This page has been archived and commenting is disabled.

And the next AIG is... (Public Edition)

Reggie Middleton's picture




 

I have posted this warning of Bank of America's naked swap writing
to my subscribers a few weeks ago. Since BAC is reporting this week, I
have decided to make my suspicions public. 

As many of my subscribers 
and readers know, I have caught many companies on the short side as
they imploded. One company that I did not get was American
International Group. The reason it escaped me? I was too close to it. I
have met Frank Tizzio (then president), Maurice Greenberg (then CEO and
Chairman), and a several of their upper management to collaborate on
deals, and was impressed with the way they ran their shop. Because of
this, I didn't apply the same critical, skeptical eye that I used with
the other prospects. Alas, because of such, I overlooked the
inevitable, and in retrospect, the blatantly obvious. Well, I have
learned my lesson. The lesson learned from AIG was not wasted on me,
but does seem to have been wasted on many others. With this thought in
mind, let's review the net, unhedged swap exposure of a few of our
analysis subjects. I think a few of my readers may
have their eyebrows raised. Some things are actually hiding in plain
sight. I have made this short description of what I see as Bank of
America, the naked swap dealer, available for free download, but you
must register (I made the process very quick) to get it. I know it is a
pain in the ass, but I want to be sure that the disclaimer is
acknowledged by all who access the document. Thank our litigious
society. See BAC Swap exposure_011009 BAC Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb.
I need for all to know that, in my opinion, bank reporting is quite
opaque, so it is not very easy to get granular information out of it.
The conclusions drawn from this post and the accompanying downloads are
derived from BAC's publicly available documents and are the result of
me and my team's best efforts to piece the information together. For
those who do not know of me, you can reference the "who am I"section
below to see how well this process has worked in the past. 

For the sake of nostalgia, here is an old post of Bank of America's estimated ABS inventory: BAC ABS Inventory ABS Inventory 2008-02-25 06:48:09 0 bytes

I will be releasing similar analysis of other banks and insurers to subscribers over the next day or two, and then to the public a day or two before their respective earnings announcement.

 The following is the bailout AIG story as excerpted from Wikipedia and annotated the BAC way by your friendly neighborhood blogger, Reggie Middleton, in bold, italic font:

Chronology of September 2008 liquidity crisis

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permits firms with the highest credit ratings to enter swaps
without depositing collateral with its trading counter-parties. When
its credit rating was downgraded, the company was required to post
additional collateral with its trading counter-parties, and this led to
an AIG liquidity crisis. [Here's a quick glance at Bank of
America's current rating as compared to AIG's, both before and after
their "incident". Be aware that this is not my proprietary rating
(which would be substantially lower), but that of the oh so accurate
major rating agencies
. I doubt if they have taken this naked and unhedged exposure into consideration!
]

Click graphics to enlarge

aig_credit_rating.jpg

 bac_credit_rating.jpg

AIG's London unit sold credit protection in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) that had by that time declined in value.[18] [The
lower quality assets are the most likely to decrease in value
dramatically. One should keep this in mind, for BAC has written $116
billion on non-investment grade (junk) credit derivatives and $3
billion in junk total return swaps. They have hedged, but not
completely. My calculations and estimates have BAC with a carrying
value of unhedged exposure of around $32 billion and a notional
unhdeged expousre of $348 billion
]. The United States Federal Reserve Bank announced the creation of a secured credit facility of up to US$85
billion, to prevent the company's collapse by enabling AIG to meet its
obligations to deliver additional collateral to its credit default swap
trading partners. [Keep in mind that BAC just gave up its
government guarantee on the JUNKY assets acquired with the Merrill
Lynch acquisition. Merrill Lynch was one of the, if not the LARGEST
writer of CDS on Wall Street! BAC also bought Countrywide, arguably the
most wretched pool of subprime and underperforming mortgage assets in
this country.
] The credit facility provided a structure to loan as much as US$85 billion, secured by the stock in AIG-owned subsidiaries, in exchange for warrants for a 79.9% equity stake, and the right to suspend dividends to previously issued common and preferred stock.[16][19][20]
AIG announced the same day that its board accepted the terms of the
Federal Reserve Bank's rescue package and secured credit facility.[21] This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.[22][23] [Well, we shall see, since Bank of America is currently the largest bank in America. We still have time to set a new record.]

