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% to 500% investment gains as well (as of the posting of this message from the beginning of the month)...

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Goldman's share price went down to nearly $50 during the 2009 crisis, and I believe things are worse this time around. Of course BoomBustBlogger, you shouldn't be greedy, subscribers. Cash in your fried calamari chips now, or at the very least hedge them - while you have them and prepare for the next opportunity. There will be plenty, rest assured. Remember how Goldman's stock actually trades...

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

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

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

 Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01

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

Goldman_Sachs_Q3_Forensic_Review_Page_02Goldman_Sachs_Q3_Forensic_Review_Page_02Goldman_Sachs_Q3_Forensic_Review_Page_02

 

Published in BoomBustBlog

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 1 & Introduction. Once one and all have caught up, we can move on to answering the question posed when we left off in The Squid On The Spear, namely So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? Condensed, Cliff Notes style hint - Goldman has the most shortable share price of all the big banks at around $100 and is quite liquid; it is more susceptible to mo-mo traders than it is to it's own book value, it is highly levered into the European debt/banking mess, and last but not least, Goldman is the derivatives risk concentration leader of the world - bar none!

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

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

As we sit at the precipice of devastating European banking failure, upon which Goldman is heavily levered into through excessive French exposure (and you've seen how prescient our French banking analysis has been, bordering the prediction of the fall of Bear Stearns and Lehman), I feel many of you should take heed when I say this bank's risk is woefully underappreciated. As in the case of Bear, Lehman, Countrywide, and a slew of other banks, the 10 minutes or so of your time to read this heavy, fact filled piece could be worth a small fortune. While we're at it, I would like to urge all paying BoomBustBlog subscribers  to (admiring the original artwork below, of course) to download and review the latest related documents on this topic:

  1. Goldmans Sachs Derivative Exposure: The Canary in the Coal Mine?
  2. Goldman Sachs Q3 Forensic Review - Retail or Professional levels
  3. Actionable Note on US Bank/ French Bank Run Contagion

You see, in said piece, ZeroHedge dutifully reported that Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure- a very interesting refresh of what I called out two years ago through "The Next Step in the Bank Implosion Cycle???":

The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

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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)

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and again the following year on CNBC...

Mr. Middleton discusses JP Morgan and concentrated bank risk.

ZeroHedge, and the market in general, appear to have a valid concern about one of these banks in particular - Morgan Stanley.

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While I'm definitely not one dismiss the risks inherent in the Riskiest Bank on the Street, see The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title?, I do believe the equity market is missing the forest due to excessive tree bark blocking its view. So, it's time to publicly pose the question that I answered for subscribers months ago, and that is...

Goldmans Sachs Derivative Exposure the Canary in the Coal Mine?

The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question “Has the value or the economic quantity of the underlying increased at a similar pace, and if not does this indicate that everyone on the street has doubled and tripled up their ‘bets’ on the SAME HORSE?”

Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?

Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history.  In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago. The notional amount of a derivative contract is a reference amount from which contractual payments will be derived, but it is generally not an amount at risk. However, the changes in notional volumes can provide insight into potential revenue, and operational issues and potentially the contagion risk that banks and financial institutions poses to the wider economy – particularly in the form of counterparty risk delta. The top four banks with the most derivatives activity hold 94% of all derivatives, while the largest 25 banks account for nearly 100% of all contracts.  Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.

In absolute terms, JPM leads this list with total notional value of derivative contracts at $78 trillion, or 1.3x times the Wolds GDP. However, in relative terms, Goldman Sachs leads the list with total value of notional derivatives at 537 times is total assets compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).

So, what does this mean? Well, it should be assumed that Goldman is well hedged for its exposure, at least on academic basis. The problem is its academic. AIG has taught as that bilateral netting is tantamount to bullshit at this level without government bailout intervention. If there is any entity at risk of counterparty default or who is at the behest of a government bailout if the proverbial feces hits the fan blades… Ladies and gentlemen, that entity would be known as Goldman Sachs.

As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...

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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!

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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...

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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...

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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.

As you read exactly how precarios the situation is in France (and Belgium, through Dexia, et. al.) keep in mind that although this is definitely not good news for Goldman's numbers, historically since the beginning of this crisis, GS has actually correlated more with coke laced, red bull juice powered mo-mo trader patterns than actual book value - reference The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? from just last reporting period...

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

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

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

 Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01

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

Goldman_Sachs_Q3_Forensic_Review_Page_02Goldman_Sachs_Q3_Forensic_Review_Page_02 

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

 

What do you think happens when word of Goldman's true exposures get out? And I'm not even half way through exposing just SOME of the dirt that BoomBustBlog subscribers had access to back in July, when those Goldman puts were nice and cheap! Interested parties should click here to subscribe, cause next up we walk through several other American banks to see who's up for re-enacting 2008-9 put parade - and historically we have usually if not always been ahead of the curve, particularly when compared to Wall Street and the sells side - see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Another BIG Reason Why BNP Paribas (France's LARGEST BANK) Is Still Ripe For Implosion!

As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

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This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

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So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipeout, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

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

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

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

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

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

Keiser Report: Troika Tanks, Junta Bots & a Run on French Banks

Stacy Summary: We interview Reggie Middleton about a run on French banks. I notice today that Pimco’s El-Erian is also talking about a run on French banks. He must have watched the Keiser Report when it aired from late last night PDT. We know you’re taking our shtick Mr. El-Erian, we’ve got our eye on you!

Go to 13:07 marker in the video, contrast and compare and consider watching the smaller more independent shows for the real scoop every now and then.

For some back ground on the "Kick the Can Triumvirate Three" [BBB Trademark], go to 20:50 in the video and dedicate 5 minutes to it...

The many ways to reach Reggie Middleton:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

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. Those who are interested should email the blog Customer Support for info.

Published in BoomBustBlog

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 demonstrate how BoomBustBlog research not only runs circles around the big name brand bank analysts in their missing this risk (once again), but has been doing so for years, since our proclamation that Bear Stearns would collapse in January of 2008 (Is this the Breaking of the Bear?) and the fishy things at Lehman Brothers just a few days afterward (Is Lehman really a lemming in disguise?). I urge the big media to catch on as the TRUTH goes viral, delivered raw and uncut. Now let's go hunt some big Goldman game! You see, unlike some of the more meek (which is really to be read as conflicted), I am particularly well suited to go after the dangerous game...  Enjoy!

All paying subscribers are urged to download the latest forensic research: Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine? in order to get a head start on what will be publshed in parts 2 and 3 of this series!

Reggie_Midleton_The_Squid_Hunter

Friday, 9/20/11, Bloomberg reports: Morgan Stanley Seen as Risky as Italian Banks, as excerpted

Morgan Stanley (MS), which owns the world’s largest retail brokerage, is being priced in the credit- default swaps market as less creditworthy than most U.S., U.K. and French banks and as risky as Italy’s biggest lenders.

The cost of buying the swaps, or CDS, which offer protection against a default of New York-based Morgan Stanley’s debt for five years, has surged to 456 basis points, or $456,000, for every $10 million of debt insured, from 305 basis points on Sept. 15, according to prices provided by London-based CMA. Italy’s Intesa Sanpaolo SpA (ISP) has CDS trading at 405 basis points, and UniCredit SpA (UCG) at 424, the data show. A basis point is one-hundredth of a percent.

... Moody’s Analytics, an arm of Moody’s Investors Service that’s separate from the company’s credit-rating business, said in a report yesterday that Morgan Stanley’s CDS prices imply that investors see the bank’s credit rating as having declined to Ba2 from Ba1 in the last month. The company is actually rated six grades higher at A2 by Moody’s Investors Service.

By comparison, Bank of America Corp. (BAC) and France’s Societe Generale (GLE) SA, which have CDS trading at 403 basis points and 320 basis points respectively, have prices that imply a rating of Ba1, higher than the implied rating on Morgan Stanley, said Allerton Smith, a banking-risk analyst at Moody’s Analytics in New York.

... Morgan Stanley was the biggest recipient of emergency loans from the Federal Reserve during the financial crisis and also benefited from capital provided by Tokyo-based Mitsubishi UFJ Financial Group Inc., now the biggest shareholder, and the U.S. Treasury, which it repaid with interest.

... While the price of Morgan Stanley’s credit-default swaps is at the highest level since March 2009, it’s nowhere near the peak reached in 2008. On Oct. 10 of that year, the annual price for five-year protection rose to the equivalent of 1,300 basis points, according to data provided by CMA, a unit of CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market.

... Trading in Morgan Stanley credit-default swaps has risen recently to 257 contracts last week, compared with 187 for Goldman Sachs Group Inc. (GS), according to the Depository Trust & Clearing Corp. That compares with a weekly average of 73 trades in Morgan Stanley and 91 in Goldman Sachs in the six months that ended on Aug. 26, DTCC data show.

... There was a net $4.6 billion of protection bought and sold on Morgan Stanley debt as of Sept. 23, according to DTCC. Even with the higher trading volume, investor skittishness in the face of Europe’s sovereign debt crisis may be leaving few market participants willing to sell CDS protection to meet the demand for hedges, said Hintz.

“With the EU teetering, few other firms are going to jump in and write CDS on a global capital markets player like MS,” Hintz said in his e-mail, referring to the European Union and to Morgan Stanley’s stock-market ticker symbol.

... The rise in Morgan Stanley’s CDS prices may also relate to an expected decline in third-quarter trading revenue or to the company’s exposure to French banks, Smith said.

... Morgan Stanley had $39 billion of cross-border exposure to French banks at the end of December before accounting for offsetting hedges and collateral, according to an annual filing with the U.S. Securities Exchange Commission. Cross-border outstandings include cash deposits, receivables, loans and securities, as well as short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements.

‘Galloping Wider’

While Morgan Stanley hasn’t updated those figures, Hintz estimated in a Sept. 23 note to investors that the bank’s total risk to France and French lenders is less than $2 billion when collateral and hedges are included.

As of June 30, Morgan Stanley had about $5 billion of funded exposure to Greece, Ireland, Italy, Portugal and Spain, which was reduced to about $2 billion when offsetting hedges were accounted for, according to a regulatory filing. The company also had about $2 billion in overnight deposits in banks in those countries and about $1.5 billion of unfunded loans to companies in those countries, the filing shows.

“Their spreads just are galloping wider,” Smith said. “Is it rational that Morgan Stanley CDS spreads would be wider than French bank CDS spreads if the concern is exposure to French banks? I don’t think that makes perfect sense.”

