Investor Reggie Middleton — author of the BoomBustBlog.com — discusses the problems in our banking system with GoldMoney’s Alasdair Macleod. Reggie states that the current zero-interest rate policy being pursued by the Federal Reserve (often referred to as “ZIRP”) is masking problems with banks, but not solving them. He points out the basic truth that money-lending institutions make money off of interest, and that as long as rates remain artificially suppressed, this will constrain lenders’ profits. This is an issue all over the world — something that makes investing in this sector tricky. Middleton argues that the European situation is particularly fraught, on account of their being “too many chiefs and not enough Indians...

See the original interview posting on Gold is Money.

As part of my ongoing series which I started in January of 2010 - Pan-European sovereign debt crisis, I detailed the rapidly developing financial malaise in Europe, detailing the risk to the larger more respected western European nations as well as their perceived profligate brethren to the south. One name popped up that analysts and media failed to harp on... Spain - at least back then. Now, people are wondering how Spain will handle its new found (at least to non-BoomBustBlog subscribers) funding crisis. To wit, and as excerpted from The Spain Pain Will Not Wane:

Professional subscribers can now actually download the original Spanish Bond Haircut Model that we used to calculate loss scenarios - Spain maturity extension_010610 (The Man's conflicted copy). Despite the fact I was probably the most realistically bearish out of the bunch, things have actually gotten materially worse since this model was constructed two years ago, hence it can use a refresh. Alas, it is still quite useful.

In the general subscriber document Spain public finances projections_033010, the first four (or 12) pages basically outline the gist of the Spanish problem today, to wit:

Spain_public_finances_projections_033010_Page_01

Spain_public_finances_projections_033010_Page_02

Spain_public_finances_projections_033010_Page_03

Spain_public_finances_projections_033010_Page_04

The stress caused by Spain breaking the central bank will bring to full fruition the theory behind our European Banking and Insurance research from the last few quarters. All would do well to remember (and re-read, if need be),

This research, although over 2 years old, has proved to be quite useful and prophetic, till this very day. Ask the editors at CNBC as they ran this story: Spain Recession Deepens as Austerity Weighs

Spain's economy shrank further in the second quarter of the year and a slump in domestic spending accelerated, signaling a protracted recession as the country presses on with efforts to slash its public deficit.

Spain's economy fell back into recession in the first quarter of the year, when output fell 0.3 percent, and government estimates show GDP will probably fall for this year and next year as it pushes through further measures aimed at slashing a bloated deficit.Gross domestic product fell by 0.4 percent in the second quarter of the year, according to final data that confirmed a preliminary reading. But on an annual basis it dropped by 1.3 percent, worse than initial estimates of 1.0 percent.

The data came a day after Spain said its economy performed less well than expected in both of the last two years.

On Tuesday, the National Statistics Institute, INE, also revised down 2011 fourth quarter GDP to -0.5 percent from -0.3 percent.

Close to record high borrowing costs and an economy showing little sign of picking up any time soon is nudging Spain closer to calling for a European bailout, which analysts say is only a matter of time.

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

Well, fast forward to today's CNBC headlines and you get: Spaniards Pull More Money Out of Banks in July. What a surprise, eh? As excerpted:

A rush by consumers and firms to pull their money out of Spanish banks intensified in July, with private sector deposits falling almost 5 percent as Spain was sucked into the centre of the euro zone debt crisis. Private-sector deposits at Spanish banks fell to 1.509 trillion euros at end-July from 1.583 trillion in the previous month.

Hmmm!!! How's that bank run thingy work again? Oh yeah, as excerpted from the prophetic piece from July 23, 2011 - The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! which detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

 Related links:

• You Have Not Known Pain Until You've Tried To ... Jun 19, 2012 – The MSM reports Spanish Short-Term Debt Costs Reach Alarm Levels:Spain paid a euro era record price to sell short-term debt on Tuesday, ...

• CNBC Asks, "So Why Are Spanish Bond Yields ... Jun 15, 2012 – CNBC asks So Why Are Spanish Bond Yields Falling? Well, that's a good question. Short answer: Well rates spiked dramatically, and we are ...
• Surprise! Spain Makes The Same Ass-Backwards ...  Jul 23, 2012 – Spain has crossed the rubicon, and entered into bad decision nirvana as it too decided to ban short selling, which has worked so well for all of ...