AIG's share prices had fallen over 95% to just $1.25 by September 16,
2008, from a 52-week high of $70.13. The company reported over $13.2
billion in losses in the first six months of the year.[24][25] [Well,
green shoots is a sproutin'! AIG is currently trading at $44.33. I am
at a loss as to how anyone can justify such, but hey, people are still
buying Bank of America stock as well...
] The AIG Financial Products division headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. [Hmmm!!!
BAC has written protection $2.6 trillion notional, with $348 billion
unhedged (at least according to my calculations). For those "not to use
notional nitwits", that translates to $198 billion carrying value with
$32 billion apparently unhedged or written naked - just like AIG, with
one big exception. It appears as if BAC has one the machismo contest of
"mine is bigger than yours" with AIG - congrats fellas!
] Of those securities, $57.8 billion were structured debt securities backed by subprime loans.[26] CNN named Cassano as one of the "Ten Most Wanted: Culprits" of the 2008 financial collapse in the United States.[27][Well,
Ken Lewis, the BAC CEO, is not to popular around these parts  either. I
am sure the upcoming Cuomo/congress investigations will be juiced when
they find out that BAC is doing the AIG thing, just on a much larger
scale!!!
Just remember who you heard it from first!
]

As Lehman Brothers (the largest bankruptcy in U.S. history at that time) [Hey, I warned you guys about Lehman and Bear WAY in advance, just as I am doign ow with Bank of America - "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) - Is this the Breaking of the Bear? January 2008 - Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!) - Lehman stock, rumors and anti-rumors that support the rumors  Friday, 28 March 2008 - Funny CLO business at Lehman  Friday, 04 April 2008]
suffered a catastrophic decline in share price, investors began
comparing the types of securities held by AIG and Lehman, and found
that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the values used by Lehman which weakened investors' confidence in AIG.[24] [If
BAC is not careful, the market may have similar misgivings on how BAC
values its credit card recievables and mortgages held in off balance
sheet trusts. See our my findings on what may lay off balance sheet - If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank
] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, to raise cash.[24] The Federal Reserve hired Morgan Stanley to determine if there are systemic risks to a financial failure of AIG, and asked private entities to supply short-term bridge loans to the company. In the meantime, New York regulators allowed AIG to borrow $20 billion from its subsidiaries.[28][29] [Why ask Morgan Stanley? In 2008, they were "The Riskiest Bank on the Street".
I guess it takes one to know one! I ask my readers, is one of the
biggest banks in the country that then swallows the biggest brokerage
and at the time the sickest brokerage in the country right after
swallowing the biggest and sickest mortage lender in the country a
systemic risk if it fails? I bet a lot of you guys and gals can answer
that question for a whole lot more than the government paid Morgan
Stanley. I wonder, why don't these guys ask me my opinion? NY bloggers
don't get enough respect :-)
]

At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent.[30]
The Federal Reserve continued to meet that day with major Wall Street
investment firms, hoping to broker a deal for a non-governmental $75
billion line of credit to the company.[31] Rating agencies Moody's and Standard and Poor downgraded AIG's credit ratings on concerns over likley continuing losses on mortgage-backed securities. [Now,
this is just simply hilarious. With friends like the credit rating
agencies, who needs enemies? Think about the fire alarm that starts to
go off just when the smoldering embers of what use to be your house
begin to cool...
How much money has AIG paid the credit ratign agencies over the last 10 years or so?
]
The credit rating downgrade forced the company to deliver collateral of
over $10 billion to certain creditors and CDS counter-parties.[32] [Well, we shall see what will happen with that "other" bank] The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17.[33]
Just before the bailout by the US Federal Reserve, AIG former CEO
Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert
B. Willumstad offering his assistance in any way possible, ccing the Board of Directors. His offer was rebuffed.[34] [And why wasn't this man's assistance accepted???]

Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG could draw up to $85 billion. The loan was collateralized
by the assets of AIG, including its non-regulated subsidiaries and the
stock of "substantially all" of its regulated subsidiaries, and with an
interest rate of 850 basis points over the three-month London Interbank Offered Rate
(LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility,
the U.S. government received warrants for a 79.9 percent equity stake
in AIG, with the right to suspend the payment of dividends to AIG
common and preferred shareholders.[16][20] The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.[20][35][36]
AIG's board of directors announced approval of the loan transaction in
a press release the same day. The announcement did not comment on the
issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing
of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve.[16][21][37] AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.[38] On September 22, 2008, AIG was removed from the Dow Jones Industrial Average.[39]
An additional $37.8 billion credit facility was established in October.
As of October 24, AIG had drawn a total of $90.3 billion from the
emergency loan, of a total $122.8 billion.[40]

Maurice Greenberg, former CEO of AIG, on September 17, 2008, characterized the bailout as a nationalization of AIG. He also stated that he was bewildered by the situation and was at a loss over how the entire situation got out of control as it did.[41] On September 17, 2008, Federal Reserve Bank chair Ben Bernanke asked Treasury Secretary Henry Paulson
join him, to call on members of Congress, to describe the need for a
congressionally authorized bailout of the nation's banking system.
Weeks later, Congress approved the Emergency Economic Stabilization Act of 2008. Bernanke said to Paulson on September 17:[42]

 [Oh,
this soap opera gets worse. Bank of America's bailouts have totaled
$168 billionos so thus far, and we haven't even addressed the naked
swap writing issue as of yet. Then again, BAC did buyout the Merrill
Lynch loss guarantee from the government after much wrangling. I don't
think this was the wisest idea, for they very well may still need it.
Again excerpted from Wikipedia
]
:

Bank of America received US $20 billion in federal bailout from the US government through the Troubled Asset Relief Program (TARP) on 16 January 2009 and also got guarantee of US $118 billion in potential losses at the company.[45]
This was in addition to the $25 billion given to them in the Fall of
2008 through TARP. The additional payment was part of a deal with the
US government to preserve Bank of America's merger with the troubled
investment firm Merrill Lynch.[46]
Since then, members of the US Congress have expressed considerable
concern about how this money has been spent, especially since some of
the recipients have been accused of mis-using the bailout money.[47] The Bank's CEO, Ken Lewis,
was quoted as claiming "We are still lending, and we are lending far
more because of the TARP program." Members of the US House of
Representatives, however, were skeptical and quoted many anecdotes
about loan applicants (particularly small business owners) being denied
loans and credit card holders facing stiffer terms on the debt in their
card accounts.

According to a March 15, 2009 article in The New York Times, Bank of America received an additional $5.2 billion in government bailout money which was channeled through American International Group.[48]

As a result of its federal bailout and management problems, The Wall Street Journal
reported that the Bank of America is operating under a secret
“memorandum of understanding” (MOU) from the US government that
requires it to ”overhaul its board and address perceived problems with
risk and liquidity management.” With the federal action, the
institution has taken several steps, including arranging for six of its
directors
to resign and forming a Regulatory Impact Office. Bank of America faces
several deadlines in July and August and if not met, could face harsher
penalties by federal regulators. Bank of America did not respond to The Wall Street Journal story.[49]

This
is exactly what I am talking about when I say these institutions CANNOT
hedge their large risks. The number 2 derivative holder in the country
(Bank of America) and the number 3 derivative holder in the country
(Goldman Sachs) had to be bailed out by the government through AIG
(another large derivative holder) when AIG had just $10 billion dollars
in collateral calls that it could not pay. AIG was the largest insurer
in the world!!! The number 1 derivative holder int eh country (JP
Morgan) needed $90 billion or so in bailout monies when its major
counterparty failed - Bear Stearns. See
Is this the Breaking of the Bear?
January 2008 for how easy that was to see coming at least 3 momths in
advance! That circle of concentrated risk is even smaller now then it
was back then. Now 5 institutions hold 97% of the notional vale and 88%
of the market value in derivatives, and they are all basically in the
same business and all basically hedge with each other. It is not a true
hedge when the other side can't pay, and history has clearly  proven
how easy it is for the other side not to be able to pay. See a sampling
of my many posts on this topic:

