I have decided to allow those who are curious or who may not have not heard of me, and those oft celebrated MUPPETS (see Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Rip Off Clients) to actually see what I keep behind the BoombBustBlog paywall by distributing our premium research for free. Why do such a thing? Well, to be honest, I do it in celebration of the man quoted as saying "Lets start having fun... lets get funky... let's announce everything... let's be WILDLY positive in our forecasts... lets take this thing to the extreme... if we get wacked [sic] on the ride down-who gives a shit... THE TIME TO GET RADICAL IS NOW... WE HAVE NOTHING TO LOSE..." (hint, this is the current Groupon CEO) in addition to the underwriters of said wonderful company. Read on and you'll see why such independent research is desperately - and I do mean desperately - needed. As a matter of fact, there's no valide reason why (after reading this rather meaty article) my servers should not be overloaded by the deluge of ex-muppets looking for some guidance through the fog of muppet master bankers stateside. To wit...

Wall Street Rakes in $42 Million From Groupon IPO - Deal Journal ...

And just so you don't think this is a personal vendetta against said muppet master pulling the strings that do God's work (it's probably more like an impersonal vendetta), let's sprinkle a little yellow stream on the Morgan Stanley parade shall we? After all, Morgan Stanley can be expected to pay up to 60% of those (ill-found? Depending on where your values lie...) gains in compensation, namely bonuses - apart from whether said bonuses were ever really deserved in the first place.... Yes, I'll go back there again, see Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!":

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost about 2/3rds of their clients money. I though to myself, "Damn, now that's some bold, hubristic s@$t". So, I decided to attempt to lay it out for everybody in the blog, see "

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics....

... Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.

Okay, enough the Muppet Manipulating, Money Marauding, Doing Work in God's Name Brand Bank Bashing... Let's get down to the nitty gritty of the report that I said I will give away for free. I am offering the report, earnings advisory addendum and accompanying simplified model to show what we're made of. Of course paying subscribers, and even casual blog readers, cannot say that I didn't thoroughly warn you! Early shorts on this stock as per our research notes valuation matrices would have given pleasant Christmas presents and would have also stuffed one hell of an Easter basket as well!!!

In case you still don't get it, the sell side research departments of these banks did not offer BoomBustBlog research to their clients. Oh no, then how in the hell can they dump their stock??? They issued glowing reports from their own analytical cum soft sales staff.

On that note, let's reminisce.... In June of 2011 I release proprietary research to BoomBustBlog Subscribers. You can now download said report absolutely free, here  Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36). After reading said report, prepare for some real comedy, as reported by Dailypolitical.com:

Groupon (NASDAQ: GRPN) was downgraded by equities research analysts at Stifel Nicolaus from a “hold” rating to a “sell” rating in a research note issued to investors on Monday.

Other equities research analysts have also recently issued reports about the stock. Analysts at Bank of America (NYSE: BAC) downgraded shares of Groupon from a “buy” rating to a “neutral” rating in a research note to investors on Monday. They now have a $20.00 price target on the stock, down previously from $30.00. Separately, analysts at Benchmark Co. cut their price target on shares of Groupon from $32.00 to $28.00 in a research note to investors on Monday. They now have a “buy” rating on the stock. Finally, analysts at Goldman Sachs (NYSE: GS) reiterated a “buy” rating on shares of Groupon in a research note to investors on Thursday, February 9th.

Groupon traded down 3.20% on Monday, hitting $14.54. Groupon has a 52-week low of $14.85 and a 52-week high of $31.14. The company’s market cap is $9.376 billion.

Whoa!!! Goldman Sachs reiterated their "buy" recommendation just in time for their damn Muppet Clients to lose ~40% by the close of the market today. Go ahead, stuff those damn Muppets, fellas!

For the record, in June of 2011, a full ten months ago, I made clear to my subscribers the following (as excerpted from the now free download)...

We value Groupon at $6.6bn using DCF. The current valuation is based on 10 years of revenue projections which are overly optimistic in our view.  We have forecasted revenues of $4.0bn in 2011 and expect revenues to nearly double to $7.5bn in 2012 and reach $35bn by 2020. We have assumed cost of equity of 12% and terminal growth of 3% from 2021 onwards. We have kept gross profit at stable levels and assumed operational gearing to (∆ Operating Profit / ∆ Revenue) to improve considerably. Despite these optimistic projections we were still not able to justify a valuation close to $10bn let alone $20-25bn. We only see downside risks to valuation of $6.6bn and believe that Groupon’s rejection of Google offer of $6.0bn was a mistake in first place. Google’s valuation of $6.0bn most assuredly included a premium for synergies that Google could have achieved with Groupon which would be clearly absent in the standalone entity. We see the fair value of Groupon close to $3.0-4.0bn if we assume a more realistic picture. Given all kinds of questions surrounding Groupon’s business regarding the sustainability of revenue growth, costs control and even the business model itself (i.e., the relationship with merchants) and external competition, we remain deeply concerned even on the sustainability of a successful IPO for Groupon. 

For the record, at about $14 per share, Groupon is market-valued at about $9.1 billion dollars!!!! Here are some key highlights: Groupon restates revenue, EXACTLY as I warned just three months earlier.

1. Monday, 26 September 2011 What's The Best Way To Profit From Groupon's IPO?
2. Groupon Revenue Restated 09/26/2011

1. Sunday, 13 November 2011 I Hope You Groupon IPO Investors Got Coupons At The IPO!!! Yeah, That's Right I Was The First To Say It

Semantic Housekeeping

I noticed in the comment columns of some of the blogs that there was some controversy concerning my dressing up as a Zulu warrior in my hunting of the giant Vampire Squid. I wish to correct thee. I did not dress up as anyone but Reggie. I had shorts on from the Gap. As for the weaponry donned, yes I did grab a little something from my personal stash, but it was not Zulu, it was Masai in origin. I suggest all brush up on their African warrior history. Why don weapons at all? Well as intellectually and physically capable as I desire myself to be, hunting Vampire Squid can be a dangerous occupation, therefore one should go into the fray fully packed. Was I somehow regretfrul of marketing my brand as who I actually am? Of course not. If anything, I suggest many of you institutional asset manager types don intellectual weaponry of some sort or fashion, be it of Zulu, Masai or other origin. After all...

Who would rather be, a 45% to 62% capital LOSS MUPPET or a Masai (or Zulu) Warrior? Should I even have to ask?

Shaka kaSenzangakhona (aka Shaka Zulu)
The only known drawing of Shaka—standing with the long throwing assegai and the heavy shield in 1824, four years before his death
Reign	1816 - 1828
Born	ca. 1787 KwaZulu-Natal, near Melmoth
Died	c. 1828 KwaZulu-Natal
Occupation	Monarch of the Zulu Kingdom

Masai Warriors 

Maasai warriors in German East Africa, c. 1906-1918.

