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European Bank Investors, Don’t Look Now – You’ve Been Hoodwinked, BamBoozled…
Personally, I consider the European bank stress tests to be a farce;
an attempt to Bamboozle, Hoodwink and Dis-inform any who would be naive
enough to drink the Kool-Aid – not to dissimilar from the US bank stress
tests (see You’ve Been Bamboozled, Hoodwinked and Lied To! Here’s the Proof). CNBC reports that “NO”
default scenarios will be played out, which I find to be rather
unrealistic since the reasons why the banks are enjoying restricted
access to the capital markets is the fear of default! Think long and
hard about this…
You are showing signs of HIV, and nobody wants to come near you, make
love to you or lend long term to you due to the symptoms of this most
unpleasant and deadly disease despite the many proclamations you have
made to the contrary. You decide to set the record straight by visiting a
prominent doctor to diagnose your issues and placate your associates.
The doctor comes up with a prognosis, but simultaneously declares that:
- AIDS (the syndrome), and death have not and will not be considered
because the doctor will not let any of his patients catch AIDS or die! Whaaatt!!!??? Does
the doctor really have that much control over who catches diseases and
who dies? [Analogous to refusing to even consider the potential for
default on sovereign debt, as if no European country has ever defaulted
before - many have, and many probably will in the future as well). This
analogy actually serves us quite well for the ECB has very limited
control over who gets sick and how the contagions (both financial and
economic) are transmitted (see below). - The patient will be assumed to operate between 96% and 57.8%
efficiency. This is, of course, a problem if the patient truly is
terminally ill, for his health should receive significantly more of
a.... Well, a haircut. - Only the patient's mucous membranes and other very short-lived
tissue will be considered for examination, for the patience plans on
keeping other body parts for the long term, hence they should not be
affected by fluctuations by any potential illness. Yes, I know this
statement doesn't make any damn sense, but then again neither does the
ECB excluding hold to maturity and portfolio inventory from the stress
tests either. It really doesn't matter how long you plan on holding said
items, if they are permanently impaired in value, then they are
permanently impaired, Right???!!! I know, we won't even consider a
default scenario, but since countries do default.. If a default occurs,
or more realistically a restructuring, then wouldn't longer term
inventory be impaired - Permanently???!!! In the post A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina
I demonstrated how much damage was done to the Argentinian bond holders
after their restructuring. Too bad the Argentinian investors didn't
have the all-powerful ECB there to declare that restructuring and
default are not part of the rules, hence not allowed. The following is
the price of the bond that went under restructuring and was exchanged
for the Par bond in 2005
Price of the bond that went under restructuring and was exchanged for the Discount bond
With this quick historical primer still fresh in our heads, let’s revisit our Greek, Spanish, and Italian banking analyses
(the green sidebar to the right), many of which are trying to push the
400% mark in terms of returns if one purchased OTM options at the time
of the research release. It may be worthwhile to review the Sovereign debt exposure of Insurers and Reinsurers as well. A quick glimpse at our calculated restructurings are in order as well...
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“With the Euro Disintegrating, You Can Calculate Your Haircuts Here”
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The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!
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A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina
So, the patient pays this doctor money for his opinion, shows the
opinion to all of if friends, business partners, lovers and associates
and they all pretty much tell him to stay the hell away from them.
Why??? For one, it's not so much that he probably has HIV and/or AIDS -
for many people have it and are still living productive lives, but
moreso that he is demonstrably dishonest and unrealistic about his
situation, and therefore cannot be trusted. This is where I stand with
the European bank stress tests. You literally invalidate everybody's
results by trying to slip a few (or maybe a whole lot of) sick banks
under the covers. The patient above may very well have been healthy, but
we will not know and never trust him due to the silly games that were
played. Of course, if he was healthy, there really would be no need to
play the games in the first place, now would there?