I have addressed this ad nauseum on the blog, but the answer to that questions has been put best by Tyler Durden, at ZeroHedge put it best:

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

You see, despite the massive following that the big brand name bank analysts have, none of them warned on Morgan Stanley nor the banking industry in a timely fashion. That is none, except for none other...

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  • In early August, when the French banking system was ripe for implosion and not a peep was available from any of the big brand names, who instead focused on Italy but apparently failed to inform clients that Italy fed contagion directly into the French banking system... The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
  • Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer: In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head. I then provided a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

 

File Icon French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers

 

 

File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

 

 

Herein lies the rub, though. The Bloomberg article above rightfully states that Morgan Stanley has more gross exposure to France then its peers, but it totally leaves out the aggregate risk that its peers face. Is the media, led by the market, ignoring the squid canary in the coal mine?

 

A month or so ago (Monday, 22 August 2011), I penned the public blog post that also relased my most recent research on Goldman Sachs - The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? -  as excerpted:

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

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

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

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

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

 Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01

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

Goldman_Sachs_Q3_Forensic_Review_Page_02Goldman_Sachs_Q3_Forensic_Review_Page_02 

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

This warning given to both to my paying subscribers (in explicit detail) and my blog followers two months ago. Over the last few days, the sell side has followed suit, unfortunately not in enough time to capture much of the downward share price movement. Compare the difference between the two time frames from the perspective of catching/avoiding the sharp share price drop and it is clear that the BoomBustBlog one and a half month or so headstart/prescience had its advantages...

  • om: Goldman Sachs estimates cut at Meredith Whitney AdvisoryMeredith Whitney is slashing Goldman Sachs September quarter EPS estimate to 31c vs. consensus $1.45 and FY12 EPS estimate to $7.85 vs. consensus $15.14. Shares are Hold rated. :theflyonthewall.com

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If one were to click through on the links above this chart leading to the various sell side downgrades, the main focus is on accounting earnings diminishing primarily as a result of potential trading issues. These issues were covered in our report two months earlier, yes, but there are several things we covered that the sell side missed, and apparently is continuing to miss. It is these "misses" that will be the focus of the next two articles on. As a teaser, I urge all to read (or reread) the controversial piece: So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? and stay tuned as I post part two of this documented virtual squid hunt over the next few hours.

Related reading and media:

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Published in BoomBustBlog

Summary: If I were able to show in this article that it really ISN'T different this time, would it change any decision maker's path or actions? We all know the answer to that question. Time to get those outlier event short positions ready, it's going to be a rough ride!!! A complete recap of recent events...

So, at what point do we ever learn the basic lesson that "You can't solve an indebted nation's debt problems with more debt"?  WSJ.com reports:

German lawmakers approved by a wide margin legislation to boost the scope and size of the euro zone's rescue fund, in a major step toward tackling the bloc's sovereign-debt crisis.

Lawmakers passed the reform of the European Financial Stability Facility with 523 'yes' votes, while 85 lawmakers voted 'no' and three abstained. The vote was seen as a test of Chancellor Angela Merkel's center-right coalition.

All 17 euro-zone governments have to approve the expansion, which will boost the fund’s lending capacity to €440 billion ($595.94 billion) from €250 billion and expand its powers to allow it to extend credit lines to banks and buy bonds on the secondary market.

This was the problem that I had with Paulson's original TARP idea. It just won't work because it doesn't solve the problem. Instead, it attempts to conceal the problem in fashion that pretends it never existed. Let's walk through this so a 5 year old can understand it.

Interestingly enough, Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly fame contend "that historically, significant waves of increased capital mobility are often followed by a string of domestic banking crises". If that is actually the case, then the very goal of the Euro project was bound to bring about a sting of banking crises and all of this was actually inevitable. As excerpted:

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The forgotten history of domestic debt has important lessons for the present. As we have already noted, most investment banks, not to mention official bodies such as the International Monetary Fund and the World Bank, have argued that even though total public debt remains quite high today (early 2008) in many emerging markets, the risk of
default on external debt has dropped dramatically, especially as the share of external debt has fallen. This conclusion seems to be built on the faulty premise that countries will treat domestic debt as junior, bullying domestics into accepting lower repayments or simply 12 defaulting via inflation. The historical record, however, suggests that a high ratio of domestic to external debt in overall public debt is cold comfort to external debt holders.

Default probabilities probably depend much more on the overall level of debt. Reinhart and Rogoff (2008b) discuss the interesting example of India, who in 1958 rescheduled its
foreign debts when it stood at only1/4 percent of revenues. The sums were so minor that the event did not draw great attention in the Western press. The explanation, as it turns out, is that India at this time had a significant claim on revenue from the service of domestic debt (in effect the total debt-to revenue ratio was 4.4. To summarize, many investors appear to be justifying still relatively low external debt credit spreads because “This time is different” and emerging market governments are now relying more on domestic public debt. If so, they are deeply mistaken.

If this is actually the case, then what does it portend for China, whose markets have seen unprecedented capital mobility and flows, and whose banking system is tantamount to a hidden NPA factory sitting on top of an inflationary economy teetering on the precipice of a deflationary canyon?

Inquiring minds may want to know, but proactive minds have been following BoomBustBlog all along.

The Complete Pan-European Sovereign Debt Crisis, forecast from the 1st quarter of 2010, complete with a detailed Greek, Portuguese and Irish default scenario(s).

