence".

Societe Generale has released ‘hard facts’ about its liquidity position on Monday.

Among the points the bank says it has managed to successfully manage a reduction in access to USD funding through a disposal of USD legacy assets, increased use of secured USD funding (repos), EUR/USD swaps and a “reduction  in short-term market positions”.

But as Espirito Santo Investment Bank’s Andrew Lim is quick to point out, the bank never actually states its short-term high quality liquid assets with respect to its short-term wholesale funding reqirements. That is, its coverage ratio.

In other words it’s all very well selling off legacy assets, and depending more on secured USD funding (repos) but that sort of strategy only really works providing you have a large amount of short-term high-quality liquid assets to pawn to begin with.

In other words it’s all very well selling off legacy assets, and depending more on secured USD funding (repos) but that sort of strategy only really works providing you have a large amount of short-term high-quality liquid assets to pawn to begin with.

Just like an individual facing a short-term liquidity crunch, if you happen to own a bunch of valuable gold jewelery, it’s more than likely you’ll be able to raise the short-term cash you need from the pawning industry. If you only own a bunch of already constructed flat-pack furniture, whatever its book value, you’re going to be less likely to raise the cash.

(The point to appreciate  here is that it’s only the ECB which lends cash against the equivalent of flat-pack furniture — possibly why the EUR/USD basis swap is one other option being presented by SocGen as a funding route. You switch your flat-pack furniture for euros, and then swap them for dollars in the currency basis swap market.)

Lim's notes, as quoted by Aphaville...

This is a fairer measure of the robustness of Soc Gen’s liquidity profile and in this respect, Soc Gen fares the worst out of all the French and investment banks (see page 4 of attached note). Soc Gen states that the group’s buffer of unencumbered liquid assets is €105bn - however, this includes lower quality assets (such as risky sovereign bonds which can now only really be repo’d with the ECB, and AAA credit assets like RMBS, which we do not consider high quality and liquid). We think its true high quality liquid asset portfolio is more like €42bn by our calculations.

Lim then states directly:

This model will come under threat if the credit and equity markets lose belief in the robustness of its short-term funding profile, in our view.

It is quite refreshing to see some real and objective analysis come out of the sell side, particularly from one bank regarding another, but I must admit that if I had to pick a bone with Lim's analysis, it wouldn't be the content or quality, but the timeliness. What the hell took you so long to come to these rather astute observations, dude? Let's recap the BoomBustBlog perspective before I offer my opinion for the upcoming week...

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

image012

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

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

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

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

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

I also provided a very informative document for public consumption which clearly detailed exactly how this French bank collapse thing is likely to go down: File Icon French Bank Run Forensic Thoughts - pubic preview for Blog - A freebie, to illustrate what all of you non-subscribers are missing!

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document contianing all types of juicy details...

This bank is trading down significantly as I type this. Of course, last but not least, Moody's finally chimes in with the obvious as it arrives at a smoldering pile of ashes and cinder where an investment house used to be, squirting its fire hose at full blast - all so after the fact: French Banks Poised for Moody’s Downgrade and Biggest French Banks May Have Ratings Cut by Moody’s on Greek Holdings (Duhhh!)

My next post will reveal my views on European bank liquidity (or more accurately, the lack thereof) and why the Lehmanization of big European banks is basically a forgone conclusion.

Published in BoomBustBlog

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

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

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

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

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

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

From Eurocalypse, one of the resident BoomBustBlog traders:

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

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

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

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

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

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

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

Relevant material for capturing maximum alpha duing this European banking meltdown:

File Icon French Bank Run Forensic Thoughts - pubic preview for Blog - A freebie, to illustrate what all of you non-subscribers are missing!

Published in BoomBustBlog

Trading commentary from BoomBustBlogger resident trader, Eurocalypse...

It's Labor Day in the US, but mkts are already in the move in Asia and Europe. The previous week ended on a quite bearish note, with red ink in all stock markets, especially financials, and moves that exceeded the implied volatilities/breakeven moves, after a period of relatively calm. This is hardly a surprise to us. Really! Any BoomBustBlogger who has put on any of the bearish positions recommended in the subscription material is due to be very, very richly rewarded in the next day or two. I can’t recall any good economic data last week, and one should be foolish to expect anything good anytime soon when all stimulus has been withdrawn, and austerity mode is full ON.

Still I believe the most significant development in the last days is not in the stock market but in the PIIGS crisis again, and on that note my full trading opinion can be downloaded by all subscribers here Eurocalypse Trading Update 9-6-2011.

 italy_10yr

10Y Italian yields have resumed their uptrend, with supply hitting the market through a very poorly received auction last week. As I have said before, no money manager can buy this Italian debt. This statement must be emboldend, for on Tuesday, 19 July 2011 I wrote "Didn't Anyone Notice The Seemingly Irreparable Damage To The Eurozone Last Week? Global Short Ban, Here We Come!":

When last week's Italian 10Y surged from 5% to 6%, it marked something irreparable, which was not indicated in the extent of the move, but its violence.
Six percent, as we know, is unsustainable for Italy (more than its GDP nominal growth which is closer to 2-3% today, and getting worse...)