See The BoomBustBlog Sovereign Contagion Model for more on this topic. From CNBC:
SOVEREIGN SCENARIO:
- No default applied
- Starting point is the value at the end of 2009
- Haircuts were applied to all EU government bonds (even Germany - 4 percent for a 5-year bond)
- Haircuts were applied to trading books only
- Portuguese 5-year bonds haircut: -14 percent [BoomBustBlog estimates are considerably higher, see Introducing the Not So Stylish Portuguese Haircut Analysis]
- Germany 5-year bond haircut: – 4 percent
- A 10-year Greek bond would have a 42.2 percent haircut if a
long-term interest rate that was 5.77 percent at the end of 2009 would
surge to 14.69 percent at the end of 2011. [Subscribers can see our
estimates here A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina]
- In this case, a 5-year Greek bond would see a fall in value of 23 percent.
Interested parties can read the entire 50+ article Pan-European Sovereign Debt Crisis series by clicking here. You can subscribe here.
- advertisements -
I suggest that we the populace conduct our own stress test by withdrawing our funds simultaneously from banks and brokerages for a day and see what happens.
I'd love to test the solvency of the FDIC.
Good Times
These "stress tests" and the means to "pass" them were sold to the European banks by that well known asshat Geithner. He pulled the same crap here to prop up the banks and keep the good times rolling for the Hamptons set so Europe just jumped on board. I have commented before that Geithner is far beyond any meaningful critcism of his actions. His perpetual lies are so big that people are awestuck and rendered incapable of forming a cohesive rebuttle to them.
Reminds me of that Monty Python skit with the parrot in the pet store. 'This parrot you sold me is dead.' 'No he's not, he's just resting.'
Stress tests served no more of a valuable function than the U. S. banks tests did.
Pure Ponzi food. Now with fully functioning printing presses warmed up and a perfect willingness for the CBs to print, there is nothing stopping them.
I fell all warm and fuzzy now -- how 'bout you?
not sure i want to be confident that banks have such appalling standards that they simply accumulate bad loans in perpetuity and keep needing free money from a central bank and tax payer bail outs to keep paying fat bonuses when the banks run out of shareholder equity.
I hope no one seriously thinks that Banks could ever liquidate and realize their stated asset values. Only in a bubble market when ponzi finance is prevailing....banking is all about confidence in the system and earning a spread between (largely) illiquid assets and very liquid liablities. Once the confidence is lost, a run ensues and it is game over. That is why these tests are structured the way they are, to create confidence, without which banks are dead.
We assumed it would be a joke, but we wondered how easy they would have to make it so that only a handful of institutions failed. Well, the adverse macro condition assumes zero growth for 2010 and a 0.4% decline for 2011. It may turn out that when people look into this over the weekend, the markets on Monday won't be quite as giddy as they were today.
The benchmark macro-economic scenario assumes a mild recovery from the severe downturn of 2008-2009, whereas the adverse scenario assumes a “double-dip” recession. For the euro area, the GDP growth under the benchmark scenario is assumed at a level of +0.7 (2010) and +1.5% (2011), whereas under the adverse scenario the euro area would see a decrease of GDP by -0.2% in 2010 and -0.6% in 2011. For the whole European Union (EU27) the benchmark scenario assumes a +1.0% growth of GDP in 2010 and +1.7% in 2011, whereas under the adverse scenario the GDP would not grow in 2010 and would decline by -0.4% in 2011.
woops..posted this on the "central bankers met in a bar" one! my bad
here it is again
well now...CNBC is reporting that banking analysts globally have access to a line by line list of individual bonds per European bank for both the trading and non-trading books. If true, this makes the regulators and stress tests used for the US banking system a farce for not publishing the same level of detail.
We can now view and do our own stress tests at any level of stress for any European bank. This is the flip side if the scam that goes for US bank reporting. It is the positive of regulatory arbitrage.
US regulators don't dare require US banks to be transparent. European banks are now fully transparent.
Wonder how long it will be before we get the same level of disclosure at the central banks of the Fed and the ECB.
Who is going to win the race of a) a rational stress test that reflect the different business models of each bank and b) develops a fair value model that translates bank fails of stress tests into the zombie corporates who rely on bank (and state funding) to propagate a failed business plan?
