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The Greco-Franco Bank Run Has Skipped the Pond, Landed in NY/Chicago and Nobody Noticed, Exactly As I Predicted!
Four months ago, I posted to seminal pieces, namely The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!and The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style! that
outlined in explicit detail, the path, methodology and cause and effect
of bank runs that will emanate from Europe. Any who have not read these
two posts, be aware that I consider them a must. For those of you who
feel that my posts are too long, I urge you to take the content embedded
within them more seiously (both paid and free content), for although
verbose, they are proving to be most prescient.
As excerpted:
Traditional views on this “bank run model”
largely (or more aptly, only) consider individual savers in the form of
depositors on the short side (liquid liabilities). It is a run such as
this that caused the banking collapse during the US Great Depression.
The modern central banking system has proven resilient enough to fortify
banks against depositor runs, as was recently exemplified in the recent
depositor runs on UK, Irish, Portuguese and Greek banks – most of which
received relatively little fanfare. Where the risk truly lies in
today’s fiat/fractional reserve banking system is the run on
counterparties. Today’s global fractional reserve bank get’s more
financing from institutional counterparties than any other source save
its short term depositors. In cases of the perception of extreme risk,
these counterparties are prone to pull funding are request
overcollateralization for said funding.
This is what precipitated the collapse of Bear Stearns and Lehman
Brothers, the pulling of liquidity by skittish counterparties, and the
excessive capital/collateralization calls by other counterparties. Keep
in mind that as some counterparties and/or depositors pull liquidity,
covenants are tripped that often demand additional capital/collateral/
liquidity be put up by the remaining counterparties, thus daisy-chaining
into a modern day run on the bank!
image006
This phenomena essentially discredits the
thinking at large and currently in practice that “since individual
expenditure needs are largely uncorrelated, by the law of large numbers”
banks should expect few withdrawals on any one day. The fact of the
matter is that in times of severe distress, particularly stemming from
solvency issues (read directly as the Pan-European Sovereign Debt
Crisis, and Greece, et. al. in particular), the exact opposite is the
case. Individual depositor and counterparty actions are actually HIGHLY
correlated and tend to move in tandem, particularly when that move is
out of the target fiat bank. They tend to take heed to the saying “He
who panics first, panics best!"
Asset/liability mismatch can, at
the margin nearly assure a Lehman-style fiasco in the case of an impetus
that sparks herding mentality, whether it be among depositors/savers or
institutional counterparties.
So, armed with the cause, effect, and path of bank runs coming from
Europe, templated by Lehmand and Bear, guess what happend yesterday? As
excerpted from FT.com: MF Global and the repo-to-maturity trade
... So, while most of the media has
been commonly referring to MF’s sovereign bond positions as proprietary
bets gone wrong, there’s more to it than just that. If anything this was
a financing position (or liquidity trade) — not a bet on the future
direction of the bonds themselves. What’s more, if executed properly the
trade should — at least on paper – have posed little or no risk. The
maths was simple enough. You account for the cost of borrowing funds
using the bonds in question as collateral (the repo rate) versus the
ultimate coupon payments received from the very same bonds.
This is because in dysfunctional
markets the repo rate can be out of kilter with the ultimate returns of
the bond itself. This is especially the case if there are more
counterparties willing to provide short-term liquidity in return for
rates that beat the nominal risk-free return. In other words to act as
pawnbrokers to the market. Alternatively, if you have a good credit
standing in the market you may be able to achieve a more favourable repo
rate than others. If everyone plays their cards right, MF Global
receives financing (or liquidity) at a better rate than the market’s –
since they are offsetting the repo charges with the ultimate coupon
payments — and the counterparty is rewarded in basis points for holding
the bond in the interim.
Gross profit is simply total inflow minus total outflow.
As fixed income guru Moorad Choudhry noted in the “Repo Handbook”
such a trade should generally be considered low-risk since the
financing profit on the bond position is known with certainty until the
bond’s maturity.
...In other words, mark-to-market ought not be a concern. As long
as the bond pays out at the price you bought if for (which it will if
it is held to maturity), it should not be considered a risky position.
As can be seen from MF Global’s earnings statement, MF was indeed counting on the EFSF guarantee to ensure that this would be the case:
... “Over the course of the past year, we have seen opportunities
in short-dated European sovereign credit markets and built a fully
financed, laddered maturity portfolio that we actively manage. We
remain confident that we have the resources and expertise to continue
to successfully manage these exposures to what we believe will be a
positive conclusion in December 2012,” Mr. Corzine concluded.
