LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog

Will someone explain to me why the world is so enamored with Goldman.
It appears that their research department is now recommending clients
to bet on European bank contagion risk. LTTP (Late to the Party), we
first warned on European bank risk in Spain with BBVA in January of last
year (The
Spanish Inquisition is About to Begin…). Starting in January of
this year, I went in depth into the European contagion thing when
practically all of the banks, pundits, analysts and rating agencies said
this was contained to Greece.

In February, I posted “The
Coming Pan-European Sovereign Debt Crisis – introduces the
crisis and identified it as a pan-European problem, not a localized
one.” To wit:

Banks are the epicenter of the economic
crises that face the developed and emerging nations over the last few
years. Many appear to have allowed the media to carry the conversation
away from the banks and into sovereign debt issues, social unrest etc.,
but the main issue still resides in the banks. Why, you ask? Well,
because every single major country conducts its finances through the
banks and when those finances become stressed, the banks will be the
first to show it and usually show it in an aggrieved manner since most
banks are still highly leveraged.…

The smaller sovereign nations that failed
to keep their hands on the fiscal and budget reigns during the global
liquidity bubble are also facing issues. Greece is the current poster
child for this scenario, having been downgraded by the ratings
agencies, money
and capital are fleeing from the country in a typical “run on the bank
scenario”, their debt being shunned by the markets with CDS
exploding and the
big market makers in their debt refusing accept their bonds as
collateral. This is Lehman Brothers, part deux, which actually makes
plenty of sense since the solution to the banks failing was the
government taking the failing asset risk onto the balance sheets, hence
now the governments are being seen as at risk of failing versus the
backstopped private sector.

The larger sovereign nations are at risk
of either having to bailout their less fortunate brethren or facing the
fallout of having the repercussions of a domino effect reverberate
across the EU and its major markets/counterparties. This goes deeper
than some may suspect. For instance, the weakest sovereigns in the Euro
area are still the central and eastern European nations, and the
stronger sovereigns are heavily leveraged into these countries through
their “overbanked” system. If (or when) these companies start to
publicly exhibit cracks, quite possibly due to the domino effect of
Portugal, Greece and Spain finally tipping, then you will find the
Nordics showing stress through their banking system (the biggest CEE
lenders) at a level that the countries may be hard pressed to backstop,
for their banking systems are literally multiples of their GDPs.

Okay, come latter day April (a full 3 and a half months later), and I
read over at ZeroHedge…

Goldman’s Charles Himmelberg has just
reiterrated his call for Long CDS on local banks in Portugal, Spain and
Italy, hedged by selling Main (iTraxx) protection. It is our view that
as accounts plough into this trade and as bank spreads blow out, it
will only accelerate the funding complexities, the bank runs and the
inevitable collapse of the financial systems in all of the other
imparied peripheral countries, ultimately leading to the collapse of
the EMU. Will Goldman be accused next of destroying Europe? Stay tuned.

… With total debt around €265bn, they believe Greece is
not out of the woods yet. The Greek government faces a financing gap of
about €51bn during the next 12 months, and will need to enact strong
fiscal tightening (up to 10% of GDP) and new reforms to re-establish
growth.

… High unemployment, decreasing house prices and poor to capital
markets are likely to continue to challenge firms in southern Europe,
where corporate bonds are only around 7% of GDP (compared to 14% in the
rest of Europe and 28% in the US). Local banks, which used to rely on a
stable deposit base, will face increased competition from larger
players, who are willing to diversify away from bond funding. They will
also face new regulatory charges over the coming months. While we
remain positive on financials as a whole, we think the local southern
European banks will continue to underperform.

For these reasons, we re-iterate our recommendation to buy
protection on local banks in Portugal, Spain and Italy against iTraxx
Main (Exhibit 13).

I really don’t know why everyone swears these guys walk on water.

Actionable
Intelligence Note For All Paying Subscibers on European Bank Research

As I Explicitly
Forwarned, Greece Is Well On Its Way To Default, and Previously
Published Numbers Were Waaaayyy Too Optimistic!