For some reason, it appears that there are still many monied interests that would literally want to be a little green (yet cute) victim versus an entity that would stand up, arm itself intellectually and defend its own economic interests. Alas, to each their own....

Goldman Clients aka MUPPETS!!!

Click any and all graphics in this post to expand to print quality

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?	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!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 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!

And back to Groupon for a minute... Way to Go Muppet Masters Goldman et Morgan, eh? Let's not fret too much about the $42 million  in fees. My assumption is that it is both expensive and fraught with red tape, you know getting a Ponzi scheme authorized by the SEC!!!

Groupon IPO Scandal Is the Sleaze That's Legal

Izard Nobel LLP Announces Class Action Lawsuit Against Groupon, Inc.

MarketWatch - 17 hours ago

Izard Nobel LLP Announces Class Action Lawsuit Against Groupon, Inc.

Reuters Key Development - 17 hours ago

Bernstein Liebhard LLP Announces That a Class Action Has Been Filed Against <...

MarketWatch - 19 hours ago

Pomerantz Law Firm Has Filed a Class Action Against Groupon, Inc. -- GRPN

Girard Gibbs LLP Launches Groupon Legal Investigation

MarketWatch - Apr 3, 2012

Girard Gibbs LLP Launches Groupon, Inc. Legal Investigation

Reuters Key Development - Apr 3, 2012

Newman Ferrara LLP Investigates Groupon, Inc. for Possible Breaches of <b>......

MarketWatch - Apr 3, 2012

Robbins Geller Rudman & Dowd LLP Files Class Action Suit Against Groupon,...

Reuters Key Development - Apr 3, 2012

Groupon to Settle Class-Action Lawsuit for $8.5 Million

Bloomberg - Apr 2, 2012

Groupon Inc. (GRPN) Faces Accounting Issues, Why is Anyone Surprised?

ValueWalk - Apr 2, 2012

Rigrodsky & Long, P.A. Announces an Investigation of Groupon, Inc. for <b...

MarketWatch - Apr 2, 2012

Rigrodsky & Long, P.A. Announces Investigation 

Harwood Feffer LLP Announces Investigation of Groupon, Inc.

MarketWatch - Apr 2, 2012

Harwood Feffer LLP Announces Investigation Of Groupon, Inc.

Reuters Key Development - Apr 2, 2012

Groupon Revisions Highlight New Model's Risks

BusinessWeek - Apr 2, 2012

Groupon Inc. (GRPN) Is Declining After Q4 Revision

NASDAQ - Mar 30, 2012

A quick visual op-ed courtesy of williambanzai7...Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!

The full Max Keiser Show which aired Yesterday in Europe. My interview starts at 14:30 in the video.

A topic drill down of what was discussed in the video above.

Yes, there is a US Treasury Ponzi scheme as afforded by the Federal Reserve in an era of what seems to be perpetual ZIRP...

But wait a minute, isn't ZIRP actually killing the banks slowly but surely? If so, why has the sell side been so bullish on ZIRP in for the banking industry???

Oil prices spike in the face of slack economic demand and the face of recession - again?

The US Education Ponzi causes rampant tuition inflation in the face of tepid if not non-existent increases in actual education quality - of course all of this is financed by a credit/loan bubble where you have a ~trillion dollar market that already has a ~25% delinquency rate. Exactly how is this expected to end?

Speakng of education...

Municipalities have been burnt and bent over by big Wall Street Banks on a regular basis.

So, what happens when you do derivative business with Goldman Sachs as a municipality or sovereign state? Here's nearly an hour worth of answer for you, from countries and municipalities around the world!

Now, Reggie Middleton on Goldman Sachs' business model

• The Goldman Grift Shows How Greece Got Got
• Name brand investing in the WSJ - BoomBustBlog
• Quickly revisiting name brand investors... - BoomBustBlog
• Are you hooked on name brands? - BoomBustBlog
• The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...
• What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer!
• The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!

Facebook CEO Running From Investors 'Cause He's The Only Invest That He Actually Needs To Respect…

Is Facebook's CEO Running Away From Investor Responsibility Because He IS the only Investor Whose Opinion Actually Counts? Last month I released an update to our Facebook IPO analysis (subscribers may download it here FaceBook IPO & Valuation Note Update). In its caveats section, I made pains to make very clear that one of the biggest threats to Facebook investors actually emanates...

 Well, there you have it! And executive director at Goldman Sachs has explicitly corroborated what I and many in the blogosphere have been crowing for some time now, and that is... 

The whole video can be seen here on the Max Keiser show, starting from about 19:00 minutes in where I discuss risk vs reward in GS and how they outperform eventhough risk outweighs reward. Those who like numbers and charts can see where I actually demonstrated in For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks:

As in “When the Patina Fades… The Rise and Fall of Goldman Sachs???“, we can reminisce over the fact that Goldman BARELY earns its cost of capital on an economic basis, and that’s before considering the potential horrors which may (and probably do) lay on the balance sheet (for more on BS horror, referenceReggie Middleton vs Goldman Sachs, Round 2) .

GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.

And now we have supporting evidence from the inside... From the NYT:

"TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. I can honestly say that the environment now is as toxic and destructive as I have ever seen it."

"To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."

"I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work."

" I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave."

 "How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence. What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym."

"I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all."

"It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen."

More on the topic..

The Goldman Grift Shows How Greece Got Got

I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!!

Is It Now Common Knowledge ThatGoldman's Investment Advice Sucks?

The Brown Stinky Stuff is Splattering Off the Fan Blades and Landing on That Shiny New Building on the West Side Highway.

The mainstream media is still focusing its attention on leaves while ignoring the danger posed to the entire forest. A quick scan of the big headlines for the day...

ECB Sees Slower Growth, Flags Success of Money Flood - Slower EU growth directly following a devastating EU recession is a very, very bad thing. Combine this with the fact that the ECB felt the need to flood its banking system with a trillion euros of cheap liquidity collateralized by quasi-used toilet paper should make clear that they are terrified of what comes down the pike. Is or is not the writing on the wall?

Roubini: Private Sector’s Greece Deal Is ‘Sweet’ - Yeah, well, 50% is a 100% percent more than nothing - which is exactly what some bondholders may get as they hold out until this time next year. See LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?