Forewarning of the French banking debacle, complete with prescient call of the Franco bank run - culminating with the French bank most at risk:

I have no doubt the French government along with the other EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts. The fact of the matter at hand is that they simply can't afford to bail them out. I have predicted FIRE sector (including banks) failure at a commendable rate (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?). It's not rocket science, though. It's simply (and actually quite simple, since my 10 year old can do it) math, coupled with a pliable understanding of human nature couped in grasp of history. Listen, it was the (attempted) bailing out of the banking system that got these countries in this situation to begin with. Bailing out the banks just two years later??? Do you really thing that will help the sovereign debt situation or hurt it? If the bailout goes through, you eat the small losses (relative to the big gains that BoomBustBlog delivered subscribers) and roll your gains directly into bearish positions on the bailing sovereigns. It's really just that simple. Don't believe me, let's look at history...

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 So, as I was saying...

Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional), read the balance of this article for perspective, then populate the assumptions and inputs with what you feel is realistic. I'm sure you will come up with conclusions similar to ours. Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)

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A detailed and accurate picture of what is happening...

  1. Now That European Bank Run Contagion Has Started Skipping Across That Big Pond... US Bank Risk Stands Woefully Underappreciated!!!
  2. The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download
  3. BNP Bust Up: Yet Another Reason Why BNP Paribas Is Still Ripe For Implosion!
  4. Most Headlines Now Show French Bank Run Has Started, And It's Happening Just As Our Research Anticipated
  5. I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
  6. And The European Bank Run Continues...

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

Stacy Summary: We interview Reggie Middleton about a run on French banks. I notice today that Pimco’s El-Erian is also talking about a run on French banks. He must have watched the Keiser Report when it aired from late last night PDT. We know you’re taking our shtick Mr. El-Erian, we’ve got our eye on you!

Go to 13:07 marker in the video, contrast and compare and consider watching the smaller more independent shows for the real scoop every now and then.

For some back ground on the "Kick the Can Triumvirate Three" [BBB Trademark], go to 20:50 in the video and dedicate 5 minutes to it...

My April presentation in Amsterdam as Keynote detailing the inevitable...

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

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

Note: This bank has members of its peer group who have been identified as at risk, but no one has pulled the covers off of this one as of yet. I think I may blow the whistle. It will be a doozy, and a potentially very profitable one at that since nearly 3/4 of it tangible equity is embroiled in a region that looks like it is about to blow up. As I type this, some of the puts have already doubled in price. I will be releasing additional analysis on this bank this weekend for paying subscribers.


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

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

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

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 

...

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

 Let Me Post This Paragraph ONE MORE TIME!

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

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

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

Mr. Middleton discusses JP Morgan and concentrated bank risk.

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

An Independent Look into JP Morgan.

Click graph to enlarge

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

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

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

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

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

 

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

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

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So, as I was saying...

Check this out, from "On Morgan Stanley's Latest Quarterly Earnings - More Than Meets the Eye???" Monday, 24 May 2010:

Those who don't subscribe should reference my warnings of the concentration and reliance on FICC revenues (foreign exchange, currencies, and fixed income trading).  Morgan Stanley's exposure to this as well as what I have illustrated in full detail via the  the Pan-European Sovereign Debt Crisis series, has increased materially. As excerpted from "The Next Step in the Bank Implosion Cycle???":

The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png

So, How are Banks Entangled in the Mother of All Carry Trades?

Trading revenues for U.S Commercial banks have witnessed robust growth since 4Q08 on back of higher (although of late declining) bid-ask spreads and fewer write-downs on investment portfolios. According to the Office of the Comptroller of the Currency, commercial banks' reported trading revenues rose to a record $5.2 bn in 2Q09, which is extreme (to say the least) compared to $1.6 bn in 2Q08 and average of $802 mn in past 8 quarters.

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High dependency on Forex and interest rate contracts

Continued growth in trading revenues on back of growth in overall derivative contracts, (especially for interest rate and foreign exchange contracts) has raised doubt on the sustainability of revenues over hear at the BoomBustBlog analyst lab. According to the Office of the Comptroller of the Currency, notional amount of derivatives contracts of U.S Commercial banks grew at a CAGR of 20.5% to $203 trillion by 2Q-09 from $87.9 trillion in 2004 with interest rate contracts and foreign exchange contracts comprising a substantial 84.5% and 7.5% of total notional value of derivatives, respectively. Interest rate contracts have grown at a CAGR of 20.1% to $171.9 trillion between 4Q-04 to 2Q-09 while Forex contracts have grown at a CAGR of 13.4% to $15.2 trillion between 4Q-04 to 2Q-09.

In terms of absolute dollar exposure, JP Morgan has the largest exposure towards both Interest rate and Forex contracts with notional value of interest rate contracts at $64.6 trillion and Forex contracts at $6.2 trillion exposing itself to volatile changes in both interest rates and currency movements (non-subscribers should reference An Independent Look into JP Morgan, while subscribers should referenceFile Icon JPM Report (Subscription-only) Final - Professional, and File Icon JPM Forensic Report (Subscription-only) Final- Retail). However, Goldman Sachs with interest rate contracts to total assets at 318.x and Forex contracts to total assets at 11.2x has the largest relative exposure (see Goldman Sachs Q2 2009 Pre-announcement opinion Goldman Sachs Q2 2009 Pre-announcement opinion 2009-07-13 00:08:57 920.92 KbGoldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb, Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb,). As subscribers can see from the afore-linked analysis, Goldman is trading at an extreme premium from a risk adjusted book value perspective.

