Displaying items by tag: Current Affairs

BoomBustBlogger "Rogier" posted an interesting counterpoing to my French Bank run thesis. For those who haven't been following, reference SocGen CEO Dismisses Rumors, Says France Is Not US - He's Right, But It May Be Worse And Bank Run Can't Be Ruled Out!!!. Rogier's counterpoing is the Citigroup analysts William Buiter's report on the ECB being capable to bail out all of the indebted Europe, as well as all of indebted Europe's banks as well - simultaneously, by printing money but not prinitng so much as to stoke inflation. Yes, that does sound rather extravagant. As a matter of fact, I was feeling his story a little more until I actually typed that statement down and realized how far fetched difficult it may be. 

One of the failing precepts in the article has been the mindset that is burying the profligate states as we speak, and that is the circular argument. Reference my discussion of this phenomenon as it refers to Greece: Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!


The gist of the story is that Greece will solve its over-indebtedness issues by acquiring addtionals debt. Hey, we just traveled full circle!

Greece will implement austerity measures that will slow growth and implemenation, thus cut government costs while the country grows the economy out of the hole. But wait a minute here! How do you grow your economy out of a situation by slowing economic growth through austerity. Did we just spin around in a circle again? Below is an excerpt of the Citigroup report that drives the circular reasoning concept home... 


You see, the problem with the French argument is that the sovereign debt crisis, (which I feelI have credbily predicted and called accurately from the beginning. Reference the Pan-European Sovereign Debt Crisis series, starting with The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one. The primariy problems emanated from oversized banks (Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe) who got into trouble taking undue risks.

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


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


In the beginning, it was thought that these problems were that of the peripheral EU and CEE states only, but that was (and is) definitely not the case. You see, this is as much a case of humarn behavior as it is macro-economics. If one understands that concentp, the spread was easy to see coming from early last year, reference The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries. The consequent post, also explains what many seem to be overlooking, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? 

Now, as a result of sovereing states privatizing profits and socializing losses, they attempt to take multiples of thier GDP on the public balance sheets in terms of economic risks. Yes, it does sound both absurd and unsustainable, and accuracy is endemic on both counts. This particularly so when the health of the sovereign states themselves is callled into question due to the foibles of human nature in terms of honesty - referencing Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

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The attempt to save insolvent banks that are multiples of the size of the soverign states that try to save them is a recipe for disaster that simply creates insolvencies on both sides of the public/private economic membrane, versus just the side that it originated in. Greece is proof-positive of said posit: How Greece Killed Its Own Banks!  Greece forced its banks to buy Greek debt to stoke the perception of demand. Said debt collapsed in value, and voila!


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


The natural result of several nation-states attempting the same failed strategy, Contagion - Introducing The BoomBustBlog Sovereign Contagion Model. Contagion is exponential in nature, yet I feel many analysts are still thinking linear. Again, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

This point of view started as:

  • a keynote speech in Amsterdam,


Published in BoomBustBlog

CNBC reports Google to Acquire Motorola Mobility for $40 a Share in Cash. This gives Google the hardware chops to release reference quality mobile computing devices without the need for:

  1. Carrier subsidies
  2. carrier bloatware
  3. vendor bloatware
  4. slack in technology refreshes, which will lead to..
  5. extremely rapid tecnology refresh cycles which have averaged nearly quarter for Google's Andorid OS.
This means trouble for many competitors if Google can pull the hardware execution off, and I beleive they can. It also gives them an immense advantage over the other handset makers because they, by defaut own Android, the "Driod" moniker (through MMI), the IP to implement the newest Android tech in near real time, and most importantly nearly 50% of the world's market share in OS coming out of the gate.
Expect Google to immediately drop margins, and therefore prices across the board while simultaneously raising the bar significantly in terms of functionality and performance, not to mention the tech refresh cycles. I would imagane the refresh cycles will be concentrated in the software side, assited by the hardware which will show no customization of the interface therefore allowing instant adotpion of updates. Expect to see a firmware SIM card, independence from carriers, and fully subsidized smartphones that will probably best the performance of the iPhone 5 before the 2 tech refresh.
What should not be overlooked is how Google is able to hit two birds with one stone here - patent protection AND hardware manufacturing capabilities. From Forbes.com:

Google has just closed its biggest acquisition to date, and surprisingly enough its in the burgeoning world of cellphones. The company announced this morning that it was buying smartphone and tablet maker Motorola Mobility for $12.5 billion in cash, paying a whopping 63% premium on Motorola’s closing share price on Friday.

Shares of Motorola Mobility, traded on the NYSE, shot up by 60% in pre-market trading, while Google’s shareholders didn’t seem to like the deal, sending its shares down by 3% in pre-market trading in New York.

The companies said both boards had approved the deal, which will give Google complete control of the manufacturer of smartphones and tablets like the Xoom, which run the Android operating system.

Google’s CEO and co-founder, Larry Page, said on the company’s official blogthat the acquisition would also “supercharge the entire Android ecosystem,” and boost its patent portfolio, which would “enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.”

According to The Street, Motorola Mobility holds 17,000 patents.

And from The Street:

With 17,000 patents, Motorola Mobility is the best mobile partner Google's Android could ever wish for as industry hostilities heat up.

"We believe this is the singular most important issue for the smartphone industry at the moment," JPMorgan analyst Rod Hall wrote in a research note Monday. 

Google has complained that the current patent system is broken and does not encourage innovation. But that doesn't mean Google isn't interested in acquiring more. The company said it's adding a collection of 1,000 patents from IBM that it acquired in a deal struck last month.

The battle lines in the patent war were drawn earlier in July, in the surprise aftermath of the Nortel patent auction.

Apple's formation of Rockstar Bidco, a super consortium including Research In MotionMicrosoftEricssonSony and EMC -- the group that won the $4.5 billion auction -- is the best example yet of how the powers are aligning.

The consortium illustrates the establishment of two distinct camps: Google and its partners against the rest of the field.

As relative newcomers to the mobile industry, Google and Apple have very little legal ground to stand on when it comes to connected devices and wireless patents. Apple helped boost its position a bit with the Rockstar Nortel patents acquisition, a move that the Wall Street Journalsays is being reviewed by the Justice department.

But Google is a software company whose fortunes in mobile are riding on the success of smartphone partners like Samsung, Motorola, HTC and LG.