  1. Any objective review shows that the big banks are simply too big for the safety of this country

  2. As the markets climb on top of one big, incestuous pool of concentrated risk...

  3. The latest OCC report shows an INCREASE in derivatives risk concentration

  4. An Independent Look into JP Morgan

 

Additional Bailouts of 2008

On October 9, 2008, the company borrowed an additional $37.8 billion
via a second secured asset credit facility created by the Federal
Reserve Bank of New York (FRBNY).[43]
From mid September till early November, AIG's credit-default spreads
were steadily rising, implying the company was heading for default.[44]
On November 10, 2008, the U.S. Treasury announced it would purchase $40
billion in newly issued AIG senior preferred stock, under the authority
of the Emergency Economic Stabilization Act's Troubled Asset Relief Program.[45][46][47]
The FRBNY announced that it would modify the September 16th secured
credit facility; the Treasury investment would permit a reduction in
its size from $85 billion to $60 billion, and that the FRBNY would
extend the life of the facility from three to five years, and change
the interest rate from 8.5% plus the three-month London interbank offered rate (LIBOR)
for the total credit facility, to 3% plus LIBOR for funds drawn down,
and 0.75% plus LIBOR for funds not drawn, and that AIG would create two
off- balance-sheet Limited Liability Companies (LLC) to hold AIG
assets: one will act as an AIG Residential Mortgage-Backed Securities
Facility and the second to act as an AIG Collateralized Debt
Obligations Facility.[45][47]
Federal officials said the $40 billion investment would ultimately
permit the government to reduce the total exposure to AIG to $112
billion from $152 billion.[45] On December 15, 2008, the Thomas More Law Center
filed suit to challenge the Emergency Economic Stabilization Act of
2008, alleging that it unconstitutionally promotes Islamic law (Sharia)
and religion. The lawsuit was filed because AIG provides Takaful
Insurance Plans, which, according to the company, avoid investments and
transactions that are"un-Islamic".[48][49]

Counterparty Controversy

AIG was required to post additional collateral with many creditors and
counter-parties, touching off controversy when over $100 billion was
paid out to major global financial institutions that had previously
received TARP money. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps
purchased from AIG by the institutions), a number of Congressmen and
media members expressed outrage that taxpayer money was going to these
banks through AIG.[50]

Had AIG been allowed to fail in a controlled manner through bankruptcy,
bondholders and derivative counterparties (major banks) would have
suffered significant losses, limiting the amount of taxpayer funds
directly used. Fed Chairman Ben Bernanke argued: "If a federal agency
had [appropriate authority] on September 16 [2008], they could have
been used to put AIG into conservatorship or receivership, unwind it
slowly, protect policyholders, and impose haircuts on creditors and
counterparties as appropriate. That outcome would have been far
preferable to the situation we find ourselves in now."[51]
The "situation" to which he is referring is that the claims of
bondholders and counterparties were paid at 100 cents on the dollar by
taxpayers, without giving taxpayers the rights to the future profits of
these institutions. In other words, the benefits went to the banks
while the taxpayers suffered the costs.

Well,
Bank of America may very well give Ben Bernanke and the American
taxpayer an opportunity to find out if we have learned our collective
lessons. With the S&P pushing 1100 while practically all of the
problems from the period illustrated above remain extant, and if
anything exacerbated (ex. counterparty and concentration risk, credit
risk and asset quality concerns, and above all, government sanctioned
opacity in reporting), I doubt so very seriously.

 

Who is this guy, Reggie Middleton?

When I have sounded the alarm in the past, it made sense to take
notice. Look at who has failed over the last two years, and what I have
said publicly, months before each failure. 

                                                     i.     Is this the Breaking of the Bear?:
On Sunday, 27 January 2008 I made it very clear that Bear Stearns was
in a fight for its life and was in explicit risk of failure. Most sell
side firms had a buy on this stock at $185, and it had an investment
grade rating from all of the big ratings agencies. We all know what
happened two months later.

                                                    ii.     "Is Lehman really a lemming in disguise?":
On February 20th, 2008, I made the proclamation that Lehman was hiding
significant losses on its balance sheet. We all know what happened 7
months later. It had an investment grade rating from all of the big
ratings agencies.