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

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

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

Click to enlarge...

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Banks exposure to interest rate and foreign exchange contracts

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

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

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

bank_ficc_otc_exposure_jpm.png

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

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

Published in BoomBustBlog

bnp_paribasStacy Herbert and Max Keiser have absolutely scooped the FT on the French bank run story with thier interactive interview of me and the use of new media. Absolutley! The following are Stacey's Twitter stream in reverse chronological order for today:

  1. No lines outside BNP Paribas. But then it is still lunch time. No self-respecting French person would neglect dessert course.
  2. Here is @ReggieMiddleton on a French bank run on 12 September boombustblog.com/BoomBustBlog/A… Post provides links back to even earlier warnings.
  3. A must watch Keiser Report youtube.com/watch?v=ciGKW3… Troika Tanks, Junta Bots & A Run On French Banks
  4. Today's episode of the Keiser Report features interview with @ReggieMiddleton talking about a run on French banks. Should be on youtbe soon.
  5. Keiser Report bit.ly/qvnYBi Troika Tanks, Junta Bots & a Run on French Banks with @ReggieMiddleton #keiserreport
  6. @ReggieMiddleton warned you first! read.bi/oRSDwd EL-ERIAN WARNS: "These Are All The Signs Of An Institutional Run On French Banks"

Last week, Stacey and Max distributed free bank run models for thier viewers and readers to play with...

Posted on September 18, 2011  -Stacy Summary: We’re interviewing Reggie Middleton this week for  the Keiser Report. In particular, we’ll be talking about French banks. Check out his “Run on the Bank” model for BNP Paribas. Questions for Reggie in the comments thread below.

And they even used Twitter to solicit questions from their audience to ask me during the taped show. All in all, a very strong coverage of the French bank run situation, before the actual run. This is how I belive the media should work. While I don't necessarily disagree with anything that Mr. El-Erian has said in this interview (and how could I since it is essentially an abbreviated version of what I have been saying for 4 months), and I have the utmost respect for him, it is far, far from timely. I urge any and all to read Mr. El-Erian's article and the FT presentation and compare it to that of the more independent (if not bombastic) new media and let me know which offers more substantive value.  For those that do not follow me, the following has been my chronological take to date (those that do follow me and have seen this already can skip past the recap down to the videos below):

Post Note: BNP management is now shopping around for capital investment.

On that note, let's review my post last week, "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers. It outlined some very telling reasons why BNP's share price appears to be spillunking, namely:

    1. Management is lying being less than forthcoming with the valuation of toxic assets on its books.
    2. The sheer amount of these assets on the books and the levereage employed to attain them are devastating
    3. BNP has employed the proven self destructive financing methodology of borrow short, invest in depreciating assets long!
    4. BNP management lying being less than forthcoming about reliance on said funding maturity mismatch, despite the fact it handily dispatched Bear Stearns and Lehman Brothers in less than a weekend!

Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipeout, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

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

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

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

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

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

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

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

Here is the actual Max Keiser post today that has the interview...

Keiser Report: Troika Tanks, Junta Bots & a Run on French Banks

Stacy Summary: We interview Reggie Middleton about a run on French banks. I notice today that Pimco’s El-Erian is also talking about a run on French banks. He must have watched the Keiser Report when it aired from late last night PDT. We know you’re taking our shtick Mr. El-Erian, we’ve got our eye on you!

Go to 13:07 marker in the video, contrast and compare and consider watching the smaller more independent shows for the real scoop every now and then.

For some back ground on the "Kick the Can Triumvirate Three" [BBB Trademark], go to 20:50 in the video and dedicate 5 minutes to it...

Published in BoomBustBlog
Wednesday, 21 September 2011 19:23

And The European Bank Run Continues...

I urge everyone to get your respectve models (contingent upon your subscription level, ranging from free to institutional) from the post BoomBustBlog BNP Paribas "Run On The Bank" Models Are Available For Download and plug in your assumptions BEFORE Europe's Lehman Moment arrives - for if when it does, most nations will be powerless to do anything about it. "Why?" you ask! Well, as so adroitly articulated in Reinhart and Rogoff's "This Time Is Different: Eight Centuries of Financial Folly", for 800 years one of the primary reasons for the monumental structural indebtedness of nations is the bailing out of their respective financial systems. This massive debt then becomes too much to service, and then bang... Default! This time around, it really just may be different, though.

I say this because the developed nations of the world and their leading economic superpowers (EU/China/US) have either goosed their financial systems (China) or allowed them to leverage out of control, collapse, then bailed them out by breaking the taxpaying populace either now or by mortgaging their future (EU/US). The problem is that in each case of the "Kick the Can Triumvirate Three" [BBB trademark], none of the core, structural or even nominal banking problems have been rectified nor addressed, despite the fact that the massive depreciatng toxic assets, leveraged to the hilt and massively mispriced due to regulatory capture are growing in both threat and stature. For more on this topic, reference How Regulatory CaptureTurns Doo Doo Deadly and Lehman Brothers Dies While Getting Away Wiht Murder: Introducing Regulatory Capture.