Android-shop Samsung is in a legal battle with its former ally Apple. In April, Apple filed a lawsuit against Samsung for copying its iPhone and iPad. In June, Samsung sued Apple for patent violations.

Motorola, however, is far better positioned to defend the Android camp. Not only does Motorola have far more patents than its nearest competitors, it appears to have more of the key patents that may help the Android camp in a battle against Apple.

"It is interesting to note that Motorola asserted 18 patents against Apple, and sued Apple first, whereas Apple has asserted just six patents against Motorola," Morgan Stanley analyst Ehud Gelblum wrote in a research note last month.

So while Apple might have a Rockstar consortium, Google has a friend with deep patent portfolio.

May I remind readers of Google's true business model from historical posts...

Google's investment history has been phenomenal, besting the vast majority if financial acquisition players and enabling Google to place itself at the top of several diverse markets in a record amount of time. The mobile computing market is but one example or many. It would be unwise to blindly bet against their having throught and strategized this move through. As excerpted from A Realistic Look At The Success Of Google's Investment History:

As promised, I am presenting historical justification of the logic behind my call of absurdity in the drastic drop in share price after Google announces a redoubled effort in investment and marketing of its nascent businesses. I went into the logic in detail via our Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google. The following pages are excerpted the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).

To begin with, Google apparently realized early on that it could better realize returns by investing shareholder capital through acquisitions. It has actually been quite acquisitive, making 88 purchases over the last 13 year. Last year was Google's most acquisitive year, ever!

Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android: Google's business model is to create negative cost products and services that take the floor from under the competition by compressing margins to zero or very close to it - or using network effects to prevent competition from gaining the momentum to become or remain effective. They have been very successful in doing this in the news distribution arena, internet adverstising, an obviously mobile computing OSs, reference the result of their efferts in the performance of what use to be the USs number one smartphone vendor - As Forecast Last Year and Clearly Demonstrated This Year, Research in Motion's Problems Are Far From Over.

I believe I have been one of the most accurate pundits over the last two years regarding Google's prospects, by far: Did A Blog Best Wall Street's Best of the Best In Guaging The True Value of Google? We Have To Think More Like An Entrepeneur & Less Like A Wall Street Analyst

Webcast Information

Google and Motorola Mobility will hold a conference call with financial analysts to discuss this announcement today at 8:30am ET. The toll-free dial-in number for the call is 877-616-4476 (conference ID: 92149124). The call will also be webcast live athttp://investor.shareholder.com/media/eventdetail.cfm?eventid=101369&CompanyID=ABEA-3VZHGF&e=1&mediaKey=A21887C59EBAAC12F1BCF4D43C080953. The webcast version of the conference call will be available through the same link following the conference call.


Published in BoomBustBlog

The professional level subscription document detailing the likely causes of a run on our primary bank run candidate is now available for download (Bank Run Liquidity Candidate Forensic Opinion, the retail version containing valuation available here - French Bank Run Forensic Thoughts - Retail Valuation Note). It is presented at a timely fashion for much of the core EU has just implemented short bans on financial companies - exactly as I anticipated several days ago. If history repeats itself (and it usually does), this action will serve as a precursor to the bank run that I have anticipated and warned about over the last few weeks. For those who don't subscribe to the professional BoomBustBlog analysis, yet want an inkling of what is going on in French banking, I have redacted the aforelinked document as a free public preview: French Bank Run Forensic Thoughts - pubic preview for Blog

You know, if it wasn't so damn destructive, it would actually be funny how regulators appear to find it genetically impossible to learn from mistakes - whether it be theirs or somebody elses. In 2008, when the US foolhardedly decided to allow banks to misreport their long term toxic assets bought with excessive, short term leverage, said banks collapsed. It was not as if this was unforeseen. France is anxious to repeat that exercise with its banks and sovereign debt. In 2008, when the US foolhardedly decided to ban shorts on insolvent financial companies, I made a small fortune constructing synthetic short positions with options that skyrocketed in value because regulators dabbled in markets in which they really had no clue. ZeroHedge reminds us that the short ban in the US ended in a 48% drop in financial company share prices.

It should be obvious to anyone who can remember at least 3 years ago that short bans are not good ideas. They spread more panic and uncertainty than they cure - and the banks' business models are based upon faith and full credit. It appears that the French think they can make ths mistake better than the Americans, as CNBC reports SocGen CEO Dismisses Rumors, Says France Is Not US. Of course not, they just act that way when there is an opportunity to efficiently repeat a boneheaded error. Exactly as I warned just TWO days ago in the post "Time To Load Up On Bank Puts? The Futile Attempt To Make The Insolvent Appear Solvent By Interefering With Market Pricing - Short Ban Has Started", I now bring you this afternoon's news - France, Italy, Belgium and Spain Ban Short Sales

France, Italy, Spain and Belgium plan to enact bans on short selling or on short positions, the European Securities and Markets Authority said today.

“Some authorities have decided to impose or extend existing short-selling bans in their respective countries,” ESMA said in a statement on its website. “They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets.”

The most false rumor is what is represented as many of these bank's balance sheets. I warned all BoomBustBloggers last year that this European bank collapse was coming.

It started as:

  • a keynote speach in Amsterdam,

Over the next few days I will offer advanced trading techniques to allow BoomBustBlog subscribers to monetize their view via the market, despite the attempts by those who do not see to manipulate free markets. In the mean time I will excerpt portions of the Pro/Institutional report on the French bank most at risk for a run, available for download right now -File Icon Bank Run Liquidity Candidate Forensic Opinion.

 Here are a few screen shots from the free public abridged version (File Icon French Bank Run Forensic Thoughts - pubic preview for Blog), that easily demonstrates the problem with the French banks cannot be solved by banning short selling. The problem is inherent in the banks themselves. Please click to enlarge to printer quality...




Published in BoomBustBlog

We warned our paying subscribers about the potential of a French bank run over a month ago and described the process in illustrative detail. See:

  1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
  2. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! (see the free links below at the end of this article for more)

We also named the most at risk bank in question, and offered explicit trade setups to monetize the situation. What is happening now in France is basically a foregone conclusion and was easily foreseen if one was paying attention, or even if one was just reading BoomBustBlog. Now comes the next step in the saga, and that is the debunking of misinformation and disinformation.