Witching Hour: Will Enough Investors Take Greek Deal? - Does it really matter? The deal doesn't seem to be enough to put Greece on the path to sustainable economic recovery since by our calculations Greece will be forced to come back to the table within two to four years, reference The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media. As a matter of fact, what seems to be missed is the greater economic fallout of all of this free money engineering...  Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE. This gets even worse. If PSI doesn't go through and CAC is implemented then you have a credit event and CDS market does its job thereby banging those American banks that wrote the CDS. If the CAC is not implemented then the CDS didn't do its job and the premium that was absorbed by CDS will then be applied directly to sovereign debt meaning heavy debt service. The only way out of this is debt destruction, a true default. 

Furthermore, there's the common sense consequence of what the ECB has done that apparently wasn't too commonly perceived amongst those decision makers at the ECB, as reported by ZeroHedge last night:

In what could prove to be the most critical unintended consequence of the ECB's LTRO program, we note that as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties. While the hope was for any and every piece of lowly collateral to be lodged with the ECB in return for freshly printed money to spend on local government debt, perhaps the expectation of a truly virtuous circle of liquidity lifting all boats forever is crashing on the shores of reality. This 'Deposits Related to Margin Calls' line item on the ECB's balance sheet will likely now become the most-watched 'indicator' of stress as we note the dramatic acceleration from an average well under EUR200 million to well over EUR17 billion since the LTRO began. The rapid deterioration in collateral asset quality is extremely worrisome (GGBs? European financial sub debt? Papandreou's Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets - to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle - especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.

This huge increase in margin calls can only further exacerbate the stigma attached to LTRO-facing banks - and as we noted this morning (somewhat presciently) both the LTRO-Stigma-trade, that we created, and the potential for MtM losses on the carry-trades that LTRO 'cash' was put to work in could indeed start a vicious circle in European financials, just as everyone thought it was safe to dip a toe back in the risk pool.

Hmmmm... Let's take a more critical look at the potential consequences by reviewing page 9 of the subscriber forensic report for BNP Paribas (click here to subscribe).

•  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

Heavy ECB margin calls on institutions that have abused the ambiguity cover provided by Topic 820 can foresee some significant pain in the near future. Having to sell something for reality's price that you carried on your books at fantasy's price has never proved to be a profitable endeavor.

Subscribers should now review pages 10, 11, and 12 of said document - which will really get your britches in a tear.

It really doesn't look to positive, but that's bullish, right!!!!

Can such a thing really happen? Here's another interesting story from ZeroHedge on the carry trade gone bad...

We know how AIG and MF ended, as of yet we don't know how LTRO will end.

AIG was the ultimate carry trade. They sold massive amounts of CDS for a very small spread. They had no funding cost, no collateral requirements(initially), and no mark to market risk for their own P&L.  The year before AIG blew up, management was spending all sorts of money buying back their "undervalued" shares. Actually they probably bought back a lot of shares in early 2008.  What could go wrong with the trade?  The only thing that could go bad was a downgrade to AIG at the same time as the assets they wrote CDS on went down, because then and only then would they have to post collateral.  Their CDS had massive negative mark to markets long before they were on the verge of collapse. It was the fact that a downgrade to their ratings could enable their CDS counterparties to call for collateral.  It was the threat of collateral calls that ended it for AIG.

LTRO has variation margin.

What happened at MF?  Massive positions in short dated bonds to earn the "carry". All was fine until the size concerned people. They had trouble financing the position. The position was so large the market pushed against them. With so much leverage they couldn't meet the margin calls and selling the bonds would wipe them out.

LTRO has variation margin and the banks have disproportionately large positions in the debt of their country.

Lots of "carry" trades have worked out well, but when they don't, the result is pretty ugly. Many argue that LTCM was also just a giant "carry" trade that unwound when vol and mark to market blew through their ability to post collateral.

In closing, I urge all subscribers to play with the BNP bank run model once again. Remember my admonitions from last summer? 

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

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

•  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

The first model (all are cast in Excel 2010 format [.xlsx]),  BNP Exposures - Free Public Download Version, is available to the public free of charge and is designed to spark the discussion of Whether Another Banking Crisis Is Inevitable? Here are some screen shots.

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

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

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

• a research note to subscribers,  The Inevitability of Another Bank Crisis,
• followed by blog posts on the same, see Is Another Banking Crisis Inevitable?

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

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

Income statement implications of a true bank run...

Greece will burn economically because of financially engineered, grifted ways and it most definitely will not be the only country in the EZ to do so. I have made this unequivocally clear since February of 2010, over two years ago - reference the Coming Pan-European Sovereign Debt Crisis.

So who is responsible for such a potentially cataclysmic event and what can be done about it? Well, amazingly, I'll answer it all in one post by combining a little reporting with some hardcore, truly objective, independent financial analysis. Ahhh, I love this new media blogging thingy! From Bloomberg:

Goldman Secret Greece Loan Reveals Two Sinners

Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.

You know, one sentence into this Bloomberg piece it already smacks of realism simply by indicating it was a mistake for an unsophisticated party to do business with Goldman. It's a damn shame that such a statement can be so believable on its face without even an ounce of justification provided yet. It goes to show you exactly how many feel, deep down, Goldman actually manages to outperform. It takes money from the foolish, as opposed to earning it by being the so called best of the best. It is the best, but the best had marketing and grifting - not necessarily engineering the best solution for its clients. You see, most of the time the best solution for your clients are antithetical to both your bonus pool and margin expansion.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

I hate to say it, but if you're foolish enough to listen to the most profitable bank tell you not to say thing to anybody else about said deal, then you may deserve what's coming to you. If there are any sovereigns or any other entities reading this and you find yourself in a similar situation, I suggest you simply contact me. For those who aren't familiar with me and my ability to sniff things such as these out, I urge you to ask the question, Who is Reggie Middleton? I'll independently review the deal for you and give you the T-R-U-T-H! You know, its been a while since I've seen that word in articles such as these. Another damn shame. There should be plenty of opportunity for me to discuss this, for Greece is definitely not the only European entity to be diagnosed with a chronic case of Goldman's financially engineered derivative product indigestion, reference Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!  So, I'll be looking forward to hearing from, and visiting you France, Spain, Italy, Portugal, Ireland, Belgium...

Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.

“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.

Righhhhht!!! Two sinners... How about an orgy in an economic brothel where financial syphilis was being passed around by the pimp who told all of the excited teenage boys who were about to get their cherry popped that they didn't need condoms, those little rubber things were for wimps. BTW, those pimply faced teenage boys who were convinced to get down without their intellectual/economic prophylactics had a much more diverse selection of accents than this story may lead one to believe - as excerpted from Smoking Swap Guns...

Moreover, one of the key reasons why such manipulations continued is the apparent ignorance of the EU's Eurostat, which knew enough about these deals to tighten the rules governing their accounting-albeit only after they had served their purpose - the Ponzi! When Italy's then-Prime Minister Romano Prodi miraculously achieved a four-percentage-point improvement in Italy's budget deficit in time to usher the country into the common currency, Italy's use of accounting gimmicks was widely discussed, and then promptly ignored. As at that time, everyone was only too eager to look the other way in the drive to get the single currency up and running.