In the US its the housing market's fall out, being fed by ever depreciating housing prices. For those with short memories, the housing prices that collapsed in 2008 that caused the crash are significantly higher than the housing prices now. If the banks were in trouble then, I query... What are they in now? See:

  1. Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn
  2. The Residential Real Estate Week in Review, or I Told You We're In A Real Estate Depression! The MSM is Just Catching Up
  3. Reggie Middleton's Real Estate Recap: As I Have Clearly Illustrated, It's a Real Estate Depression!!!
  4. and There's Stinky Gas Inside Of This Mini-Housing Bubble, You Don't Want To Be Around When It Pops!

In the EU, it's the sovereing debt thingy (see my pan-European sovereign debt crisis series, which anticipated this from January of 2010). I haven't had the opportunity to address in complete detail what this sovereign debt crisis will do to European CRE yet, American 'Realist' Reggie Middleton Paints a Sombre Picture for European Real Estate Amid Fears of Stagflation

And as stated above, in China, it's massive NPAs being built up in an artificially goosed up banking system designed to hide and conceal the effects of economic slowdown under the auspices of expansionary growth, when in fact it is truly a debt fueled bubble, just like in the EU and the states. See Will China Hit That Inflation Deer In The Global Macroeconomic Headlights Anyway, Despite The Fact They Are Slamming On The Brakes? and China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You Don't Get Something (Growth Through Stimulus) For Nothing (No Economic Consequences).

Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional), read the balance of this article for perspective, then populate the assumptions and inputs with what you feel is realistic. I'm sure you will come up with conclusions similar to ours. Below is sample outout from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)

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Bloomberg reports: Lloyd’s of London Pulls Euro Bank Deposits

Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.

“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”

European banks and their regulators are trying to reassure investors and customers that lenders have enough capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures. Siemens AG (SIE), European’s biggest engineering company, withdrew short-term deposits from Societe Generale SA, France’s second-largest bank, in July, a person with knowledge of the matter said yesterday.

Lloyd’s, which holds about a third of its 2.5 billion pounds ($3.9 billion) of central assets in cash, has stopped depositing money with some banks in Europe’s peripheral economies, Savage said, declining to name the countries or institutions.

Simply fuel to the fire... As excerpted from my bank run post yesterday: Most Headlines Now Show French Bank Run …

Siemens shelters up to €6bn at ECB: Siemens withdrew more than half-a-billion euros...matter told the Financial Times. In total, Siemens has parked between €4bn ($5.4bn) and...to deposit cash directly with the ECB. Siemens’ move demonstrates the impact of the eurozone... By Daniel Schäfer in London and Chris Bryant and Ralph Atkins in Frankfurt...

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

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

image006image006image006

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

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

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

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

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

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

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

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

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

Make no mistake! And just for those who cannot catch the hint... Reuters reports:

Bank of China halts FX swaps with some European banks

The European banks include French lenders Societe Generale (SOGN.PA), Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA), and Bank of China halted trading with them partly because of the downgrading from Moody's, the sources said.

Another Chinese bank said it had stopped trading yuan interest rate swaps with European banks.

The sources declined to be identified because they were not authorized to speak with the media.

Contacted about this move by the Chinese banks, spokespeople for Societe Generale, UBS and BNP Paribas declined comment. Credit Agricole was not reachable for comment.

One of the sources said that Bank of China's decision may apply across its branches, including the onshore foreign exchange market.

"Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

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

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


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ZeroHedge reports: Bank Downgrades Jump The Atlantic: S&P Cuts Italian Intesa Sanpaolo, Mediobanca From A+ To A

Just so the Italian banks don't feel isolated and get more than their fair share of intraday limit down closes, here comes S&P, via Bloomberg:

    • S&P cuts Intesa Sanpaolo ratings to A from A+; outlook negative
    • S&P cuts Mediobanca ratings to A from A+; outlook negative

BoomBustBloggers were given the heads up on this as far back as February 9th, 2010 in our subscriber document: Italian Banking Macro-Fundamental Discussion Note

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As a matter of fact, all of the banks illustrated in that document were/are highlysuspect!As experpted fromy post yesterday which touvhed upon Italy as contagion...

Remember, I also asserted that Italy was nowhere near as strong a credit as the media and the sell side has made it out to be. As a quick recap:

Subscriber document (click here to subscribe) from March 2010 (exactly 1 1/2 years ago): [PDF] Italy public finances projection, as excerpted from page one...

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Did I have a point? Well, a full year and a half later, as per Moody's by way of ZeroHedge...

As usual, a corrupt and pathetic Moody's continues to boldly not go where everyone else has gone before. Luckily, S&P, which had the balls to cut the US, has just done so to Europe's next domino, by downgrading Italy from A+ to A, outlook negative. Then again, this was pretty much telegraphed 100% earlier today as noted in "Italy Expected To Cut Growth Forecasts Further." Anyway, those incompetents from Moody's are next.