Contrary to what some European bank officials have to say, the current crisis is and EXACT mirror of 2008. Reference this excerpt from On Your Mark, Get Set, (Bank) Run! The Dominos of Serial Lehman 2.0 (x 4) In The EU Are Falling Into Place At A Quickening Pace:

Here are a few updates supporting my thesis of the potential of a serial bank run (another one, that is) in Europe and the Eurozone. As was the case with Lehman Brothers and Bear Stearn (two of the biggest bank collapses that I have called during this "ongoing crisis), counterparties and funding sources get gun shy in the face of overvalued collateral and signs of insolvency - as well they should. Remember, we have identified banks that are at risk of Lehman 2.0, and for the exact same reasons that Lehman was at risk of such. Reference The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!, which I consider to be a must read!

Focusing on the most pertinent and contagious of the issues at hand leads us back to the initial premise of a European bank run. I laid the foundation for said topic discussion last Thursday in "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style" and the fear du jour is a European version of the Lehman Brothers or Bear Stearns style bank run. The aforelinked at explanatory piece is a must read precursor to this illustration of what can only be described as the anatomy of a European bank run - before the fact. Remember how the pieces of the puzzle were perfectly laid together for a Bear Stearns collapse in January of 2008, two months before the bank's actual collapse? Reference "Is this the Breaking of the Bear?"(January 2008) in which Bear Stearns collapse was illustrated in explicit, graphic detail. Lehman Brothers wasn't impossible to see either (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008).

Yes, I did capitalize on the collapse of Bear Stearns and Lehman by identifying their failure and fall many months before it was every mentioned in the market or analysts reports. May I also add, they both had investment grade ratings from all three major purveyors of that... "stuff", and the management of both banks swore the market was simply exaggerating the problems when things did surface publicy. Using the archival power of the Web, let's reminisce, as excerpted from Four Facts That BANG JP Morgan That You Just Won't Hear From The Sell Side!!!

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

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

Meredith Whitney downgraded Bear Stearns today Friday, March 14th, 2008: "Yep, she did it. The ratings agencies are considering a downgrade. I thought it was a joke when I first heard it. Let's just imagine that I used these wise sources as an info source to make my money! The ratings agencies and sell sides are jokes that I can no longer laugh at."

It's a good thing no one listened to that damn blogger who has the gall to charge money for his research and opinion. We had to listen to him bitch and moan for 2 months before... Is this the Breaking of the Bear? (January 2008)"

Bear Stearns is in Real trouble

Bear Stearns will soon be, if not already, in a fight for its life... the biggest issues don’t seem all that prevalent in the media though. Bear Stearns is in a real financial bind due to the assets that it specialized in, and it is not in it by itself, either. For some reason, the Street consistently underestimates the severity of this real estate crash. If you look throughout my blog, it appears as if I have an outstanding track record. I would love to take the credit as superior intelligence, but the reality of the matter is that I just respect the severity of the current housing downturn – something that it appears many analysts, pundits, speculators, and investors have yet to do with aplomb. With a primary value driver linked to the biggest drag on the US economy for the last century or so, Bear Stearn’s excessive reliance on highly “modeled” and real asset/mortgage backed products in its portfolio may potentially be its undoing. This is exacerbated significantly by leverage, lack of transparency, and products that are relatively illiquid, even when the mortgage days were good."

Notice how the worse case scenario is economic insolvency - as in less than ZERO!

Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back

...  I can say that when I do watch it I hear a lot of perma-bulls stating that this and that stock is cheap because it is trading at or below its book value. They then go on to quote the historical significance of this event, yada, yada, yada. This is then picked up by a bunch of other individual investors, media pundits and other “professionals,” and it appears that rampant buying ensues. I don’t know how much of it is momentum trading versus actual investors really believing they are buying on the fundamentals, but the buying pressure is certainly there. They then lose their money as the stock they thought was cheap, actually gets a lot cheaper, bringing their investment down the crapper with it. What happened in this scenario? These investors bought accounting numbers instead of true economic book value. Anything outside of simple widget manufacturers are bound to have some twists and turns to ascertain actual book value, actual marketable book value that is. This is what the investor is interested in, the ECONOMIC market value of book, not what the accounting ledger says. After all, you are paying economic dollars to buy this book value in the market, so you want to be able to ascertain marketable book value, I hope it sounds simplistic, because the premise behind it is quite simple – How much is this stuff really worth?. The implementation may be a different matter, though. I set out to ascertain the true book value of Bear Stearns, and the following is the path that I took.

Then he had the nerve to come back with Bear Stearn’s Bear Market – revisited Friday, February 22nd, 2008

So, who was right?

The Bust that Broke the Bear’s Back? Monday, March 10th, 2008: My ruminations on Bear Stearns look to come into their own…

It looks as if the prudent should start debating the ability of Bear Stearns to remain a going concern Thursday, March 13th, 2008

Despite the Federal Reserve’s efforts Wall Street fears a big US bank is in trouble Thursday, March 13th, 2008: While I can't know for sure which IB it may be, my studies tell me it is either the Bear with the Broken Back or the Riskiest Bank on the Street, and that's where I'm concentrating my bets…

From the London Business Times: Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed's unprecedented move to pump $280 billion (£140 billion) into global markets was seen as a sure sign that at least one financial institution was struggling to survive. The name on most people's lips was Bear Stearns. [Hey, it pays to read the boombustblog.com. ...] “The only reason the Fed would do this is if they knew one or more of their primary dealers actually wasn't flush with cash and needed funds in a hurry,” Simon Maughan, an analyst with MF Global in London, said. Bear Stearn's new CEO states unequivocally that his balance sheet hasn't changed since November and that they have $17 billion of cushion. [He did not outright say that they were in good shape though. My concern was looking forward. They are a significant counterparty risk (along with Morgan Stanley) and they have significant illiquid level 2 and 3 assets as a percentage of tangible equity. In addition, 17 billion is not much considering the leverage and amount of illiquid assets held by this bank.]

The case of bank management credibility and their proclamation in contravention to BoomBustBlog research has been called into question in more instances than just Bear Stearns!

Reggie Turns Bearish on Lehman in February, before anyone had a clue!!!

  1. Is Lehman really a lemming in disguise? Thursday, February 21st, 2008
  2. 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.
  3. I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton

Like I said above, it's not as if upper management of these Wall Street banks would ever mislead us, RIGHT????

Erin Callan, CFO of Lehman Brothers Lying giving an interview on TV in March and again in June of 2008.