Whats even more important is that VAR has gone crazy everywhere. Not only banks, even insurers and money managers take volatility of an asset as an input. When you lose 7% in capital in one week, which is 7x the 100bp spread you hoped to make in 1 year, something is very wrong. Even stock market indices failed to sell off as much in a week (and rarely do so)...
Thusly, nobody in their right mind is going to buy Italy (or Spain). The only natural buyers now stem from:

    1. short covering (profit taking) activity,
    2. passive buying from Italian accounts for ALM purposes (they must be "invited" to do so)
    3. and public buying trying to prop up the market, but their pockets aren't deep enough.

As a result, we may have the very few next auctions doing ok (especially if yields go up and short covering continues), but then its chaos Portugal-style.. it could take only a few weeks (or even days!) from here.

The only way I envision it not happening is Euro-bonds gaining traction and actually being implemented (but that doesnt seem likely if you believe the press reports) or financial repression.

Financial Repression???!!!

By financial repression, I mean taking out short sellers,,,, seriously! Not only banking stocks (like was done in 2008):

    1. SEC Extends Ban On Shorting Of Financial Stocks - Forbes.com Oct 1, 2008 – Restrictions will expire Oct. 17, about the time a slew of bank earnings are set to be released.

    2. SEC Halts Short Selling of Financial Stocks to Protect Investors Sep 19, 2008 – SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets. Commission Also Takes Steps to Increase Market Transparency ...

    3. S.E.C. Temporarily Blocks Short Sales of Financial Stocks ... Sep 19, 2008 – The Securities and Exchange Commission issued a temporary ban on short ... Short selling — a bet that a stock price will decline — is the ..

but on govt debt as well, making void all CDS contracts on sovereigns (or saying they will expire or cash settle at a very soon date) and trying to shut out HFs by increasing regulation, disclosure and taxation on them.

Excess volatility is not good for the markets, and it would surely cause huge short covering, but it could buy some time, and if the move is surprisingly large (bringing us to 4% range...!!!) then maybe it's not just buying time, and we are underestimating the extent of the short sellers which currently have the market in hand (and we know all the "good" reasons why).

Now, with the benefit of hindsight, we now know that I was much more prescient observative than many a long would be keen to admit!!! When the 10Y yields shot up from sub 5% to 6.3% in a few weeks’ time, VARs exploded. Traders and Money Managers just can't take any positions anymore (or only a fraction of what they could) and for choice, those who can take positions from a flat book, would prefer to be short, of course !!! Thus the only buying activity has been from tactical short covering and some passive domestic buying, but basically all the non-domestic non-passive demand has vanished, and the ECB just can’t make for all of that.

So it is only a matter of little time when Italy and Spain implode like Greece or Ireland or Portugal, especially with all the auctions hitting the market after the summer vacations. In this light, the post Did You Know That The Upcoming Italian Auction Can Spark Contagion That Touches A BIG US Bank? is s!imply indicitave of the chickens coming home to roost, and the subscription document that highlights the sytemic US bank that is at risk here is a very valuable document indeed! Subscribers, reference File Icon Actionable Note on US Bank/ French Bank Run Contagion, then follow up with the respective retail and pro versions of the subsequent docs on that subject bank.

So it is hardly a surprise to see the indexes down in Europe led by financials. Reggie has been spot on all along on that, and I am 100% with him on the big picture, and actually I may be even more pessimistic than he is. Think USSR 1989, (Crony) Capitalism 2012.

 socgen

I wrote last week to go short again the SP @ 1177, and to increase short positions when we traded 1215 before the payrolls. It was tough given the false double bottom signal, but that proved the correct choice. As I wrote, despite being oversold in the longer term charts, the European markets were vulnerable after the short squeeze, and and we called it over, especially in financials, reference Bank Run Candidate Option Trading Update (referencing native exchange pricing, ADRs are available for US investors.

Cutting gamma may have been a bit of a bad idea, but even with Fridays and todays move, which reminds that shorting vol is NOT a good idea, longs have had difficulties to make for the lost theta. Even though I’m pretty sure were in a bear market, I’m not sure we will see a straight line down from here. I still believe in my targets (see previous trading tips) of 1030 in SP and that if a crash in European markets happen, there will be a consequent bounce to play.

Many of the remaining recommended option strategies on the downside, are spreads which perform better if we don’t go down too fast until the end of the month, though the Armageddon November SP 1100 put is still alive.

Anybody who has followed the western European markets full know that the Reggie Middleton calls on French bank runs have been spot on. The French banks have basically been decimated as the markets start to truly realize what BoomBustBloggers have knew for months by now... Just As Predicted Over The Past Month, The French Bank Run Seems To Have Commenced. The French banks are truly getting slaughtered. For those who haven't been following Reggie and BoomBustBlog on this topic, you have missed out on an amazing call that I have not seen replicated anywhere! Below are a list of public links that detail the call:

  1. France, As Most Susceptble To Contagion,…
  2. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

  3. What Happens When That Juggler Gets Clumsy?

  4. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such

  5. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year

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

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

  8. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run

  9. Observations Of French Markets From A Trader's Perspective

  10. On Your Mark, Get Set, (Bank) Run! The D…

 

Relevent Subscriber downloads

Trading setups and illustrations:

Fundamental analysis and forensic research:

Published in BoomBustBlog

True market volatility is still here with trading ranges that are as wide as some years annual moves. We still maintain our fundamental bearish stances, particularly on US EU banks, both of which have rallied heavily over the last few days. In today's news...