Maybe there's a dodge (sic) to allow GM to buy out Apple.
There ya go...most excellent insights reggie. you are the jesse owens of the financial world...vvv small plea...hit with sharp jabs...i dont like rope a dope! :)
Hilarious youtube mashup from the 2008 primaries...
How Obama plagiarizes Spike Lee...
How Barack Deceives Stupid People
http://www.youtube.com/watch?v=uOwLqSTcxX4
get your bamboozled quota for the day here folks...
Really on topic there. Thanks for diverting the flow.
If a bank fails in Europe, does it really fail if noone sees it?
Nice article Reggie!
It will be interesting to see what happens when analysts around the world conduct their own stress tests that include holdings of sovereign debt. I would be shocked if 50% of the European banks were found to be legitimately solvent. So much for Basel II. Maybe Basel III will prove better. (I'm not holding my breath!)
Profit Prophet
Stress tests,are only as good as the criteria used to quantify them,whoose benefit are they for ? It is just propaganda to try to convince the mass populace that the politicians have acted and are in control of the situation (which they are not ) and the banks have had to improve their act.The reality is that banks are still bankrupt and no matter who owns the worthless shares (if you purchase bank shares you are purchasing mass debt) be it state or individuals the banks keep going on handouts of liquidity.The politicians are buying time wandering around in the dark desperate to find a flickering candle.Meanwhile everyday the merrygoround of debt repayment,derivitives and hedge fund liquidation carries on ticking,because these are the timebombs that will rip out the heart of the financial system.Austerity is just an excuse for circumstances beyond their control.Financial markets are run on greed,give them an inch and they take a mile but the ultimate responsability for the current financial nightmare is purely the politicians who are supposed to act for the public good.Everyday bad debt is moved around the markets and central banks but it still remains bad debt no matter where it goes.Hyperinflation will be the only way to flatten these unpayable debts and move on.
Ready for the 2 pm NY dmp.? A 'hungary' but patient bear .
Nice work Reggie, looks like Spain bore the brunt of it.
What else did you expect from a "Culture of Corruption"?
The real question is can we exploit it?
As far as regulatory and stat reporting go, the realm of pure fiction has been reached.
Good job Reggie, appreciate your time and effort as always.
The truth went out the window years ago, stress test was just another PR stunt to make us all feel warm and fuzzy.
Great reading as always,
these stress test are just as fraudulent as Moody's putting AAA on stated income based MBS. Plus all the banks had lots of time to switch Sovereign holdings from the trading books to treasury and therefore don't get any haircut at all, sick joke! And even if they didn't have time to switch the trading books are all hedged. Benron must be mighty proud of Trichet!!
All the banks are already in a much worse current position than the worst case scenario.
Next they are goning to free Madoff, as he is probably the only one that can help these retards to keep this farse going for another year.
Did you ever consider lightenning up on the self-promotion?
...and that has what to do with the quality, accuracy, and asked price for the information given here? The result of your comment has been that the top spot has been hijacked and the first full page at least has to be scrolled through to get to some discussion of the post. Thanks.
The kicker is that he ALWAYS witholds conclusions. I suggest he could do this without being so blatantly obvious. I've successfully done what he is doing with only a bare mention of my web site. If the info is good, they will come without the constant come-ons.
perhaps you should thank him for his hard work and time spent trying to help us.
Sry,my mistake.....I thought article's last line was a solicitation for subscription.
Sorry just jealous perhaps?
Don't you have a lawn or two to cut with that hat of yours?
I believe Reggie does excellent analysis and puts a lot of his time in to it. Not only is he usually spot on, he gives it to us for free. I for one, do not mind a little bit of self promotion from someone offering me good information without asking for anything in return.
A little bit of libertine altruism [true altruism, unlike the forced altruism foisted upon us by the FedGov] goes a long way for me in affording Mr.Middleton credibility.
Keep it up Reggie, and thanks.
The man works hard and is trying to make a living...
Hi Reggie,
I amazes me how many different usernames you have.