Even if the big Wall Street banks would lie to us, we have expert analysts at hot shot, white shoe firms such as Goldman Sachs, who of course not only are "Doing God's Work" but also happen to be the smartest of the smart and the "bestest" of the best, RIIIGHT!!!??? Below we have both Erin from Lehman AND Goldman lying on TV in a single screen shot. Ain't a picture worth a thousand words???

We even had the inscrutable Meredith Whitney say "To suggest that Lehman Brothers is going out of business is a real stretch!" (She OBVIOUSLY DOESN'T READ THE BOOMBUST) as well as Erin Callan, the CFO of this big Wall Street bank on TV lying interviewing again...

But that damn blogger guy Reggie Middleton put his "put parade"short combo on Lehman right about that time, and had all of these additional negative things to say...

Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008

May 2008: I never got a chance to perform a full forensic analysis of Lehman, but did put a fair size short on them a few months back due to their “smoke and mirrors” PR (oops), I mean financial reporting. There were just too many inconsistencies, and too much exposure. I was familiar with the game that some I banks play, for I did get a chance to do a deep dive on Morgan Stanley, and did not like what I found. As usual, I am significantly short those companies that I issue negative reports on, MS and LEH included. I urge all who have an economic interest in these companies to read through the PDF’s below and my MS updated report linked later on in this post. In January, it was worth reviewing “Is this the Breaking of the Bear?”, for just two months later we all know what happened. I came across this speech by David Eihorn and he has clearly delineated not only all of the financial shenanigans that I mentioned in my blog, but a few more as well. Very well articulated and researched.

So, who was right? The Ivy league, ivory tower boys doing God's work or that blogger with the smart ass mouth from Brooklyn?

Please click the graph to enlarge to print quality size.



 The reason why I went into such an indepth recollection of the events of the rather recent past is to draw distinct parallels between Bear Stearns and Lehman Brothers, both banks whose problems I recognized ahead of the pack - and the French banks, whose problems I outlined for subscribers early on as well. Bear and Lehman underwent a liquidity crisis that was the result of solvency issues. Basically, assets purchased on leveraged basis for the balance sheet dramatically devalued, leaving a gaping equity hole. This equity hole scared off counterparties who gave liquidity, or forced them to raise collateral calls, calls which Bear and Lehman didn't have the money to pay due to asset/liability mismatch. Somebody let me know if this sounds familiar...



As excerpted from Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such:

The biggest European banks receive an average of US$64bn funding through the U.S. money market, money market that is quite gun shy of bank collapse, and for good reason. Signs of excess stress perceived in the US combined with the conservative nature of US money market funds (post-Lehman debacle) may very well lead to a US led run on these banks.

 And here's the assets that were devalued and the games being played to hide the gaping equity hole on the European end...

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


As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

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


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

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

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

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

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

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

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

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

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

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

Just in from Reuters, by way of Zerohedge:

Reuters continues:

 That sudden rise in risk perception, combined with sharp share price falls in French banks, prompted some banks in Asia to speed up reviews of counterparty risk and look at whether they should cut exposure to European lenders, sources at each of the six banks in Asia said. Contacted about the moves by the banks in Asia, a spokeswoman for top French lender BNP Paribas <BNPP.PA> in Paris said: "We never comment on market rumours."

Societe Generale <SOGN.PA> had no immediate comment to make while a spokeswoman for Credit Agricole <CAGR.PA>, which will publish its second-quarter earnings later in August, said the bank would not make any comment.

The banks in Asia and the sources -- a mix of risk officers, senior traders and loan bankers -- could not be identified because of the sensitive nature of the information.

The head of treasury risk management for Asia at one bank in Singapore said their credit lines to large French banks had been cut because of the perceived risks in lending to these counterparties.

"We've cut. The limits have been removed from the system. They have to seek approval on a case-by-case basis," the treasury risk official said. The bank official declined to name the French banks.

A senior credit trader in Singapore said that when a bank's shares fall that sharply their risk officer will automatically look at how much exposure they have to that lender.

And more:

 Banks' heightened responses could exacerbate the market strains if they all acted simultaneously with portfolio-at-risk modelling, analysts said.

"The thing is if they all use it at the same time they will all sell at the same time when risk goes up, and that will drive prices down and it is like a snowball because then the prices go down and then your value-at-risk ratio will tell you 'oh, I must reduce my risk even more'," said Mark Matthews, head of research at Julius Baer.

Several of the traders and bankers in Asia said that while they had not cut all exposure to any particular institution, they were very cautious about taking on new trading positions with them.

A senior risk officer at a bank in Singapore said "obviously we are having a review", when asked if they were reassessing their positions with European counterparties.

Bankers and risk officers at the five institutions in Asia that were still dealing with French banks said that while short-term lending of up to 30 days was still taking place, they were conducting a thorough review of longer-term credit lines regardless of the type of transaction.

"It's all in relation to (our) take on a French bank's credit risk, regardless of whether it's a swap or interbank lending transaction," said a senior loan banker at a Japanese bank.

Hopefully, I have given a clear enough picture of the parallels between the French banks and Bear Stearns and Lehman Brothers from a historical perspective. Now, let's hear what French bank management has to say...

Bloomberg reports SocGen Denies Rumors About Credit as Shares Tumble

Societe Generale (GLE) SA, France’s second-largest bank, denied “all market rumors” and asked the nation’s market watchdog for an investigation after speculation France’s creditworthiness was in doubt sent the shares tumbling.

The lender’s performance in July and early August shows it will be able to post “solid” results in the future, Paris- based Societe Generale said in a statement after the market closed yesterday. The bank asked France’s Autorite des Marches Financiers to open a probe into the origin of speculation that is “extremely harmful to the interests of its shareholders.”

Doesn't this sound like the Lehman and Bear Stearns Executives in the videos above???

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 The Complete "Run on the Bank" User Guide!
  1. Game Over For The European Ponzi Scheme?…
  2. France, As Most Susceptble To Contagion,…
  3. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
    1. 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
    1. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  5. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
    1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
  6. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
    1. Observations Of French Markets From A Trader's Perspective

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

Published in BoomBustBlog

Let's see hear... It didn't work during the last market crash. Actually, I don't think there was ever a time when it DID work. Nevertheless, let's try it anyway. You can't sell insolvent companies short! As anticipated last week in our post Didn't Anyone Notice The Seemingly Irreparable Damage To The Eurozone Last Week? Global Short Ban, Here We Come!


