On Challenges To The Mainstream Financial Channels, BofA's (In)Solvency, CDS and Long-Only Pundits Dominating the MSM

Lauren Lyster, the enticing Russian TV/Capital Accounts host gave me
the rare opportunity yesterday to sit down and run my mouth for 15
minutes straight. This is a format which is most conducive to true
conveyance of knowledge and information, at least in my not very humble
opinion. I'm just not the 8 second soundbite type.

In viewing the
interviews below, compare and contrast to the other two similar but
large channels at large, Fox Business News and CNBC, I am quite curious
to get your opinions and feedback.

I query, why is the bond market so much more fundamentally
astute than the equity markets? Is it becuase it is truly too deep and
wide to manipulate? In today's headlines (and right after this world
saving 5th European bailout):

• Fitch Says Greece Deal to Result in Temporary Default
• Italian 10-Year Yield Tops 6% in Auction, Setting Record

Let's get to the interview before we go any farther...

Interview w/Reggie Middleton: Is Bank of America going Bust? (Part 1)

Interview w/Reggie Middleton: Is Bank of America going Bust? (Part 2)

I addressed the CDS issue in detail in yesterday's blog post, which should be read by any who have not already: The Banks Have Volunteered (at Gunpoint) To Get 50% of Their Money Taken - No Credit Event???.
Why is this credit event issue pertinent? Well, if the Europeans
succeed in shamming the CDS market, rates skyrocket (duhh, didn't think
of that???) and all banks that state they are hedged via CDS truly
aren't? I delved into this in detail in 2009, with the blog post And the next AIG is... (Public Edition)...
Think about it! If there is a credit event then the fireworks start. If
there is no credit event, then what does that say about Goldman, who
swears to high hell they are adequately hedged? Hedged with CDS that
won't get triggered upon a 50% loss? Let's take a closer look with
excerpts from recent BoomBustBlog posts and subscriber research...

Of course, you know I'm going to say "I told you so!" Reference So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? and then Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? You see, in said piece, ZeroHedge dutifully reported that Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure- a very interesting refresh of what I called out two years ago through "The Next Step in the Bank Implosion Cycle???":

The
amount of bubbliciousness, overvaluation and risk in the market is
outrageous, particularly considering the fact that we haven't even come
close to deflating the bubble from earlier this year and last year! Even
more alarming is some of the largest banks in the world, and some of
the most respected (and disrespected) banks are heavily leveraged into
this trade one way or the other. The alleged swap hedges that these guys
allegedly have will be put to the test, and put to the test relatively
soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ),
you cannot truly hedge multi-billion risks in a closed circle of only 4
counterparties, all of whom are in the same businesses taking the same
risks.

Click to expand!

 

This concept was further illustrated in An Independent Look into JP Morgan...

Click graph to enlarge (there is a typo in the graphic - billion should trillion)

Cute
graphic above, eh? There is plenty of this in the public preview. When
considering the staggering level of derivatives employed by JPM, it is
frightening to even consider the fact that the quality of JPM's
derivative exposure is even worse than Bear Stearns and Lehman‘s
derivative portfolio just prior to their fall. Total net
derivative exposure rated below BBB and below for JP Morgan currently
stands at 35.4% while the same stood at 17.0% for Bear Stearns (February
2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear
Stearns and Lehman Brothers, don't we??? I warned all about Bear
Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?":
On February 20th, 2008) months before their collapse by taking a close,
unbiased look at their balance sheet. Both of these companies were
rated investment grade at the time, just like "you know who". Now, I am
not saying JPM is about to collapse, since it is one of the anointed
ones chosen by the government and guaranteed not to fail - unlike Bear
Stearns and Lehman Brothers, and it is (after all) investment grade
rated. Who would you put your faith in, the big ratings agencies or your
favorite blogger? Then again, if it acts like a duck, walks like a
duck, and quacks like a duck, is it a chicken??? I'll leave the rest up
for my readers to decide.

I then posted the following series,
which eventually led to me finally breaking down and performing a full
forensic analysis of JP Morgan, instead of piece-mealing it with
anecdotal analysis.