The Pan-European Sovereign Debt Crisis, to date:

1. The
   Coming Pan-European Sovereign Debt Crisis – introduces the
   crisis and identified it as a pan-European problem, not a localized
   one.
2. What
   Country is Next in the Coming Pan-European Sovereign Debt Crisis?
   – illustrates the potential for the domino effect
3. The
   Pan-European Sovereign Debt Crisis: If I Were to Short Any Country,
   What Country Would That Be.. – attempts to illustrate the highly
   interdependent weaknesses in Europe’s sovereign nations can effect
   even the perceived “stronger” nations.
4. The
   Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to
   Western European Countries
5. The
   Depression is Already Here for Some Members of Europe, and It Just
   Might Be Contagious!
6. The
   Beginning of the Endgame is Coming???
7. I
   Think It’s Confirmed, Greece Will Be the First Domino to Fall
8. Smoking
   Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
   Beware!
9. Financial
   Contagion vs. Economic Contagion: Does the Market Underestimate the
   Effects of the Latter?
10. “Greek
    Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants
    on Fire!
11. Germany
    Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort
    of…
12. The Greece and the Greek Banks Get the Word “First”
    Etched on the Side of Their Domino
13. As
    I Warned Earlier, Latvian Government Collapses Exacerbating
    Financial Crisis
14. Once
    You Catch a Few EU Countries “Stretching the Truth”, Why Should You
    Trust the Rest?
15. Lies,
    Damn Lies, and Sovereign Truths: Why the Euro is Destined to
    Collapse!
16. Ovebanked,
    Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
17. Moody’s
    Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks
18. The
    EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!
19. How
    BoomBustBlog Research Intersects with That of the IMF: Greece in the
    Spotlight
20. Grecian
    News and its Relevance to My Analysis
21. A
    Summary and Related Thoughts on the IMF’s “Strategies for Fiscal
    Consolidation in the Post-Crisis
22. Euro-Gossip
    Debunked, Courtesy of Trichet and the IMF!
23. Greek
    Soap Opera Update: Back to the Bailout That Was Never Needed?
24. Many Institutions
    Believe Ireland To Be A Model of Austerity Implementation But the
    Facts Beg to Differ!

Comments

[Ned Zeppelin]

Anything from Reggie has been not only well-researched and articulated, but correct to boot!

[George Washington]

When Mark Spitz bragged that he was going to win 5 gold medals before the Olympics and then didn't win any, he looked like an arrogant bragard.

When he bragged he would win 5 gold medals at the next Olympics and DID win them, he didn't look like arrogant or like a bragard - he just looked like a winner.

To me personally, Reggie looks like Mark Spitz in the SECOND Olympics.  He makes a lot of claims, but he comes through.

For as long as I've been following him, he has made a lot of calls, and they've turned out to be pretty much right.

Is his content worth paying for? Yes.  It is much higher quality and more detailed than 99.999999999% of what is out there in the MSM.

There are some other great writers who post at ZH also, but I am writing this because Reggie is specifically exploring pay-per-view price models for his content.

[Reggie Middleton]

Thank you for the supportive words everybody. Believe it or not, I am not trying to come across as a braggart. I am actually dumbfounded that so many actually believe that Goldman is best of breed. It is not. It is a well run bank, but its employees are the same as everyone else's, just paid off of a higher revenue base. That revenue base is derived from a monopoly status and political edge that most competitors do not have.

As a matter of fact, I know for a fact that Morgan Stanley has taken several of Goldman's sales force at the MD level, which Goldman could have prevented but chose not to.

I have rarely ran up against Goldman and come out lacking in a level playing field. Alas, the world in general is not level, is it? As long as everyone realizes it is the unleveled playing field that gives Goldman the edge and not necessarily superior talent, I will remain rant-free :-)

BTW, I am going to try to beta run the pay per view payment system next week.

[drwells]

What paid content do you all look at? I'm subscribed to Contrary Investor (took WAY longer to do that than I should have), Russ Winter at the Wall Street Examiner, and the WSE's Fed and Treasury report. I used to have Greg Weldon's Money Monitor and I'd still have it today if I could afford the $500 monthly.

[Hulk]

Reggie should give it a whirl. Can't hurt trying, his analysis is top notch

Yours too GW

[bigkahuna]

This is interesting. Is it pump and dump? Lets see how this works out...