If you search the archives of my site, you will find that I made a small fortune off of the spike in the value of my puts as the short ban had several unintended (for those who never bothered to think it through) consequences. Of course, once the ban was lifted, the once protected financial institutions were summarily MASSACRED! Enriching the very same short sellers that were sought to keep at bay. See:

My initial analytical take on what we know so far of the "Man's" Master Plan September 2008

I am now targeting US banks in coordination with the Europeans. My analysts have jumped into the lab as of last night, Asian time. To all of my subscribers, prepare for a wild rolleroaster ride that will make 2008 look tame in comparison. Get ready, get set, ADAPT!!!!

Reference my Twitter stream for this morning as the markets start to tank once again...

ReggieMiddleton: All wide trailing stops are still in place, allowing me (barring a violent gap up) a guaranteed 300% on the SPX, although it was 800%.

ReggieMiddletonReggieMiddleton:Nearly all of them are better traders than I, but instead of selling vol, I'm buying further up the ladder of risk at cheaper prices.

ReggieMiddletonReggieMiddleton: I'm taking this rally & reduced volatility to allow some of my stingily priced OTM put bids to get hit in contravention to BBB traders

Published in BoomBustBlog

This is an indepth piece that addresses my subcribers inquiries into trading the fundamental/forensic research I offer. The topic du jour is the US Treasury downgrade.

Attention subscribers: time sensitive, actionable research available at the end of this document.

Illustrative Trade Setups & Opinions For Retail Subscribers of BoomBustBlog

Instrument of choice for retails subscribers: The Proshare ETFs track the total return of an index on a daily basis with a x2 or x3 leverage. Professional and institutional subscribers would most likely trade the treasuries and futures markets directly.


The Basics

Targeting US Federal Government Fixed Income, there are 2 available indexes, one relating to 7-10yr treasuries (PST - seeks twice (200%) the inverse [opposite] of the daily performance of the Barclays Capital U.S. 7-10 Year Treasury Bond Index), one for 20yr+ treasuries (TBT - ProShares UltraShort 20+ Year Treasury seeks  twice (200%) the inverse [opposite] of the daily performance of the Barclays Capital U.S. 20+ Year Treasury Bond Index). Because 20Y treasuries have (much) more duration than shorter ones, they tend to move more in price terms as yields move about the same.

This is almost always true of fixed income, except in case of Greece’s current situation where the perception of imminent default causes all securities to converge to the same price, and yields simply to don’t follow the convention rules, ex. 8% of nothing is no less than 20% of nothing.

For an outright play (without options) TBT will be more volatile than PST, and has arguably more leverage embedded. However for an option play, the most volatile instrument is not of paramount importance, what’s most important is the return on the premium invested. A distinct, yet oft overlooked nuance.

Fundamentally Speaking…

From a fundamental play, our traders are not confident the market is ripe for THE BIG FIXED INCOME SELLOFF which would make the 10Y UST look like the Greeks. Actually there’s still a plausible case for 10Y UST moving sub-2% and to begin speaking Japanese ! (JGB yields currently 1% and have touched only a very few times and very briefly 2% in the last 10 years, averaging more 1.3%-1.4%...). Why? Because the FED like the BOJ could just monetize the debt and print money to put them on their balance sheet with a QE3, 4 etc....

The Greek scenario is a bank run scenario, which is possible (as we all know from informative postings such as On Your Mark, Get Set, (Bank) Run! The D…) but timing is everything and everything is difficult ot accomplish!!!

Caveat Emptor!

Even a guy(gal) who bought a 20Y JGB in 2003 at the lowest ever, 1% yield, if he held it through today, has made money despite the higher yield today.... The (BTFD -Buy The Fu@&ing Dip) mentality is truly firmly entrenched! To what should be no one’s surprise, the speculative longs are mostly the banks, "hedging" their ALM mismatch by buying bonds, assuming their deposits are stable.

The bank’s risk becomes a MTM risk, but accounting rules allow them to cope with that as long the deposits are there. For more strategically inclined banks (wink, wink), MtM losses would only affect their AFS (available for sale) reserves and capital (so not the net result of the bank).

Note: There is a potentially very profitable equity trade stemming from this habit, see The Mechanics Behind Setting Up A Potent… & European Bank Run Trading Supplement Ava…).

Of course because everybody is long, there are episodes of panic and risk reduction which are violent because it becomes a one-way market, but when everybody has reduced risk, it snaps back violently and a new cycle begins... so it has been.

The pain trade in FI for banks is lower yields, because high yields is how banks make easy money. Remember my comments on ZIRP killing the banks it was designed to help (reference the YouTube Video and scroll 13 minutes into the video).

On a short term basis, if anything our traders bet for higher FI prices and lower stocks again... and panic to resume.

Note how the 121 strike on the SPY were well chosen (reference subscription document SPY option strategies in violent down moves). We’ve come through, and as the market continues to sell off, you could continue to adjust your delta buying back (and locking actual profits because even if the market doesn’t move anymore your puts are in the money) when the market sells off and when it bounces towards 121 again, you can unload it. We saw 116 at the lows... gamma is how you make a killing with options.

With the aforementioned limitations, caveats and market behaviors in mind, I'm pleased to present to BoomBustBlog subscribers the following detailed, illustrative trade setups...

Published in BoomBustBlog

If today's broad market actions is confusing you, it shouldn't be.


What you are experiencing is the effects of global central planning on the financial markets. I just went into this in detail, and regular readers/subscribers have seen this several times this week alone (and for good reason): Do Black Swans Really Matter? Not As Much as ...

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

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable?

The ECB is now full on taking the Fed's position of buying up junk assets in order to manipulate prices. The Fed is bigger than the ECB and afters years of QE and tens of trillions wasted, we're worse off than when we started. The ECB should have taken notes, alas, they didn't. CNBC reports:

ECB Ready to Buy Italian, Spanish Bonds: Sources -The ECB has agreed in principle  to buy Italian and Spanish bonds if key structural reforms are brought forward, according to people familiar with the matter.