• Here Comes That Contagion... From Greece to Belize to... Spain ... Aug 20, 2012 – renege Etymology From Latin renego, from nego (“deny”). Possibly influenced by renegotiate. See also renega...

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Yesterday, I posted The Difference Between Money and Wealth and Why You Can Easily Print One But Must Actually Create The Other, and as if on cue, global inkjet nozzles 'round the world started whizzing - to wit:

• ECB Cuts Rate to Record Low of 0.75%, Deposit to Zero and Bank of England Prints Money Again to Boost Economy
• China Cuts Rates for Second Time in Month and China Set to Post Worst Growth Since 2008 Crisis
• BOE Restarts QE Amid Euro Crisis

Why such rampant printing? The whole world's afraid Europe's impending implosion will engulf global economies. They very well shoud be, this was quite evident 3 years ago (Pan-European sovereign debt crisis) and the can kicking is nearing the end of its useful cycle... ECB's Draghi: We See Now a Weakening of Growth in Whole Euro Area

Here's the secret that BoomBustBlog subscribers know yet seems to be lost on much of the European powers that be: cutting rates and printing will absolutely NOT prevent the nuclear winter in Real Assets. Since loans behind real assets are anywhere between a vast chunk and the majority of bank loans, when this thing goes the European banking system goes with it. This will manifest itself stateside (see sidebox), but the Europeans will get hit harder, at least initially... The reason? Well, it doesn't really matter how low interest rates are - if banks don't lend, borrows will not gain access to capital. Banks are too weak and skittish to lend despite "so-called" record profits, billions in bonuses and compensation, and trillions in bailouts. I repeat, and I repeat again, the only solution is to let the insolvent fail.

Reference the quite informative post from which the graphics below were excerpted: Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE

Slide21

 So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

• •   Debt Analysis, Blog Subscriber Edition
  •  Preliminary Download

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dddwwnnmmn

Fastforward to today, and NIEUWE STEEN INVESTMENTS N.V. - NSI (one of our shortlisted REIT) suffered the most due to revaluation of their Dutch office portfolio. It therefore witnessed 26% decline in last 4 months.

NSI is simply a microcosm of what's to come for many larger real asset investors. I have warned that the Dutch, with what many consider to be a strong and relatively stable economy, was not immune to the European contagion, reference Are The Ultra Conservative Dutch Immune To Pan-European Economic Contagion...

An update of "shortable" (as in still having some meat on the bone) French banks is available for download to subscribers - French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian Exposure: As Italy pops with outrageous funding yields (just like Greece), France will be forced to bailout its banks once again, leaving the socialist country facing the dilemma of potentially having to ask for a bailout itself. As you may know from my previous writings, the French banking system is bigger than France itself so a true bailout cannot practically come from within.

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

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

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

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

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

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

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

Today's MSM headlines make this quite clear, but before we get to them, just remember how obvious this was two and three years ago and why NOBODY should be shocked or surprised! See Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe from Wednesday, 31 March 2010 and Is Another Banking Crisis Inevitable? from Feb 4, 2011 and a complete video tutorial based on early 2010 work that has yet to be even one iota inaccurate... 

Now, why would anyone be concerned about a bank run today? Oh yeah...

 CNBC reports Spain Officially Requests Cash for Bank Bailout From Europe, right after I made it clear that CNBC is asking the wrong questions - to wit: CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?" 

You also have CNBC reporting that Fitch Cuts Cyprus to Junk as Greek Exposure Hits (exactly as the Greek bailout constructionist lawyer from Gottlieb in the video above said it would last week). Exactly one year ago today I claimed Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par at 30x+ Leverage: Bank Collapse is Inevitable!!! I wasn't joking. Bank collapse is INEVITABLE!!!

If you remember, Greece was supposed to be in the clear right? Let's bring back Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! All said Greece would never default while I made it clear multiple defaults were literally guaranteed as far back as 2010:

The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino 2010

Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! 2010

and the list goes on...

1. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?

2. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

As I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!

How Greece Killed Its Own Banks!

Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

Spain was even called as an unrecognized problem back in 2010: As We Have Warned, the Fissures Are Widening in the Spanish Banking System

So what's the purpose of all of this reminiscing? Well, the contagion trade is on and popping my friend. Those BoomBustBlog Armageddon Puts That Became Fashionable At Goldman are ready to be strategized. My next post on this topic will be on that big EU bank that was the last to be priced for contagion. In the meantime, remember (subscriber only - click here to subscribe) contagion model research:

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

Next up is an updated take on that big bank hooked to deep into Greek and Italian exposure. I'll try to have the subscriber document and a free preview opinion up in a few hours on BoomBustBlog. In the mean time and in between time, follow me:

On Monday, 18 June 2012 I penned "Is Morgan Stanley Once Again The "Riskiest Bank On The Street"?". You see, MS has more than a few skeletons in the closet an d the upcoming market volatlity and dearth of revenues isn't going to help the situation any. Yesteday, Moody's chopped two notches off of the MS ratings belt, albeit in the usual too little too late faschion. 

Via ZH: Here We Go: Moody's Downgrade Is Out - Morgan Stanley Cut Only 2 Notches, To Face $6.8 Billion In Collateral Calls

• MOODY'S CUTS 4 FIRMS BY 1 NOTCH

• MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES

• MOODY'S CUTS 1 FIRM BY 3 NOTCHES

• MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S

• MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3

• MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S

• MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S

• BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG

Remember, it was collaeral calls that put the nails in Bear Stearns and Lehmans coffin. I made this very clear in both cases - 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? 

Am I right about the Bear?

Despite the Bear Stearns negative developments, and my opinion of its value, Bear Stearns has managed to find investors as was mentioned earlier in the insider transaction section. These are accomplished and wealthy investors to boot. My concern is that so many astute, accomplished and economically powerful investors have failed to realize and fully appreciate the depth and breadth of the current real asset recession, burst bubble, and quite possibly asset depression we have recently entered. This has destroyed the value of many bottom fishing value investors, both intitutional and retail.

image018.gifimage018.gifA brief perusal through my site reveals a fairly decent track record of recognizing the potential damage to be done by this "devaluation diaspora". Only time shall tell the tale of Bear Stearn's contribution to this list. Twelve months to date, BSC has lost over 50% of its share value and it near ground zero of the housing bubble burst. Observing the share price patterns of the companies who were actually at ground zero shows that a 50% is far from the midway mark when tracking from the peak of the bubble. I am certain their may be financial concerns such as well capitalized investment funds, foreign firms/funds, and/or stateside banks who have, and are considering a buyout. Yet, as I have stated with Ambac Financial, MBIA, Beazer Homes, and Countrywide during similar institutional forays into attempted vulture investing - Caveat Emptor: Seeking the bottom of a bottomless pit is a hazardous venture, indeed.

To date, I have been blessed with a modicum of accuracy in my research. As always, I am short any company that I am bearish on, and will be long any company that I am bullish on.

There was also 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?”

Those damn rating agencies...

Of course, we all know how reliable and timely the rating agencies are, right? See Rating Agencies vs Reggie Middleton, Part 3 and the Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts

The latest Q2 qualitative observations for JPM are now available for all paying subscribers to download: JPM June 20 2012 Observations. This document contains a few interesting tidbits that, of course, you will get from nowhere else. For instance, did you know that the Q1 2012 financial results have many hidden secrets? We have looked at the Bank’s Q1 2012 financial results and have the following observations:

• The Bank reported Q1 2012 revenues of $26.7 billion , an increase of $1.5 billion , or 6% , from the prior-year quarter. That sounds decent for a big bank in tough recessionary times, eh? However, the increase was primarily driven by a $1.1 billion benefit from the Washington Mutual bankruptcy settlement. Excluding this benefit, the revenues were almost the same as that in Q1 2011. With flat revenues like these, just imagine what could happen to the bottom line when a multi-billion dollar trading loss occurs.
• The Bank had booked a loss on fair value adjustment of Mortgage Service Rights (MSR) in Q1 2011 of $1.1 billion. Hey, you know they just don't make those ephemeral, totally contrived 2nd order derivative products like they used to, eh?

Excluding the effect of the MSR loss along with the impact of gain from Washington Mutual bankruptcy, the bank’s Q1 2012 revenues actually decreased compared to Q1 2011.

Combine these secrets, derivative trading (oops, I mean hedging) losses and that bland ZIRP sauce that sucks profits in an increasingly expensive compensation landscape and you'll get one hell of a safe return for your 401k, right Mr Bove, et. al.? 

