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I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
I'm going to appear on the Max Kesier Show Tuesday. I noticed that there were some questions being asked on his site concerning the topic du jour, which is the condition of the French banking system, and BNP Paribas in particular. I will take this space and to answer the questions in detail, and will address some on the air as well, time permitting.
Reggie talks a lot about the system crashing, yet advocates taking profits from trades in the very paper that will die with the system. How does Reggie see the endgame? What does he use as a store of value?
The endgame is difficult to see, but if I had to hazard a guess, there is a strong chance the US may end up on top again. This is a topic that requires an entire show, if not a series of shows, in and of itself. The question of a store of value is a tricky one in an environment where nearly everything is at risk of an explosive devaluation. For instance, gold is a popular trade now, but even if gold maintains its relative value to fiat currencies or appreciates - and is not in an bubble, if the states are truly serious about cramming fiat down your throat, you will have your gold forcibly repriced, taxed to hell, or confiscated in some form or fashion anyway. If the government truly doesn't want the reserve trading instrument to be gold, there's a strong chance it will not be gold - at least as long as said government is still in power. Thus, if the gains to be made in a fiat currency that may collapse outrun the pace of said collapse, you are still ahead of the game - assuming that fiat currency is still liquid and accepted as legal tender.
My last comments on Max’s show were in answer to what I thought the Fed’s endgame was. At the time, it was difficult to see for I saw this country on an unsustainable path. I did theorize that the triumvirate, the global economic powers three, the US/China/EU were simply kicking the can down the road until one of the others simply blew up or imploded. Such an event would force capital flight from that economic machine into the other two, enabling the kick the can down the road game to go on much farther. Well, it appears that I may have been on to something, for Greece is nearly universally accepted as a default waiting to happen with yields reaching 150%, and now all of the periphery is on life support from the ECB, not one state, some states, but all of them! This has served to drive US treasury yields straight down, flirting with negative rates again… Yields have plummeted towards negative territory despite an explicit downgrade from one of the major ratings agencies. As I said, the capital flight of fright trade that basically throws the middle finger up at the ratings agencies and their opinions. The US is in bad shape. The EU is in a worse predicament for the near to medium term, and China is an inflationary fireball teetering on a deflationary collapse (once the massive NPAs garnered from bank lending and fraud run amok get recognized). The US may end up on top simply by being the best of a triumvirate of very bad situations! Go to the 20:55 marker in this previous Max Keiser interview for more on this view at the beginning of the year, and let me know if it makes sense given 20/20 hindsight...
If BNP Paribas does see a bank run what impact will this have on the European and global banking markets? Will it spark contagion and which entities are most at risk? If so, are there measures that can contain it.
BNP Paribas is large enough to spark a chain reaction throughout the European banking system, thus causing a domino effect that can definitely reach the financial shores of the US banking system. The entities that are most at risk are the very same entities that are:
- Still overleveraged
- Sitting on misvalued, highly depreciated, and hard to move toxic assets
- Materially exposed to BNP Paribas through counterparty relationships and lenders for:
- Depositors are likely to pull short term deposits from the bank leaving it vulnerable to an exaggerated short term liquidity crisis;
- Counterparties will then rush to be the first out of the door and those who don’t may very well increase collateral requirements and margin calls
- 1 & 2 above can combine to exacerbate the capital hole created realized by coming clean on the sovereign debt values held on the banks’ books. This can be caused by the default of Greece alone, although we all know Greece will not be alone if or when it does default.
- A default by Greece will devalue at best, and likely cause serial defaults in the periphery. Just imagine if Greece is perceived to gain a benefit by defaulting (which it will benefit over extreme austerity vs debt destruction), why would the voting populace of the other periphery states, ex. Ireland and Portugal, not force a default? The banking system will literally collapse from the recognition of the gaping hole that is already there.
Here's how it will play out if contagion does spark, as excerpted from the Saturday, 23 July 2011 post, 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 Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).
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.
Let's assume a small, but significant portion of depositors remove their money, putting some funding stress on the bank. Counterparties take notice and either pull funding or raise collateral requirements, which compound the problem. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":
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 borne by institutional 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!
This house of cards sits atop an even more precarious peak. You see, the spark for this potential combustion is already alight, the action is simply awaiting for someone to turn and face the fire. That fire just so happens to be the carrying of massively devalued bonds on bank's books as risk free assets at par (or close to it). There is absolutely no way banks can even recognize the losses on the books now without massive collapse. Just imagine the situation when Greece actually does default!
For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same:
- a research note to subscribers,
The Inevitability of Another Bank Crisis, - followed by blog posts on the same, see Is Another Banking Crisis Inevitable?, as excerpted...
Last week, I made available for free download models with which my followers could actually calculate BNP's dilemma, see The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download. The aforementioned article should be opened only after reading Research: BoomBust BNP Paribas? in order to gain the proper background thought that went into developing the models. Below is output from the free public model that I released with some realistic numbers put in for an "adverse" case scenario.
I'm sure many of you are saying, "So exactly how realistic are those haircuts?" Well, let's take a look at countries who were in similar situations in the past to see how their bonds and bond investors fared, as excerpted from A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina:
Price of the bond that went under restructuring and was exchanged for the Par bond in 2005
Price of the bond that went under restructuring and was exchanged for the Discount bond
To put this into perspective in terms of profit and loss...
One should keep these figures in mind, for in the blog post "How Greece Killed Its Own Banks!"I ran through a much, much more optimistic scenario that wiped out ALL of the equity of the big Greek banks. Remember, the Greek government stuffed these banks to the gills with Greek bonds in order to created the perception of a market for them. As excerpted...
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)…
The same hypothetical leveraged positions expressed as a percentage gain or loss…
Now, let's add all of this up:
- the depositors who can break the bank overnight,
- the counterparties that can also break the bank overnight, and
- the toxic bonds bought with leverage and currently priced to perfection which should serve as the impetus for implosion...
What do these ingredience combined to make? A pretty nasty recipe!
I like Reggie. Can you ask him which is the best protest against the bankers:
1. