Friday, 07 October 2011 01:54

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

 Yes! I'm still hunting Squid, but the Architeuthis dux apparently has called in an ally, a benefactor, an aid befit those who master the art of regulatory capture, one who is steeped in power, authority and influence. Yes, indeed - this benefactor is no mere game warden, and his mastery over this side of the force is not minimal. As a matter of fact, his mere spoken word today has served to move this elusive member of the Architeuthis genus farther away from equilibrium in terms of fundamental valuation - at least on a risk adjusted basis while at the same time reducing the value of put contracts on it. However, sometimes there exists a counterbalance to such forces.... Actually, more often than many are led to, and probably would like to believe... Superheroes don't look like what you see on TV or in the movies. No capes, tights, or patent leather boots. Sometimes, all they wear and bring to bear is... the Truth!!!

thumb_Reggie_Middleton_as_Tribal_Truth_Seeker_At_Goldman_Sachs_HeadquartersDow Jones reports: Geithner: Morgan Stanley, Other Major US Banks, Not at Risk of Failure

WASHINGTON - Morgan Stanley (MS) and other major U.S. banks aren't at risk of succumbing to the same fate as Lehman Brothers, which fell victim to the 2008 financial crisis, Treasury Secretary Timothy Geithner assured senators on Thursday.

When asked at a Senate Banking Committee whether the euro-zone sovereign debt crisis could bring down Morgan Stanley or another major financial institution, Geithner said, "Absolutely not."

The largest U.S. firms are much stronger than they were before the crisis, and the direct exposure of the financial system to European countries under the most pressure is "very modest," he said.

However, given Europe's size and interconnectedness, Geithner said leaders there need to "move more aggressively to address this."

 Okay, so either Geither doesn't read me, or he's bluffing. Months before Bear Stearns collapsed, did Tim Geithner and/or the Office of the Treasury warn of it? Did they even know? Hey, the bearer of the Truth warned you (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) with Is this the Breaking of the Bear? There comes a time when an actual track record of accomplishment means something. So, dear readers, do you look to Tim Geithner and the Office of the Treasure as your hero, championing the cause of Truth and financial insight, or dare you risk looking somewhere a tad less conventional but a hell of a lot more reliable? Long story short, is it time for investors and the media to accept new heroes... After all, before one considers whether Geithner is to be relied upon to accurately opine upon the health of Morgan Stanley and the other banks, one should look to how well he has done in the past. Since there are a raft of incidences upon which he could have used his (super0 powers of deductive reasoning and analytical prowess, he could have very well missed the collapse of Bear Stearns (after all, most of us are merely human) but still would have (or at least should have)...

  1. Warned or know about Lehman (I warned in Is Lehman really a lemming in disguise?),
  2. The housing market crash (I warned in Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?)
  3. The commercial real estate crash (Will the commercial real estate market fall? Of course it will ~ Do you remember when I said Commercial Real Estate was sure to fall? ~ The Commercial Real Estate Crash Cometh, and I know who is leading the way!)
  4. The collapse of state and municipal finances, with California in particular (May 2008): Municipal bond market and the securitization crisis – part 2
  5. The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual
  6. The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton, Welcome to the World of Dr. FrankenFinance! and Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion 
  7. The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010: The Pan-European Sovereign Debt Crisis
  8. Ireland austerity and the disguised sink hole of debt and non-performing assets that is the Irish banking system: I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!

If you have not heard from your Office of the Treasure head or Tim Geithner months ahead (or at least in time to do something about the happenstances listed above (and there are a lot more where that came from), then I do suggest it is high time you either started looking for new heroes, or at the very least, realize that Tim Geiithner may not know what the hell he's talking about in regards to which banks are at risk and which are not. That is, unless he is defining at risk as not being on the select list upon which he is willing to bankrupt the country in order to ensure they don't fail.

On that note, let's move on so I can demonstrate that those very same banks that Geithner opines upon do have risks which he has failed to delineate. Never fear, for Reggie will fill said gaps.

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...

If there is any doubt as to who to believe, your favorite Blogger Superhero or Timothy Geithner, I'd gladly put my track record up against his and his whole crew in order to ascertain who holds the most credibility!

As excerpted from the Dow Jones article above - yes, we must drive certain points home!:

When asked at a Senate Banking Committee whether the euro-zone sovereign debt crisis could bring down Morgan Stanley or another major financial institution, Geithner said, "Absolutely not."

The largest U.S. firms are much stronger than they were before the crisis, and the direct exposure of the financial system to European countries under the most pressure is "very modest," he said.

Okay, so as we know I run a subscription blog service. Those who actually do subscribe have read content that flies in the face of the assertion above, and have been paid handsomely for it as I Served Up Fried Calamari From Raw Squid. As excerpted from the subscription document File Icon Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, page 3:

thumb_image024

Mr. Geithner's assertion that "the direct exposure of the financial system to European countries under the most pressure is "very modest,"" really doesn't appear to hold much water, does it? Unless, of course, he doesn't think that France is under, or will be under much pressure? Hey, maybe that's it. Well, if it is, then maybe he should subscribe to BoomBustBlog! France is facing the threat of a serial European bank run as I type this. Reference Dexia Inches Toward Breakup as States Seek to Salvage Parts: Oct. 7 (Bloomberg) -- Dexia SA inched toward a breakup as France, Belgium and Luxembourg sought to protect their local units...