On top of that — just in case an
unexpected default risk came its way — MF Global had actually hedged the
$6.3bn position with a $1.3bn short French government bond trade.
So what on earth went wrong? Italy and
Belgium are, after all, still very unlikely to default before the end
of 2012. There is no reason, therefore, why the bonds shouldn’t payout.
Which leaves only the
possibility of some skittish repo counterparties suddenly getting cold
feet and pulling out (or demanding a greater proportion of
over-collateralisation with respect to the loan.
If repo contracts were completely reneged upon, this
would not only have left MF with a sudden liquidity issue — especially
if they couldn’t find a fresh counterparty — but also with a sudden need
to mark-to-market the bonds.
Indeed as Reuters reported on Monday:
Last week, counterparties likely pressed MF Global to post more
collateral on derivatives trades and may have started reducing the
company’s repo financing lines, market sources said.We’re not sure
exactly how easy it is to undo a “repo-to-maturity” trade, but it does
leave us wondering who exactly those counterparties might have been.
Update 9.30pm GMT: As
Kamekon points out below, in most circumstances — depending on the
terms and conditions — repos would be subject to regular margin calls or
“loan repayments” which re-establish the original repo ratio. Either
way, a fall in the value of the bonds could create a major liquidity
drain for MF Global. Though these sorts of liquidity risks should have
been accounted for in VaR calculations. Much harder to anticipate would
have been a complete disappearance of willing counterparties.
So there you go. The MF Global collapse was fueled (ironically) by ZIRP as clearly predicted here The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications, and the straw that broke the camel'sman's back was an old fashioned institutional bank run, as was clearly anticipated many months ago here at BoomBustBlog.
Subscribers, this distrust, collateral calling, back stabbing bank
run thing will get much worse before it gets better. I strive to put out
quality, not quantity, and I truly believe that those banks and
entities outlined in the research reports of the past two months are
going to prove to be blockbusters of alpha on the short side. Reference
the Commercial & Investment Banks
subcategory under "Banks & Financial Services" heading in the
subscription content tab. The last three entities covered are again ripe
for the picking after the recent bear rally, in the case of a systemic
downturn (which I fully anticipate) although I can't guarantee for how
long.
Discuss Finance, Investment, Blogs, Global Macro and Research with Reggie Middleton of BoomBustBlog at Salon de Ning
700 Fifth Avenue New York, NY 10019
6:45 pm, Friday November 4th
I
will bring plenty of research, debate and discussion, so put your smart
caps on, be prepared to overpay for drinks and be in the company of
beautiful women.
Previous BoomBustBlog events have been more than worth it...
»
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If you still doubt that you should be cashing out your hard or hardly earned retirement assets in IRA,401-K? if you are not able to understand what is currently in play or you are unwilling to understand, you deserve the fleecing that you will be getting in the next 12 to 18 months. In the best of case you will pay higher taxes then current rates when you begin to withdrawal @ 59 1/2 or you will be forced to surrender the entire asset for the good of the collective and agree to a 3% monthly stipend from goobs trust fund managers, who will be making big time dough on yours and every other suckers what seems to goob as a paltry bag of shells. It is already in the planning stages, consult the Federal Register Feb 2010. I will admit that it takes courage to admit that the system is melting down, though once you are willing to admit that not only could it happen, but it is happening as we write, then the rest is easy. Stack! till its backed, don't break your mama's back.
You are unique.
Thanks for that. Subjecting your company to maturity mismatch is akin to gambling.
GE was doing it and got the Fed to bail them out. While GE's bet was for their loan portfolio, the underlying rookie error remain largely the same. I suppose in GE's case they knew they could get the govi to bail them out while collecting large bonuses, paying little tax, and offshoring jobs. A long way since Thomas Edison. Gotta love the oligarchy.
The bummer about Edison was after his Open Source innovation lab he became oligarchy and used government to crush the competition. Some may recall what he did to Tesla ripping him off $50k which back then was a fortune. The abillity to buy government for pittance is the problem.
When your business model is predicated on derivatives to the Nth the initial liquidity influx may work well in your favor, but over time the spread distorts so badly that it becomes difficult to find suckers to cover your fractionalized accounting: this is essentially a sophisticated PONZI and nothing more. Madoff to the Nth with the gov and the SEC providing a semblance of legitimacy can only appear kosher for so long......................who the fuck cares about the coupon rate when the repo rate is thinned out and inverted into a total liability = INSANITY!
