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Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead

Reggie Middleton's picture




 

Last week I penned Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream, wherein I continued the argument that serial bailouts of banks whose assets dwarf domicile GDPs has never, ever worked. Part and parcel to said argument was Germany's resistance to such profligate spending and the perception that Germany was somehow immune to the economic maladies that afflicted its European trading partners - reference The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... An astute reader commented on these postings as follows:

Reggie, all well argued, but the scramble for German Bunds is still on and even if it were to stop there won't be many who sell. (or COULD sell). Even if, you have the ECB who could easily buy up German bunds as well and keep rates down. At the end of the day it's a complete fiasco, no doubt, but that day could last a lot longer than you (or me) currently assume...

I have broached the argument in the past that the ECB is not god, or even close to it, and that it can only play the bond buying ponzi for but so long before negative consequences occur. Reference: 

How much damage is being inflicted upon the ECB, and how? Well simply read How Greece Killed Its Own Banks! and remember that this article was written in the beginning of 2010, when the bonds were trading for much more then they were right before they defaulted! then reference Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!

 

The ECB's balance sheet bloat doesn't begin or end with Greece. I excerpt "The Bull Argument For Europe Is Credible, Except For The Circular Argument: You Can't Solve Debt Problems With More Debt!!!" as follows:

Italy has close to a quarter trillion euros of bonds maturing around now and another $352 bln maturing next year. The market has already soured on Italy's need to raise so much capital and has punished it through rate increases. The ECB already holds an estimated 20% of Greek, Portugal and Irish outstanding bonds yet it has jumped on the Italian bond buying bandwagon as well. It is doubtful that it has the political will to do the same for Italy and Spain, and even if it did it may not have the financial will to politically monetize the guaranteed losses it will endure. Just take a look at the losses it took on Greek bonds last year, before they really tanked...

image001

The same hypothetical leveraged positions expressed as a percentage gain or loss…

image003

One should doubt that the new EFSF is likely to be large enough to rescue all of insolvent Europe without the necessary debt destruction taking place.

 Hopefully, by now, I have presented enough to get the message across. The question is, whom have I gotten the message across to? Again, evidence that BoomBustBlog should be one of your first reads, ahead of the MSM and the sell side, significantly ahead! Last week, CNBC ran this article - Time Bomb? Banks Pressured to Buy Government Debt Thursday, 31 May 2012 | 2:42 PM ET

US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making 

the debt crisis even worse, a Citigroup analysis says. Regulators are allowing banks to escape counting their country's debt against 

capital requirements and loosening other rules to create a steady market for government bonds, the study says.

While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to 

make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.

"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, 

the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently."

"Specifically," Lorenzen adds, "having banks loaded up with domestic sovereign debt will only increase the domestic fallout if the 

sovereign ultimately reneges on its obligations."

The banks, though, are caught in a "great repression" trap from which they cannot escape.

"When subjected to the mix of carrot and stick by policymakers...then everything else equal, we believe banks will keep buying," 

Lorenzen said.

Institutions both in the U.S. and abroad have been busy buying up their national sovereign debt for years, he found.

Spanish banks bought 90 billion euros worth while Italian firms picked up 86 billion euros just between November and March. Even 

in the UK, which has avoided a debt crisis as it is outside the euro zone and able to set its own monetary policy, banks have increased

holdings of gilts by 100 billion pounds over the past few years.

And in the U.S., banks, though having "comparatively low holdings" of Treasurys, have bought $700 billion of American debt since 2008.

"Ask the simple question: Why are banks buying sovereign debt when yields are either near record lows, or perhaps more interestingly, 

when foreign investors are pulling out?" Lorenzen wrote.

It's really enough to make you say, "Hmmmm!!!" While I have illustrated, in explicit detail, the danger to the banks due to this "kick the can 

down the road syndrome" (subscribers, see the 141 items in the Banks & Financial Services downloads section) The truly underappreciated 

risk is in the insurance sector, as illusrated in the "The Biggest Threat" post.