It wasn't until 2008-a decade after the deals became popular-that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations. Still, till date too little is known about countries' continued exposure to the deals that are already out there.

Overall, though there is less evidence to support that there are more such swap deals that happened during the late 90's till early part of this decade, the data below showing a sharp decline in interest payments as a percentage of GDP particularly for Belgium (apart from Greece and Italy), hints that there are considerably more of these deals to be discovered. The questions is, will they be discovered before or after the respective sovereign issues record debt to the suckers sovereign fixed income investors.

e

Notice the extremely supercalifragilisticexpealidocious reductions Belgium, Greece and Italy have made in their interest payments from 1993 to 2000 in this graphic made pre-2000. If one didn't know better, one would have thought theses countries actually used magic to make such reductions. Italy practically cut their debt service (projected, of course) in half. It really makes one wonder. I'm just saying...

BoomBustBlog subscribers (click here to subscribe) are welcome to download our contagion models which have been quite accurate thus far in mapping out where this has, and quite likely will lead us.

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

In Contagion Should Be The MSM Word Du Jour, Not Bailouts and Definitely Not Greece! I included sample output from the Model detailing the various paths of contagion that can be taken given default by "XYZ" country..

And back to the Bloomberg article...

Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed. Harvard University, Alabama’s Jefferson County and the German city of Pforzheim all have found themselves on the losing end of the one-of-a-kind private deals typically pitched to them by securities firms as means to improve their finances.

Goldman Sachs DNA

“Like the municipalities, Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk,” said in a phone interview. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren't compromised -- it’s part of the DNA of that organization.”

Nawwww!!!  It can't be! Say it "Ain't True!" For those who haven't seen this VPRO special on how Goldman Sachs looted European countries years ago, it is literally a must see. The mayor of a small Italian village speaks candidly and openly to the audience. All it really takes is to hear it from the horse's mouth. If that's not good enough, you can always hear my 15 minute contribution, or that of Simon Johnson, or even Matt Taibbi. Yes, it's all here, complete with English translations where necessary.

A gain of 600 million euros represents about 12 percent of the $6.35 billion in revenue Goldman Sachs reported for trading and principal investments in 2001, a business segment that includes the bank’s fixed-income, currencies and commodities division, which arranged the trade and posted record sales that year. The unit, then run by Lloyd C. Blankfein, 57, now the New York-based bank’s chairman and chief executive officer, also went on to post record quarterly revenue the following year.

So Greece helped "grease' the FICC bonus pool under Lord Lloyd, eventually catapulting him up to the CEO position. Hmmm... Of course, you don't get something for nothing. Methinks Goldman et. al. may have a couple of bones stuffed up into thier closet as well. Speaking of FICC, reference this excerpt from So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?...

Banks exposure to interest rate and foreign exchange contracts

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

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

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

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

bank_ficc_otc_exposure_bac_and_gs.png

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

Of course, this article is about Goldman right? In addition, exposure doesn't necessarily mean that the  shit will it the fan, right? After all, it's different this time!!!

The interest rate storm is coming, that is unless Europe can maintain historically low rates as several countries default. Then again, they never default, right...

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

Again, click the little pics to make big pics...

So, as I was saying...

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Goldman is much more highly leveraged into the derivatives trade than ANY and ALL of its peers as to actually be difficult to chart. That stalk representing Goldman's risk relative to EVERY OTHER banks is damn near phallic in stature!

Click those little pictures to make BIG pictures....

As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... , this is not a new phenomenon. Quite to the contrary, it has been a constant trend through the bubble, and amazingly enough even through the crash as banks have actually ratcheted up risk and assets in a blind race to become TBTF (to big to fail), under the auspices of the regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture). So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just giving y'all a heads up ahead of time...

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

• Goldman Sachs Q3 Forensic Review - Retail
• Goldman Sachs Q3 Forensic Review - Professional

Okay, now back to that Bloomberg article...

‘Extremely Profitable’

The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan. Those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.

The trading costs on the swap rose because the deal had a notional value of more than 15 billion euros, more than the amount of the loan itself, said a former Greek official with knowledge of the transaction who asked not to be identified because the pricing was private. The size and complexity of the deal meant that Goldman Sachs charged proportionately higher trading fees than for deals of a more standard size and structure, he said.

“It looks like an extremely profitable transaction for Goldman,” said Saul Haydon Rowe, a partner in Devon Capital LLP, a London-based firm that advises global investors on derivatives disputes.

Disappearing Debt

Goldman Sachs declined to comment about how much it made on the swaps. Fiona Laffan, a spokeswoman for the firm in London, said the agreements were executed in accordance with guidelines provided by Eurostat, the EU’s statistical agency.

Oh yeah, Eurostat! That bastion of Eurofellas who really, really know what they're talking about - as evidenced from Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

Revisions-R-US!

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

“Greece actually executed the swap transactions to reduce its debt-to-gross-domestic-product ratio because all member states were required by the Maastricht Treaty to show an improvement in their public finances,” Laffan said in an e- mail. “The swaps were one of several techniques that many European governments used to meet the terms of the treaty.”

Cross-currency swaps are contracts borrowers use to convert foreign currency debt into a domestic-currency obligation using the market exchange rate. As first reported in 2003, Goldman Sachs used a fictitious, historical exchange rate in the swaps to make about 2 percent of Greece’s debt disappear from its national accounts. To repay the 2.8 billion euros it borrowed from the bank, Greece entered into a separate swap contract tied to interest-rate swings.

Falling bond yields caused that bet to sour, and tweaks to the deal failed to prevent the debt from almost doubling in size by the time the swap was restructured in August 2005.

Greece, which last month secured a second, 130 billion-euro bailout, is sitting on debt equal to about 160 percent of its GDP as of last year...

‘Teaser Rate’

The derivative Loudiadis offered Sardelis in 2001 was also complex. Designed to provide a cheap way to repay 2.8 billion euros, the swap had a “teaser rate,” or a three-year grace period, after which Greece would have 15 years to repay Goldman Sachs, Sardelis said. All in, the deal appeared cheap to officials at the time, he said.

“We calculated that this had an extra cost above our normal funding cost on the yield curve of 15 basis points,” Sardelis said....

‘Very Bad Bet’

Sardelis said he realized three months after the deal was signed that it was more complex than he appreciated. After the Sept. 11, 2001, attacks on the U.S., bond yields plunged as stock markets sold off worldwide. That caused a mark-to-market loss on the swap for Greece because of the formula used by Goldman Sachs to compute Greece’s repayments over time.

