Erste Group Reveals Stunner: Reports Billions In Previously Undisclosed Underwater Sovereign CDS; Who Is Next? And How Much More Is Out There?Submitted by Tyler Durden on 10/10/2011 14:36 -0400
Anyone looking at a heatmap of European markets today will see a sea of green punctuated by a very red island in the middle. The culprit: Austrian mega bank Erste, which issued an ad hoc and very unexpected press release, in which it warned that losses in its Hungarian and Romanian books would lead to a 14% hit, or €1.1 billion, to tangible book value, something that in itself is not a surprise to anyone (except the stress test). After all, since early 2010, most have known that due to Swiss Franc-based mortgage exposure, Hungary is next to follow in the PIIGS footsteps, and its collapse has so far been delayed due to lower overall public and private sector leverage. What was, however not only a surprise, but a shock, was that Erste disclosed some major losses on its €5.2 billion CDS portfolio, consisting of "EUR 2.4 billion related to financial institution exposures, and EUR 2.8 billion related sovereign exposures". Why is this a surprise? UK-based financial advisory Autonomous explains: "The fact that Erste had a sovereign CDS portfolio which was not marked-to-market has left many investors scratching their heads. As a reminder the EBA stress test data showed Erste to have zero sovereign CDS exposure within its sovereign mix compared to the €2.8bn it now appears to have ‘fessed up’ to (taking a cumulative €460m hit). They also have €2.4bn exposure to banks via writing of CDS. The bulk is non-PIIGS but banks spreads have moved in the same manner as sovereigns (albeit wider and more volatile)." And there you have it: the bogeyman that everyone has been warning about, yet nobody has seen, CDS written (as in sold) in bulk against other sovereigns and other banks which up until now were only mythical, as they, to quote the EBA (which had Dexia as its safest bank) simply did not exist. Oh, they exist all right, and what they do is create a toxic spiral of accentuating losses whenever the risk situation deteriorates, creating positive feedback loops of ever increasing losses until the next Dexia appears... and then the next... and the next. Expect the market to latch on to this dramatic revelation like a rabid pitbull once the hopium high from today's EURUSD short covering squeeze wears off.
Hunting the Squid, Part 2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?Submitted by Reggie Middleton on 10/03/2011 11:32 -0400
How will GS put a real hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. You pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party I've been talking about for the last few quarters.
Monday afternoon the markets shot straight up after taking a dose of CNBCialis. CNBC was the first to break the story about letting EFSF use leverage or turning the EIB into a vehicle to increase the potency of the EFSF funds. That was followed up by more leaks to other news sources. Stocks went higher quite happily but failed to drag the credit markets with it to a large degree. Any analysis of the various plans all lead to the same conclusion - no matter how complex or convoluted the plan, the only way it works is for Germany and France to risk their credit ratings to support everyone else, or to print money. No miracle solution was at work. Plans may yet be put in place, but it is clear all they do if shuffle the deck chairs and obfuscate who is picking up the tab, but solve nothing. It is clear that if it gets implemented, any further problems would become far worse as there would be no Eurozone country strong enough to support the rest. What wasn't clear, is whether the downgrades would occur even before the plans were launched. As I wrote earlier, I will change my view of the market when something real comes out to make me change it. I also really believe that in the near term, after a Greek default, SPX is likely to move in a range of 1000-1150, and the next big move will be if the global economies can resurrect growth.
Warren came, he saw BRK/A trading at $99,000, he took a bath, and decided that this aggression against BRK/A will not stand, man. As a result, after taking a metaphorical bath on BAC, the Octogenarian has just decided to launch a share repurchase program in the company with the massive short S&P put, because "In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise." In other words, Buffett is slowing starting to realize that he has to put up or shut up, and very soon he will also realize that just because the president allegedly has his back (it is not called the "Buffett Plan" for nothing), he won't have a "perpetual get out of risk card" for life, and America's taxpayers may soon let the world's most crony capitalist just fail.
Ben Bernanke promised to sit, like an elephant, on short-term interest rates for another two years - at least. What were US Money Market Funds (MMF) going to do? US Treasury yields are 0.09% for 12 months, 0.02% for 6 and negative 0.01% for 3 months. You can’t deliver negative yields to investors (that would empty the fund pretty quickly) and you still want to charge some management fees. Enter funding-hungry European banks. You might be surprised to learn the following: the world’s largest bank (by assets) is – French...
Morgan Stanley's Exposure To French Banks Is 60% Greater Than Its Market Cap... And More Than Half Its Book ValueSubmitted by Tyler Durden on 09/22/2011 11:07 -0400
With French banks now a daily highlight in the market's search for the next source of contagion, and big, multi-syllable words such as conservatorship and nationalization being thrown about with increasingly reckless abandon, perhaps it is time to consider the downstream effects of a French bank blow up. And we are not talking French sovereign troubles, which are about to get far worse with the country's CDS once again at record highs means the country's AAA rating is as good as gone. No: banks, as in those entities that are completely locked out from the dollar funding market, and which will be toppled following a few major redemption requests in native USD currency. Which in turn brings us to...Morgan Stanley, the little bank that everyone continues to ignore for assumptions of a pristine balance sheet and no mortgage exposure. Well, hopefully we can debunk one of these assumptions by presenting the bank's Cross-Border Outstandings, which "include cash, receivables, securities purchased under agreements to resell, securities borrowed and cash trading instruments but exclude derivative instruments and commitments. Securities purchased under agreements to resell and Securities borrowed are presented based on the domicile of the counterparty, without reduction for related securities collateral held." We'll leave it up to readers to find the relevant number.