From the 2009 BoomBustBlog "I told you so" archives...

To wit regarding JP Morgan, on September 18th 2009 I penned the only true Independent Look into JP Morgan that I know of. It went a little something like this:

Recent Articles on JPM

Who Will Be The Next JPM? Simply Review The BoomBustBlog Archives For The Answer

Who Caused JP Morgan's Big Derivative Bust? The Shocker - Ben Bernanke!!!

Listen Carefully and You Can Hear the Crumbling Of The Sovereign Nation Formerly Known As JP Morgan

In the meantime and in between time, here's a subscription dump of our archives for JPM to placate the insatiable thirst of the BoomBustBlog paid subscriber:

JPM Q1 2011 Review & Analysis

 

JPM 3Q 2010 Forensic Update 

JPM Public Excerpt of Forensic Analysis Subscription

JPM Restricted Stock scheme

JPM 2Q10 review

 JPM 1Q 2010 Valuation Review 

 JPM 4Q09 review

 JPM Report (092209) Final - Professional09/24/2009

JPM Forensic Report (092209) Final- Retail

JPM Option Analysis

On 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...

Well, now is the time to pose the question again. "Is Morgan Stanley once again 'The Riskiest Bank on the Street?". Subscribers (click here to subscribe) are asked to download our newest outlook on this bank - MS 2Q12 qualitative review (432.08 kB 2012-06-18 09:57:10). Remember, we believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research - simply reference "Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?"

As excerpted from the aforelinked MS 2012 link:

1. Debt Valuation Adjustment of USD 2.0 bn in 1Q2012 raises some concerns

Morgan Stanley reported Q1 2012 consolidated net revenue of USD 6.93 bn, down nearly 8% from USD 7.57 bn in Q1 2011. The Bank disclosed that the results for Q1 2012 and Q1 2011 included negative revenues of $(1,978) mn and $(189) mn, respectively, related to the movement in Morgan Stanley's credit spreads and other credit factors on certain long-term and short-term debt (termed hereinafter “Debt Value Adjustment or DVA”). Excluding DVA, net revenues were USD 8.9 bn and USD 7.76 bn for the two quarters, respectively.

Since I, personally, think the logic behind DVA hits/additions to revenue is unrealistic, this in and of itself is not much of an issue from a valuation perspective. However, the amount of DVA in 1Q2012 draws special attention for it is an issue. The figure increased from USD 189 mn in Q1 2011 to almost 10 times to USD 1,978 mn in Q1 2012.

Debt Value Adjustments – Q1 2011 to Q1 2012 (USD Million)

The adjustment accounts for nearly 25% of Q1 2012 revenues which on gross basis increased 14.7% (Y-on-Y). That is a very, very significant chunk and it’s alarming that it hasn’t drawn more attention from investment and analytical practitioners.

The timing of the write down raises the following suspicions:

1) Was the adjustment postponed in preceding quarters to be recorded in the books of a quarter which witnessed healthy growth in revenues?

2) Exactly what caused such a huge loss in Q1 2012? The macroeconomic environment in Q2 2012 is not any better than that of Q1 2012. Are we going to see a similar write down again in Q2 2012? Or more accurately put, will the drivers of said writedown manifest themselves in Q2 2012, just to pop up in public reporting sometime in the future when most appropriate from an accounting perspective?

Continue reading to find what we feel is the cause of this gap in the subscriber document  MS 2Q12 qualitative review. In other news...

Morgan Stanley, Citi lead financial stock slump

Morgan Stanley (MS) volatility elevated as shares near 44-month low

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

Fast forward nearly one year later and the WSJ reports Crédit Agricole Girds Greek Unit for Greece Euro Exit, as excerpted:

PARIS—Crédit Agricole SA ACA.FR +3.49% is making contingency plans to abandon its Greek bank or merge it with a conglomerate of domestic banks in the event of Greece leaving the euro zone, according to a person with direct knowledge of the plans.

The admission offers the starkest evidence yet of international companies preparing for the worst in Greece, just days ahead of elections that could set it on a path to leave the currency union. It also underscores the lengths to which France's third-largest listed bank will potentially go to draw a line under its disastrous foray into Greece.