Of course this occurs after Italy figures out it can't sell its own bonds... It Just Got Worse: Italian Treasury Just Announced It Will Not Sell 3 Month Bills At The August 10 Auction:

Of course, it's not just Italy (or Greece, or Portugal, or Ireland) either. From ZH: News Just Keeps Getting Worse: Spain To Cancel August 18 Auction As Bundesbank President Says Opposes ECB Bond Buying

These actions by the ECB are a waste of capital and resources, and when applied to Greece, simply allowed Greek debt to literally freefall afterwards (and haircuts are being passed around anyway). Ditto for Portugal and Ireland, sans government sanctioned haircuts - at least so far (but they're coming, rest assured). Never one to allow good money to fail to be chucked after bad, they do the same with Spain and Italy, apparently failing to notice that it hasn't worked the last three times they tried. Alas, this time is really different. Spain and Italy are truly too big to save in such a fragrant bailout fashion, and if Italy succumbs it will cause the French banking system implode - plain and simple, see France, As Most Susceptble To Contagion,…

This has recently been admitted by Germany, as per Speigel:

Hamburg - Growing up in the federal government, according to SPIEGEL information doubts whether Italy could be rescued by the European EFSF rescue - even if the fund tripled. An economy like Italy was not to support, to being too large, it is said to justify.

The financial needs of the country is huge. According to government experts from the other partner countries may also not lift the guarantee of the entire Italian public debt of over € 1.8 trillion. By then the markets would suspect that Germany was overwhelmed.

Therefore, there is the Federal Government that Italy is through savings and reforms itself from the crisis. The bailout was opposed only designed to catch small to medium-sized countries.

Without the French to help backstop the EU, Germany is all on its own. Reference ZeroHedge on the topic: Explaining How The Just Announced ECB Market Rescue Pledged 133% Of German GDP To Cover All Of Europe's Bad Debt

Two weeks after Zero Hedge readers were informed about it, slowly the sell side is coming to the realization that not only will the EFSF have to be expanded (that much was known), but that Germany, and specifically the outright economy, will be on the hook by an unprecedented amount of money. And expanded it will have to be: not by two, not by three, but by a cool four times, to a unbelievable €3.5 trillion which according to Daiwa's Head of Economic Research, Grant Lewis, is an act which will be necessary to convince financial markets of euro area resolve to save Italy and Spain. Says Lewis: "France, Germany contribution to EFSF’s capital would increase to 80% if Spain, Italy had to drop out of guarantee structure.  France, German contingent liabilities would be > 50% of GDP if EFSF expanded; added to France, Germany current debt may trigger downgrades to both countries." Yes... and no. As we explained when we referred to a far more accurate and complete report by Bernstein, merely a €1.5 trillion expansion in the EFSF, would mean that Germany is on the hook to the tune of €790 billion or 32% of German GDP. If France is downgraded, Germany essentially becomes the sole backstopper of the entire Eurozone, to the tune of €1.4 trillion or 56% of its GDP. Now let's assume Daiwa is correct, and the full amount under the EFSF has to increase to €3.5 trillion. That means that Germany "contin[g]ent liabilities", in the worst case scenario where France again gets downgraded, and it likely will eventually, would surge to about €3.3 trillion, or an insane 133% of German GDP

What is not mentioned by the media is that Germany's banks are coming up on a record CRE mortgage rollover, a rollover on properties which are quite underwater. Expect a(nother) real estate crash shortly.

In addition, for some obscene, arcane reason, someone, somewhere actually believes the ECB can pull off buying everything from everyone at inflated prices without an extremely negative repercussion. I disagree... Vehemently. It is interesting, though, to hear other viewpoints.  BoomBustBlogger Pieter writes...


A Belgian professor (University of Leuven) believes, that the only way to avoid the danger of contagion is to change the ECB into the European lender of last resort. It may print enough money to prevent an institutional bank run.

De Centrale Bank moet de eurocrisis oplossen

De uitweg uit de Europese ellende

Unfortunately the text in in Dutch.

Pieter has been gracious enough to translate the article for us. As many techies know, a manual translation is just that much more accurate than the Google/Babblefish renditions.

The Central Bank has to solve the euro crisis

The escape from the European misery
Monday August 1 2011  Author: Professor Economics at the KU Leuven.
‘Only if the European Central Bank guarantees that the bondholders will be paid, the financial contagion can be  brought to a hold’, PAUL DE GRAUWE has written.

We are getting used to it. The European Counsel is gathering in a crisis atmosphere to put out the fire in the Euro zone. At the end of the meeting the European leaders are making rock hard statements: the crisis is averted, fundamental decisions have been taken, and the euro is saved.

Yep, he's right. We have seen this movie before. Reference the following articles (all well over a year old):

After some days of euphoria the markets turn and the crisis starts all over again. The last European Counsel is no exception to this procedure. Two days the euphoria lasted. We are in full crisis again. The interest rates on Spanish and Italian bonds that had fallen resume their upward tendency. ‘The contagion from Greece had been averted’, the European leaders declared solemnly. Nothing is farther from the truth.
Why is it so difficult to stop the contagion from one country to another? To answer this question you need to understand one of the most essential features of a monetary union. The members of the union issue bonds in a ‘foreign’ monetary unit. With that I mean a unit that they have no control over. Consequently they cannot guarantee the bondholders that they always will have cash available to pay the bonds on maturity. The Belgian government for example cannot guarantee that it will have enough Euros to pay the bond holders. This in contrast to a country that issues its own money. Such a country can guarantee the bondholder that on maturity there will be always cash to pay for the obligations. And there is no limit on the amount of money that the central bank is issuing.

This situation makes the members of the monetary union very vulnerable for the danger of contagion. It is comparable to the banking sector. If everyone runs at the same time to the bank to change the deposits into cash, the bank has not enough means to accommodate this conversion. Only one bank that has a problem with its solvency suffices for people to have doubts about other banks (the healthy ones as well) so that they will run to their banks too.

It's actually a little more in depth than that, but he definitely gets the point. For those how haven't followed my bank run series...

  1. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
  2. What Happens When That Juggler Gets Clumsy?
  3. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
  4. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  5. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
  6. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
  7. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
  8. Observations Of French Markets From A Trader's Perspective
  9. On Your Mark, Get Set, (Bank) Run! The D…

This instability of the banking system is solved by charging the central bank to be the ‘lender of last resort’, in other words to take care that the banks have the means to pay the depositors. The existence of this guarantee makes sure that the depositors do not run to the bank and that the guarantee is not (or hardly) executed.