“If you calculated that when we did it, it looked very nice because the yield curve had a certain shape,” Sardelis said. “But after Sept. 11, we realized this would be the wrong formula. So after we discussed it with Goldman Sachs, we decided to change to a simpler formula.”

The revised deal proposed by the bank and executed in 2002, was to base repayments on what was then a new kind of derivative -- an inflation swap linked to the euro-area harmonized index of consumer prices. An inflation swap is a financial bet that pays off according to the degree to which a consumer-price index exceeds or falls short of a pre-specified level at maturity.

That didn’t work out well for Greece either. Bond yields fell, pushing the government’s losses to 5.1 billion euros, according to an analysis commissioned by Papanicolaou. It was “a very bad bet,” he said in an interview.

“This is even more reprehensible,” Papanicolaou said of the revised deal. “Goldman asked them to make a change that actually made things even worse because they went into an inflation swap.”

And what the hell were they expecting? Didn't they realize that it was Goldman that was on the other side of the swap? Do you expect a wolf to turn down a pound of meat if he is asked if he wants it?

Confidentiality Requirement

Greece was handicapped, in part, by the terms Goldman Sachs imposed, he said.

“Sardelis couldn’t actually do what every debt manager should do when offered something, which is go to the market to check the price,” said Papanicolaou, who retired in 2010. “He didn’t do that because he was told by Goldman that if he did that, the deal is off.”

Sardelis declined to comment about the analysis, as did Petros Christodoulou, director general of the debt-management agency since February 2010.

It isn’t unusual for dealers to impose confidentiality requirements on clients in complex transactions to prevent traders from using the information to front-run or trade against the bank arranging and hedging the deal, said a former official who analyzed the swap and asked not to be named because the details are private.

Personally, I dont care if it isn't unusual to impose confidentiality on complex deals. If you don't understand the deal, seek qualified, impartial assistance. If you're counterparty doesn't like that, then ever so politely tell them to f@ck off - PERIOD! If you enter into a deal that you don't understand, don't be surprised from that itchy/burning/stretched feeling you're bound to feel in your anus a few months into the deal.

‘Large Number’

Goldman Sachs’s initial 600 million-euro gross profit “sounds like a large number, but you have to take into account what the bank will be setting aside as a credit reserve, the cost to Goldman to fund the loan and the cost of hedging the currency component,” said Peter Shapiro, managing director of Swap Financial Group LLC in South Orange, New Jersey, an independent swaps adviser. “It’s hard to tell what the profit margin would have been.”

Hmmmm... Methinks I could tell that it would have been a lot higher than a plain vanilla loan's profit margin at prevailing rates, no?

The report Papanicolaou commissioned after taking over the agency showed the repayment formula meant that Greece would have to pay Goldman Sachs 400 million euros a year, he said. The coupon and the mark-to-market swings on the swap prompted George Alogoskoufis, then finance minister, to decide to restructure the deal again to limit losses, Papanicolaou said.

Loudiadis and a team of Goldman Sachs advisers returned to Athens in August 2005, according to former Greek officials. The agreement they reached to transfer the swap to National Bank of Greece SA and extend the maturity to 2037 from 2019, gave the Greeks what they wanted, Papanicolaou said.

Oh yeah! That ever so solvent bastion of Greco-intellectual economic capability that I warned about two years ago, see How Greece Killed Its Own Banks! and the Greek Banking Fundamental Tear Sheet.

‘Squeeze Taxpayers’

The 5.1 billion-euro mark-to-market value of the swap was “locked in,” Papanicolaou said. It was that politically motivated decision to restructure and fix the increased market value that did as much damage as the original swap, said Sardelis, now a board member of Ethniki General Insurance Co., a subsidiary of National Bank of Greece.

“You can’t have prudent debt management if you change all the assumptions all the time,” he said.

Gustavo Piga, a professor of economics at University of Rome Tor Vergata and author of “Derivatives and Public Debt Management,” sees a different lesson.

“In secret deals, intermediaries have the upper hand and use it to squeeze taxpayers,” Piga said in an interview. “The bargaining power is in investment banks’ hands.”

Professor Gustavo Piga is the esteemed fellow who offered the nuggets of wisdom in the VPRO video above.

The nitty gritty on Goldman Sachs that you just won't get anywhere else...

If you haven't already, please do review the first four parts of this series, and if so skip past this break and into the nitty gritty--->

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!

A Few Quick Comments On Goldman's Q4 2011 ... - BoomBustBlog

Reggie Middleton on Realism and being Offensively Honest

The many ways to reach Reggie Middleton:

Or simply email me.

I think I will recap this week in BoomBustBlog postings early since a comment from the British sell side bank Barclay's literally irked the shit out of me. First the comment, then the recap. In my post yesterday, "Does Anyone See This Emergency As An Emergency, Or Is A Half Trillion Euro Pay Day Loan Bullish?", I inquire as to whether the Barclay's strategist weed is actually stronger than ours.

... headline from Bloomberg: Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash

Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.

The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.

So, basically, nearly twice as many banks are in trouble now as compared to just three months ago. This is bullish, right???!!!

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to heart, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks?

Now, to answer that question, let's jump to a post earlier in the week introducing my interview regarding Greece on RT's Capital Account, Why Greece Bailout Games Will Cause The Rest of the EU to Break Out the Grease…

... If you didn't have a job, you wouldn't be able to pay back your loans. Then again, one way to solve this problem is simply not to give anybody a loan, eh?

Alas, we don't have to worry about that since the money spigots are just so turned on to the Greek corporate sector you don't have to worry about a scarcity of jobs. With all of that capital sloshing around the system, Grecian companies are bound to start going on a hiring binge ANY MINUTE NOW!

Now, look very carefully at the last two charts, take a big toke, and re-read what that Barclays Bloke had the nerve to speak in a major business rag... 

 ...it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Damn.... Okay, maybe we are taking this guy out of context. After all, he also said, "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money". Hmmm, let's take a look at some of the smaller banks, wait a minute... Aren't the Greek banks relatively small???

Then there's the issue of the run on the banks. With all that is going on, I made very clear that multiple runs are imminent, hence the need for 100 bp, junk collateral funding from the ECB. The Barclay's bloke says differently in that the money will not go to cushion runs, but will go to the greater [sic real] economy. Yeah... Pass the blunt! As excerpted from the following reports...

BNP Exposures - Professional Subscriber Download Version

BNP Exposures - Retail Subscriber Download Version

BNP Exposures - Free Public Download Version

 French Bank Run Forensic Thoughts - Addendum and Update

I have explored European bank runs in depth, see The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).

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! 