Losses Push Major Banks out of Top Europe Index

 

European banks Societe Generale, UniCredit and Intesa Sanpaolo, which suffered heavy losses in August, will be removed from the region's blue-chip STOXX Europe 50 index, the index complier STOXX said.

Euro Zone, IMF Clash on Estimates of Banks' Damage

International Monetary Fund staff have provoked a fierce dispute with eurozone authorities by circulating estimates showing serious damage to European banks’ balance sheets from their holdings of troubled eurozone sovereign debt.

ecb_logo1The IMF’s work, contained in a draft version of its regular Global Financial Stability Report (GFSR), uses credit default swap prices to estimate the market value of government bonds of the three eurozone countries receiving IMF bailouts – Ireland, Greece and Portugal – together with those of Italy, Spain and Belgium.The analysis, which was discussed by the IMF’s executive board in Washington on Wednesday, has been strongly rebutted by the European Central Bank and eurozone governments, which say it is partial and misleading.

Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks’ tangible common equity – the core measure of their capital base – by about 200 billion euros ($287 billion), a drop of 10-12 percent. The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks.

The ECB and eurozone governments have rejected such estimates.

Elena Salgado, Spanish finance minister, told the Financial Times on Wednesday that the fund was mistaken in looking only at potential losses without also taking account of holdings of German Bunds, which have risen in price.

“The IMF vision is biased,” she said. “They only see the bad part of the debate.”

Ms Salgado added “this is the second time it has happened”, referring to the fund’s October 2009 GFSR, which estimated that eurozone banks had only written down $347 billion of $814 billion of probable losses from the financial crisis. 

It later revised down that total of probable total losses by a quarter. Ms Salgado said that the European stress tests of banks were a better indication of their vulnerabilities.

Officials involved in the debate say the mark-to-market analysis can explain much of the recent fall in European commercial banks’ share prices, including French and German institutions that have large holdings of eurozone sovereign debt.

“Marking to market is a fairly brutal exercise, but these are the estimates that hedge funds are currently making,” one official said.

Hmmm. The IMF and the EU are disagreeing on how bad the state of European banking really is... Has anyone really wondered what would happen if a truly independent entity would review the books? What would be their findings? Let's take a look at the BoomBustBlog EU archives and pull out Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! while keeping in mind that this article was researched and written well over a year ago!

The IMF and the EU have been consistently and overtly optimistic from the very beginning of this crisis. Their numbers have been dramatically over the top on the super bright, this will end pretty, rosy scenario side - and that is after multiple revisions to the downside!!! We can visit the US concept of regulatory capture (see How Regulatory Capture Turns Doo Doo Deadly and Lehman Brothers Dies While Getting Away with Murder: Regulatory Capture at its Best) for the EU, but due to time constraints we will save that topic for a later date. To make matters even worse, the sovereign states have taken these dramatically optimistic and proven unrealistic projections and have made even more optimistic and dramatically unrealistic projections on top of those in order to create the illusion of a workable "austerity" plan when in reality there is no way in hell the stated and published plans will come anywhere near reducing the debts and deficits as advertised - No Way in Hell (Hades/Tartarus/Anao/Uffern/Peklo/Niffliehem - just to cover some of the Euro states caught fudging the numbers)!

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

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

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

image031.png

Revisions-R-US!

image044.png

and the EU on goverment balance??? Way, way, way off.

image040.png

If the IMF was wrong, what in the world does that make the EC/EU?

The EC forecasts have been just as bad, if not much, much worse in nearly all of the forecasting scenarios we presented. Hey, if you think tha's bad, try taking a look at what the govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!...

greek_debt_forecast.png

Think about it! With a .5% revisions, the EC was still 3 full points to the optimistic side on GDP, that puts the possibility of Greek government forecasts, which are much more optimistic than both the EU and the slightly more stringent but still mostly erroneous IMF numbers, being anywhere near realistic somewhere between zero and no way in hell (tartarus, hades, purgatory...).

Now, if the Greek government's macroeconomic assumptions are overstated when compared with EU estimates, and the EU estimates are overstated when compared to the IMF estimates, and the IMF estimates are overstated when compared to reality.... Just who the hell can you trust these days??? Never fear, Reggie's here. Download our "unbiased, non-captured, empirically driven" forecast of the REAL Greek economy - (subscribers only, click here to subscribeGreece Public Finances Projections Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb. Related banking research can be downloaded here:

It really is a shame when you have to pay for the truth, isn't it? If you think you've witnessed an example of social unrest in Greece, you ain't seen nuthin' yet. Wait until the reality of these faked numbers start hitting home...
greek_strikes.png

What about the UK?

I'm glad you asked. We just finished our UK analysis (subscribers, see UK Public Finances March 2010 UK Public Finances March 2010 2010-03-24 09:32:01 617.23 Kb), and the Greek theme has continued into the land of the Brits.

uk_economic_estimtes.png

... and in terms of government balance over-optimism???

uk_gaovernment_balance_projections.png

...

And what about Italy???