The problem that the members of a monetary union experience is the same as the problem with the banks. It may be solved in a similar way as in the banking sector. It is sufficient that the central bank of the monetary union, the European Central Bank takes the task upon itself of the ‘lender of last resort’. In this way it guarantees that the members of the monetary union always will have the Euros to their disposal to pay the bond holders. It will suffice to take away the fear of investors and the drive of the contagion.
At first the ECB has played this part, though reluctant. Since some months it made clear that it does not want to do this any more. This change of policy of the ECB is the fundamental explanation why the danger of contagion can not be ward off.
The European leaders have tried to offer a reply to this by creating the European Rescue Fund. But this cannot and will not be able to replace the function of the ECB. The main cause is that the rescue fund does not create money and is dependent of the members for its means. And these are limited, in contrast to the means the ECB may dispose of and which are unlimited.

Permanent crisis

Strangely enough, the European leaders have decided during the last summit to allow the acquisitions of bonds directly form the market by the rescue fund, but they failed to place adequate means to its disposal. The rescue fund has no credibility any more and cannot stop the contagion. That is only possible by the ECB, but it has no desire to.
One of the arguments used by the ECB to stop its function as ‘lender of last resort’ is that the guarantee might offer a wrong signal to politicians. By the guarantee they might be tempted to allow too much debt. ‘The ECB will pay for it’. That is indeed risky. But it is a risk as well in the banking sector, in which the ECB offers the same kind of guarantee. The way to solve this problem is not to take away the guarantee because this results in permanent crisis situations, but to create legislation that limits the issuing of government debt
To take away the danger of contagion and to stabilize the financial markets it will be necessary for the ECB to take its responsibility in stead of escaping it. At the same time strong mechanisms have to be implemented to restrain the growth of government debt. All this needs more political unification. It is still a long way to the stabilization of the euro.

Note from Pieter: This translation has no other purpose than to inform Mr. Middleton about the content of an article in the Standaard of August 1 2011. The usual disclaimers apply: it is not my opinion, I offer no warranty as to its completeness, veracity or accuracy. Copyright © 2011

Ths is the problem with the professor's ECB thesis as of right now. It is a near sentient pile of toxic asses. Throughout last year I stated that the ECB's incessant buying of Greek, Irish and Portguese bonds were wiping its equity. Academics disagreed, until....Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!

 There has been a lot of noise in both the alternative and the mainstream financial press regarding potential risk to the ECB regarding its exposure at roughly 48 to 72 cents on the dollar to sovereign debt purchases through leverage, and at par at that. This concern is quite well founded, if not just over a year or so too late. In January, I penned The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults. The title is self explanatory, but expound I shall. Before we get to the big boy media's "year too late" take, let's do a deep dive into how thoroughly we at BoomBustBlog foretold and warned of the insolvency of both European private banks and central banks, including the big Kahuna itself, the ECB! The kicker is that this risk was quite apparent well over a year ago. On April 27th, 2010 I penned the piece "How Greece Killed Its Own Banks!". It went a little something like this:

Yes, you read that correctly! Greece killed its own banks. You see, many knew as far back as January (if not last year) that Greece would have a singificant problem floating its debt. As a safeguard, they had their banks purchase a large amount of their debt offerings which gave the perception of much stronger demand than what I believe was actually in the market. So, what happens when these relatively small banks gobble up all of this debt that is summarily downgraded 15 ways from Idaho.

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


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


Relevant subscription material for BoomBustBlog paying members:

    1. File IconGreece Public Finances Projections
    2. File IconBanks exposed to Central and Eastern Europe
  1. File IconGreek Banking Fundamental Tear Sheet

Online Spreadsheets (professional and institutional subscribers only)

Several months later I posted several followup pieces along the same vein:

To Cut or Not to Cut, The Irish Threaten To Play Rough With Those Clippers: Threats of Haircuts Rattle the ECB! Thursday, March 31st, 2011

I also made it very clear that haircuts and restructurings were on the table for Portugal.

The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History Tuesday, December 7th, 2010

Long Story, Short - The ECB Will Need Close to Infinite Funding To Pull The Whole EU Out Of This Whole Intact

It has been written about extensively:

  1. With Greek Debt Yielding 20%+ and Trading at Half Par Value, European Banks Are Trapped!
  2. It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Banking Crisis
Published in BoomBustBlog

In the meantime, contagion spreads...

My last couple of posts have been focused on monetizing this amazingly sharp break in the world equity markets.

I urge all not to forget what has caused this, because if you fully grasp the cause you know that this is now 1 week affair. A LOT of unwinding needs to be done. I'm not saying their won't be short squeeze induced rallies or TPTB won't start QEing use again, but at the end of the day, this shit really must (and will) fall apart at the seams. It's the only path to true economic growth. In the meantime, the contagion spreads:

RBS Posts Wider-Than-Expected Loss on Greek Writedowns, Insurance Payments

Royal Bank of Scotland Group Plc (RBS), Britain’s third-biggest bank, swung into loss in the first half after writing down the value of its Greek debt and setting aside funds to compensate insurance customers.

The net loss was 1.4 billion pounds ($2.3 billion), compared with a profit of 9 million pounds in the year-earlier- period, Edinburgh-based RBS said in a statement today. Analysts had estimated the bank would have a 571 million-pound loss, according to the median estimate of five surveyed by Bloomberg. The lender wrote down its Greek debt by 733 million pounds.

RBS, the last of Britain’s five biggest banks to report results, set aside 850 million pounds to compensate clients who were improperly sold personal-loan insurance. It followed France’s BNP Paribas SA, Credit Agricole SA and Germany’s Deutsche Bank AG in writing down Greek debt after signing the Institute of International Finance’s rescue plan last month.

I have been preaching Pan-European Bank Run for some time, based primarily off of the inevitable writedowns that will need to be taken on profligate state debt. It started as:

  • a keynote speach in Amsterdam,

  1. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
  2. What Happens When That Juggler Gets Clumsy?
  3. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
  4. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  5. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
  6. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
  7. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
  8. Observations Of French Markets From A Trader's Perspective
  9. On Your Mark, Get Set, (Bank) Run! The D…

Well, it has begun, as both banking counterparties and sovereigns pull liquidity, exactly as described in The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style! and The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

Reference this Bloomberg article, after taking into consideration that UK and German banks have already pulled back exposure (read liquidity)... Denmark Forcing Liquidity Crisis on Banks

The Danish state’s refusal to extend guarantees on bank debt beyond 2013 means even healthy lenders will suffer the fallout of a liquidity squeeze that could be avoided, the head of the Local Bankers Association said.

“There’s nothing wrong with helping banks out with their liquidity, it won’t cost the taxpayer,” Bent Naur, the chairman of the Copenhagen-based group, said yesterday in a phone interview. “The state should prolong the guarantee, not for troubled banks, but for those that meet solvency requirements. That will avoid a liquidity squeeze when everybody needs to refinance at the same time.”