Overnight and on demand funding is at a 72% deficit to liquid assets that can be used to fund said liabilities. This means anything or anyone who can spook these funding sources can literally collapse this bank overnight. In the case of Bear Stearns, it was over the weekend.

In reviewing my post on this topic in January predicting the fall of Bear - "Is this the Breaking of the Bear?", it is actually scary how prescient it actually was...

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

Okay, I’ll admit it. I watch CNBC. Now that I am out of the confessional, 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...

I urge all to review that post of January 2008 and realize that negative equity is negative equity, and no matter how you want to label it, account for it, or delay and pray, broke is broke! This lesson should not be lost on the Europeans, but unfortunately, it is!

 So, is this just theory, or do I have a point? Well, I had a point when I applied the theory to Bear Steans in 1/08, three months before they collapsed. It also seemed to work as I warned about the collapse of the Greek banks in 2010, see How Greece Killed Its Own Banks! and the subscription-only  Greek Banking Fundamental Tear Sheet. Was I right regarding large equity drawdowns causing masiive bank runs? Well in "So, Can Europe Nationalize All Of Its Troubled Banks? Place Your Bets Here" I quoted an article from ZH:

 Greek Bank Deposit Outflows Soar In January, Third Largest Ever

According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.

So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?

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

 My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Stay tuned!

In a discussion that I had over at ZeroHedge there came the topic of whether bank runs are possible in Europe. Well, I believe we've already had some devastating one's (ex. Northern Rock) but if one takes the continent only or the EZ in particular, we still have a significant systemic threat. The gist behind the argument is that if the true economic capital is weakened to the point that depositors/creditors/counterparties make a run for it, the sovereign nation in which it is domiciled will simply nationalize it. Hmmm... Let's take a look at how that might work out, as excerpted from Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

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

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

 

Imagine the Swiss nationalizing just UBS and Credit Suisse, whose assets constitute 500% of the Swiss GDP. THAT'S JUST TWO BANKS!!! Imagine if the entire banking system got into trouble from daisy chaining European defaults??? 

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.

If BoomBustBloggers remember, I went on a tear with my theory of European bank runs last summer. Reference:

• The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
• The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
• On Your Mark, Get Set, (Bank) Run! The D…
• The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

I strongly suggest that any interested in the topic peruse the links above if they haven't already done so. They drive the point home. And on the topic of Greece and bank runs, ZH runs Greek Bank Deposit Outflows Soar In January, Third Largest Ever

According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.

Were the big Greek banks effectively nationalized already? Don't the depositors and counterparties/creditors know that Bank of Greece and the ECB have their backs. I mean, come on now. Paranoia is simply going too far. MG Global account holders may be getting some of their monies back, as is somebody who had an account somewhere in Lehman. I remember when I made this warning about Bear Stearns back in January of 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). Nobody wanted to listen: Is this the Breaking of the Bear?

Once again, do I have a crystal ball??? Or just a spreadsheet??? After all, the ECB just injected a record amount of junk collateral backed, near ZIRP liquidity into the European banking system - Helicopter Ben style - a half trillion Euro worth, or 3/4 trillion dollars or so. And to think, many believe Hip Hop music and iPhones to be one of the biggest US exports:-) Of course, everybody on the sell side sees this as bullish - reference Cascade is to Domino as Greece is to Por… and Does Anyone See This Emergency As An Eme… for a more common sense approach to this ECB bailout of bailouts. As for just why such a massive liquidity injection was necessary? Well, as this excerpt from the subscriber edition of the BNP Paribas report is marked...

'Nuff said! Subscribers, as (not if, but as) this breaks, these are the companies trading at the valuations that are most shortable/profitable in my opinion...

US CRE

• US REIT Fire Sale Scenario Analysis
   US REIT Foreclosure Scenario Analysis
•  US REIT Sample Property Valuation
•  US REIT Cashflows and Debt Preliminary Analysis

European Insurance

•  Insurer Report_122511 - Professional/Institutional edition
•  Insurer Report_122511 -Retail edition

European CRE (this one is a bit dated)

•   Debt Analysis, Blog Subscriber Edition
•  Preliminary Download

European banking

Haircuts, Derivative Risks and Valuation

And the cat that was already let out of the bag...

BNP Exposures - Professional Subscriber Download Version

BNP Exposures - Retail Subscriber Download Version

BNP Exposures - Free Public Download Version

 French Bank Run Forensic Thoughts - Addendum and Update

 

Today's big headline from Bloomberg: Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash

Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.

The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.

So, basically, nearly twice as many banks are in trouble now as compared to just three months ago. This is bullish, right???!!!

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to hear, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks? Is the "pass[ing] it on the the economy" the reason why there is now so much liquidity in European CRE? Here's a quick reminder of where I stand on this...

So, it's safe to say that all of those European REITs and real estate concerns with property mortgages coming up for renewal while underwater will definitively see most of that LTRO 2 money, right? Let's all take a deep breath and hold it as we wait for that one to happen. Ready? One... Two... Three...

What do you think, pray tell, happens when the liquidity starved, capital deprived, over leveraged banks fail to roll over all of that underwater Eu mortgage debt?

Slide21Slide21Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Reggie Middleton Featured in Property EU, one of Europes leading real estate publicatios

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

In continuing with my rant on the absurdity of even pretending the Greek situation is salvageable or that Greece will somehow be bailed out without a near complete absolution of their debts, I  bring forth from the BoomBustBlog archives the Sovereign Contagion Model. For those who haven't read my most posts on this topic, please review The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media and Grecian Tragedy Formula, Bailout Number 3.

It is my contention that Greece's significant default is a forgone conclusion. It is also my contention that media attention should be much more focused on the damage to be done by a Greek default - considerably more so than whether Greece will ultimately default of not or what type of bailout it may or may not recieve. I have been of this mindset for several years which is why I had my analyst team create the Sovereign Contagion Model below.

I've decided to go through a portion of the model and subset of its output to spark a real, realistic discussion in the media (I will discuss this on Capital Account via RT [Russian Television] live, today at 4:30 pm, re-airs at 7:30pm).

Summary of the methodology

• We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
• In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors - a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
• Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
• The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.
• Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings
• Sovereign Contagion Model - Pro & Institutional - contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.

What happens when you take the raw public debt exposure and you massage it for reality? Well, BoomBustBlog subscribers already know. Here's a sneak peak of just one such scenario...

(Click to enarge)

This is a scenario of a 96% chance of a Greek default, which naturally daisy chains along the EU corridor. Why do I say "naturally daisy chains" you query? Well, to begin with, the leveraged holdings of Greek bonds will take a massive, mark to market recognized loss - except for possibly the ECB who holds the most since that institution feels it can rewrite the rules. Bond investors levereaged 10 to 60 percent taking a 75%+ loss on an unlevered basis are not just underwater, they are deep sea fishing.