Makes me want to crawl under my bed in the foetal position and let the planet careen and shoot off its moorings....
You can't have a bank run when taking out your retirement funds means having to pay a penalty, thus preventing most non-retired from touching their savings. Bank runs are now extinct thanks to 401Ks, IRAs, Roth IRAs, and the like. That said, counter-party risk is not and broker destruction is still a real possibility. IMHO.
I've been following Reggie's posts on ZH for some time. The msm avoids this topic as much as possible since it's extremely alarming.
Reggie Middleton > Reggie Bush
My bet is that some major player(s) has an axe to grind with either MF, its principal(s) or its customer(s). In other words a revenge play Or a play that would help further an interest on the other side of their trade(s) market. Its not so far fetched as you may think, and I know the mentality of the players. Dod eat dog, long standing grudges, jealousy, greed and power all enter into the equation(s).
One aspect we didn't hear much about with regard to Bear and Lehman is who were the players short the firms CDS's. It may be that the firms that called in the collateral were the same firms that had eiither outright or hidden short positions in the firms. In this way they could eliminate a competitor and at the same time reap a windfall fortune on its demise.
More will be revealved as the facts emerge.
WINNING!!!
I just checked my checking account. My $77.20 is still there. Whew!!!
In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding.
This is the principal mechanism in play during a deleveraging, is it not?
Plus, we know that banks borrow short and lend long, and house (assume the risk, and the exposure, and try to profit from) the mismatch, but yes, sometimes you gotta rub people's noses in it before they get it.
I gave it 5*s, because of the previous calls on MF, but my take on it is that they were mainly hoisted by their own petard - the fraud scandals within the US, and their rather public admissions of defrauding their own clients - facilitating the institutional bank run. I think the financing positions on Eu bonds are merely a revelation of the positions most of the other banks hold.
Anyway, many thanks Reggie.
they are all nothing but a cowering pack of conniving jackals, I know this, I used to work for them, they fired my ass 20 years ago because I would not conform and take their phony deals and shit any longer. Now their phony fiat bs is hanging by a thread, and it will eventually find equilibrium beneath the ground floor of the tree of life. take heed people and prepare I say, before you are no longer able to prepare and are forced to remain in the line for their daily ration of goober's gruel.
Bank runs start like the gypsy Roms, they run all over the place in their motor homes. They have no rules and they dance to their own tunes.
Unlike the Roms however bank runs always end up in Tsunamis. And then no amount of Rom bogey man chasing and barricading and irate 'I told you so' wailing will stem the tide of fiat hyperinflation and/or asset defation; we're in the eye of the cyclone and its Charybdis or Scylla time, and you better be a clever fella to thread the needle in your ''hit the road jack" RUN...'cos what you say makes the woman mean; who sings to you "you aint no good, so hit the road jack...you're the great pretender!
"AW, now baby please you don't mean that...AW, NOW BABY PLEASE.
"but it does leave us wondering who exactly those counterparties might have been."
--- Maybe if you could find out who these counterparties are you'll also find the "missing" $900 million.
GS and JPM?
Reggie has it right. See how money, created out of thin air has exploded the worlds financial sector and, it can disappear as if it never existed: Evaporation of Wealth on a Vast Scale: How $Millions - Trillions Can Disappear
It's M(other)F(ucking) Global!!!
Sorry Reg, wrong again. "These are banks now." Nice way of saying "these are governments now." Can always short the euro...but that's about it. If the literally tons of gold start moving "that's from government to government."
Hey, anyone know what Dr. Burry is up to these days?
ES CLARISIMO QUE EL SISTEMA SOLO FUNCIONA APALANCADO... Y ES COMO EL BAILE DE LA SILLA FALTANTE... EN ALGUN MOMENTO...
All the big banks are getting paranoid, and trying to find liquidity to protect themselves. Stocks will certainly be expendable as the ones that "panics first, panic best" attitude prevails. and the herd heads for the door.
no they're not.
I dumped a massive load (of stocks) last week after most of my stuff rose 20-30% in a week or two...sometimes being scared is helpful....there is a reason for "gut feelings."
Did you just go to the sidelines (cash-moneymarket)? The real need at this point is exit the system with what we have left in IRA's, pensions and 401k's. Time is very short before this blows up and we are trapped in a bankrupt system.
Reggie - Thanks for the insights.
