LGD - To Infinity and Beyond! What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?

We are in the process of updating the very revealing work we
performed last year, identifying which banks were most likely to do the
"Lehman Brothers" thing. I believe we were the only media source to
predict the collapse of Lehman Brothers, CountryWide, WaMu, Bear
Stearns, etc. months in advance - with each of these calls being
precedent setting calls from both a profit and strategic preparation
perspective. The thought process that went into the research and taking
speculative positions behind said research against the crowd, resulted
in an interesting experience -to say the least. Reference  the
introductory paragraph from Is this the Breaking of the Bear? from January
27, 2008, two months before this banks collapse (I gave a similar
diatribe for Lehman, several months before their collapse or even mere
negative presence in the media as well):

Anybody
who follows my blog knows that I am extremely bearish on the global
macro environment, particularly risky and financial assets. As I see it,
the Doctor(s) FrankenFinance are constantly percolating econo-alchemical brews such as that of the ongoing “Great Macro Experiment,”
eliciting undulating waves of joy and elation from amateur speculators
such as myself while simultaneously creating risk/reward traps that many
a financial and real asset concern may never escape from. While
discussing with my team how best to move forward to find a target of our
“Macro Experiment” victim analysis in the financial sector, I was
queried as to what to look for in creating the short list. Evaluating
investment banks, like evaluating the monolines, is not necessarily a
straightforward endeavor. No matter how you do it, someone is going to
disagree. This is what makes what I do so appealing. All I have to
answer to is performance. I just need a profitable result in order to be
successful. No corporate politics or conflicts of interests to get in
my way. In the end, absolute return is the ultimate criteria, and not
whether it is accepted by the ivy league or academia, industry
practitioners, sponsors, clients or whether or not XZY bank has been
doing it differently for the last 25 years. Investing for your own
account enforces a certain code of realism that, at times, may not be
shared by others. So, I used that realism as my strength and my focal
point to guide the creation of a short list, the ultimate target, and
the valuation/risk analysis methodology. I simply said, in the REAL
world where I would have to make some money from some REAL
assets,throwing off REAL cash flows and REAL market transactions? Using
this “Reggie REALity Engine” (so to speak) to power the analysis proved
very enlightening. We found banks that counted spread guesstimates as
assets. We found banks that could not afford to keep their best
employees. We found too many banks that faced insolvency in the very
near future. We found a lot. To keep this story short, let’s just say we
used the engine to find that truth that nobody really wants to hear.
That truth as marked to reality. This resulted in a short list of 2
firms. The first one is Bear Stearns, which we will delve into here. The
second one is what I call, “The Riskiest Bank on the Street”, and the
blog post and analysis will be out in a few days. Using a Sherlock
Holmes style of forensic analysis, we have tried very hard not to leave
anything out of our scope of analysis. In the case of Bear Stearns, it
was not easy since very little info was available outside of the plain
vanilla 10Q, 10K, etc. They also volunteered very little information.
Much of this is investigative analysis and it would be much more
detailed if we had access to the Bear Stearns inventory. We wrote to
Bear Stearns’ investor relations department asking for more information
on the company’s exposure to risky assets and their breakup. So far, no
word back. No need to be concerned for my health, I’m not holding our
breath…

Alas,
as I stated earlier, it is that truth that no one wants to hear. So if
you are one of those "no ones" that don't want to hear the truth, cover
your ears, cause here we go...

Well,
here we go again, but this time on a much, much larger level. In
addition, the investment portion of the game has become much more
complicated for now you don't just have to know what the disease is and
who has it, but you have to be able to navigate the fact that our dear
Fed Chairman has eliminated all inoculations against said disease (or
put more aptly, poked holes in all of our condoms) by artificially
suppressing volatility and rates and distorting normal price discovery
through market mechanisms, see Did Bernanke Permanently Cripple the Butterfly That Is US Housing? The Answer Is More Obvious Than Many Want To Believe and as excerpted: 

... Do
Black Swans Really Matter? Not As Much as the Circle of Life, The
Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!,
Bernanke et. al. have snipped the chrysalis of the US markets and
economy one too many times. He has interrupted the circle of life...

