French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!

Reggie Middleton's picture
 

I took the weekend off and all types of nonsense occurs in my wake.
Well, I'm back with some fresh research. Subscribers, we have found
another bank at risk (and you know how well the other banks that we
targeted fared in the past - Bear, Lehman, the entire French banking
system, etc.) and will be releasing the research in the next 24 hours.
In the meantime, I would like to address the massive bear market
rally/short squeeze that probably created many a draw down. First, a
little misdirection and disinformation as reported by CNBC: Greek 'Haircut' No Threat to French Banks: Noyer 

French
banks could cope with a significant Greek "haircut"—a private sector
writedown of Greek bonds—but it is still possible that the country's
financial institutions may have to be recapitalized, Christian Noyer,
governor of the Bank of France, told CNBC.

"Greece
is not a problem for the French banks," Noyer said. "The total
(exposure) of the French banks to Greek sovereign debt is significantly
smaller than the first half of profits for the French banking system."

That exposure amounts to roughly 8 billion euros, while French banks' first-half profits totaled about 11 billion euros.

Still,
Noyer would not rule out recapitalization for banks in France, given
that all of Europe's banks' could face mandatory increases to their
required capital base, depending on a decision by the European Bank
Authority (EBA), the European Union's banking regulator.

Where shall I begin? Well, Reuters reports German Finance Minister Insists Greek Debt Haircut Should Be At Least 50-60%, as excerpted:

Greece's
debt crisis cannot be solved without larger write downs on Greek debt
and governments are trying to persuade banks to accept this, German
Finance Minister Wolfgang Schaeuble said on Sunday, just days ahead of a
key EU summit.

Asked
in the interview with ARD whether there could be a Greek debt
write-down of as much as 50-60 percent, Schaeuble said: "A lasting
solution for Greece is not possible without a debt write-down, and this will likely have to be higher than that considered in the summer."

In
July, private creditors agreed to a voluntary write-down of 21 percent
on their Greek debt, a figure which now looks insufficient. Euro zone
officials said last week losses are now likely to be between 30 and 50
percent.

"Of
course we would like, if possible, to agree together with the banks.
That is why we will be discussing things with them. But it is clear,
there must be a level of participation which is enough to bring about a
lasting solution for Greece. That is enormously difficult," Schaeuble
said.

The market has an even higher implied actual haircut! Analysis - Greek debt enters Argentina-style twilight zone

Reuters - Even that would be a better deal than levels of a 60 to 70 percent haircut currently priced into Greek debt. Most Greek bonds are trading at around 35 cents on the euro. For emerging market players with experience of Argentina, which defaulted on $100 ...

Of
course, a little useless financial engineering can make things all good
right? Yeah, right! You see, what looked like a bad deal just a week
ago... EU Officials: Private Sector Bondholders Could Expect 30-50% Haircut Business Insider - ‎Eurozone officials told Reuters today that the private sector will likely see a 30-50% haircut on holdings of Greek bonds
if they participate in a debt swap deal. That's far more than the 21%
that had been expected under the initial terms of the July ...

Looks like a hell of a bargain today... Greek Bond Deal: Too Good to Last

Wall Street Journal (blog) - Reason 2: As we have pointed out before, a sharp fall in Greek bond
prices since July 21 makes the bond swap look like an even better deal
to bondholders. The new bonds they would receive through the exchange
have other benefits to investors—they ...

Pointless Greek bond swap dead — long live pointless Greek bond swap

FT Alphaville (blog) - For all we know, the terms of the current bond swap may simply be tweaked to get the “new” haircuts, for example by lengthening the maturities of the new bonds or cutting the coupons paid by Greece, while keeping other things (like collateral) much the ...


Contrary to Noyer's opinion above, both Reggie Middleton and other disinterested yet objective sources state Greek banks can withstand haircut of up to 30 percent - sources
Reuters UK - ATHENS (Reuters) - Greek banks could endure a loss of up to 30 percent on their Greek government bonds but could not stand significantly bigger haircuts, Greek banking sources said on Thursday. "Banks can withstand a haircut of up to 30 percent but a ...

Of course, those loyal BoomBustBlog readers knew this to be the case a year and a half ago!
Subscription analysis from early 2010 shows Greece was nearly guaranteed to default as its banks were stuffed with trash:

File Icon Greece Public Finances Projections
File Icon Greek Banking Fundamental Tear Sheet

Online
Spreadsheets (professional and institutional subscribers only) showed
that haircuts were to be multiples of the originally proposed 21% if
Greece were to even have a chance of digging itself out of the hole!!!