1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
3. As the markets climb on top of one big, incestuous pool of concentrated risk...
4. Any objective review shows that the big banks are simply too big for the safety of this country
5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

You
can download the public preview here. If you find it to be of interest
or insightful, feel free to distribute it (intact) as you wish.

 JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

 Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010, discusses JP Morgan and concentrated derivative bank risk.

If you think that's scary (and you really should) check out Is Goldmans Sachs Derivative Exposure the Squid in the Coal Mine?

The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question “Has
the value or the economic quantity of the underlying increased at a
similar pace, and if not does this indicate that everyone on the street
has doubled and tripled up their ‘bets’ on the SAME HORSE?”

Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?

Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history.  In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago. The
notional amount of a derivative contract is a reference amount from
which contractual payments will be derived, but it is generally not an
amount at risk. However, the changes in notional volumes can provide
insight into potential revenue, and operational issues and potentially
the contagion risk that banks and financial institutions poses to the
wider economy – particularly in the form of counterparty risk delta. The
top four banks with the most derivatives activity hold 94% of all
derivatives, while the largest 25 banks account for nearly 100% of all
contracts.  Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.

In
absolute terms, JPM leads this list with total notional value of
derivative contracts at $78 trillion, or 1.3x times the Wolds GDP.
However, in relative terms, Goldman Sachs leads the list with
total value of notional derivatives at 537 times is total assets
compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).

So,
what does this mean? Well, it should be assumed that Goldman is well
hedged for its exposure, at least on academic basis. The problem is its
academic. AIG has taught as that bilateral netting is tantamount to
bullshit at this level without government bailout intervention. If there
is any entity at risk of counterparty default or who is at the behest
of a government bailout if the proverbial feces hits the fan blades…
Ladies and gentlemen, that entity would be known as Goldman Sachs.

As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...

Goldman
is much more highly leveraged into the derivatives trade than ANY and
ALL of its peers as to actually be difficult to chart. That stalk
representing Goldman's risk relative to EVERY OTHER banks is damn near
phallic in stature!

 As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... ,
this is not a new phenomenon. Quite to the contrary, it has been a
constant trend through the bubble, and amazingly enough even through the
crash as banks have actually ratcheted up risk and assets in a blind
race to become TBTF (to big to fail), under the auspices of the
regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture). So,
what is the logical conclusion? More phallic looking charts of blatant,
unbridled, and from a realistic perspective, unhedged RISK starring
none other than Goldman Sachs...

And to think, many
thought that JPM exposure vs World GDP chart was provocative. I query
thee, exactly how will GS put a real workable 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. If
that's truly the case, all of 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. Oh yeah, that
perpetually printing clinic also known as the Federal Reserve just might
be running a little low on that cheap liquidity antibiotic... Just
giving y'all a heads up ahead of time...

And back to Bank of America Lynch(ing this) CountryWide....

The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!: Yes, BAC is insolvent, and yes CountryWide is (and was) now a real estate company first and foremost - reference "Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?"

I
know I wouldn't. I believe there are better investments out there from a
risk/reward perspective. Countrywide is in a bit of a jam, and it is
not just from bad loans on the books. Looking at the Countrywide
Foreclosures Blog (yes, there actually is one), I found this article:14,196 Homes Offered For Sale on Countrywide Financial's Website.
I browsed through some of the site, and the small sample of numbers
that I looked at seemed accurately reported. It also seems to mesh with
Housingtracker.net. Browsing through the comments, someone noticed that
the bank and trust offerings were not included. I looked, and at first
glance, it seemed like he had a point. Now,it is a lot of work to verify
all of this, but if it does pay out (and it looks like it does),
Countrywide has nearly 100% of it market capitalization outstanding as
REOs - in a market where houses just aren't selling and property values
are falling fast. This is totally discounting each and every under performing and underwater mortgage asset they have on their books.