... Crédit Agricole Chief Executive Jean-Paul Chifflet has said publicly he doesn't see a Greek exit as the most likely scenario. But the bank is pressing ahead with contingency planning focusing on two possible options, the person familiar with the matter said: consolidating its Emporiki Bank of Greece SA unit into a larger conglomerate of Greek banks, in which the French lender's stake would get diluted down to 10%, or simply walking away and letting Emporiki fail.

"Politically, if Greece were to exit the euro zone, Crédit Agricole would have no obligation to stay," said this person. The Paris-based lender is also considering plans to transfer some "good" assets from Emporiki to Crédit Agricole, the person said, without disclosing details. 

Abandoning Greece's largest foreign-owned retail bank could expose Crédit Agricole to legal and reputational risks and would echo its abrupt departure from its Argentine bank units 10 years ago after the Latin American country defaulted on its debt.

Analysts estimate a Greek exit from the euro zone would cost the bank at least €5.2 billion. Crédit Agricole's direct funding to Emporiki stood at €4.6 billion in March. 

...Crédit Agricole has been scrambling over the past year to stem the red ink at its Greek operations. Its acquisition of Emporiki in 2006 saddled the French lender with billions of euros in losses and is one of the reasons its shares have plunged more than 70% over the past year, sparking uproar among shareholders. Emporiki is Greece's sixth-largest bank.

Last week, the bank secured a small bit of breathing space when Emporiki finally succeeded in getting funding from Greece's central bank, the Crédit Agricole spokeswoman said. Crédit Agricole had lodged numerous similar requests to borrow from the Greek central bank's so-called Emergency Liquidity Assistance program, and was repeatedly turned down because Emporiki is foreign-owned. According to the person close to the matter, Greece's central bank finally agreed to the request, after Crédit Agricole said it would otherwise leave the country.

This is essentially the specific institutional bank run that I warned about last year. In addition, I gave my paying subscribers plenty of notice on this particular bank back in 2010 - reference  Greek Banking Fundamental Tear Sheet. As for how that institutional bank run thing works, we excerpt "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

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

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!

This assertion is backed by today's WSJ reporting:

A host of international companies have admitted they are working on contingency plans in the event of Greece exiting the euro, with many concerned about how to retrieve cash in the country under such a scenario. But none have disclosed potentially walking away from assets in Greece.

... Greek government officials have long pointed to the need to merge local lenders in order to help them withstand mounting problems that include huge losses arising from Greece's debt restructuring, and soaring nonperforming loans in the recession-ravaged economy.

Despite several failed past attempts, analysts now say the government could finally force this process through after it takes over a majority stake in Greece's four largest commercial banks—National Bank of Greece SA, NBG +5.99% EFG Eurobank Ergasias SA, EUROB.AT +8.04% Alpha Bank AE and Piraeus Bank TPEIR.AT +2.87% SA.

The state's bank bailout fund, the Hellenic Financial Stability Fund, is expected to underwrite about 90% of the four banks' capital increases scheduled for later this year, effectively nationalizing the banks. Emporiki could therefore be swallowed by one of the new merged entities, but it remains unclear how advanced talks are. A spokesman for the Hellenic Financial Stability Fund declined to comment.

Remember, this is why the STATE bailouts were needed in the first place. Reference BoomBustBlog archived article Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe from back in 2010:

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.

One would think that was rather prescient, eh? Not really, just the objective use of a spreadsheet. It gets worse, though, as read in today's WSJ article...

Even if Greece remains in the euro zone, the French lender will need to deal with rising defaults and deteriorating economic conditions. In the first quarter alone, Emporiki, which carries net loans worth €18.7 billion on its balance sheet, posted a €905 million loss.

Last week, Moody's Investor Services downgraded Emporiki's rating two notches further into junk territory.

But if we just continue reading one more paragraph down in my "Ovebanked, Underfunded, and Overly Optimistic" article from 2010:

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.

Damn, if I saw it coming from so far back, what the hell is wrong with those French bank executives? So, back to "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!"

A full video description of how this is to happen...

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!

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

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. Below is an excerpt of an email exchange that I had with Eurocalypse, the European CDS trader that contributes trade setups to BoomBustBlog (click here for his background), who happens to have ran an ALM department in a sizeable French bank.

FYI, im hearing from my well connected friends that the Chairman of the BoomBustBlog bank run candidate in question has been seeing Sarkozy everyday recently...

