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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 this is all so tiring, why don't you stay out of his threads? Spare yourself the wear and tear.
well you could listen in to other financial 'experts' who, unlike Reggie, don't have a clue and always manage to get it wrong
indeed even CNBC's Steve Liesman today was showing how his survey results of Joe Public versus Wall Streets 'finest' on predicting the economy, Fed policy etc that the 'dumb money' was beating the over-paid money bags of WS's clueless tossers in ivory towers ...the penny still hasn't dropped for Steve that he spends all day quoting those morons as 'authoritive' sources (poor Steve!)
and if you still don't like Reggie getting it right you could pick from a large selection of lifes losers, hell knows we're stuffed to overflowing with the crones! Yep there's Paul Krugman (never right at any point since birth), Ben Bernanke (greatest contrarian to reality since his senile Fed predecessor), Barrack Obumma (a Trotsky tosser 200 years behind the curve) or the Financial Times chief economist, Martin Wolf (a completely clueless flip-flopping windbag)
I like to listen to Reggie because he actually does some thorough research before he opens his gob ...you might like to suck on that lollipop for a few months before you next open yours
no research done by me. And even Reggie will admit i'm more right than he is. the secret you ask? "i commune with the dead."
The problem with the dead is all of their thoughts are from the past so they don't know what happens in the present or future. They are dead...not future space aliens. Now if you said future space aliens that would have made sense.
Fuck Steve Jobs....Reggie should be the next guy nominated for sainthood. Alive, of course. No more banking analysis needed. The big boys are all intertwined, and insolvent, waiting for that little push to send them over the edge. And even Ben can't print enough to cover the losses. Prepare yourselves accordingly.
No fucking Steve Jobs, he did something smooth, cool, productive and cutting-edge beautiful (Apple). Fuck Googles Steve Schneider if you must, he's just an Apple-reject also-ran afterall
In fact it looks like hero Jobs is going to roast zero Schneider from the grave with Siri, Apples cool, smooth, faultlessly working voice recognition cutting-edge software
Siri was launched on the understated named new iPhone 4S ...did the 'S' stand for Steve or Siri ?
Reggie may not have noticed it, to be fair nobody on the planet has noticed it, because Apple take you apart quietly, smoothly and with little fan fare ...they just cooly take the space away
Siri is going fry Google just as they cooly microwaved global giants Sony, Nokia, Motorola and Microshite
Siri is type-pad Google without a type-pad, without even a touchscreen ...Siri is your personal secretary to talk to, to search for you, and more...
Reg, we're in the software technology space, not the financial numbers space... this is about inspiration not perspiration
What you miss in the financial modelling is Apples consummate skill and ability to change the space ...what should put the shits up the stupid doubters is Apples incredible proven record to tie consumer centric innovation with pin sharp strategy and execution. That's how they take apart big buggers with such stunning ease. Google will never know what hit them before they're left gasping in Apples wake
Bro i'm not here to say 'I told you so"... nope I'm just going to point it out and rub it in. Not as a matter of logic (which is worthless) nor as a matter of financial maths (which are just tape measures of the world, not human ability to change the world)
Android : copy Apple by numbers
Siri : redefine and reshape Google search 2 generations ahead
Google toast. Apple crumpet . . . sorry Bro!
Siri is a rip off of capabilities that Android has had for some time. Fuck apple (little a).
By the way good job Reg. Careful though of saying I told you so, so many times recently, you are still human. Nonetheless great job and analysis.
Android is where compared to Siri ?
A "rip off of (Android) capabilities" ...er, capabilities (in the future tence yes?) to do what better than Siri precisely?
Fuck Google ....no i'll leave it to Siri actually ...Goodbye Goofball, join also-rans Microshite on the dumb heap of global brands sliced and diced by Apple
Let's be honest. Apple's job was to repackage existing technologies in a way
the average Art student could understand. X windows too complicated?
No problem, allow Apple to insulate you from the vagaries of window management
with a coherant and consistent user interface. Don't worry about incompatible
3rd party hardware because there isn't going to be any. Just as Pascal was
a half assed ripoff of C, just as Lilith was a ripoff of X windows, just as Linux is a ripoff
of Unix..oh wait..it's a clone...just as Android is Linux/GNU with Dalvik JIT
crap smeared on top...just as Google is just a front for the Nazi/CIA/NSA's massive
IAO database program...yes I said IAO.... just as Siri is your conceptual Indian tantric
sex girl slave...