I'm actually in the process of building a staggered put portfolio on this company, among others covered in my research notes, right now. I will

post on why I chose what I chose to represent my bearish position on this company in a future post, likely sometime this week if time permits.

icon Preliminary Observations (498.08 kB 2011-12-08 10:05:24)

icon Report_122511 - Professional/Institutional edition (975.49 kB 2011-12-27 11:05:59)

icon Report_122511 -Retail edition (876.11 kB 2011-12-27 11:04:09)

icon Insurance cos. EU exposure 11-2011 (10.72 kB 2011-11-28 16:20:21)

icon Insurance Cos. Operational Stress (11.92 kB 2011-11-29 10:11:51) 

 

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Mon, 06/04/2012 - 20:53 | 2494246 ebworthen
ebworthen's picture

Zombified?

I hear Lehman and Bear Stearns are fully capitalized.

Countrywide is doing just fine also, along with Enron and Solyndra.

You must be reading that doom and gloom stuff to believe that the banks are insolvent and governments are trillions in debt above their GDP's and ability to ever in the history of humanity pay them.

"God Save the Banks" playing on the H.M.S. Titanic, champagne and a great view of icebergs of the starboard bow.

Mon, 06/04/2012 - 23:10 | 2494683 slewie the pi-rat
slewie the pi-rat's picture

bong-ho from the larboard, BiCheZ!

Mon, 06/04/2012 - 18:50 | 2493891 Zero Govt
Zero Govt's picture

 

"No...... Sleep...... til Brooklyn"

No recovery or green shoots until these big zombie banks die

Mon, 06/04/2012 - 17:41 | 2493651 tony bonn
tony bonn's picture

"...the scramble for German Bunds is still on..."

horse crap....if bunds are anything like us debt, the scramble for bunds is to configure interest rate swaps....the tower of monster debt is teetering....keep your eyes on jpm and deutchbank where the irswaps are starting to unravel.....there is grave catastrophe ahead and there is absolutely no flight to safety - only doubling down on preposterously criminally bad debt....

Mon, 06/04/2012 - 17:30 | 2493610 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

fer chrissakes Reggie stop blowing your horn (oh wow I was so right, see how right I was? See? See?) etc. it's a bore. Your analysis is good enough to stand on its own without all the cheerleading.

And for the last time, it's not "Grecian". That word was invented for some men's hair cream. The word is "Greek". Makes you look ignorant, which I do not think you are.

Mon, 06/04/2012 - 18:50 | 2493902 Kiss My Iceland...
Kiss My Icelandic Ass's picture

"Grecian" may not be the term in current use, but it wasn't invented for hair cream.

 

According to Merriam-Webster, it means "Greek" :

http://www.merriam-webster.com/dictionary/grecian

 

See also Keats' famous ode :

http://www.bartleby.com/101/625.html

 

Keep up the great work Reggie !

Mon, 06/04/2012 - 19:33 | 2493991 Freddie
Freddie's picture

+1

I did not think Grecian was correct but Reggie was right.  He may toot his horn but he is not a fake like Cramer.  He should have his show before that f*** Cramer but Reggie would have to sell his soul to CNBC. 

Reggie comes off as a decent guy trying to do a goiod job. Cramer comes off as a greedy f*** who was best buddies with Elliot Spitzer.   The word was Cramer when he ran his hedge fund - he would whisper stories in Maria ear.  He never got nailed for it.  

Tyler - tell you banner ad ad agency to stick to the t shirt with the grils with big bras. The ad with the old hippy guy with no shirt grosses me out.  That old hippy needs to be eaten by one of them gay zombies.

Mon, 06/04/2012 - 19:37 | 2494014 Kiss My Iceland...
Kiss My Icelandic Ass's picture

PS, it's a blogger's prerogative to blow his/her own horn. I think I've noticed TD doing it once or twice :)

Mon, 06/04/2012 - 23:07 | 2494679 slewie the pi-rat
slewie the pi-rat's picture

people make fortunes fading slewie's calls!

get it?  "calls"  ...heh...