Again, we're glad you inquired. Subscribers should download Italy public finances projection Italy public finances projection 2010-03-22 10:47:41 588.19 Kb as well as theFile Icon Italian Banking Macro-Fundamental Discussion Note and the

File Icon Spanish Banking Macro Discussion Note in anticipation of our upcoming Spain analysis, which should be a doozy!

This is Italy's presumption of economic growth used in their fiscal projections:

italian_real_gdp_growth.pngitalian_real_gdp_growth.pngitalian_real_gdp_growth.png


image006.png

image042.png

 

For those of you who still have any interest in the big European Sovereign Debt Scam, I also introduce you to our analysis of European bank asset impairments. Reference (yes, once again) the instructional video, the public blog post and the high end subscription only "UGLY TRUTH". It is absolutely amazing how often I can use, and then reuse these links yet they still remain quite timely, informative and apt given the contextual news for the day at hand. Apparently, there must be some validity to their content.

The Keynote Presentation in Amsterdam

Banks NPAs to total loans

Source: IMF, Boombust research and analytics

Euro banks remain weak as compared to their US counterparts

Health of European banks is weaker when compared to US banks. European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.

EURO Stress Test Rebuffed, Again

The OECD working paper “The EU stress test and sovereign debt exposures” by Adrian Blundell-Wignall and Patrick Slovik rebuffs the EU stress test, as we have several times in the past. The argument in the white paper echoes BoomBustBlog view that accounting policies allows banks and financial institutions to mask their true economic health. An asset that has declined in value leads to economic loss irrespective of its classification as held-to-maturity or held-for-trading, but accounting policies allow banks to mark down only their trading portfolio to the current market value while leaving a large chunk of held-to-maturity at book value even if said asset loses 50% in value that would take years to recover, or the bank could be presented with the very distinct possibility that there may be no recovery of said value loss. The former event (of recovering back to book value) would mask the true economic picture at a given snap shot of time while the latter (no recovery) is more of time shifting distortion wherein current profits are inflated for future losses.

Coming back to the EU stress test, the paper contends that by focusing only on the trading book exposures, the EU stress test gave a rosy picture of banks true health.

•     Sovereign bond haircuts were applied only on the trading book holdings with implicit assumption that bonds held to maturity will receive 100 cents in the euro. This assumption severely understates the banks losses as 83% of banks investment portfolio is in banking books in form of held-to-maturity assets while only 17% of assets are held in trading portfolio. In case of sovereign default, the distinction between the banking book and the trading book simply disappears. By considering only a smaller component of banks investment books, EU stress tests have severely undermined the estimated write-downs on banks books and have given rosy picture about banks true health. The logic of said methodology is that with the EU/ECB/ EFSF SPV (basically, a giant new European CDO) backing, no sovereign state will be allowed to default.

•     Second, and more importantly, the market is not prepared to give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the EFSF SPV comes to an end.

o   The assumption of no default over 2010-2012 appears reasonable given that the EFSF is made up of a €720bn lending facility (€220bn from the IMF; €60bn from the EU; and the SPV can build exposures for 3 years to the limit of €440bn for the 16 Euro area countries) which provides a guarantee of funding for any countries facing financing pressures, certainly for the next 3 years.

o   However, the concerns in the market beyond 2012 are: the longer-run fiscal sustainability problem; and the difficulty of achieving structural adjustments in labor and pension markets and ability to achieve a sustainable growth in a period of budget restraint. The fear is that this will not be resolved by the time the support packages run out, and hence the probability of restructuring may not be put at zero by portfolio managers. Angela Merkel has recently announced her willingness to spearhead several common nation reforms to put the EU block of nations on heterogeneous footing in regards to regulation, debt management etc. This will go a long way to solving the problem at hand, but will also put significant strain on several of the weaker nations, again exacerbating the probability for restructuring to bring said nations in line with their stronger counterparts.

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.

If you liked this, then you probably would have great interest in:

Relevant material for capturing maximum alpha duing this European banking meltdown:

File Icon French Bank Run Forensic Thoughts - pubic preview for Blog - A freebie, to illustrate what all of you non-subscribers are missing!

Published in BoomBustBlog

On Tuesday, 12 April 2011 I wrote "Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks".  Today, CNBC runs this on thier front page today... Big Banks Forced to Cut Back Again as Economy Weakens: Battered by a weak economy, the nation’s biggest banks are cutting jobs, consolidating businesses and scrambling for new sources of income.

I believed this to be inevitable for we are still nowhere near a true economic recovery. The main source of lending for most US banks, the housing industry, is in a veritable depression. See Reggie Middleton's Real Estate Recap: As I Have Clearly Illustrated, It's a Real Estate Depression!!! and The Residential Real Estate Week in Review, or I Told You We're In A Real Estate Depression. Even the news today points to more of the same... Pending Home Sales Fall 1.3 Percent in July from June

Big companies are firiing freely again while the main engine of US employment, the small business, exhibits a slowing in hiring in August as wages dip. The balance sheet draw is evident as some banks dump assets at firesale prices.... years after the alleged fire has been put out, while other banks simply refuse to come clearn with the truth... Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn 

Needless to say, it is nigh time to start to take another look at the big US banks.