Whatever. It's all crap. That new T-Pain microphone toy is gonna be hot, I tell you.
would the MF Global or MF Google tosser that junked me like to put up or shut up?
...cat got your tongue is your Android too clunky and slow to type an argument before nappy-changing time
I hear what your saying about Jobs being a visionary. Consider who bought out whom. So Steve had to compromise if he wanted his visions fully implemented. When the world is running Fascists and now oligarchs get fed to fuel the fire no company or individual is safe. Fascism destroys competition and tech favorite of governments is Google.
Technology as a tool is helping us all think faster but as investment goes I would pick Google over other players if I was considering longevity. I don't like providing political economic analysis over fundentals.
However, none of us should have to calculate fascism in our investment choices but it is what it is. The middle ground of how and where to invest for yourself or society is the most difficult place to be right now. Good luck.
Raging Debate - do detail where you thnk "technology is a tool helping us think faster" ?
Tech doesn't help us think faster, tech is trying to speed up to catch up with human thought
I'm curious. Will it be necessary to spend hours "training" the software to recognize individual voices?
Last time I tried voice recogniton software, I gave up after spending too much time reading and then correcting the mistakes made by the software in the training of it to recognize my speech.
from what i hear Siri is very good, including very able to translate our quirky dialects/accents ... Apple only do very good (unlike their slurring stumbling competitors)
In my neck of the woods, SIRI is shit.
We're talking Asia here, so its no small beer.
It cant understand the accents doesnt have the databases.
It's pretty overlay, that's overmarketed and at least for me grossly underdelivers.
Yes lets "talk Asia" ...Google are on the slide there, Apple on the up (ever expanding sales and retail shops)
"small beer" to you but that's because you can neither count nor grow in expanding markets
Nor is Apple "pretty overlay" you pea brained analyst. It is function that functions faultlessly (unlike their inept bumbling also-ran copy-cat competitors)
In order for you arsewipes to mount a decent attack on Apple, which you've failed miserably to do in decades, you idiots need some competitors that does something, anything, better
Keep scraping the bottom of the barrel for shit guys, muck raking is all you shit stirrers are good for
It's also as useless as lady gaga's dick for Irish accents.
...and Android (iPhone copy) is as useless as Lady Gaga's arse ring ...what's your point, slurring Irish drunks hard to understand? ...speak to their wives
That's a design feature, not a flaw!
You just have to hold your mouth differently while talking.
So you go on this long rant and you don't even know?
You do like to post pro-apple comments frequently. I usually bash them but not for Apple being sucky just their zombie fanatics being so.
I am not a zombie fanatic of anyone or anything... I praise Reggie regularly but if i think he's wrong on something (his pro-Google, anti-Apple view) I don't pull my punches
all i see in the Apple sphere is a brilliant company leading the consumer tech-space with consumate class and having a bunch of snivelling toe-rags and inept losers do as much muck-raking as possible to take the focus away from what utter shite they are
in order for your "Pro Apple" critique to hold water you need to ask why wouldn't anybody be pro the best consumer tech company on the planet. Thank fuck for Apple because their competitiors are a tragedy
Not always is the issue with what is said but rather how
Oh a fashion victim... you put style over content ...well at least you're happy standing there looking like a plonker with nothing to say
Your kind of a dick Zero Govt but thumbs up for hillarity!
You're kind of a twat too mate... picking Google for "longevity" should see you unravel nicely before my very eyes
...and to all the other junkers (Google back-office staff) ditto fuktards
Apples Siri will eat Google for breakfast ...watch this space
Wow.
Reggie's gone minimalist ;-)
an no TARP or bailouts this time, thats done, Europe may fall for it, but we wont.
But, but, but my charts say otherwise????
Then you should pay attention to them - to your own chart be true. Prove your love by going long banks.
Fantastical. Gotta get me a copy of that handbook so I know what you're talking about. Sounds BRILLIANT! as usual, thanks. This sort of carnage is not big enough to bring down the cartel, only make it stronger, no? Did MF have a target on their back and this liquidity squeeze was deliberate? Were they covering their short Euro bets last Thursday?
I hate asking questions that could easily net a "RTFM" response ... but ... how does ZIRP cause this outcome? I just don't get my head around it, I'm not connecting some dots, or something.