Held by Countrywide Mortgage Co.	$ 2,910,876,468
Held by Countrywide Trust and Bank	$ 2,969,067,322
Total	$ 5,879,943,790
CFC Market Capitalization	$ 6,180,000,000
% market cap held as REO	95%

 

Subscribers,
if the Europeans mess this up (and a gambling man would probably be
best served casting his bets in that direction) expect the subject bank
of this article, and the most recent forensic download ( Haircuts, Derivative Risks and Valuation) to go "BOOM!" See the blog post This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

Lauren asked a very good question regarding why I'm the only pundit making such dire observations...

As
for the touchy question as to why I am stating things that no one else
does, I tried to be politically correct in espousing my thoughts on the
"long only wold of the MSM". I believe I was fair, and I wear my own
track record on my sleeve, see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

I can be reached via the following channels, or directly via email:

• 
• 
• 
• 
• 

I
will be releasing the date (probably this week), location and time of
the NYC meet and greet within the next 24 hours or so, so we can chat,
drink, debate, argue and fraternize with pretty woman together in a
trendy spot in the Meat Packing District or the Bowery (I apologize in
advance to all of my female readers/subscribers). Those who are
interested in attending should email customer support.There
has been strong interest in the London meeting, enough to warrant the
venue - I simply need to get the travel and venue organized due to a
change of plans. For those that are new to the blog, these are pics of
previous meet and greets...

BoomBustBlog on the MotherLand in the Hudson, NYC

BoomBustBlog on the MotherLand in the Hudson, NYC

 

BoomBustBlog in the 79th Street Boat Basin, NYC

BoomBustBlog in the 79th Street Boat Basin, NYC

 BoomBustBlog at BuddhaKahn, Meatpacking District, NYC

Comments

[mjk0259]

If higher interest rates result from no CDS, does this not indicate that the CDS were priced too low to begin with?

[StychoKiller]

I pity any of the "Whales" out there that heard what you said and choose to ignore it.  Actually, make that "Anyone" out there...

[Zero Govt]

Right On Reggie

so your 'Catch 22' scenario regards a 50% Bond haircut causing a CDS mushroom cloud begs the question...

...has BNP Paribas, Soc-Gen and Deutsche Bank hedged their disasterous loans to Greece with those cowboys across the Pond?

Is Jamie Dimons 9 New York shag-pads on the Bailiffs asset book for Froggy financial exuberence

Regards your hang-time on RT versus CNBC there are restaurants and there are fast food joints. Shape your message to the sound-bite... watched CNC today and it's a line of puffy Big Macs (sugary crap). You can say JP Mortgan are "over-leveraged junk" just as easily as your longer deeper explanation on RT of the CDS market

Presumably this is why the Eurozone meetings are dragging on forever... every bwanker in Europe and America has their balls under the hammer about to fall  

[Laughinggrizzley]

doublepost

[Laughinggrizzley]

Reggie, to answer your question on contrasting the big east coast media vs RTN. There always seems to be a fear that the corp media controlled outlets will "lose" access to the large banks if they report something negative. I could see this with when Faber interviewed Kyle Bass, and was in complete disbelief that Germany would not go "all in" in the bailout. I can't comment on FBN, as they do not have the graphics of CNBC.  I doubt Herb would let you prove your point without interrupting you. Lauren can wear that cocktail dress anytime.

[StychoKiller]

[quote]There always seems to be a fear that the corp media controlled outlets will "lose" access to the large banks if they report something negative.[/quote]

After Saddam Hussein was deposed, CNN admitted to putting his propaganda on-air in order to maintain "access" to Baghdad -- CNN, the "most trusted" name in news (yeah, right!) -- so why should you be surprised at this?

[falak pema]

rm : cds will die, bofa will dry, gs will buy, socgen will sky, berlu will say ciao ciao, ecb will print, no way the world will go dry in 2012, its election year for france and usa.

So the death of cds is one way to kill the derivative scam. JpM will hit the mattresses.

[Threeggg]

Reggie thanks for telling deflationists to fuck off.

The CDS is the new kriptonite/Backstop to deflation as the money to pay these claims if triggered does not even exist...............yet. That is why "nothing" will be allowed to fail or put pressure on the balance sheets causing defaults to trigger CDS. (circlejerk)

You "Da Man" Thanks again for making things understandable and not putting poo-poo on it to make it sweeter. 