 

 

 

 

 

Published in BoomBustBlog

JohnMack_copyOn February 10, 2008, I created an extensive blog post, explicitly labeling Morgan Stanley as "The Riskiest Bank on the Street!" To my knowledge, I was the only one to make such a blatant accusation. Of course, months later Morgan Stanley and all of its brethren started collapsing. Many attributed this to the overall market malaise, I didn't.

In September of 2008, 7 months after the first bearish report, I penned "As I said, the Riskiest Bank on the Street", which essentially compared my opinion, analysis and most importantly accuracy, to that of the Street's sell side, as excerpted...

For all of those who had/have a buy on Morgan Stanley, contact me for a special institutional subscription to the blog. I have said Morgan Stanley is a very strong short candidate (for about 9 months now).

Wall Street has said the following (from Zacks.com, ABR = average broker recommendation): 

MORGAN STANLEY
(NYSE) $21.75

Current ABR 2.27
ABR (Last week) 2.27
# of Recs in ABR 11
Average Target Price: $51.60
LT Growth Rate 10.40%

The average broker recommended price for that period (and this period as well) was/is absolutely absurd, and has no grounding whatsoever in reality. This is what my report said in 2008:

We value Morgan Stanley at US$20.76 per share, 58% lower than the current market price – We have analyzed Morgan Stanley exposure toward the Level 3 assets and its exposure to unconsolidated VIEs. To value Morgan Stanley, we have used the Discounted Cash Flow (DCF), Price-to- adjusted book (P/BV) and Price-to-Earnings (P/E) multiple methods. Based on our weighted average valuation, we arrive at a fair value of $20.76 which represents a downside of 57% from current levels of $48.25.

Look at graph below to determine who was closer to the truth, Reggie Middleton and his team, or Wall Street - all of Wall Street!

Does this make you wonder why create posts such as Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? It should be blatantly apparent that anyone who follows Sell Side researh over that of BoomBustBlog is at best taking extreme risks with their capital, and more realitically headed for disaster and deserving every bit of it along the way. The telling portion of this tale is today's Bloomberg article ilustrating a fact which we suspected, but which no one really knew for sure except Wall Street banking insiders, and that was that MS took $107 in loans from the Fed during 2008. More than any other entity in the history of the Fed, more than all of the banks who had both larger balance sheets and asset basis' than MS, more than anybody. So, was I right? Was MS truly the The Riskiest Bank on the Street? We shall delve into the Bloomberg article, but first, a few more excerpts from the aforementioned blog post of January 2008:

"Worsening macro and market conditions to restrict revenue growth – Financial services industry witnessing its toughest times in recent history faces a tough task of getting things back to normal. The deteriorating macro environment coupled with flagging confidence among investors/customers alike, things are more likely to get worse than better."

"as tests to its excessive exposure to the anemic capital reserves of its counterparties, namely monoline insurers and hedge funds."

Now, from Bloomberg: Morgan Stanley at Brink Got $107B From Fed:

As markets convulsed in September 2008, Morgan Stanley (MS) Treasurer David Wong briefed the Federal Reserve on a “dark” scenario in which the U.S. firm would need at least $10 billion of emergency loans from the central bank.

It got 10 times darker by month’s end. Morgan Stanley borrowed $107.3 billion, the most of any bank, according to data compiled by Bloomberg News using information released in response to Freedom of Information Act requests, related court orders and an act of Congress.

Morgan Stanley’s borrowing -- more than twice the amount all banks got from the Fed in the market squeeze that followed the Sept. 11 terrorist attacks -- peaked after hedge funds pulled $128.1 billion from the firm in two weeks, documents released by the Financial Crisis Inquiry Commission show.

The first comprehensive examination of the Fed’s emergency lending reveals how close the New York-based bank came to running out of cash because of a run on its prime brokerage, the unit that finances hedge funds’ trades and holds their cash and securities. The Fed loans also show the degree to which Morgan Stanley and other banks depended on such brokerage accounts for funding, even though clients could close them on short notice.

“These were like hot-money deposits that could flee in an instant,” said Tanya Azarchs, a former Standard & Poor’s analyst who covered Morgan Stanley during the crisis and is now a consultant in Briarcliff Manor, New York. The firm “never thought that the hedge funds would get that spooked.”

Wow! Pretty damn prescient? Or just observant? I'll let you be the judge, but here's a hint: you don't have to be prescient to see any of this coming, and I'm no more special than any other Joe Schmoe on the Street - outside of being a lot less conflicted! Of course, it doesn't end there. Let's take a look at the Golden Boys from that same post back in September of 2008 ("As I said, the Riskiest Bank on the Street"):

Look at what I said in Reggie Middleton on Goldman Sachs Q3 2008 vs what the guys that most retail investors and family offices give their money says about Goldman Sachs... 

GOLDMAN SACHS GROUP INC
(NYSE) -114.50
Current ABR 2.96
ABR (Last week) 2.79
# of Recs in ABR 12
Average Target Price: $200.91
LT Growth Rate

17.40% 

 

Again, the average broker consensus is an absolute joke. Subscribers and long time readers know my price targets for Goldman were much more pessimistic. Who was right? I refer you to What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone…:

GS’s considerable leverage provides a means (the lever) of high returns to shareholders when asset prices are appreciating but the same becomes a very material economic concern when the asset prices lose value. With low trading revenues, GS has little cushion to absorb write-downs on these assets, leading to erosion of equity. As of March, 2010, the GS’s investments portfolio amounted to $339 billion (nearly 566% of the tangible equity). Referencing my previous posts, “Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look” and “When the Patina Fades… The Rise and Fall of Goldman Sachs???“, we can reminisce over the fact that Goldman BARELY earns its cost of capital on an economic basis, and that’s before considering the potential horrors which may (and probably do) lay on the balance sheet (for more on BS horror, referenceReggie Middleton vs Goldman Sachs, Round 2.