Im very surprised about the extent of the ALM gap from the BRC ("Bank Run Candidate"), but my guess is that balance sheet is including the trading books.
Typically the biggest chunk of the balance sheet are govt bonds, and they are refinanced with the repo market. That should explain a lot of the gap.
I dont think the ALM managers manage that gap, and I dont think they should either. Info on the ALM gap ex-trading book should be monitored.

The trading activity is monitored by a market risk group with another set of limits, and of course they would monitor liquidity, closely hopefully.

Of note, there are new official liquidity ratios put in place in Basel III (the LCR Liquidity Coverage Ratio which is a 1 month ratio, and the DFSR which is a 1 year ratio). Basically, Govt bonds are considered as the ultra liquid assets, and actually the LCR forces the banks to hold liquid assets against their 1 month gap calculated with some liquidity assumptions both on the asset and liability side) of course these liquid assets, will mostly be govt bonds in practice, because there is not anything more liquid, and not anything else in sufficient size...

The question is, exactly how liquid are the bonds of sovereign Greece, Ireland and Portugal.  Much of this stuff should rightfully be classified as level 3 assets. The 50% depreciation in the Greek long bond should really, really cause many to rethink both the logic and the strategem behind so called "risk free asset" classes!!!

I'm not saying there is no liquidity risk on the trading books. Effectively if there are signs of stress in the repo market, all players will try (at the same time...) to reduce the size of their trading books ... leaving the market bidless... but its not the intent of banks to try to make profit on the liquidity gap in that case.

Finally the big picture, I think one cannot again ignore that the banking sector and govt debt are totally intertwined as I wrote before. Ultimately, the collapse of the banking sector means the collapse of govt finances and vice versa. Its a FEATURE of a fractional reserve lending system where the eligible asset of choice is those govt bonds, and of a system where govts can freely float more and more debt (as long as there is demand), as money is created by the CB in the process, which end up in the liability side of private banks which then need to buy something etc...

On the liquidity side, many French regional banks were overextended with loan to deposit ratios over 120% (despite being deposit-rich institutions). The main reason is they boosted a lot retail mortgage activity.

Anyway, in France, were converging with Japan.

1. Tough competition within banks, shrinking margins (consumer laws against predatory lending in France, French banks earn a lot of money from the poorer clients who have temporary deficits on their checking accounts).
2. The housing and CRE market bubble has not exploded yet (Paris home prices are at the highest ever).
3. Then there is the Euro crisis on top of that
4. ...and the govts wanting to levy more banking taxes...

The sector should be a HUGE UNDERPERFORM! The only way they can make money in the future, is buying those govt bonds and sitting on them, like the Japanese banks...and pray for the bond market not to explode like in Greece!

Or Portugal, or Ireland, or...

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

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

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

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

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

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

I will provide additional tidbits to the public as I deem fit. In the meantime, the question du jour?

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

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

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

Professional and institutional subscribers will have access to our contributing trader’s trade setups and opinions within a week and a half. Institutional subscribers should feel free to reach out to me via Google Plus for video chat and discussion this and every Tuesday at 12 pm (please RSVP via email). If you need an invitation to Google+ and are a subscriber, simply drop me a mail and I will give you one. Feel free to follow me on:

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Note to subscribers, updated research availalble: GS Revenue Analysis Q2 12 - our opinion of the robustness of Goldman's upcoming quarter (103.95 kB 2012-06-13 10:39:33).

In the beginning of the year, I appeared on CNBC extolling the risks of the F.I.R.E. sector, Reggie Middleton Sets CNBC on F.I.R.E.!!!. 

The day after the warning on the insurance portion of F.I.R.E it was announced that Insurers’ 2011 Catastrophe Losses Hit Record. I was the only one in the mainstream media warning of the multi-sector risk that I know of. As a matter of fact, there were several personalities stating the exact opposite of the main man (and I don't mean Lobo).

 Now, as you can see, there is a one quarter trading pop where the banks did well, but looking at the big picture and factoring in today's macro climate, I think it's easy to see where banks are bad news. Just ask Mr. Dimon. Where I believe Mr. Bove went wrong in the moderate term analysis is he, again, severely underestimated both the macro outlook for the banks, the fundamental risk of the trash on the balance sheets (almost none of which we are truly privy to) not to mention the extreme risk of the trading practices of these entities. These are the primary reasons why I have been so bearish on them. Time will tell who is right, and I believe I have time on my side.