[JW n FL]

here's a hot tip for ya Reggie!

www.cbremarketplace.com/959WyckoffAvenue/ since you dont have any time for Occupy Wall Street, other than your one lil token video..

[JW n FL]

http://www.youtube.com/watch?v=bLr63uyVWLc&feature=related

[MrBoompi]

Reggie I agree.  I'd love to do a closer inspection of Lauren's "portfolio" any day of the week!

We all just have to wonder how long this farce can go on?  It seems they can keep kicking the can down the road forever, even though we've been able to recognize severe problems for some time now.

[Georgesblog]

This will be fun to watch. It would be significant if the discussion involved real money. Since it is in reality, a crowd sitting at card tables playing Monopoly, no correlation between investment markets and the real world exists. The proof of that statement should be very immediate in the response of markets. The intensity of faith in the lie has grown to the level of psychosis. To recognize reality is to see debt manipulation as deception and delusion. For billions of people, that will come to a bad end.

http://georgesblogforum.wordpress.com/2011/10/26/wage-slave-2012-update-...

[Big Ben]

If I were holding Greek bonds fully hedged with CDS, why would I accept a 50% haircut? I would just hold on to the bonds. If Greece continues to make payments on them, then fine, I get my money and the CDS expires worthless. But if Greece ever misses a payment, then that would have to qualify as a credit event and my CDS should protect me.

So the only people who I would really expect to accept the 50% haircut would be:

1. Bondholders without CDS hedging.

2. Bondholders who have CDS hedges, but who don't believe the CDS will really protect them.

I think the Europeans are hoping that most bondholders will fall into categories 1 and 2. The fact that they expect that most bondholders will fall into one of those categories says a lot about the health (or lack thereof) of the current system. It will be interesting to see what the acceptance ratio is.

[sgt_doom]

Once again, it takes Reggie to state the obvious!

And why is it necessary?  Because the jackholes at ISDA, US Chamber of Commerce, Financial Services Roundtable, et al., keep spewing their propagandistic and fictional nonsense!

Thanks Reggie, you are still The Man!

[ZackAttack]

I hate to be parenthetical and obnoxious, but, Lauren Lyster, just... Dayum! Any chance you could talk her into a BBB outing sometime?

[roymunnson]

How does this not end bad?

[roymunnson]

So without CDS market bond holders have....wait for it

Zero Hedge

[Uncle Sam]

You are truly worthy.

[anonnn]

Fraudulent contracts are not enforceable by the public courts, unless they are deemed enforceable by intimidation or government authority [fiat].

This is not a new situation. About 150 years ago, Charles Dickens wrote about failure to do Due Diligence:

 Panks [debt collector]: “A person who can't pay, gets another person who can't pay, to guarantee that he can pay. Like a person with two wooden legs getting another person with two wooden legs to guarantee that he has got two natural legs.”   [Charles Dickens' Little Dorrit ]

Fraud committed by persons/corporations who claimed to be responsible for Due Diligence and thus cannot claim ignorance when they accepted known amounts of debts/liabilities greater than their total assets.

[Hedge Fund of One]

Which contracts were fraudulent - the bonds, the CDS, or both?

Apparently fiat says neither bonds nor CDS are enforceable.

[sgt_doom]

And that Law of Fraudulent Conveyance....

[Pladizow]

Is a seperate issue!

[fockewulf190]

Your getting the long air time on Russia Today because, unlike the commercial based MSM, they have almost no commercials, and RT is the english propaganda arm of the Kremlin.  Not to detract from your great analysis Reggie, but if there is any story out there which join the USA and any sort of decline, your welcome at RT...as well as Press TV from Iran for that matter.

[Melin]

then Russia and Iran are helping get the truth out which can only help the US.  

[fockewulf190]

Your comment would have a semblance of merit if RT was just as aggressive with pursuing the truth about what happens within Russia as it does digging dirt up within the US. Reggie´s message is sound, but RT´s ultimate modus operandi is not to help, it is to spread negativaty about the United States in any way, shape or form.   You will never see the Kremlin, or Putin, ever being criticized on RT.  Never.  Remember one thing, independant news within Russia...as well as Iran. is dead; crushed out of existance.  Some reporters have even been murdered...their cases  unsolved even to this day.