He appears to be missing the point. Insolvency is contagious when the entire pool of banks in question hold similar assets that are devaluing. What the Denmark state is essentially saying is that it will no longer use taxpayer capital to float the solvency of insolvent banks. If said banks were truly healthy and solvent, then they will cater to their own liquidity needs. Alas, they can't because of ALM mismatches (see The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style! and The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!) and assets erroneously being carried on the books for materially less than they can be liquidated for. Face it, the Ponzi is crashing, jump off of the boat before it sinks any farther!

Banks in Denmark, home to the European Union’s toughest resolution laws, need to refinance about $35 billion in state- guaranteed debt in the next two years. The government has rejected calls to extend its backing, arguing the industry should instead consolidate.

Read as "Accept true market pricing for your transactions and take you haircuts like men (and women) as you try once agin to add 1 + 1 to equal 3! Haircut! Recogniize Lossss! WHAAAATTT???!!!

Lenders already face higher funding costs as two regional bank failures since February triggered senior creditor losses. Moody’s Investors Service warned in May borrowing costs for Danish lenders will increase “long-term.”

“When we look at the calendar, 2013 isn’t far away,” said Naur, whose association represents 88 lenders in Denmark, Greenland and the Faroe Islands. Helping healthy banks access liquidity won’t prop up insolvent lenders, he said.

You guys haven't seen anything until you see what's under the covers we're pulling off of this French bank, very soon (France, As Most Susceptble To Contagion, Will See Its Banks Suffer). These actions forces capital flight, and guess where it flies to???

Go to 21:00 in the video below. Bernanke strategy all along 

Yesterday I said expect US rates to go negative, well... Less than a day later...

Published in BoomBustBlog
Friday, 05 August 2011 05:33

Timely Trading Tips For 8/5/2011

Sixty points down on the S&P with most world markets following suit! What a day, what a day. This is what those Armageddon puts discussed Yesterday morning looked like by the end of yesterday's trading session, up 265% in profit!


The SPX/e-mini options are admittedely a pain in the ass to trade for many retail investors, so I posted a useful illustrative guide on a lower cost (out of pocket) alternative - Game Over For The European Ponzi Scheme? Monetizing Pan-European Sophisticated Ignorance Via US Options, Part 1 For Retail and Professional Realists.

Things were moving so fast that the market was breaking literally as I was posting it. Long story, short - if you believe that the Circle of Economic Life is about to come back to the forefront, you should still be stocking up of volatility. If not, then hedge up and sell of for full profit.

As excerpted from the afore-linked post:

What It Takes To Actually Make Money

ATM (annualized) vol (125) is around 24% on Aug, 23% on Sep, 22% on Oct and 21.5% on Nov. (these are approximations, rule of thumb: the implied daily move (in %) is (annual) volatility / sqrt (250) if we count 250 biz days every year). So 24% is roughly a 1.5% move a day. More adequately speaking, roughly, an options trader who is delta hedged and long options, needs the mkt to move more than 1.5% a day to make money. As implied is, because of risk premia, often 10% or 15% more than (expected) realized vol you see vol is not cheap against recent history, but compared to 2009 early 2010 it is quite cheap. So if you are of the mindset of our last few posts (see list at end of this article), there is upside there.


Any reversion to bank collapse volatility makes even today's option prices look cheap. You have to be careful, though. The global financial planning cartel has other plans.

Reference Do Black Swans Really Matter? Not As Much as ...



All subscribers are welcome to download this full document file icon This is the introductory post to a series of trade setups for European Bank at Risk, complete with sample trade setups.

The following is a quick note from Eurocalypse on the topic...

Hi Reggie

This is terribly impressive, and I am in admiration with the timing of your call.

He is referring to the timing/macro/fundamantel call - I recommended he put together a vega trade via SPX/SPY opition setups last week, but a day or two delay combined with a rapid plunged gave scant time to take advantage of it

I deeply hope your readers and yourself have benefited from the options strategies, market has been so quick; I dont know if it could be published in time.

...I'd recommend to take partial profits. Premiums have probably doubled or morewith the move and probable increase in vol. at this stage even the move is so violent we should have a very bad day at least until the opening of the US market today,waiting at least 1 hour after the opening seems wise.

I'd recommend to take some profits, after that because theta becomes expensive at this level especially with the weekend coming!

There are several ways to do it:

  1. Take off X% of the initial strategy to make it 0 cost,
  2. Delta hedge, and increase the delta hedge when market continues to sell off (thats the benefit of gamma) for naked options.
  3. If vol jumped already to stupid levels, sell some put spreads below the strong support levels indicated in the previous trade setups to make up for the initial premium with the increase of vol, you sell less options and you end up with a nice structure which can end in the money on both sides.

The probability of a total meltdown is here though so I'd keep some downside but no one ever lost booking some profits.

I'm actually quite confident it's going to happen, the issue is timing is everything, hence OTM longer dated puts.

Longer term down the road im even more pessimistic than you are.USSR 1989, EURO 2012 and put US, UK and Japan with it probably as well.

Beyond that chaos anarchy wars? I hope not but terra incognita!

The decision of BNY Mellon to tax big deposits is a prelude to financial repression, freezing accounts to prevent a bank run.

See BNY Mellon imposes fee on rapidly growing deposits, in short, the bank will punish anyone who does not invest their money in risk assets of some sorts. That's right, a bank that is trying to discourage you from saving in cash. What the hell??? This is probably just the beginning as the TPTB attempt to force capital into the Ponzi pool in order to keep the facade of value on devalued assets...

... having a max of money "voluntiraly" invested into debt instruments which wont be repaid...
What things like this will do is ensure the reverse will happen. The smart money will exit first en masse which will make sure they end up NEEDING to freeze these accounts.

Anyway, its a pleasure contributing to your blog


Published in BoomBustBlog

Bloomberg reports Stocks Tumble Two-Year Yield Drops to Record Low. It looks as if the short to medium term goals of Geithner and Bernanke may have paid off as the world's capital runs from one Ponzi scheme to another - exactly as I anticipated. image029

Go to 21:00 in the video below. Bernanke strategy all along 

Reference Do Black Swans Really Matter? Not As Much as ...

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

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

Here's how to play it via options -Game Over For The European Ponzi Scheme?…

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