Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE

Reggie Middleton's picture

I think I will recap this week in BoomBustBlog postings early since a comment from the British sell side bank Barclay's literally irked the shit out of me. First the comment, then the recap. In my post yesterday, "Does Anyone See This Emergency As An Emergency, Or Is A Half Trillion Euro Pay Day Loan Bullish?", I inquire as to whether the Barclay's strategist weed is actually stronger than ours.

... headline from Bloomberg: Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash

Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.

The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.

So, basically, nearly twice as many banks are in trouble now as compared to just three months ago. This is bullish, right???!!!

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to heart, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks?

Now, to answer that question, let's jump to a post earlier in the week, Why Greece Bailout Games Will Cause The Rest of the EU to Break Out the Grease…

... If you didn't have a job, you wouldn't be able to pay back your loans. Then again, one way to solve this problem is simply not to give anybody a loan, eh?


Alas, we don't have to worry about that since the money spigots are just so turned on to the Greek corporate sector you don't have to worry about a scarcity of jobs. With all of that capital sloshing around the system, Grecian companies are bound to start going on a hiring binge ANY MINUTE NOW!


Now, look very carefully at the last two charts, take a big toke, and re-read what that Barclays Bloke had the nerve to speak in a major business rag... is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Damn.... Okay, maybe we are taking this guy out of context. After all, he also said, "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money". Hmmm, let's take a look at some of the smaller banks, wait a minute... Aren't the Greek banks relatively small???

Then there's the issue of the run on the banks. With all that is going on, I made very clear that multiple runs are eminent, hence the need for 100 bp, junk collateral funding from the ECB. The Barclay's bloke says differently in that the money will not go to cushion runs, but will go to the greater [sic real] economy. Yeah... Pass the blunt! As excerpted from the following reports...

file iconBNP Exposures - Professional Subscriber Download Version



I have explored European bank runs in depth, see The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!


Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).



The problem then is the same as the European problem now, leveraging up to buy assets that have dropped precipitously in value and then lying about it until you cannot lie anymore. You see, the lies work on everybody but your counterparties - who actually want to see cash! 

Overnight and on demand funding is at a 72% deficit to liquid assets that can be used to fund said liabilities. This means anything or anyone who can spook these funding sources can literally collapse this bank overnight. In the case of Bear Stearns, it was over the weekend.


In reviewing my post on this topic in January predicting the fall of Bear - "Is this the Breaking of the Bear?", it is actually scary how prescient it actually was...


 Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back

Okay, I’ll admit it. I watch CNBC. Now that I am out of the confessional, I can say that when I do watch it I hear a lot of perma-bulls stating that this and that stock is cheap because it is trading at or below its book value. They then go on to quote the historical significance of this event, yada, yada, yada. This is then picked up by a bunch of other individual investors, media pundits and other “professionals,” and it appears that rampant buying ensues. I don’t know how much of it is momentum trading versus actual investors really believing they are buying on the fundamentals, but the buying pressure is certainly there. They then lose their money as the stock they thought was cheap, actually gets a lot cheaper, bringing their investment down the crapper with it. What happened in this scenario? These investors bought accounting numbers instead of true economic book value. Anything outside of simple widget manufacturers are bound to have some twists and turns to ascertain actual book value, actual marketable book value that is. This is what the investor is interested in, the ECONOMIC market value of book, not what the accounting ledger says. After all, you are paying economic dollars to buy this book value in the market, so you want to be able to ascertain marketable book value, I hope it sounds simplistic, because the premise behind it is quite simple – How much is this stuff really worth?. The implementation may be a different matter, though. I set out to ascertain the true book value of Bear Stearns, and the following is the path that I took...

I urge all to review that post of January 2008 and realize that negative equity is negative equity, and no matter how you want to label it, account for it, or delay and pray, broke is broke! This lesson should not be lost on the Europeans, but unfortunately, it is!


 So, is this just theory, or do I have a point? Well, I had a point when I applied the theory to Bear Steans in 1/08, three months before they collapsed. It also seemed to work as I warned about the collapse of the Greek banks in 2010, see How Greece Killed Its Own Banks! and the subscription-only File Icon Greek Banking Fundamental Tear Sheet. Was I right regarding large equity drawdowns causing masiive bank runs? Well in "So, Can Europe Nationalize All Of Its Troubled Banks? Place Your Bets Here" I quoted an article from ZH:

 Greek Bank Deposit Outflows Soar In January, Third Largest Ever

According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.