I
have always been of the contention that the 2008 market crash was cut
short by the global machinations of a cadre of central bankers intent on
somehow rewriting the rules of economics, investment physics and global
finance. They became the buyers of last resort, then consequently the
buyers of only resort while at the same time flooding the world with
liquidity and guarantees. These central bankers and the countries they
allegedly strive to serve took on the debt and nigh worthless assets of
the private sector who threw prudence through the window during the
“Peak” phase of the circle of economic life, and engaged in rampant
speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference  The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

This
brings us back full circle to today, where (despite the protestations
of many in the sell side such as "Buy the Euro Banks Goldman" and those
in the mainstream media who proclaim that risks are beimgn overblown,
Europe's banking system is sitting on the nuclear version of a veritable
powder keg that could very well make the Bear Stearns/Lehman days look
like a veritable bull market. I plan on delivering an update to our
European bank exposure analysis for subscribers:

•  Euro Bank Soveregn Debt Exposure Final -Retail (641.14 kB 2010-05-13 00:10:33)
•  Euro Bank Soveregn Debt Exposure Final - Pro & Institutional (934.65 kB 2010-05-13 00:11:32)

Take
note that this update will include several American banks and the risks
they face from writing nearly all of the richly priced CDS purchased by
said European banks. This is an interesting and complicated story
because all of those IMF/EU bailouts, besides adding more debt to
already debt laden countries, have considerably subordinated the claims
of the stakeholders involved. The following was written over a year ago,
and has proven to be quite prescient:

The
year 2013, with a IMF-proclaimed debt ratio of a tad under 150%, is the
time when Greece will have to refinance the debt to pay the IMF.
However, since the current debt raised by Greece is at fairly high
rates, new debt will only be available at much higher rates (as markets
should price-in the risk of high debt rollover) unless there is some
saving grace of a drastic plunge in world wide interest rates and a
concomitant plunge in the risk profile of Greece. At a 150% debt ratio,
historically low artificially suppressed global interest rates that have
nowhere to go but higher and prospective junk ratings from the US
rating agencies, we don’ t see this happening. Thus, the cost of
borrowing for in 2013 is likely to be much higher in the market than the
nearly five percent for the existing debt. Greece will either be unable
to fund itself in the markets at all, and will have to convince the
Euro Members and the IMF to extend the three-year lending facility just
announced (reference What We Know About the Pan European Bailout Thus Far)
or, it will get the debt refinanced at very high rates. In both cases
the total debt as a percentage of GDP will continue to rise, and this is
not a sustainable scenario over the longer-term. In addition, if it
accept the EU/IMF package and there is an event of default or
restructuring, the IMF will force a haircut upon the private and public
debtors beyond what would have normally been the case. This essentially
devalues the debt upon the involvement of the IMF, a scenario that we
believe many sovereign bondholders (particularly Greek, Spanish and
Irish) may not have taken into consideration. This also leaves the
possibility of a significant need for many banks to revalue their
sovereign debt – particularly Greek sovereign debt – holdings.

As
illustrated above, there is a higher probability for a Greek sovereign
debt restructuring in 2013, which will definitely not hurt IMF (since it
has a preferred right) but the Euro Members and other investors who
will be holding the Greek debt.

LGD: Loss Given Default... ~100%???

We're
talking damn near complete wipeouts boys and girls. There are
practicaly no entities holding this debt at par that are leveraged under
30x. The starting point in case of default for Greece is between
roughly 48% to 52% of par. You've seen the math on BoomBustBlog many a
time - Over
A Year After Being Dismissed As Sensationalist For Questioning the
ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!

 

Add forced subordination due to IMF and US imperialitic dictate, and discussion
of recoveries may very well be moot. On that oh so cheery note, let's
move on to the basis of the refresh of our European bank exposure note
for subscribers, who have voted overwhelmingly to have us pursue this
venue...

I woild
like to take this time to warn those who may have a waning interest in
real estate due to the fundamentals defying act of REITs over the two
years, that party is likely quite over if and once the Europeans blow
up. The real long term risks still sitting on US, Asian and European
bank balance sheet are still real asset based, and because it is so
labor intensive to hide tons of bricks, dirt and mortar under pulp based
ledger sheets using creative yet relatively meek accountants, these
chickens are coming back home to roost to.