Thanks,
Cooter
For a lender such as a bank, interest rate revenues are their primary sources of revenue. Falling rates mean less income on the same amount of loans in the future, so they either have to grow reserves in order to maintain revenue, or survive on lower revenues. Add in refis and it gets worse, as a more profitable revenue stream is either lost to a competitor, or replaced with a smaller stream. Then there's the carry-trade that finances it, which depends on a steep yield curve. Thing is, ZIRP is starting to flatten out the long end as the financial world runs down Exeter's Pyramid to the "safety" of Treasurys as the whole world comes unglued (Mises' crack-up boom).
Simply put, interest rates should be a market phenomenon to properly price money over time based upon demand for all things, as it balances unlimited demand vs. scarcity better than any central planner could ever dream of. But then we wouldn't 'need' the central planners...
Forget it. It this guy could write coherent sentences he might be worth bothering with.
Translation -- I predicted it. Buy my newsletter.
I must be incoherent because I understood it, but then again, I'm a Space Cadet.
Mkkby, you are mistaken Reggie has detected one big story after another. I don't follow all the intricacies, but the kernel of the case is intriguing: today's bank runs result from cash calls triggered by fearful counterparties. Secondly, such collateral calls can strike any institution. Third, we have entered a dangerous phase when such calls are highly probable. Am I missing something?
Mkkby - Tech managers that get involved with economics do far better on video then the written word. It's why I don't write many articles. As a new specialist class to meet demand for news/facts etc. I believe this class is better off making utilities for content, raising funds and then pontificating after to talk one's own book.
I see either skilled or unskilled writers setting up advisory businesses for investment consulting. While this may provide access to important people, it doesn't meet demand because demand itself is very volatile.
In other words, this class may be better off going for low-hanging fruit meeting demand for social media utilities. Working upward on the pryamid to be considered expert or leadership made sense fifty years ago but now we're operating and finishing transitioning into 4d models like Facebook which is more an aggregate model. Attempting otherwise is 16 hours a day to finally have that older, wealthy person tell you they won't invest outside of the .667 model (unfinished pyramid).
Just do the 4d model and sell them on traffic which is monetizeable real-estate and easy for all to understand. If you even suggest going outside the box in a phase of transition and suggest advice about the risks of going with devil known, some Gen X peers bug out. Don't waste your time. Be a leader and don't ask for permission then you'll get the dough. The good news is since the world is so dark, being a brighter bulb and being motivated does help on the income side of the equation.
Thanks for letting me share these thoughts.
Interesting. Are you a consultant for "new media" solutions?
Can you explain what ".667 model (unfinished pyramid)" is?
Thx
Yes Stax, I own some social media assets but if I am honest I should say it is at the consulting stage.
As for your specific question, economic distribution can now be mapped with topography and physics using some simple math.
The net out is the financial system, literal buildings, markets all are evolutionary tools that reflect our evolution. A pyramid can be viewed in geometric numbers and visually reflected on paper, brick, digits or whatever else you could think of. The numbers 666 are a triangle. Oh my God its revelations! Umm no. The East has understood the metric system for a long time. Or talk to the Indians or Middle Eastern people. Religious mythology almost always reflects discussion of creation. Math and religions are linked but that is another story.
Now the numbers 6667 mean that we're nearing an accelerated completion of progress of using 4d tools. Dimensions? Yes, physics again. Facebook is a 4d tool or you could say it is a 4444 model as in box formation.
To create a plan to solve the world paradoxic problems (5d) one would code two mathematical equations. But It is getting deep and I promised a net out. Call me if you want at 603-953-3388 but please be advised Zero Hedge gets their 20% advertising network vig. Don't you just love cliffhangers?
Jason
OMG, that was the biggest wall of shit I have seen since I had to sit in on a sales meeting where "our system did that".
Good luck feeding your family in ten years; I would short your if there were an index.
Don't mean to be an ass; best of luck friend. I have seen worse pull down serious bank. My problem is I have to deliver results; platitudes aren't products.
Regards,
Cooter
Watch Reggie's vid on RT about same...I think it was posted here earlier. He 'splains quite well.
Here ya go: http://www.zerohedge.com/contributed/ironic-prophetic-nature-mf-global-bankruptcy-filing-and-its-potential-ramifications-lehm
Thank you. Been crazy lately for me and I just missed this. I can't YouTube from work, so some gems just get past me in the 24hr hustle.
Google only works when you know what you want!
I will share in time with my small readership.
Regards,
Cooter