Reggie,
You're post are sometimes long, but they're so damn good I can't put them down.
I agree. Stellar work and for years to boot Reggie. Telling the truth while trying to build inclusive communication processes is difficult work. Cheers!
Reggie...Could the repatriation of euros, itself caused by the 'bank recapitalization' part of the recent euro plan (or the 'haircut' part, one step removed) have created the conditions under which the counterparties in effect disappeared?
CC - Where money is free and there is no actual skin in the game, these shits will pull out on a whim. So leaving MF in liquidity hell. At least I think that's part of it.
I wonder if the folks at the TBTF companies and affiliated thieves realize that no help is coming - should the s--t hit the fan for them.
There is no trust in the system either...
Just like in 2008, the trust vanished in a nanosecond of counterparty second-quessing.
Liquidity scramble....places everyone...places please.
Agree, 9/11 was one of those blue sky days where nothing could go wrong and in a couple of seconds....
No rest for the wicked and no peace for the lousy as my grandmother used to say.
I like to use the analogy that the world's banking system is just like a bunch of very drunk drag queens wearing 6 inch heels. When the first one goes down, she's going to take down all the rest in her fall.
I believe you've just insulted drunk drag queens as comparing them to the worlds banking system, shame on you........
People and institutions are getting skittish is right. They are seeing things change day to day and guarantees that where once iron clad aren't anymore (50% reduction on Greek bonds). And now this with MF. They are saying that MF wasn't a big deal, then why in hell did about a third of the Future pit guys and gals couldn't work the floor yesterday. Also Corzine used customer money (they say 700 million but I bet it's more like 1 Billion or more) to shore up positions when he shouldn't have. What nobody is saying is how many more MF's are out there in the US just waiting their turn at the run.
"What nobody is saying is how many more MF's are out there in the US just waiting their turn at the run."
How many more motherfuckers, indeed...
Corzine joins MF a year ago, it goes from a stodgy broker to a 40-1 leverage gambler, what a coinkydink. I wonder who had the other side of his 6 Bil eurobond bets? Could it be Gold-inmy-sacks? As a smokescreen he did all th fancy footwork/logical hedging/short Frenchie bonds.
Why did AIG do 200 Bil of stupid insurance? Did someone infiltrate their City operation? Who had the other side of that stuff?
A gang chooses its mark, infiltrates, loots and vanishes. The club pulled off the biggest one in history...and its still operating!
I like the way you think. I'm with you. However, I think even Gold-inmy-sacks or JPM Chase plus all Central / International banks work for even more powerful / wealthy privateers we often refer to as the financiers / oligarchs. Goldman is just following orders, same as the FED. MF Global was sabotaged, so that the wealth can be funneled to the oligarchs. I have no proof, just relying on logic and patterns so far.
Agree 100% Ranger.
Shadow club, dark pool gang, eyes wide shut maggots [Kubrick film]
Your standard under the rocks, masters of their own little universe.
They will soon meet The MASTER of The Universe............
do you mean
"WHO the MASTAH?!!!
"SHO' NUFF"!!!
Goldman seems to be another of those corps with a "skull & crossbones" corporate culture...those tentacles run deep in various global governments and banks....is there a "once a squid, always a squid" type thing going on? Probably...
i've noticed it in other "dark" corps..."Blackwater, Halliburton" etc...they act on a supra national basis like evil governments in waiting...
was Corzine pulling black ops for GS? In the abscence of regulatory enforcement why the fuck not?
Or was cuzzin' corzine just another run of the mill sociopath of the global "elite"?
http://songsofthegreatdepression.blogspot.com/
And he got a $12 million golden parachute?
And that's a surprise?
Here's to Reggie's health. May he contribute forever.
At least until the tubes are turned off
"They" need to be told, in no uncertain terms, that if they start turning things off that we have paid for ... like utilities infrastructure ... then we will be getting extremely angry with them and will retaliate for such an act of war!! (Just as a naval blockade was considered an act of war in times past).
You have to be psychologically prepared to get VERY angry when they go too far. And when you speak to the mafia, you must speak in a language that they understand.
Ok, so the bets were going badder and the bettor needed more margin, which it ran out of and nobody would lend them so they used customer cash to try to stay afloat.
Nothing particularly new here.
I'm really tired of guys like Reggie, Bruce et al... making 100,000 predictions/year... then crowing about how they "predicted" this or that. It's the oldest, tiredest, most shamless scam in the book, baby. We were all born yesterday here.