[Melin]

well I certainly wasn't suggesting an adherence to objectivity on their parts.  But facts are facts no matter who exposes it and understanding reality is always in our best interest.

[AdahPrice]

One reason it is good to have lots of independent (sovereign) nations is that, within each nation, the government (and those who hold the puppet-strings of the government) will lie like hell, but will happily expose the lies of other governments, who will cheerfully reciprocate.  In any huge empire, this process is of course greatly diminished, and less truth is therefore available to the people.

[Zero Govt]

it is a myth the media is un-biased or has been anytime in its history. The basic modus-operandi of media channels, newspapers etc is to reflect the 'angles' (biases) their owners wish to grind out in their cherry-picked selection news and editorials

Bias and spin is the standard operating procedure (agenda?) of media throughut time.... truth or balance is the exception to the rule. Fact (of life)

Nothing wrong with that at all. It creates competition in news. The problem comes when all media channels pump and dump the same message which we see in issues like the non-stop bias (bullshit) of climate change junk (Govt funded) science with few exceptions to balance the debate in all of 10 years of pure bias

RT is doing us a service by grinding its Russian agenda in competition to what is now an utterly corrupt monopolised Western media space domnated by huge diseased media dinsoaurs pumping and dumping to keep a crumbling and delusional establishment propped up a few more days

[Uncle Sam]

"If liberty means anthing at all, it means the right to tell people what they do not want to hear."

- George Orwell

[fockewulf190]

Who has that right within Russia?

[Melin]

possibly no one in Russia has that right protected.  Why do you ask?

[MFL8240]

Would please me to see JP Morgan fold and Dimon in prison fro manipulating the Silver market.  

[Zero Govt]

i'll second that without a second thought... now let's call the NYPD ...oh, just been told they're all out defending JP Morgan and Goldman Sucks buildings from people protesting... how weird is that!!!

[dick cheneys ghost]

She's got legs up to her armpits................Love the new show and RT as well..........

The truth=Zero Hedge.....Pepe Escobar and RT.com........

[asparagui]

'Enticing' isn't exactly the word I would use, but since ZH is a family friendly place it'll have to do. OH LAWD DEM RUSSIAN CHICKS

[gaoptimize]

I'm pretty tired of people objectifying and judging Russian ladies based upon their reputation or solely on interaction with hookers in a Moscow bar.  The fact is that most Russian women are AWESOME and make the best wives and mothers.  If you don't know, don't say.

[Melin]

oh brother. She's wearing cocktail hour fashion on a finance/business show because she looks hot in it. Assume boys who are interested in girls and finance will enjoy a two-fer and comment on it.  If they want to include all the women of Russia in their enjoyment, so what?  Women's lib makes women dull.

[Transformer]

The first under desk camera work I have ever seen in Financial Reporting.

[Pladizow]

They make better hookers then wifes but then so do most women!

[tony bonn]

brevity is the soul of wit. apologies if i posted this observation already.

[akak]

brevity is the soul of wit.

But hardly the essence of sound analysis.

(Was that brief enough to make my point?)

[long_and_short]

anyone know if the CDS i snull, and firms are using this to hedge risk and in effect VAR, does this now move VAR up exponentiallly?

[disabledvet]

I told you they wouldn't honor the contract. No going back now. On the good side you can still claim they saw you "in the flesh"...and ran for their lives.

[mayhem_korner]

Well, it should be assumed that Goldman is well hedged for its exposure, at least on academic basis. The problem is its academic.

Spot on.  If ISDA, EU, IMF, MTV and every other so-called "authority" is going to declare that X% debt obligation write-downs are NOT credit events, how hedged can ya be? 

There's gotta be some heavily stained fruit-of-the-looms hanging out somewhere at Goldman and the Morgue...

[Pladizow]

Goldman, BAC's and all the other TBTF's ultimate hedge is the US tax payer!

And to save the CDS market cant all future contracts be written to spell out exactly what % hair cut constitutes a default?