Then there's the human nature reality that if/once Greece defaults and does not get absolutely obliterated, other nations will wonder why they should suffer through extreme austerity measures while Greece defaults and gets to start over without paying back its debt. Hey, if he doesn't have to honor his loans, why should I? That means Portugal and Ireland will be quite reticent to suffer through high debt service and austerity while Greece doesn't.

Even if point the point above does not come to fruition (eventhough it probably would), EU-wide austerity is the same as a great recession or depression - on topr of historically unprecedented debt service. A simple glance at history reveals default is much, much wiser than suffering through a decade of austerity. Don't believe me, ask the fastest growing economy in the EU, Iceland. Don't forget to look up why Iceland is one of the fastest growing economy in the EU block as well - and they are not even in the EU. Oh yeah, that's right! They defaulted on their debt and moved forward.

Take the above into consideration as you read this article published by Bloomberg today:

Royal Bank of Scotland Group Plc, Commerzbank AG (CBK) of Germany and France’s Credit Agricole SA booked losses on their Greek government debt two days after creditors agreed to the biggest sovereign restructuring in history.

RBS, Britain’s biggest government-owned lender, posted a wider-than-expected full-year loss after taking a sovereign-debt impairment of 1.1 billion pounds ($1.7 billion). Commerzbank, Germany’s second-biggest lender, booked a 700 million-euro ($1.1 billion) writedown on Greek debt in the fourth quarter. Credit Agricole, France’s third-largest bank, reported a quarterly loss after 220 million euros in impairments on Greek debt.

Dexia SA and Allianz SE (ALV) also announced Greek writedowns today. The nation’s private creditors agreed to a debt swap on Feb. 21, paving the way for a second bailout and averting what Deutsche Bank AG Chief Executive Officer Josef Ackermann said would have been a “meltdown” worse than the collapse of Lehman Brothers Holdings Inc.

“Earnings were hit by Greek writedowns, but at least the worst is now behind us,” said Lutz Roehmeyer, who helps oversee about 11.5 billion euros at Landesbank Berlin Investment in Germany’s capital. “By aggressively writing down their holdings, banks want to show that they can cope even if Greece defaults down the road.”

RBS, Commerzbank and Credit Agricole (ACA) have all written down their Greek debt by at least 74 percent, in line with estimated losses in the securities’ net present value from the swap.

Hmmmm! Where have we heard this before?

... RBS shares jumped 4.8 percent to 28.63 pence as of 12:06 p.m. in London on optimism that Chief Executive Officer Stephen Hester has completed the worst of the writedowns and as demand recovered at its U.S. business.

... Allianz (ALV), Europe’s biggest insurer, posted fourth-quarter earnings that missed estimates as the Munich-based company booked 1.9 billion euros of non-operating impairments on Greek sovereign debt and investments, particularly in financials, for the year.

The insurer wrote down its Greek bonds to market values at the end of 2011, representing 24.7 percent of their nominal value. Shares of Allianz were up 0.8 percent to 90.57 euros.

Dexia, the Belgian lender being broken up, reported a record loss of 11.6 billion euros today. Its writedowns on Greek sovereign debt totaled 3.61 billion euros last year, including 1.25 billion euros of impairments taken by its former Belgian bank unit before it was sold on Oct. 20. In addition, Dexia (DEXB) wrote down an additional 1.01 billion euros on derivative contracts tied to the Greek debt.

... Europe’s largest lenders and insurers are likely to accede to the Greek swap because they’ve already written down their sovereign holdings and want to avert the risk of a default, analysts said earlier this week. The success of the swap depends on how many investors participate in the transaction.

Under the deal, investors will forgive 53.5 percent of their principal and exchange their remaining holdings for new Greek government bonds and notes from the European Financial Stability Facility. The plan seeks to reduce Greece’s debt burden by 107 billion euros, the Institute of International Finance, which led negotiations, said earlier this week. The swap is meant to help reduce the country’s debt to 120.5 percent of gross domestic product by 2020.

Will debt at 120% of GDP work for a country thrown into its deepest recession ever by austerity measures? Will anyone know what will happen three years out, not to mention 8 years out as declared by this story? Referencing the interactive spreadsheet published earlier this week - The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media:

As the premise to this story goes, this is definitely not about just Greece.  Let's review the contagion chart once again...

1. Australia is heavily levered into China, and any who follow me know how I feel about China. There's also speculation of an Aussi Bubble Video to Go With Your Aussie Bubble Speculation?
2. Austria and Belgium are highly exposed, yet never mentioned in the media
3. France, held hostage by its socialist stance to its over-leveraged banks - see "BoomBust BNP Paribas?"For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same:
   • a research note to subscribers,  The Inevitability of Another Bank Crisis,
   • followed by blog posts on the same, see Is Another Banking Crisis Inevitable?, as excerpted...
4. Ireland heavily levered into the UK whose banking system NPA's represent 9% of GDP!
5. Germany, the penthouse suite lessor of the Roach Motel, and potentially the biggest threat to Europe? See The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...
6. Japan: Highest debt outside of Zimbabwe, will force Japan to sell holdings to manage debt, driving up interest rates worldwide??? 

I can go on, but I think many have already got the message.

Bloomberg reports: Morgan Stanley, UBS, Goldman May Be Cut by Moody’s

Quote:

UBS AG, Credit Suisse Group AG (CSGN) and Morgan Stanley’s credit ratings may be cut by as many as three levels by Moody’s Investors Service, which is reviewing 17 banks and securities firms with global capital markets operations.

Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) are among companies that may be downgraded by two levels, Moody’s said in a statement, adding that the “guidance is indicative only.” Moody’s today cut some European insurers’ ratings based on risks stemming from the region’s sovereign debt crisis.

... Barclays Plc (BARC), BNP Paribas SA, Credit Agricole SA, HSBC Holdings Plc (HSBA), Macquarie Group Ltd. (MQG) and Royal Bank of Canada may also be cut by two levels, Moody’s said. Bank of America Corp. (BAC), Nomura Holdings Inc. (8604) Royal Bank of Scotland Group Plc and Societe Generale SA may be lowered by one grade, it said.

So, now others may start "Hunting the Squid", looking at JPM Morgan as the sovereign entity that it wants to be and DB as the leveraged powder keg that it appears. Then there's BNP, HSBC and BofA. You heard it all here first. Despite that, the MSM has put analysts in the consistent spotlight who I feel (without intending to disrespect them, of course) have been serially incorrect on banks. I have addressed this in my blog posts, namely Question the Quality Of BoomBustBlog Bank Research, Will You? Bove and Fitch Follow "The Blog"! and CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!!