So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?




So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):



 My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Stay tuned!



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BaggerDon's picture

Tar and Feathers in short supply in Europe,,,,,,,,,,,soon to be in demand here.

pmm009's picture

Talk about hoarding, did anyone see the bloomberg flash on the hoarding of 7 year T Notes?

shutdown's picture



Reggie, you are my hero!  

Buck Johnson's picture

Reggie called it, and they know he has their number.

Withdrawn Sanction's picture

Calling the Barclay's guy a "bloke" is too nice and even misleading. Better a strumpet, a harlot, or even a whore if you're really pissed.

vintageyz's picture

Now British weed is better?  The world is going to hell.

ivars's picture

A scenario how things might start to unfold very soon with a critical poiint in May 2012 (EUR down, USDx up, Silver UP, DJIA UP, GOLD steady:

Debeachesand Jerseyshores's picture

I think people should reset their "Doomsday" clock from 21Dec12 to when the first Israeli jet fighter-bomber goes wheels up heading for Iran after Bennie completes his tour of Canada and America.

That's something to worry about.

Vampyroteuthis infernalis's picture

Good article Reggie. One thing though. Please improve formatting.

steelhead23's picture

I very much agree.  I could not find any direct argument from that bloke at Barclays aimed at Reggie.  If Reggie is raling against Barclays for defending its prediction that more ECB money will find its way into the real economy, given past behavior and current liabilities, indeed, one must ask what it is they are smoking.  It ain't weed, more likely PCP.

Zero Govt's picture

Reggie, any guesstimate on when BNP goes tits up?

Zero Govt's picture

"..and it is likely they will pass it on to the economy..” said Laurent Fransolet, head of fixed income strategy at Barclays Capital in London

There's some sharp cookies in London, Laurent Fransolet isn't one of them

It's a shame his comment just missed the Global Village Idiots Conference at Davos this year (covered by CNBC). It would have made a good entry in the Village Idiots Pushing on a Piece of String Competition.

The 'winner' this year for pushing on string was Team Central Banking saying/admitting all they could do was lower interest rates to fiscally insane levels and pump the printer with lunatic levels of counterfeit money and it was "up to the private sector" to run with their deluded policies.

Have these global village idiots never thought of doing a survey to ask/see what the private sector actually wants before chucking out their moronic central bank policies on an unsuspecting world???

"So the impact may be bigger than with the first one.”

The multiple of fuk-all is (still) not much. Can this Barclays moron even do basic research and basic maths before opening his cake hole?

The world is run by village idiots (politicos and bankers). What a mess we're in

CompassionateFascist's picture

Who the hell is "we"? I'm lovin' every minute of it. BTW thanks, Reggie, this was a good, understandable post.

QQQBall's picture

lower lease rates and lower collections plus higher expenses and cap rate spike and its lights out. 


Reggie, is the overall LTV ratio based upn debt/book value or debt/acquisition  pirce/cost? Basaically, is the "V" part of the LTV marktde to market?

donsluck's picture

My problem with following Reggie's advice is his reliance on CDS, which is the only way to game a default. This means he relies on the central banks to bail out the counterparties of his CDS when the time come. This is called brittle breakdown in engineering terms. It may get you good profits for a while, but at some point the central bank(s) will not bail out the CDS "insurance" companies.

illyia's picture

Really nice job Reggie. No bases left uncovered. But, I do wish you would address the "stock" market in the USoA as an entity apart from reality.

I am sure you know what I mean by that.

In other words - I am asking - how long can this liquidity pump last given the real weight of the debt/deleverage? Yes, I know: the 64 T question. If you knew that you'd rule the world (who would want to do that???).

But, it would be very nice to have a picture. I guess I am feeling overwhelmed by the amount and scale of things... and just the degree of run-up (Fingers of Instability - remember Ty Andros?) and drop duration.**

Got opinion?

From Ludwig von Mises, Human Action, 1949:

The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. If the credit expansion is not stopped in time, the boom turns into the crack-up boom [bold, mine]; the flight into real values begins, and the whole monetary system founders. Continuous inflation (credit expansion) must finally end in the crack-up boom and the complete breakdown of the currency system.

Silberadler's picture


One big pile of sh*t.

We are all in this together.

Welcome to zee Klub.


battle axe's picture

SO the European banks are awash in shit and are hording cash, sounds like the old USA right now...