Mon, 06/04/2012 - 18:02 | 2493738 steelhead23
steelhead23's picture

Yes Reggie, let us toot your horn for you.  Now, let me try to digest what is happening.  Systemically dangerous institutions are being encouraged to purchase sovereign debts by being excused from certain reserve standards.  But, wasn't it lies in the reserves, CDS issued with no ability to pay out, that led to the market-destroying actions of the U.S. Treasury (aka TARP)?  To suggest that this will not end well is, well, child's play (that is, a child who was exposed to the Middleton Regime in NYC schools).  To the bright guys in DC, Brussels, Munich, Basel, etc., well, something had to be done lest Bondzilla awakens.  The market cannot be allowed to clear.

I am not a player in this game by choice, but I can see that you play the game very, very well.  But beware Reggie, those bright guys in DC, Brussels, Munich, Basel, etc., cheat - and they control the game.  Never forget that.

I suppose you know that Revolutionary War soldiers were paid in script.  The states had no money to pay those debts and no credit, so the market value of that script dropped to pennies on the dollar.  Shysters moved in and bought them (the ex-soldiers needed grub-stakes), the states united and national tariffs paid 100 cents on the dollar for those scripts - to the shysters.  All I am saying is that the game can change rapidly when sovereignty is changing.  And when Bondzilla awakens, sovereignty will change.  You could bet on it.

Mon, 06/04/2012 - 17:20 | 2493579 Freddie
Freddie's picture

Reggie rocks.

Mon, 06/04/2012 - 17:03 | 2493522 Muppet Pimp
Muppet Pimp's picture

Post would have been much better if it had a you tube clip of you at a Real Estate valuation seminar in Amsterdam, just sayin.

Mon, 06/04/2012 - 17:00 | 2493512 falak pema
falak pema's picture

circular reasoning and banking euro consolidation : the solution to fix it for private banking in Spain; now that is the same as ECB shenanigans, of a dead cat bounce on private front. No way out.

Mon, 06/04/2012 - 16:40 | 2493440 NotApplicable
NotApplicable's picture

Negative consequences?

In a political world?

Seriously?

Mon, 06/04/2012 - 17:25 | 2493597 slewie the pi-rat
slewie the pi-rat's picture

even with greek debt, as tyler guided us thru the amazing maZe, knowledgeable types could make the right decisions and protect themselves, and even come out ahead

we may be approaching and already perhaps have entered a different process where sovereign debt may stand upon stronger legs than just about anything except US students' debts

look at the carnage the banksters and ponzi artists have wrought, just in the US;  people don't even tend to remember fanny&freddie any more...

and the sovereigns can't eat much more, even in the EU, where now "bank deposit guarantees" seem suddenly important...  and equally impossible, logically

now that these fuking geniuses have saved us all from deflation by reflation, guess what?  they can now do the fuking deflation!  why else screw everything down this tight? 

this brings us to one of the most amazing and seldom-understood pieces of work in the history of the planet:  theParableOfTheUnjustSteward

like much of what is hidden in plain site (ha?), some opine that this was put out for people who know, not people who are running around trying to guess something at a carnival game or in a treasure hunt for children or retards...

Mon, 06/04/2012 - 21:35 | 2494118 essence
essence's picture

Slewie (hey, what happened to your clones)

The "stronger legs" upon which sovereign debt rests are drone legs, as in Armed Drones flying over all countries.

Debt serfs .... meet your master.
The banksters debt will be paid by the plebes, or else.

 

P.S.  rumor has it that a campaign donation of a million bennie bucks, or a few gold coins (no GLD shares accepted) will ensure you're on the do-not-kill list

Mon, 06/04/2012 - 23:02 | 2494669 slewie the pi-rat
slewie the pi-rat's picture

not sure abt the clonies, E

i'm on the whoCares? list

after black helis, armed drones are a big improvement  L0L!

when one takes down a jetliner full0'USorthodoxJewishNuns, it will be terrorists, hating us  for our free-dom [not to mention our ass-kicking currency];  iran;  or france, again...

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