There's No Better Indicator That Someone Is Lying Than When They Do The Opposite Of What They Say: Enter BNP ParibasSubmitted by Reggie Middleton on 09/14/2011 08:17 -0400
"Look at what I say, not at what I do! We have no liquidity problem." Listen, if you have to sell $96 billion of mismarked assets when you DON'T need liquidity, imagine what needs to be done if you have a liquidity problem!
It is quite refreshing to see some real and objective analysis come out of the sell side, particularly from one bank regarding another, but I must admit that if I had to pick a bone with Lim's analysis, it wouldn't be the content or quality, but the timeliness. What the hell took you so long to come to these rather astute observations, dude?
Ten days ago Zero Hedge presented the idea of applying an Asbestos-type settlement to the neverending lawsuits against Bank of America which if continue at the current rate will result in the swift and brutal end of the massively undercapitalized bank by a thousand Rep and Warranty litigation cuts. Yesterday, we were happy to see that the idea has received far broader billing, and is being taken up by non other than Reuters: "When some look at all of the litigation arising from Bank of America's big role in the U.S. mortgage mess, they start thinking of asbestos and how thousands of lawsuits arising from that cancer-causing product brought down many manufacturers more than a decade ago. The solution back then to dealing with claims filed by more than 750,000 workers exposed to asbestos was the creation of dozens of "asbestos settlement trusts," which have paid out tens of billions dollars in damages. Some of them are still going strong today. The asbestos trusts were seen as an innovative approach to deal with seemingly endless litigation and provide a measure of compensation to sick workers and their families. The system for dealing with claims also allowed some of the hobbled manufacturers to emerge from bankruptcy largely free of the crushing weight of lawsuits." In other words, the choices for Bank of America are now two: either it prepares for a slow, painful, insolvency as all of its cash is bled out in litigation fees and "one-time" lawsuit charges, or, almost just as bad, it funds a massive trust, ringfencing all past, current, and future claims, and which is funded...by nearly all of Bank of America's equity. Yes, the end result will be a near wipe out of the existing Bank of America stock, but it will not be bankruptcy! In essence, what BAC will do is a bankruptcy remote "prepackaged bankruptcy" in which it spins off its contingent liabilities, with an equity buffer of whatever the litigants choose (most likely up to about 95% of the firm's current equity value), and proceeds to grow as a simple bank (with or without Merrill) and fund itself through retained earnings, in the process shedding off the "cancer" that are $1.2 trillion in toxic mortgages. The result of this would be a BAC share price of under $1 but that is inevitable. The alternative: freefall chapter 11 and technically 7 (which will never be allowed by the administration, sorry Chris Whalen), means BAC trades to $0.00, and the status quo system of crony communism is finished.
You know the saying...It's not paranoia if they're really after you. Europe is much, much closer to universal bank collapse than the media is letting on. You, my friends, are getting a distorted picture of mis(or dis, depending on your paranoia level)information. Enter Bear Stearns 2.0 without a JPM to swallow it with Fed help, or Lehman Brothers 4.0x5!
The IMF says Euro banks are severely undercapitalized, the EU says the IMF is full of it. Reggie says they're both so optimistic that the word disaster can't even be spelled correctly without someone in a marble office breaking out into hives...
Tangible stores of wealth are indeed seductive, and apocalyptic overtones add to their allure. But what is tangible can be taken. Trading in apocalyptic settings has minimal gain and even the most tangible things carry risk: there is no profit in an unshakable faith in them. The only unshakable faith should be in one’s capacity to foster a world worthy of wonderful and useful ideas, avoiding religious matters. It is here that the rules themselves change in unpredictable ways. Bureaucracies collapse: the largest predators in the food chain become extinct. The best hope is to rise out of it and rise quickly and the smaller, nimbler, and more cunning can live to see brighter days. There is no science to living in such circumstances. But perhaps there is an art in it. If the world does melt under the unlaboring stars, one should not despair of it.
For what it's worth, the DAX is almost back to yesterday's "flash" crash lows. I'm not sure what is going on there (Greece, sovereign debt in general, slowing economy) but it is unlikely that yesterday's move was solely related to a fat finger or rumors of a downgrade. The Dax is now down over 20% for the year. I think the weakening economy and horrible stock performance will further impact Germany's willingness to fund bailouts across Europe. Yes, maybe it would help their market, but I suspect the average German is going to be more worried about sending money out the door at a time of weakness, than what is the "right" decision longer term.
Bank Of America Scrambles To Defend Itself From Henry Blodget's Allegations It Is Massively UndercapitalizedSubmitted by Tyler Durden on 08/23/2011 12:35 -0400
Early this morning, Henry Blodget penned a post titled "Here's Why Bank Of America's Stock Is Collapsing Again" in which he used Zero Hedge data among other, to determine that the capital shortfall for the bank is between $100 and $200 billion. It took BAC exactly 6 hours to retort. Below is the full statement.