I also explained the situation in public, and for free, early in 2010: Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
The situation with the Greek banks is the same situation with the
French, German, etc. banks. Leverage piled upon depreciating assets
simply wipes out equity. Period! How Greece Killed Its Own Banks!

...These downgrades are going to cause people to increase their risk weightings,” Yelvington said.

Well,
the answer is.... Insolvency! The gorging on quickly to be devalued
debt was the absolutely last thing the Greek banks needed as they were
suffering from a classic run on the bank due to deposits being pulled
out at a record pace. So assuming the aforementioned drain on liquidity
from a bank run (mitigated in part or in full by support from the ECB),
imagine what happens when a very significant portion of your bond
portfolio performs as follows (please note that these numbers were drawn
before the bond market route of the 27th)...

image001image001

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

image003

I even went so far as to compare Greece to Argentina, complete with
online models. No matter which way you slice it, a 50% haircut would be
akin to a snowy Christmas in the summer of a devout muslim country -
highly unlikely! A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

Now,
referencing the bond price charts below as well as the spreadsheet data
containing sovereign debt restructuring in Argentina, we get...

Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

image001

Price of the bond that went under restructuring and was exchanged for the Discount bond

image003

On that note, ZeroHedge has come out with a blockbuster explanatory article:
Credit Suisse Buries European Banks, Sees Deutsche Bank And 65 Other
Bank Failing Latest Stress Test, €400 Billion Capital Shortfall

A day after Credit Suisse killed the Chinese bank sector
saying that the equity of virtually the entire space may be worthless
if NPLs double, as they expect they will to about 10%, the Swiss bank
proceeds to kill European banks next. Based on the latest farce out of
Europe in the form of the third stress test, which is
supposed to restore some confidence, it appears that what it will do is
simply accelerate the flight out of everything bank related, but
certainly out of anything RBS, Deutsche Bank, BNP, SocGen and Barclays
related.

I'd like to add that I've ridiculed all of these
stress tests, US and European, although the European stress tests were
by far the biggest joke. Dexia passed with a grade of A (or so), and
will be nationalized momentarily. 'Nuff said!

To wit: "In our estimation of what could be the “new EBA stress test” there would be 66 failures, with RBS, Deutsche Bank, and BNP needing the most capital – at €19bn, €14bn and €14bn respectively. Among the banks with the highest capital shortfalls, SocGen and Barclays would need roughly €13bn with Unicredit and Commerzbank respectively at €12bn and €11bn. In
the figure below we present the stated results. We note RBS appears to
be the most vulnerable although the company has said that the
methodology, especially the calculation of trading income, is especially
harsh for them, negatively impacting the results by c.80bps." Oops.
Perhaps it is not too late for the EBA to back out of this latest
process and say they were only kidding. And it gets even worse: "We
present in this section an overview of the analysis which we published
in our report ‘The lost decade’ – 15-Sep 2011. One of our conclusions
was that the overall European banking sector is facing a €400bn capital
shortfall which compares to a current market cap of €541bn." Said
otherwise, we can now see why the FT reported yesterday that banks will
be forced to go ahead and proceed with asset firesales: the mere thought
of European banks raising new cash amounting to 75% of the entire
industry's market cap, is beyond ridiculous. So good luck with those
sales: just remember - he who sells first, sells best.

And the scary charts:

1. Capital Shortfalls under Stress Test part Trois (9% min. CET1 ratio)

 If
anyone over there has two synapses to spark together, I would fully
expect them to take my research over much of the anecdotal drivel passed
around the Street as research. For instance, from the outside looking
in, the Greek writedowns (yes, even the mark to myth Greek writedowns)
will most likely wipe RBS profit for the year. Now, try applying what
the real losses will be... Okay, after you do that, try realizing that
no Greek default will occur in a vacuum and all peripheral assets will
suffer in solidarity, not to mention their own solvency issues. Then add
to that that RBS is an insolvent ward of the state to begin with, after
passing stress tests itself then being nationalized. Okay, now that
we've dispensed with the most of the optimism and good news (I'm going
to skip over DB, since much of the market appears to be doing in
assuming that Germany cannot be touched despite the fact that it is
already very much "touched") and head on to the bank that I warned my
payiing subscribers about in late August - in time to see its share
price halved despite not a damn peep of a warning from the sell side of
the pop media. May I please be allowed reminisce, as excerpted from Small Independent, Bombastic Financial News Show Dramatically Scoops the Financial Times On French Bank Run Story :

 Post Note: BNP management is now shopping around for capital investment.