I
will end this post with some graphs that show the bubblistic mentality
of the German and French banks as they gorged on soon to be 2 for 1 sale
sovereign debt at the height of the US induced credit and real asset
bubble. You see, many outside of the Americas blame the US for
instigating the last world wide crash (and admittedely rightfully so),
but this time around the crash will be much bigger, and we all know
whose fault it will be (hint: it doesn't rhyme with jaflerican).
Remember, these supposedly risk free assets are being accumulated with
somewhere between 30x to 72x leverage.

 

In
preparation for what will probably be a very, very valuable subscriber
update, I will start off my next post on this topic with a public
display of what we published this time last year regarding French and
German banks. In passing, remember: 

1. The US still has the right
   to singularly vote down a supermajority in the IMF, and it is the only
   single state to be able to do that.
2. We see how well the EU has agreed on things in the past when time was of the essence.
3. The
   EU voluntarily took subordinate positions to existing claimholders,
   that was the purpose of the bailout. The IMF has never inferred such.
4. The
   Fed has opened up the swap lines in the past, and didn't do so for
   charitable reasons. Read my post on FICC risk and bank implosions on my
   blog. The Fed can't afford for Euro banks to start calling on those faux
   hedges. That's why the lines are open.
5. Any haircut you get
   before adding on a trillion dollars of debt and the IMF standing in
   front of you for $120 billion is going to be less then the one you get
   afterwards

As always, may the BoomBust be wth you! Interested parties may feel free to follow me on twitter, email me directly, or register for/subscribe to BoomBustBlog.

Comments

[anonnn]

RM-as always, awesomely lucid communication of the current scene.

Your point 4, above:

"The Fed has opened up the swap lines in the past, and didn't do so for charitable reasons."

...utter dynamite!...if you were looking for a modus operandi that would account for all the apparent madness.

The global money-gamemakers could well have created the current scene, or are the key part, of the finance-money-liquidity trap to grab the control points of world domination, i.e.--control fraud on a global scale.

From an inductive search, who but bankster principals could cause the observable facts that otherwise seem to be chance madness.

Hello swap-lines.  Goodbye safe-havens. That ensures the status of TPTB, which was [always is] feeling threatened.

That's privilege!

[aston]

Reggie

I like your post but quite annoying to read almost everywhere : for my subscribers, for those who subscribe, specifically for subscriber etc....

If you believe your analysis, please trade on the market, where you should make lot of money following your own advices, and go on to publish free of words : "for my subscribers", on this site, without trying to market your own subscribing blog.

No offence at all.

[ebworthen]

What's solvency again?

Is it like land-line phones and the princess rotary dial?

I vote you pursue sovereign debt crisis - because bank, central banks, and governments worldwide are privatizing gain and socializing losses.

This short-sighted folly usually ends in civil war and/or world war.

[Zero Govt]

solvency is for example a bankster that has written $Billions of absolute shit debt, gorged on multi-million Dollar Exec bonuses and furnished himself with cars, trophy wife and flash houses in Frankfurt, Bahamas and Cannes

insolvency is the bank shareholders and taxpayers left to carry his can of worms/shit

[Smu the Wonderhorse]

Iceberg right ahead.

[doggings]

Iceberg right ahead.

nope, iceberg is off the port side, about 1/2 a mile behind us, hull gouged through several bulkheads, the passengers locked in downstairs (homeowners) are well and truly underwater, the deckchairs are now starting to slide towards the stern as the thing starts to rear upwards, ready to straightline it into the depths. 

awesome work Reggie as usual. 

[shortus cynicus]

I do not understand basic assumptions: how should banks be in trouble if they do not mark to market and hold to "maturity", or in general if they ignore or dispute any negative facts?

Maturity could mean simple selling to ECB in exchange of fresh printed cash. ECB throws this defaulted bonds in trash and everyone will be happy. Nobody care anymore about low, accounting and previous agreements.

The only judge is Mr. Market, but where should all the "paper money refugees" flee?

Lehman crash was probably allowed because it was biggest GS competitor. I don't expect any serious events in EU, but I hope I'm wrong.