As for the Street and mean analysist estimates, this is the verbage (that's verbage, not garbage) that accompanies these reports via hyperlink:

Recommendations Research Page

Brokerage Research firms spend over a billion dollars a year to fully analyze and recommend stocks to their clients. Most of that expense is paid out as compensation to a group of highly intelligent, and well compensated, equity analysts. It is usually in your best interest to know what these Wall Street heavy weights think about your stocks before you make buy, hold, sell decisions. And there is no better place
to gather that information than on the Recommendations research pages on Zacks.com.

Okay bloggers and bloggettes, this doesn't make any damn sense.Why would anyone not want to subscribe to truly independent research is beyond my reckoning. Mediocre independent research is better than top notch biased research any day. Just imagine what mediocre biased research will offer you.

I know I may be a little biased on this topic because I may stand to gain from selling subscriptions, but let me make
this very clear - I am an investor first and foremost. That is what I do all day, everyday. The blog always has, and probably always will, operate at a significant loss.The only reason I am bothering to make this post is because I am absolutely awed by the stickiness engendered by the sell side brokerage marketing machine. One would think that this site (or any independent research site) would be oversubscribed, if anything just because there is chance they may be trying to tell the truth. Okay, rant and rave is now offline...

So, to recap, I have accurately called the fall or collapse Morgan Stanley (The Riskiest Bank on the Street and Reggie Middleton on the Street's Riskiest Bank - Update), Lehman Brothers (Is Lehman a Lying Lemming?), and Bear Stearns (Bear Fight - A most bearish view on Bear Stearns in a bear market and Is this the Breaking of the Bear's Back?), Goldman as well (Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street and Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis) as well as very recently the French bank run (The French Government Creates A Bank Run…) and Wall Street's sell side opinion still regulalry runs diametrically opposed to mine. I pray thee tell me, who has truly earned their stripes through these rough times? I query, because I have recently picked out another potential failure and we shall see how serious this one is taken this time around. To refresh everyone's memory...

The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets

Trade setups on the Squid coming up next for paying subscribers. This one will be tricky, for valuations tell an incomplete story which is the reason why I announced this one publicly. You simply cannot profit off of the ancillary Squid news.

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And in closing, for anyone who is interested...

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Key highlights of my archived research from 2008 (before the crash) on the "Riskiest Investment Bank on the Street":

The Riskiest Bank on Wall Street – Morgan Stanley has US$74 billion of Level 3 assets, over 200% of its equity, which is the highest amongst its peers. Although the Level 3 assets have declined from the previous quarters owing to huge writedowns, the reclassification of assets from from Level 2 to level 3 category continues as the liquidity for the troubled mortgage paper drys up.

Declining ABX index indicates troubled times are not over yet – Morgan Stanley used the performance of the ABX index as one of the benchmarks to writedown US$9.4 billion in 4Q 07. As this index continiues to witness downward trend, we believe that the asset writedown done so far, may not be sufficient.

Forensic Accounting of ABS Assets yields more woes - a security by security accounting of MSs ABS inventory shows at least 30% and probably 56% in additional losses coming down the pike, as well as tests to its excessive exposure to the anemic capital reserves of its counterparties, namely monoline insurers and hedge funds.

Losses from unconsolidated VIEs of $38 billion can wipe out almost half of the company’s total equity –Morgan Stanley has $20 billion of its unconsolidated VIEs assets in credit & real estate portfolio where the company expects a maximum loss ratio of 65%. Considering the worsening real estate markets, we believe that the company will incur huge losses on this portfolio. In addition, the company has $7 billion towards MBS & ABS portfolio and $10 billion of strucutured finance products.

Exposure toward Bond Insurers/private funds raises counterparty risk – The failure of bond insurers, on whose shoulders lie the rating of $2.4 trillion of bonds, raises a serious doubt about a systemic failure in the U.S. financial services industry. Morgan Stanley’s exposure of $3.6 billion toward the bond insurers may result in unforeseen losses for the company. The company has a counterparty credit risk exposure of $13.9 billion toward parties rated BBB and lower.

The riskiest bank on Wall Street – High exposure to Level 3 assets despite significant write-downs

Need to raise additional capital if current crisis worsens – Morgan Stanley raised $5 billion from China Investment Corp to maintain its capital ratios as it reported huge losses in 4Q 07. Going forward, as the credit market environment, the housing and real estate markets continues to crack, the company will likely report huge and may have to raise additional capital.

Worsening macro and market conditions to restrict revenue growth – Financial services industry witnessing its toughest times in recent history faces a tough task of getting things back to normal. The deteriorating macro environment coupled with flagging confidence among investors/customers alike, things are more likely to get worse than better. Furthermore, the decline in structured product revenues, risk averse nature owing to recent turmoil and the less active M&A environment will exert pressure on the company’s revenue growth in the coming quarters.