                                                   iii.     At the inception of this blog,
I warned about nearly all of the homebuilders as well as issuing
explicit insolvency proclamations on the monoline insurers when they
had AAA rating and were trading in the $60 dollar range. We all know
how that story ended...

1.      A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton.

2.      Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap

3.      Follow up to the Ambac Analysis

4.      Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility

                                                  iv.     I also warned
about the more generalized life/P&C insurers when they had AAA
ratings and were thought to be healthy. They have since converted into
a bank to run to the government for TARP funds and aid. See In case you haven't forgotten, I'm still bearish on the life insurance industry and scroll down for the relevant links.

                                                   v.     The current
regional bank failures were called out in the spring of 2008 with the
advent of the Doo Doo 32 list. They shortly started dropping like
flies, with investment grade ratings. See As I see it, these 32 banks and thrifts are in deep doo-doo! and "The Doo Doo 32, revisited".
Prior to this, in 2007, I made it clear that Washington Mutual and
Countrywide were probably done for (while they had investment grade
ratings), see Yeah, Countrywide is pretty bad, but it ain't the only one at the subprime party... Comparing Countrywide to its peer.

                                                  vi.     The list of
timely and relevant warnings can actually go on for some time. As a
matter of fact, after sounding the alarm on commercial real estate
exactly two years ago, and singling out the granddaddy of all
commercial real estate failures a full year in advance (General Growth
Properties was called out and shorted on this blog in November of 2007
as a general foreclosure case while it was the 2nd largest commercial
mall owner in the country trading above $60 - with and investment grade
rating, it filed for bankruptcy a year and a half later - see If only more rich heiresses read my blog for a full chronology).

 

I am not hard to reach, and can be found via the contact form at BoomBustBlog.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 10/15/2009 - 12:22 | 99835 ghostfaceinvestah
ghostfaceinvestah's picture

I agree, there will be no more failures among the chosen 19, at least under this Administration.  All the weight of failure is being placed on the USD.  That is what will break.

Thu, 10/15/2009 - 11:48 | 99682 Anonymous
Anonymous's picture

Bunch of pure BS "analysis". AIG is holding company, BAC is a bank with deposits, and it has Fed backstop. Yesterday you were blahblah JPM, today is BAC. tomorrow is WFC. Unless this country is completely burned down, these are real banks with real people's cash, believe it or not.

Thu, 10/15/2009 - 12:15 | 99709 Anonymous
Anonymous's picture

Real cash is an oxymoron. The real cash you refer too is completely overshadowed by the credit cash that is created by these institutions that can quickly evaporate. When it does, the system will devalue the “real cash” by printing more and making the public bear the losses.

Thu, 10/15/2009 - 12:08 | 99706 Reggie Middleton
Reggie Middleton's picture

Lehman had a Fed back stop too, didn't it? How many banks go down nearly every week? The reason "official" bank failures have slowed down recently is because the FDIC can't afford to take them down. See http://boombustblog.com/Reggie-Middleton/1159-Im-going-to-try-not-to-say...

Didn't WaMu, Wachovia, Indymac and Countrywide have Fed backstops and weren't they real banks with real people's cash? I have absolutely no idea what your point is?

 

The only thing that I can agree with you is that you are right, tomorrow it is WFC :-)

Thu, 10/15/2009 - 11:37 | 99735 Anonymous
Anonymous's picture

you can believe whatever you believe, and analyse whatever you analyse. All I can say is that if BAC is down the way you said, the country will be a colony of say China or india or mexico? or the judgement day finally comes.

did you learn anything from the past year? you are quoting WaMu, wachovia and etc.. If BAC, JPM, WFC and C will be all out, who the hell will take them? The Fed? will there be any banks in this beautiful country? is there still a country left? where the hell are you going to live?

Thu, 10/15/2009 - 17:34 | 100221 deadhead
deadhead's picture

Anon99735...

the balance sheets of the biggies (let alone the big regionals) are in poor shape (poor is a purposely nebulous term on my part), let's leave it at that.  they exist now not due to their own means but because of the fed and the treasury as well as extremely liberal accounting relaxations that were arm twisted out of FASB. 

without going into a small novel, you ask "who the hell will take them?"  if some things come to pass, some of which are discussed by Reggie, get used to hearing the one word most commonly used in the early part of this year: Nationalization. 