On that note, let's review my post last week, "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely File Icon Bank Run Liquidity Candidate Forensic Opinion -
A full forensic note for professional and institutional subscribers. It
outlined some very telling reasons why BNP's share price appears to be
spillunking, namely:

    1. Management is lying being less than forthcoming with the valuation of toxic assets on its books.
    2. The sheer amount of these assets on the books and the leverage employed to attain them are devastating
    3. BNP has employed the proven self destructive financing methodology of borrow short, invest in depreciating assets long!
    4. BNP
      management lying being less than forthcoming about reliance on said
      funding maturity mismatch, despite the fact it handily dispatched Bear
      Stearns and Lehman Brothers in less than a weekend!

Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

This
is how that document started off. Even if we were to disregard BNP's
most serious liquidity and ALM mismatch issues, we still need to address
the topic above. Now, if you were to employ the free BNP bank run
models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber)
you would know that the odds are that BNP's bond portfolio would
probably take a much bigger hit than that conservatively quoted above. 
Here I demonstrated what more realistic numbers would look like in said
model... image008image008

To
note page 9 of that very same document addresses how this train of
thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09

So,
how bad could this faux accounting thing be? You know, there were two
American banks that abused this FAS 157 cum Topic 820 loophole as well.
There names were Bear Stearns and Lehman Brothers. I warned my readers
well ahead of time with them as well - well before anybody else
apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?).
Well, at least in the case of BNP, it's a potential tangible equity
wipeout, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more
to BNP besides overpriced, over leveraged sovereign debt, liquidity
issues and ALM mismatch, and lying about stretching Topic 820 rules, but
I think that's enough for right now. Is all of this already priced into
the free falling stock? Are these the ingredients for a European bank
run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer
when this stock was at $50. Those who wish to subscribe to my research
and services should click here.
Those who don't subscribe can still benefit from the chronology that
led up to the BIG BNP short (at least those who have come across my
research for the first time)...

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trastde and European Bank Run Trading Supplement

I
identify specific bank run candidates and offer illustrative trade
setups to capture alpha from such an event. The options quoted were
unfortunately unavailable to American investors, and enjoyed a literal
explosion in gamma and implied volatility. Not to fear, fruits of those
juicy premiums were able to be tasted elsewhere as plain vanilla shorts
and even single stock futures threw off insane profits.

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In
case the hint was strong enough, I explicitly state that although the
sell side and the media are looking at Greece sparking Italy, it is
France and french banks in particular that risk bringing the
Franco-Italia make-believe capitalism session, aka the French leveraged
Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

So, What's the Next Shoe To Drop? Read on...

For
those who claim I may be Euro bashing, rest assured - I am not. Just a
week or two later, I released research on a big US bank that will quite
possibly catch Franco-Italiano Ponzi Collapse fever, with the pro
document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers,
be sure to be prepared. Puts are already quite costly, but there are
other methods if you haven't taken your positions when the research was
first released. For those who wish to subscribe, click here.

Now, let's refresh the output from And The European Bank Run Continues...and more importantly BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional, I strongly urge those who haven't to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP.  Below is sample outout from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price...

image014

Using more recent market inputs (you know, assuming this stuff was Level 1), we get the following...

bnp_haircut_exposure

Notice here the base case TEC impairment is now approaching the
adverse case from just a few weeks ago - and this is using market
pricing, not some pie in the sky model!

I have not recalculated
the adverse scenario in this example, but you can simply use your
imagination, or download the model and run it for yourself.

A
Greek default with haircuts somewhat inline with market prices will
wipe out 13% of BNP TEC, with a more severe cut (quite likely) taking
out nearly 20%. This is not even glancing upon the many problems we
discussed in our forensic reports (File Icon French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers,File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers).

Now,
if the ZH referenced report above is accurate (and I believe it is) the
banks are going to try to delever by selling assets in the open markets
(all at the same time, selling the same assets to the same pool of
potential buyers at the same bad times). This means that the prices used
to populate this model are probably still too optimistic. Even if they
weren't, look at the capital short fall the Greek default will leave BNP
with assuming our institutional bank run thesis holds true and they see
a slight withdrawal of liquidity of 10% this year and 15% next (knowing
full well the numbers for Lehman and Bear were much, much higher than
that before they collapsed). First, a refresher on our European bank run
theory espoused 5 months ago...

  1. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
  2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  3. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
  4. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

And the BNP results????

bnp_haircut_exposure_bank_run

Half
trillion euros here, half trillion euros there... Sooner or later,
we'll be talking about some real money! Since the problems have not been
cured, they're literally guaranteed to come back and bite ass.
Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional).

My
next post should also include research on the next bank that we have
found that has been (again) overlooked by the market, the media and the
sell side. Can we expect the same that we saw in BNP, Bear, Lehman,
etc.? Well, paying subscribers shall find out forthwith.

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

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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...

  

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