Full report:

Italy Unsolicited Ratings Lowered To 'A/A-1' On Weaker Growth Prospects, Uncertain Policy Environment; Outlook Negative

Overview

    • Italy's net general government debt is the highest among 'A' rated sovereigns. We have revised our projections of Italy's net general government debt and now expect it to peak later and at a higher level than we previously anticipated.
    • In our view, Italy's economic growth prospects are weakening and we expect that Italy's fragile governing coalition and policy differences within parliament will continue to limit the government's ability to respond decisively to domestic and external macroeconomic challenges.
  • In our view, weaker economic growth performance will likely limit the effectiveness of Italy's revenue-led fiscal consolidation program.
    • We have revised our base-case medium-term projections of real GDP growth to an annual average of 0.7% between 2011 to 2014, compared with our previous projection of 1.3% (see "Credit FAQ: Why We Revised The Outlook On Italy To Negative," published May 23, 2011). As part of our ratings analysis, we have also prepared upside and downside macroeconomic scenarios that could drive our future rating actions on Italy.
  • We are lowering our long- and short-term unsolicited sovereign credit ratings on Italy to 'A/A-1' from 'A+/A-1+'.
    • The negative outlook reflects our view of additional downside risks to public finances related to the trajectory of Italy's real and nominal GDP growth, and implementation risks of the government's fiscal consolidation program.

We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve. Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges.

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Here's the ugly truth that I, at least to date, have not seen adequately addressed in the media or the vast majority of sell side analysts reports. To wit, CNBC reports "ECB Makes $500 Million Loan, Renewing Bank Fears"

The European Central Bank says it loaned $500 million to a single bank for seven days, raising further fears that a major financial institution could be in trouble.

European Central Bank

The bank said Wednesday on its website that it would make the loan to a single unidentified bidder from its swap line through which it obtains dollars from the U.S. Federal Reserve.

Europe's sovereign debt crisis has provoked fears about the health of the banking system because of the potential for losses from holdings of bonds issued by Greece and other troubled countries.

Some banks are unable to borrow normally from other banks because of fears they will not pay the money back, leaving them dependent on last resort credit from the ECB.

I'm about to walk you through EXACLTY why the ECB needed to make said emergency loan, and why many more such loans are on tap for the very near future. As those who have been reading my blog or subscribed to my research know, I have been quite bearish on French banks of late (see the list of links at end of post for the chronology). Having picked out the prime short candidate for this bearish thesis (based on a relatively high valuation, dire liquidity predicament, and less than forthcoming management, I announced to subscribers that we probably have a prime candidate for a European bank run AND a very profitable short play. That was back in July, when investors/media/sell side analysts attention was focused on Greece and starting to hover over Italy. Well, fast forward a quarter and upon my releasing tidbits of said research to the public... As per ZeroHedge yesterday morning: BNP Freefalling

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There should be at least a few of you out there saying, "Damn, I wish I could have gotten in that." After all, rumors surrounded Soc Gen and Credit Agricole, but no one was really looking at the bank that had the most shortable share price. Hmmm! Well, now the shares are eithet banned from shorting (in Europe) or hard to borrow (in the US). The good part for bearish investors (and the problem for the banks) is that there is a limited risk of a short squeeze due to the lame brain decision to ban shorting in Europe! Thus, if you can find the shares (or options, or SSFs, or CDS, or...) go short until your heart's content, or until you hit what you feel fair valuation is, or until the bank implodes due to a bank run.

On that note, let's review my post last week, "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers. It outlined some very telling reasons why BNP's share price appears to be spillunking, namely:

  1. Management is lying being less than forthcoming with the valuation of toxic assets on its books.
  2. The sheer amount of these assets on the books and the levereage employed to attain them are devastating
  3. BNP has employed the proven self destructive financing methodology of borrow short, invest in depreciating assets long!
  4. BNP management lying being less than forthcoming about reliance on said funding maturity mismatch, despite the fact it handily dispatched Bear Stearns and Lehman Brothers in less than a weekend!

Uh Oh!!!! Or as Robin use to say back in the day, "Holy non sequitor, Batman!"

 

Well, guess what? The problems delineated above are actually just the tip of the iceberg, and if you feel that they are  the gist of BNP's dilemma, you obviously don't subscribe to BoomBustBlog. Since the BNP research is dated and most of the easy profit has been extracted out of the BNP short trade already I'm systematically spilling the beans - to the chagrin of BNP management, I'm sure. If you want to end up sounding like Robin, the boy wonder above, simply read on...

Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008

 

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipeout, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

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

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

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

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

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

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

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

Those who wish to subscribe to BoomBustBlog research, analysis and opinion should click here! You can follow my public comments via the following avenues....

Reggie Middleton Boom Bust Blog

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Relevant subscriber documents:

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I'm going to appear on the Max Kesier Show Tuesday. I noticed that there were some questions being asked on his site concerning the topic du jour, which is the condition of the French banking system, and BNP Paribas in particular. I will take this space and to answer the questions in detail, and will address some on the air as well, time permitting.

Reggie talks a lot about the system crashing, yet advocates taking profits from trades in the very paper that will die with the system. How does Reggie see the endgame? What does he use as a store of value?

The endgame is difficult to see, but if I had to hazard a guess, there is a strong chance the US may end up on top again. This is a topic that requires an entire show, if not a series of shows, in and of itself. The question of a store of value is a tricky one in an environment where nearly everything is at risk of an explosive devaluation. For instance, gold is a popular trade now, but even if gold maintains its relative value to fiat currencies or appreciates - and is not in an bubble, if the states are truly serious about cramming fiat down your throat, you will have your gold forcibly repriced, taxed to hell, or confiscated in some form or fashion anyway. If the government truly doesn't want the reserve trading instrument to be gold, there's a strong chance it will not be gold - at least as long as said government is still in power. Thus, if the gains to be made in a fiat currency that may collapse outrun the pace of said collapse, you are still ahead of the game - assuming that fiat currency is still liquid and accepted as legal tender.