We value Morgan Stanley at US$20.76 per share, 58% lower than the current market price – We have analyzed Morgan Stanley exposure toward the Level 3 assets and its exposure to unconsolidated VIEs. To value Morgan Stanley, we have used the Discounted Cash Flow (DCF), Price-to- adjusted book (P/BV) and Price-to-Earnings (P/E) multiple methods. Based on our weighted average valuation, we arrive at a fair value of $20.76 which represents a downside of 57% from current levels of $48.25.

Click the read more link below to continue reading or download the richly formatted pdf version:

icon Morgan Stanley (287.96 kB 2008-02-11 12:49:56)

Published in BoomBustBlog

Watch out, Here Comes the The Fiery Sword of Truth! Contrary to the popular opinion that Goldman is the best and the brightest, Goldman Can't TRADE!!!

The financial markets are in a sense of déjà vu with widespread panic. Markets are as volatile as ever and Goldman Sachs is yet again challenged to demonstrate its ability to create alpha. The beta gazers (those who charge 2 and 20 to simply lever up on the broad market), or more commonly put, MoMo Chasers (those chasing the most popular stocks or strategies), would normally be seeking asylum given the state of recent financial markets. Unfortunately, despite the entire “God’s Work” syndrome attached to Goldman Sachs, its prop desk is yet to exhibit the ability to generate true alpha in highly volatile market, let alone match the success of BoomBustBlog.

Let's get something out in the open immediately so there is no misunderstanding. Goldman cant' trade! It can manipulate its dominant positoins in the markets. It can take advantage of the ignorance of its customers. It can front run those who don't have the reach or ability to defend themselves. It can (and obviously does) take advantage of privileged status in our political system. Those are the things that Goldman can do and apparently is skilled at, yet contrary to the popular opinion that Goldman is the best and the brightest, Goldman Can't TRADE!!! Not only that, but that inability to trade bangs the GS shareholder EVERYTIME volatility roils the markets, and causes many to overvalue GS over the long term.

For a little historical proof of this rather unpopular assertion, let's refer to the BoomBustBlog archives, namely A Few Questions on Goldman Sachs 3rd Quarter 2010 Results That No One Thought to Ask...

Trading revenues under pressure

Goldman Sachs posted Q3 net revenues of $8.9bn, a y-o-y decline of 28%. This is despite strong growth recorded at its investment banking and the asset management division which grew at 24.5% and 7.0%, respectively. The decline was principally led by dismal performance of the trading and principal transaction segment which declined 36% y-o-y as a result of weak market conditions. The decline in overall revenues despite strong growth recorded elsewhere underscores the importance of trading revenues in Goldman Sachs overall performance. Historically, trading and principal transaction segment contributed c60-65% of total revenues underpinning inherent risk in Goldman’s business model which is nothing short of a corporate hedge fund. We have expended considerable ink in demonstrating the overvaluation of Goldman Sachs and the volatility inherent in its revenues, particularly as they have been so dependent on trading - as many hedge funds are. As a matter of fact, I have been issuing this GS warning since 2009 when Goldman had perfect trading quarter and record trading profits. Reference last quarter's quarterly update: The BoomBustBlog Review of Goldman Sach’s 2nd Quarter, 2010 Performance: I Told You So!

About three months ago, Boombustblog forewarned that GS will stand out to be the worst hit in the event of trend reversal in the financial markets and the company will have little means to escape the implications of the same on its profitability and solvency. The company generates 60-70% of the revenues from trading activities which is largely dictated by the unpredictable turn of financial events. While the financial markets were celebrating the US officially coming out of recession in the 1Q10, the subsequent Eurozone crisis (see the Pan-European Sovereign Debt Crisis series) and the slowdown of expectations in 2Q10 has beaten down the irrational exuberance and the markets experienced a spurt in volatility and drop in prices. The consequent softening of trading revenues in 2Q10 vis-à-vis 1Q10 drove 31% drop in revenues and 82% drop in net income.

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

As you can see above, volatility ramped up in 2008 and Goldman reacted like any other beta-chasing, long only hedge fund (although they aren't long only) - they lost money!

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

As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor. Here are the first 2 pages of the 19

page professional edition, with illustrative option trade setups soon to follow.

 Goldman_Sachs_Q3_Forensic_Review_Page_01

Is Goldman Sachs stock really the front running, Mo-Mo traders wet dream?

Goldman_Sachs_Q3_Forensic_Review_Page_02 

Given the high correlation of Goldman’s prop trading desk to equity markets and taking into consideration the state of equity markets in Q2-Q3, it would be interesting to see how Goldman Sachs share perform in the coming quarters. Those who would have followed the traditional school of thought and bid the price up would have already seen their capital erode by 20% during the last quarter and by 12% over the last one month alone.

Oh, and while we're at it...

I noticed ZeroHedge (one of the few sites that I syndicate BoomBustBlog content through) caused a tiff with the Canadian academia and pop media by calling attention to the abysmally low TEC ratios of Canadian banks, and comparing them to European banks. For those who didn't have the spare time to catch the cross border banking media soap opera, see:

  1. Is The Next Domino To Fall.... Canada? for the first salvoo
  2. Who is Zero Hedge, and why should we care? for the passive aggressve retort
  3. (as put by Tyler himself) "followed by a more coherent attempt to debunk the claim that a painfully low TCE ratio is never a good thing": Is Zero Hedge looking at the wrong numbers?"

