Anybody who has been following for the last fiscal quarter or so (or has seen my Spanish bank work in 2009) knows that I believe that the EMU as it stood in 2009 would probably be non-existent by the end of 2010. All of the pundits who proclaimed that the European debt crisis was over with the mere declaration that Greece may receive some additional debt either were abjectly lying or truly didn't understand the gravity of the situation. To be honest, there are a lot (and I mean a whole lot) of data points, angles and contingencies to grasp thus it is not necessarily easy. Then again, isn't that what these market professionals get paid for.

Very early in the year, I virtually guaranteed that the Greek banks would fall, or at least have to be rescued (a 2nd time) before they fell. I practically promised it. In the news today...

Lagarde to discuss Greece support with banks: French Finance Minister Christine Lagarde will meet with bank leaders on Wednesday to discuss how its banks could participate in the Greek rescue package. Lagarde told the French parliament the country's banks will reiterate their support for the rescue process on Wednesday but she said tomorrow's meeting could lead to them taking on a more active role, along the lines of what German banks have done. French banks have so far not been asked by the government to participate directly in the Greek rescue package, two sources in France's banking sector said earlier on Tuesday. They have only been asked to maintain their exposure to Greece and have agreed to do this, the sources said. "Nothing beyond this has been requested by the government," one of the sources told Reuters. France has overall the highest exposure to Greek debt, with about $75.2 billion worth of assets in total, according to Bank of International data as at end-2009. Germany's top banks and insurers offered support on Tuesday mainly by keeping open credit lines to banks and by agreeing not to sell Greek bonds for the duration of a wider IMF-led bailout. Germany's Finance Minister Wolfgang Schaeuble said that German financial firms had agreed to buy bonds issued by state controlled bank KfW as a way to help finance the bailout. Deutsche Bank Chief Executive Josef Ackermann said it was important to extinguish the fire in Greece and pledged to help the country. Ackermann is helping to coordinate efforts by the private sector to support the Greek rescue package.

I suggest one references my post, How Greece Killed Its Own Banks!.

Published in BoomBustBlog

 

I know I'll raise my hand to the aforementioned question. The issue is, as I huffed and puffed about how overvalued GS is, particularly considering the amount of risk that it faced, I got a lot of blow back. The same blow back I got in early 2008 when I shorted GS from $180 to $75 (see Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis). Well, I guess we can all see the risk that I was referring to, right???

When the Patina Fades... The Rise and Fall of Goldman Sachs??? Tuesday, 16 March 2010

I have warned my readers about following myths and legends versus reality and facts several times in the past, particularly as it applies to Goldman Sachs and what I have coined "Name Brand Investing". Very recent developments from Senator Kaufman of Delaware will be putting the spit-shined patina of Wall Street's most powerful bank to the test. Here is a link to the speech that the esteemed Senator from Delaware (yes, the most corporate friendly state in this country). A few excerpts to liven up your morning...

Reggie Middleton vs Goldman Sachs, Round 1Tuesday, 08 December 2009 and Reggie Middleton vs Goldman Sachs, Round 2 Sunday, 31 January 2010

On December 8th of last year, I penned "Reggie Middleton vs Goldman Sachs, Round 1"wherein I challenged all to take a critical look at exactly how much money was lost by Goldman Sachs' clients. Well, here comes round 2, which is directed at Goldman (over)valuation.

Published in BoomBustBlog

From Banks, Brokers, & Bullsh1+ part 1:

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

Let’s get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying “How the hell did he know that?”

The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain’t so and I’m not going to lie to you. The truth of the matter is I sniffed these incongruencies out because  2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating “This time is different”, “There is a new math” (as if there was something wrong with the old math), etc. and so on and associated bullshit.

 

So, the question remains, why is it that a lowly blogger and small time
individual investor with a skeleton staff of analysts can uncover
systemic risks, frauds and insolvencies at a level that it appears the
SEC hasn’t even gleaned as of yet? Two words, “Regulatory Capture”. You
see, and as I reluctantly admitted, it is not that I am so smart, it is
that the regulator’s goals are not the same as mine. My efforts are
designed to ferret out the truth for enlightenment, profit and gain.
Regulators’ goals are to serve a myriad constituency that does not
necessarily have the individual tax payer at the top of the heirachal
pyramid. Before we go on, let me excerpt from a piece that I wrote on
the topic at hand so we are all on the same page: How
Regulatory Capture Turns Doo Doo Deadly

First off, some definitions:

  • The Doo Doo, as in the Doo
    Doo 32
    :
    A  list of 32 banks that I created on May 22, 2008 which set the stage for my investment
    thesis of shorting the regional banks. At that time, I was one of the
    very few, if not one of the only, to warn that the regional banks would
    hit the fan.
  • Regulatory capture (adopted from Wikipedia): A
    term used to refer to situations in which a government regulatory
    agency created to act in the public interest instead acts in favor of
    the commercial or special interests that dominate in the industry or
    sector it is charged with regulating. Regulatory capture is an
    explicit manifestation of government failure in that it not only
    encourages, but actively promotes the activities of large firms that
    produce negative externalities. For public
    choice theorists
    , regulatory capture occurs because groups or
    individuals with a high-stakes interest in the outcome of policy or
    regulatory decisions can be expected to focus their resources and
    energies in attempting to gain the policy outcomes they prefer, while
    members of the public, each with only a tiny individual stake in the
    outcome, will ignore it altogether. Regulatory capture is when this
    imbalance of focused resources devoted to a particular policy outcome
    is successful at “capturing” influence with the staff or commission
    members of the regulatory agency, so that the preferred policy
    outcomes of the special interest are implemented. The risk of
    regulatory capture suggests that regulatory agencies should be
    protected from outside influence as much as possible, or else not
    created at all. A captured regulatory agency that serves the interests
    of its invested patrons with the power of the government behind it is
    often worse than no regulation whatsoever.