My last comments on Max’s show were in answer to what I thought the Fed’s endgame was. At the time, it was difficult to see for I saw this country on an unsustainable path. I did theorize that the triumvirate, the global economic powers three, the US/China/EU were simply kicking the can down the road until one of the others simply blew up or imploded. Such an event would force capital flight from that economic machine into the other two, enabling the kick the can down the road game to go on much farther. Well, it appears that I may have been on to something, for Greece is nearly universally accepted as a default waiting to happen with yields reaching 150%, and now all of the periphery is on life support from the ECB, not one state, some states, but all of them! This has served to drive US treasury yields straight down, flirting with negative rates again… Yields have plummeted towards negative territory despite an explicit downgrade from one of the major ratings agencies. As I said, the capital flight of fright trade that basically throws the middle finger up at the ratings agencies and their opinions. The US is in bad shape. The EU is in a worse predicament for the near to medium term, and China is an inflationary fireball teetering on a deflationary collapse (once the massive NPAs garnered from bank lending and fraud run amok get recognized). The US may end up on top simply by being the best of a triumvirate of very bad situations! Go to the 20:55 marker in this previous Max Keiser interview for more on this view at the beginning of the year, and let me know if it makes sense given 20/20 hindsight...

If BNP Paribas does see a bank run what impact will this have on the European and global banking markets? Will it spark contagion and which entities are most at risk? If so, are there measures that can contain it.

BNP Paribas is large enough to spark a chain reaction throughout the European banking system, thus causing a domino effect that can definitely reach the financial shores of the US banking system. The entities that are most at risk are the very same entities that are:

  1. Still overleveraged
  2. Sitting on misvalued, highly depreciated, and hard to move toxic assets
  3. Materially exposed to BNP Paribas through counterparty relationships and lenders for:
    1. Depositors are likely to pull short term deposits from the bank leaving it vulnerable to an exaggerated short term liquidity crisis;
    2. Counterparties will then rush to be the first out of the door and those who don’t may very well increase collateral requirements and margin calls
  4. 1 & 2 above can combine to exacerbate the capital hole created realized by coming clean on the sovereign debt values held on the banks’ books. This can be caused by the default of Greece alone, although we all know Greece will not be alone if or when it does default.
  5. A default by Greece will devalue at best, and likely cause serial defaults in the periphery. Just imagine if Greece is perceived to gain a benefit by defaulting (which it will benefit over extreme austerity vs debt destruction), why would the voting populace of the other periphery states, ex. Ireland and Portugal, not force a default? The banking system will literally collapse from the recognition of the gaping hole that is already there.

Here's how it will play out if contagion does spark, as excerpted from the Saturday, 23 July 2011 post, 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 Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).

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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.

Let's assume a small, but significant portion of depositors remove their money, putting some funding stress on the bank. Counterparties take notice and either pull funding or raise collateral requirements, which compound the problem. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

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

Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

image006

This house of cards sits atop an even more precarious peak. You see, the spark for this potential combustion is already alight, the action is simply awaiting for someone to turn and face the fire. That fire just so happens to be the carrying of massively devalued bonds on bank's books as risk free assets at par (or close to it). There is absolutely no way banks can even recognize the losses on the books now without massive collapse. Just imagine the situation when Greece actually does default!

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:

Last week, I made available for free download models with which my followers could actually calcualate BNP's dilemma, see The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download. The aforementioned article should be opened only after reading Research: BoomBust BNP Paribas? in order to gain the proper background thought that went into developing the models. Below is output from the free public model that I released with some realistic numbers put in for an "adverse" case scenario.

image010_copy

I'm sure many of you are saying, "So exactly how realistic are those haircuts?" Well, let's take a look at countries who were in similar situations in the past to see how their bonds and bond investors fared, as excerpted from A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina:

Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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To put this into perspective in terms of profit and loss...

One should keep these figures in mind, for in the blog post "How Greece Killed Its Own Banks!"I ran through a much, much more optimistic scenario that wiped out ALL of the equity of the big Greek banks. Remember, the Greek government stuffed these banks to the gills with Greek bonds in order to created the perception of a market for them. As excerpted...

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

image001

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

image003

Now, let's add all of this up:

  1. the depositors who can break the bank overnight,
  2. the counterparites that can also break the bank overnight, and
  3. the toxic bonds bought with leverage and currently priced to perfection which should serve as the impetus for implosion...

What do these ingredients combined to make? A pretty nasty recipe!

image012

I like Reggie. Can you ask him which is the best protest against the bankers:
1. Organise a meet up on Wall Street, with tents and guitars in tow.
2. Every “Joe Donut” (as Stacy puts it) to withdraw every cent they can from their

Guitars will only work if you enjoy the music enough to forget the rest of the problems.  Deposit withdrawal will significantly quicken the pace of banks being forced to recognize the true value of the stuff on their books though, for it will take away the mom and pop funding that they have grown used to employing to kick the can down the road ever so farther.

For those who haven't read the piece, Research: BoomBust BNP Paribas?, please do. It excerpts several pages of our BNP research which lays out the bank run scenario quite clearly. On top of that, BNP has other problems besides that plain old Bear/Lehman liquidity thing. I outline some of those for you in my next post. In the mean time, stay tuned, stay alert, and stay susbscribed to BoomBustBlog.

Published in BoomBustBlog