Now, Dick Bove and I (with all due respect to Mr. Bove, this analyzing and predicting stuff is not easy!) have disagreed in the past, and more than once or twice - see CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!! For those not familiar with Mr. Bove, he made an interesting bullish call on Bear Stearns which was essentially antithetical to my research - which essentially said Bear Stearns was done for back in Jaunary of 2008, see Is this the Breaking of the Bear? By March of 2008, Bear Stears was essentially done for. We also disagreed on Lehman Brothers, where Dick was bullish and I was quite bearish (see ). Karl Deninger's post from the Market Ticker explains the story explicitly, but of course from Karl's perspective, so to be fair to Dick all should keep that in mind: Dick Bove, Bear Stearns, And Controversy

Now, Dick Bove not withstanding, the sell side followed my lead for the big investment banks, albeit materially later. As excerpted from First I set CNBC on F.I.R.E., Now It Appears I've Set Sell Side Wall Street on F.I.R.E. As Well!!!:

If you remember, I also gave explicit warnings on the media's favorite bank, the "untouchable" Goldman Sachs! Well, it looks as if I've actually set the Wall Street Brokerage house on F.I.R.E as well. Lookee here: UBS, Goldman, Morgan Stanley Earnings Estimates Cut By JPMorgan Cazenove

JPMorgan Cazenove analysts cut their earnings outlook for investment banks for 2011, 2012 and 2013, citing worsening conditions in fixed income and equities.

Hmmmmm.... Where have we heard that befre???

UBS AG (UBSN) had its 2011 earnings-per-share estimate trimmed by 4 percent and the 2012 estimate by 11 percent, JPMorgan analysts including Kian Abouhossein said in a note to clients today.JPMorgan also curbed its Goldman Sachs Group Inc. (GS) forecast for 2011 by 37 percent and the 2012 figure by 19 percent.

Copycats???

The earnings downgrades of banks including Goldman and UBS “reflect weaker investment banking client activity and lower volumes across the board than previously anticipated,” JPMorgan’s analysts said. “Consensus needs to come down to reflect the weaker-than-expected environment” in 2011’s fourth quarter, they said.

JPMorgan also cut forecasts for other banks including Morgan Stanley (MS), whose estimates were reduced by 5 percent for 2011 and 17 percent for 2012.

From what I understand, Wells Fargo also issued a similar report on Goldman! Quite timely, fellas! Although this is not the First Time The Vampire Squid Get's Outed On TV!, I do believe it was the first time it was outright outed on the big MSM stations such as CNBC. Of course the sell side follows suit, after the fact. To wit, CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!! I would like all to remember that Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies! This is proof positive that the BoomBustBlog Forecast Pan-European Bank Run Has Breached American Soil!!! Investors, pundits and analysts can sit idly by while Squids, Morgans & Counterparty Risk Blow Up The World One Tentacle At A Time or they can actively do something about it. The decision is yours to make.

Times are changing, y'all. Hey, when are rating agencies going to jump into the fray? Not! Maybe its time to pose the question "What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog?" Go Ahead, I DARE You To Answer! In case I haven't delivered the hint strongly enough, let me be blunt. I'm directly challenging the the Sell Side house that is just now catching F.I.R.E. - Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss

I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction	I'm Hunting Big Game Today: The Squid On A Spear Tip Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?	Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...
Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!	Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...
Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!	Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty! Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies 

What Was That I Heard About Squids Raising Capital Because They Can't Trade?

Reggie Middleton vs the Squid That Can't Trade!

On that note, I post this update on our outlook for the venerable Goldman Sachs for subscribers (click here to subscribe):  GS Revenue Analysis_Q2 12 (103.95 kB 2012-06-13 10:39:33).

I will review the other sectors of my FIRE thesis in upcoming posts, leading with CRE and European banking.

For those who are encountering me for the first time or don't know who I am, feel free to find the answer to the question "Who is Reggie Middleton?" 

 Relevant subscriber research:

 Goldman Sachs Q3 Forensic Review - Professional (746.08 kB 2011-08-22 10:25:06)

 Goldman Sachs Q3 Forensic Review - Retail (509.83 kB 2011-08-22 10:27:36)