I must say that the argument by those up north is wanting and ZH made a valid point, primarily in that the RWA (risk weighted asset) methodologies are simply too open for manipulation. Of course, that is probably why they are favored by the banking institutions. Let's end this morning's post by illuminating the fact that although, Goldman Sachs capital ratios have improved, it has nothing to do with a reduction in risks weighted assets. Risk weighted assets, to the contrary, have increased to $451bn as at end June 2011 from $384bn as at the beginning of 2009. One of the key reasons for increase in capital ratios have been dilutions. As a matter of fact, Goldman Sachs’ diluted shares outstanding have increased by c24% since beginning of 2008!

Goldman_Sachs_RWA

So, if Goldman really has a problem, why haven't we heard about it from the rest of Wall Street?

Because investment performance is not the Street's business model. If it was, they would have easily foreseen thier own demise back in 2008/9. The street's busness model is churning spreads, fees and commisions from clients and customers. I truly believe BoomBustBlog bests ALL of Wall Street's sell side research, reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? After all, who else is currently warning of Goldman's risk on the Street? Answer: No one! Then again, who warned back in the summer of 2008 before the share price got cut by nearly 2/3rds? I can only think of one shop....

Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street: ...t shared by most of the analyst community and those that follow them. This brings me to the issue of Goldman Sachs. I have been bearish on commercial, mortgage and investment banks for over a y... Saturday, 05 July 2008

Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis: Here is my detailed opinion on Goldman Sachs. Be sure to review my precursor to this report: Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street. Anybody who is interested in how I Thursday, 24 July 2008

Even after a clear pattern was formed, who on the sell side warned when the markets got rocky in 2010? Hmmm. I sense a trend here... If I may prompt one to reminesce: In What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone…,, I made the following note:

GS’s considerable leverage provides a means (the lever) of high returns to shareholders when asset prices are appreciating but the same becomes a very material economic concern when the asset prices lose value. With low trading revenues, GS has little cushion to absorb write-downs on these assets, leading to erosion of equity. As of March, 2010, the GS’s investments portfolio amounted to $339 billion (nearly 566% of the tangible equity). Referencing my previous posts, “Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look” and “When the Patina Fades… The Rise and Fall of Goldman Sachs???“, we can reminisce over the fact that Goldman BARELY earns its cost of capital on an economic basis, and that’s before considering the potential horrors which may (and probably do) lay on the balance sheet (for more on BS horror, referenceReggie Middleton vs Goldman Sachs, Round 2) .


As for the Canadian media's retorts on ZeroHede's credible article, I must dare, no... make that double dare, any one to ask in print or on TV, "Who is Reggie Middleton". As a matter of fact, I'll answer that question right now. He's the guy that called...

  1. The housing market crash in the spring of 2006 and publicly in September of 2007: Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?
  2. Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 (not a single sell side analyst that we know of made mention of this very material point in the industry): Lennar, Voodoo Accounting & Other Things of Mystery and Myth!
  3. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? | After the collapse, a prudent bullish call as well... Joe Lewis on the Bear Stearns buyout Monday, March 17th, 2008: "The problem with the deal is that it is too low, and too favorable for Morgan. It is literally guaranteed to drive angst from the other side. Whenever you do a deal, you always make sure the other side gets to walk away with something.  If you don’t you always risk the deal falling though unnecessarily. $2 is a slap in the face to employees who have lost a life savings and have the power to block the deal. At the very least, by the building at market price and get the company for free!" | BSC calls are almost free and the JP Morgan Deal is not signed in stone Monday, March 17th, 2008 | This is going to be an exciting, and scary morning Monday, March 17th, 2008 | As I anticipated, Bear Stearns is not a done deal Tuesday, March 18th, 2008 [Bear Stearns stock goes from $1 and change to $10, front month calls literally explode from pennies to several dollars]

  4. The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “Can they monetize those hedges?”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody’s radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I’ll have to pay up to participate or go in short. There is too much attention focused on Lehman right now. ) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 | May 2008
  5. The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007): BoomBustBlog.com’s answer to GGP’s latest press release and Another GGP update coming… (among over 700 pages of analysis, review the January 2008 archives or search for “GGP” for more research).
  6. The collapse of state and municipal finances, with California in particular (May 2008): Municipal bond market and the securitization crisis – part 2
  7. The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual
  8. The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton, Welcome to the World of Dr. FrankenFinance! and Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion
  9. The overvaluation of Goldman Sachs from June 2008 to present): “Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look”, “When the Patina Fades… The Rise and Fall of Goldman Sachs???“andReggie Middleton vs Goldman Sachs, Round 2)
  10. The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010: The Pan-European Sovereign Debt Crisis
  11. Ireland austerity and the disguised sink hole of debt and non-performing assets that is the Irish banking system: I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!
  12. The mobile computing paradigm shift, May 2010: »
  13. The French bank run of 2011

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For all of those calamari fans.... Remember, I warned about "the Squid" before it was trendy to hate them!

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