Mr. Middleton HAS learned from the past year (and his professional experiences and as he notes in reference to wamu, wachovia, indy, countrywide, I would especially add lehman, bear stearns and even though they were IBs, not banks, they might as well have been in terms of systemic risk and federal government involvement.

it is eminently apparent that you do not have a banking/financial b'ground or have spent little to no time studying this (complicated) matter.  this is not a shot at you as we all have strengths and weaknesses.  bottom line our banking system is not far removed from the precipice of the bear stearns, lehman days. actually, i would argue that one year later the potential for crisis is greater.

fwiw, i have no connection to Reggie, don't know him, etc.  it's content.

side note to reggie...looking forward to wfc, which i happen to consider the sleeper for turd of the year. 

Thu, 10/15/2009 - 16:24 | 100133 Anonymous
Anonymous's picture

Could it be central banks of G20 via IMF who will take them, eventually?
I have heard the same arguments/questions when $700 bln were sucked out of Congress.
When a person files for bankruptcy, does he die?
Why is all this propaganda that we cannot live without these banks?

Thu, 10/15/2009 - 12:17 | 99712 Hephasteus
Hephasteus's picture

LOL. Ok. Going to make an appointment. Tomorrow Reggie rubber hoses WFC. :)

Thu, 10/15/2009 - 12:15 | 99710 Dr Horace Manure
Dr Horace Manure's picture

Reggie, at some point do you think people will actually start runs on the banks en masse?

What do you belive could be the the tipping point that brings the whole system down?

Most intelligent people know the banks are insolvent, but are complacently keeping their money there anyway.

Why?

 

Thu, 10/15/2009 - 12:19 | 99715 Hephasteus
Hephasteus's picture

It's a test. Passing the test leads to real reform and a better world. Failing leads to get your ass in time out and stay there. These people aren't going to change until they fuck up so hard that even with a wall of bullshit the message of what can you can't do gets through.

Thu, 10/15/2009 - 12:05 | 99701 Dr Horace Manure
Dr Horace Manure's picture

Oh really.  If we all show up and ask for our cash then what? 

I think starting a run on a bank would be higly entertaining.  As long as I get there before you, I'll have money and all you'll have is the pure BS.

Good luck.

Thu, 10/15/2009 - 12:19 | 99831 ghostfaceinvestah
ghostfaceinvestah's picture

I predict there will be bank runs, not because of a fear of bank collapse, but because of a fear of USD collapse.

Once the USD starts declining relative to commodities at the rate of 5%+ a day, people will panic and start to pull their dollars out of banks to convert into something, anything, real.

Bernanke is blind to the effects of currency panics because the US has never had one.  Talk to people in other countries who have had them, they are downright scary.  The American sheeple will panic.

Thu, 10/15/2009 - 14:51 | 100006 Anonymous
Anonymous's picture

And when they start pulling those USD out of the banks those dollars will be used to buy things, anything, before the price goes up. That in itself will drive prices and inflation leading to a weaker Dollar, more withdrawals, more inflation, etc. Hyperinflation to be exact.

Thu, 10/15/2009 - 12:27 | 99842 Cheeky Bastard
Cheeky Bastard's picture

ghostface; i don't think we will see bank runs; the sheeple is simply to stupid to even know that the banks are a ) insolvent b ) that the FDIC is broke c ) that they are actually allowed to pull THEIR money out of the banks they protest against on tea parties.

Plus all the propaganda being served will successfully eliminate any possibility that the sheeple will do the right thing and crash these mofos. 