And it's not as if these countries don't have a history of defaulting..,

image022

You see, Now That European Bank Run Contagion Has Started Skipping Across That Big Pond... US Bank Risk Stands Woefully Underappreciated!!! If you scan the news, you will find that Most Headlines Now Show French Bank Run Has Started, And It's Happening Just As Our Research Anticipated. I have warned of the weakness in the French banking system at least a quarter and a half ago, see France, As Most Susceptible To Contagion, Will See Its Banks Suffer. Again, where was Mr. Geithner's salient warning? Be careful who you listen to! Since Geithner wasn't available to issue said warnings, I took it upon myself to create a step by step tutorial on exactly how it will happen....

I then cam forth publicly with much of the content offered to subscribers...

  1. The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download
  2. BNP Bust Up: Yet Another Reason Why BNP Paribas Is Still Ripe For Implosion!
  3. I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
  4. And The European Bank Run Continues...

Now, back to Mr. Geithner's comments to the US Senate:

Morgan Stanley (MS) and other major U.S. banks aren't at risk of succumbing to the same fate as Lehman Brothers, which fell victim to the 2008 financial crisis, Treasury Secretary Timothy Geithner assured senators on Thursday... The largest U.S. firms are much stronger than they were before the crisis,

Okay, I'l bite. The US banks have been flooded with capital and assistance since this debacle started. Despite that, their compensation and payout has not been limited and they are essentially back where they started from apart from being in compliance with new and updated capital requirements. I beg thee, ponder hither... Weren't they also in compliance with the then current and revised regulatory capital requirements when they started dropping like flies and requiring Trillions of dollars of additional assistance. Yes! Trillions! AIG alone pulled in nearly $200 billion of aid, and that's just ONE institution! Need I remind you of the magnitude of this situation? As excerpted from Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

GS__Banks_Derivatives_exposure_temp_work_Page_2

This concept was further illustrated in An Independent Look into JP Morgan...

Click graph to enlarge (there is a typo in the graphic - billion should trillion)

image001.png

and again the following year on CNBC...

Mr. Middleton discusses JP Morgan and concentrated bank risk.

Okay, I know many of you are saying, "...but the banks ARE in compliance, right?" I'll dance.

Let's walk through WHY the banks are in compliance since the fact that they were in compliance last go around and still collapsed doesn't seem to move everyone in the room. Reason number one for the subject bank at hand, the SQUID, and reason enough to consider regulatory compliance to be a farce in and of itself in these tumultuous times...

Dilutions

To start with, Goldman Sachs regulatory ratios are adequate to meet Basel 3 norms and we expect the firm to sufficiently maintain its regulatory ratios above the minimum norms prescribed by the regulator, without any further dilution. However, given higher exposure to market risk compared to its peers which have higher weights for risk adjusted capital determination, Goldman Sachs will have the to set aside a higher proportion of capital compared to its peers which could be a source of competitive disadvantage to the firm and economic disadvantage to shareholders’.

Although, Goldman Sachs capital ratios have improved, it has nothing to do with a reduction in risk weighted assets. Risk weighted assets, to the contrary, have increased to $451bn as at end June 2011 from $384bn as at the beginning of 2009. One of the key reasons for increase in capital ratios have been dilutions. As a matter of fact, Goldman Sachs’ diluted shares outstanding have increased by c24% since beginning of 2008.

As excerpted from the subscription document file icon Goldman Sachs Q3 Forensic Review - Professional, page 6:
thumb_Goldman_Sachs_Q3_Forensic_Review_Page_06

To make matters even worse, there is a plausible argument that many of these numbers are grossly understated. Here are observation from a BoomBustBlogger who is also a trader at the CME:

My question is does DTCC capture the total amount of CDS outstanding. Lets take Greece for example I think they showed about 77.4 bln. outstanding in gross   notional amount and a net notional amount of 4.2 billion represented by 4,349 contracts (I guess that's net) I admit I have a hard time deciphering even these   basic entries from the DTCC pages. But I suspect that the numbers in the DTCC reports are not accurate.The reason is they say they report trades that are   cleared by one of their designated clearing entities. I suspect the majority of cds contracts are privately negotiated and not cleared by one of DTCC's clearers.

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!

The many ways to reach Reggie Middleton:

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Or simply email me.

Meet Reggie Middleton in person in NYC and London!

I will be hosting two BoomBustBlog meet and greets, for those who aren't too put off by my truthful, fact-based style. One in the next couple of weeks in a swank, pretty people laden lounge in downtown Manhattan, and the other potentially in London in mid-November - both wherein we sit down and chew the fat about things financial, global macro and socio-economic over drinks and heated debate. I will have plenty of gratis BoomBustBlog research there as well. I have also recieved significant interest in a paid seminar. Any who would be interest in such, basically tthe ability to bend my ear for 45 minutes or so, without the benefit of drinks and pretty ladies swarming around, please let me know so I can guage interest and arrange as deemed fit. Those who are interested should email the blog Customer Support for info.

 
Last modified on Friday, 07 October 2011 10:13

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1 comment

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