About a year and a half ago, after sounding the alarm on the
regionals, I placed strategic bearish positions in the sector which
paid off extremely well. The only problem is, it really shouldn’t have.
Why? Because the problems of these banks were visible a mile away. I
started warning friends and family as far back as 2004, I announced it
on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be
ready to collapse some time soon. Most investors and pundits won’t
realize it because a) they don’t read BoomBustblog, and b) due to
regulatory capture, the bank has been given the OK by its regulators to
hide the fact that it is getting its insides gutted out by CDOs and
losses on loans and loan derivative products. Alas, I am getting ahead
of myself. Let’s take a quick glance at regulatory capture, graphically
encapsulated, then move on to look at the recipients of the Doo Doo
Award as they stand now…

A picture is worth a thousand words…

fasb_mark_to_market_chart.png

So, how does this play into today’s big headlines in the alternative,
grass roots media? Well, on the front page of the Huffington
Post
and ZeroHedge, we have a damning expose of Lehman
Brothers
(we told you this in the first quarter of 2008, though),
detailing their use of REPO 105 financing to basically lie about their
liquidity positions and solvency. The most damning and most interesting
tidbit lies within a more obscure ZeroHedge article that details
findings from the recently released Lehman papers, though:

On September 11, JPMorgan executives met to discuss significant
valuation problems with securities that Lehman had posted as collateral
over the summer. JPMorgan concluded that the collateral was not worth
nearly what Lehman had claimed it was worth, and decided to request an
additional $5 billion in cash collateral from Lehman that day. The
request was communicated in an executive?level phone call, and Lehman
posted $5 billion in cash to JPMorgan by the afternoon of Friday,
September 12. Around the same time, JPMorgan learned that a security
known as Fenway,which
Lehman had posted to JPMorgan at a stated value of $3 billion, was actually asset?backed
commercial paper credit?enhanced by Lehman (that is, it was Lehman,
rather than a third party, that effectively guaranteed principal and
interest payments)
. JPMorgan concluded that Fenway was worth
practically nothing as collateral.

Hold up! Lehman was pledging as collateral allegedly “investment grade”,
“credit enhanced” securities that were enhanced by Lehman, who was
insolvent and in need of liquidity, itself. For anybody who is not
following me, how much is life insurance on yourself worth if it is
backed up by YOU paying out the proceeds after you die bankrupt? Lehman
was allowed to get away with such nonsense because it was allowed to
value its OWN securities. Think about this for a second. You are in big
financial trouble, you have only a $10 bill to your name, but your
favorite congressman (whom you have given $10 bills to in the past) has
given you the okay to erase that number 10 on the $bills and put
whatever number on it you feel is “reasonable”. So, when your creditors
come a callin’ , looking for $20 in collateral, what number would you
deem reasonable to put on that $10 bill.

Ladies and gentlemen, in the short paragraph above, we have just
encapsulated the majority of the mark to market argument. Let’s delve
farther into the ZH article:

 

By early August 2008, JPMorgan had learned that Lehman had pledged
self-priced CDOs as collateral over the course of the summer. By August
9, to meet JPMorgan’s margin requirements, Lehman had pledged $9.7
billion of collateral, $5.8 billion of which were CDOs priced
by Lehman
, mostly at face value. JPMorgan expressed
concern as to the quality of the assets that Lehman had pledged and,
consequently, Lehman offered to review its valuations. Although JPMorgan
remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that
it had no other collateral to pledge.
The
fact that Lehman did not have other assets to pledge raised some
concerns at JPMorgan about Lehman’s liquidity

 

Hmmm!!! Three day old fish has a fresher scent, does it not? So where
was the SEC, the NY Fed, or anybody the hell else who’s supposed to
safeguard us against this malfeasance? Even bloggers picked up on this
months before it collapsed. The answer, dear readers: REGULATORY
CAPTURE!

Again, from ZH:

 

The SEC was not aware of any significant issues with Lehman’s liquidity
pool until September 12, 2008, when officials learned that a large
portion of Lehman’s liquidity pool had been allocated to its clearing
banks to induce them to continue providing essential clearing services.
In a September 12, 2008 e?mail, one SEC analyst
wrote: Key point: Lehman’s
liquidity pool is almost totally locked up with clearing banks to cover
intraday credit ($15bnjpm, $10bn with others like citi and bofa).
withThis is a really big
problem.

 

BoomBustBlog featured several warnings starting January of 2008!

One would think that after all of this, the problem would have been
rectified. To the contrary, it has been made worse. Congress has
pressured FASB to institutionalize and make acceptable the lies that
Lehman told its investors, counterparties and regulators. That’s right,
not only will no one get in trouble for this blatant lying, the practice
is now actually endorsed by the government – that is until somebody
blows up again. At that point there will be a bunch of finger pointing
and allegations and claims such as “But who could have seen this
coming”.

Do you not believe me, dear reader. Reference

About the Politically Malleable FASB, Paid for Politicians,
and Mark to Myth Accounting Rules
: the nonsense is unfolding and
collapsing right now, even as I type this sentence.

The next place to look??? Who knows? Maybe someone should take an An
Independent Look into JP Morgan
.. or maybe even an unbiased
gander at Wells Fargo (see

The Wells Fargo 4th Quarter Review is Available, and Its a
Doozy!)
. After all, If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear
It?

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:

 

Published in BoomBustBlog
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