Thu, 10/15/2009 - 17:17 | 100205 deadhead
deadhead's picture

cheek...one of the rare times i'll disagree with you my friend.

i spent years in retail banking and very much understand the psychology of the typical american in re their cash and view of banks.  many are not aware of the state of the fdic and that is due to the cooperation of the MSM.  additionally, the explicit and oft repeated mantra that the usa will back depositors is well documented and believed by americans.  should the shit hit the fan, there would be no stopping of the presses to fulfull that backing, even taking the dollar to zimbabwe status.

that said.....our most recent example of a run was not long ago on IndyMac bank.  there were lines out the door and it was reported "mildly" by the MSM and then squashed.

americans on these types of items are very quick to panic.  if there is to be a snowstorm where i live (NY), which is a very common occurrence, people freak out, run to the grocery store, buy 20 loaves of bread, 15 gallons or milk, ad infinitum.

part of the reason the FDIC is not closing banks (yes, fdic is broke but they can get plenty of funny money) is an overwhelming fear that the msm will start giving the story legs. if this does happen, there will be runs, I promise you.  first in line will be all the old goats that robo talks about...they will be in line at 6 in the morning and will demand their cash...guaranteed.  then it will snowball.  as most bank branches actually keeping very, very little cash on hand, it will run out quick.  then, the shit will really hit the fan.  within an hour, grocery store shelves will be wiped clean, gas stations will have lines of cars topping off tanks, etcetera.

in this scenario, which I really think we could see in 2010 depending on how things unfold, i do think it will calm down in several days and won't develop into much more, except further distrust of the us government and all their lies.

 

Thu, 10/15/2009 - 17:30 | 100217 Miles Kendig
Miles Kendig's picture

Back to sleep..  Rinse & repeat

Thu, 10/15/2009 - 13:20 | 99885 Anonymous
Anonymous's picture

I have to disagree. Americans might seem dumb, but they are paying attention to what is going on.

They know that the FDIC is broke.

They know the dollar is getting clobbered.

They are lazy though and won't take action until we're in a crisis again.

I think a currency panic is a very real possibility.

Thu, 10/15/2009 - 11:17 | 99774 Enkidu
Enkidu's picture

The only thing that keeps the game going is that we don't show up to get the cash. The whole system is based on that premise.

Thu, 10/15/2009 - 11:48 | 99680 Dr Horace Manure
Dr Horace Manure's picture

The sky is always falling around here.  ZH is a very depressing read. 

The most depressing thing about reading ZH is that I am now totally convinced you are all correct.  I'm throwing my hat into the "Depression" ring and placing my bets accordingly.

Please keep telling us the truth.

Oh, and a heads up on when to short this monster would be greatly appreciated.  

Thu, 10/15/2009 - 11:02 | 99762 Rusty Shorts
Rusty Shorts's picture

 - get out of the water before Oct 19, 2009.

Thu, 10/15/2009 - 12:48 | 99858 nhsadika
nhsadika's picture

Rusty,

I've read that a few times from you.  Someone is always making that claim for a Monday in October.

Why don't you give us some more context on what position your source is in, and what trigger event?

Thu, 10/15/2009 - 17:02 | 100189 deadhead
deadhead's picture

as I recall, the crash of 87 was on a monday october 19

Thu, 10/15/2009 - 11:58 | 99689 McGriffen
McGriffen's picture

Spring of 2007...when most financials were hitting all-time highs

Thu, 10/15/2009 - 11:56 | 99687 Cheeky Bastard
Cheeky Bastard's picture

read the manifesto. 

Thu, 10/15/2009 - 11:24 | 99663 Anonymous
Anonymous's picture

reggie is great - very thorough!

Thu, 10/15/2009 - 11:22 | 99659 Anonymous
Anonymous's picture

Are you one of these evil hedge fund traders who shorts a stock, spreads malicious rumours and rides it aaaaallllll the waaaay doooowwwwwn ?

Thu, 10/15/2009 - 11:29 | 99722 Anonymous
Anonymous's picture

All possibility of effective rumors could be eliminated with honest accounting. Until then, why should anyone give a bank's financial statement as much credibility than a blog posting?

I would be really impressed to learn that Reggie has sufficient influence to bring down an otherwise healthy company.

Thu, 10/15/2009 - 17:03 | 100190 deadhead
deadhead's picture

honest accounting would scare even the shorts!!

Thu, 10/15/2009 - 09:41 | 99586 Anonymous
Anonymous's picture

Thanks for posting some content from Reggie. I have been following him for quite some time.

Do NOT follow this link or you will be banned from the site!