Well, CNBC has invited me to do a full hour on their show tomorrow for the halftime report (12pm to 1pm) knowing full well I am probably the biggest contrarian that channel has ever seen. Stay tuned, it should be interesting. I will provide some downloadable valuation models companies and/or sovereigns for my readers to play with to facilitate conversation and get the tweets/emails going during the show - hopefully in my next post later on today.

Now, back to Bloomberg's report and banking, let's recap...

Goldman

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: 

1. I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction
2. Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?"
3. Reggie Middleton Serves Up Fried Calamari From Raw Squid: Market Perceptions of Real Risk in Goldman Sachs

So, what else can go wrong with the Squid? 

Plenty! In Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?" I included a graphic that illustrated Goldman's raw credit exposure...

So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party
I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just
giving y'all a heads up ahead of time...

And for those who may not be sure of the significance, please review my presenation as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam, below. After all, for all intents and purposes, Dexia has officially collapsed - [CNBC] France, Belgium Pledge Aid for Struggling Dexia... and its a good chance that it's a matter of time before BNP follows suit - exactly as BoomBustBlog predicted for paying subsccribers way back in July.

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

• The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
• What Happens When That Juggler Gets Clumsy?
• Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
• The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
• The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
• Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run 
• France, As Most Susceptible To Contagion, Will See Its Banks Suffer
• Observations Of French Markets From A Trader's Perspective
• On Your Mark, Get Set, (Bank) Run! The D…
• ECB As European Lender Of Last Resort = Institutional Purveyor Of A Pan-European Ponzi Scheme

 The European banking debacle was predicted at the start of 2010, a full year and a half before this has come to a head. If I could have seen it so clearly, why couldn't the banking industry and its regulators?

Now, back to GS, and considering all of the European falllout coming down the pike, of which Goldman is heavily leveraged into, particulary France (say BNP/Dexia/etc.)...

Let's go over exactly how GS is exposed following the logic outlined in the graphic before this series of videos, as excerpted from subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 3,4 and 5.

Bank of America

Bank of America Lynch[ing this] CountryWide's Equity Is Likely Worthless and It Will Rape FDIC Insured Accounts Going Bust

Warning! This is going to be a highly, highly controversial post. It is long, it is thick with information, and it hits HARD! Thus if you are easily offended by pretty women, intellectually aggressive brothers in cognitive war garb, your government regulators selling you out to the highest European bidder, or the cold hard facts borne from world class research that you can't find from the sell side or the mainstream media, I strongly suggest you stop reading here and move on. There is nothing further for you to see. As for all others, please keep in mind that I warned of Bank of America Lynch[ing this] CountryWide's swap exposure through a subscriber document on Thursday, 01 October 2009, then went public with it shortly thereafter.

There has been a lot of feedback and emails emanating from the last RT/Capital Accounts interview that I did earlier this week, as well as it should be. The dilemma is that I don't think the viewership is taking the topic seriously enough. I explicitly said, on air, that the Federal Reserve endorsed this country's most dangerous bank in shifting its most toxic assets directly onto the back of the US taxpayer through their most sacrosanct liquid assets, their bank accounts. In addition, when the shit hits the fan, those very same assets will be second in line for recovery, for the derivative counterparties will get first grabs.

Now, maybe its due to the fact that the interviewer was a cutie, or my voice was too deep, or because I didn't appear in my superhero garb, but I really don' think the message was driven home by the interview that I gave on Russian TV's Capital Account introductory show last week. So, let's try this again, but this time instead of donning that suit and tie, I go as that most unlikely of financial superheroes...

To begin with, for those who did not see the Capital Accounts interview on Russian Television, here it is...

Next, we need to see just how pertinent being 2nd in line is in the liquidation of an insolvent investment bank. I do mean insolvent. Yes, I know the big name brand investors who don't look like that rather unconventional superhero standing in front of the Squid headquarters above may believe that BAC has value, but I have told you since 2008, and I'll tell you now - the equity of Bank of America Lynch[ing this] CountryWide is effectively worth less than zero! Yeah, I know, many of those name brand analysts espoused in the mainstream media disagree, and to each their own, but several of Bank of America Lynch[ing this] CountryWide's latest acquisitions, ex. Countrywide, Merrill Lynch, etc. were enough to make it insolvent. Add several negative numbers together and do you think a little financial engineering is going to give you a positive number??? A little common damn sense is all that is needed to fill the bill here.

That $6 you see quoted on your equity screens is a freebie, a giveaway, and not indicative of economic book value in my opinion. Then again, I could be wrong, but I was correct on practically every major bank, insurance and real estate co. failure in the US over the last 4 years, as well as predicting many of the European ones. See Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

BNP Paribas

BoomBust BNP Paribas? as excerpted...

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

• a research note to subscribers,  The Inevitability of Another Bank Crisis,
• followed by blog posts on the same, see Is Another Banking Crisis Inevitable?, as excerpted...

But wait, there's more - much more!

JP Morgan

Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:

I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): JPM Q1 2011 Review & Analysis.

I have warned of this event. JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011.

This piece has always been a classic: An Independent Look into JP Morgan

image001.pngimage001.png

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

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

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

You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish.

JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

Traditional banking revenues: manifest destiny as forwarned - Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks

Morgan Stanley

'Nuff said! Let's move over to Morgan Stanley... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? You know, I'm still quite bearish on Asian, European and American banks. Just look at the facts as they're laid before you...

• Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

• Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably!

 HSBC

Subscribers, see the lastest research: HSBC Haircuts, Derivative Risks and Valuation. I prefer not to excerpt this material, but this post is lengthy and rich enough as it is. The archives are rich on this company as well...

HSBC_Holdings_Report_04August2008 - pro

HSBC_Holdings_Report_04August2008 - retail

My take on Moody's itself...

Interesting Documentary on the Power of Rating Agencies, Reggie Middleton Excerpts 

I have also warned extensively on the other nations that Moody's is just now getting to stripping, and will address them in detail in a separate post. In the meantime, this is a good time to bring up that Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts

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

Banking problems are inevitable as long as policymakers, regulators and central bankers insist on try to control the economic circle of life.

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

Reminisce while traipsing through our real estate analysis and research:

1. 1. On Employment and Real Estate Recovery Monday, April 25th, 2011
   2. A First In The History Of Mainstream Media? NAR Is Identified As A Joke! Tuesday, March 29th, 2011
2. The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011
   1. Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
3. Further Proof Of The Worsening Of The Real Estate DepressionThursday, February 24th, 2011
   1. In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011
4. When Will the Mainstream Media Be Ready To Call The NAR The Sham That It Really Is? Tuesday, February 22nd, 2011

Those who wish to jump on the gravy train of our next US bank analysis featuring those susceptible to this malaise can subcribe here and now!

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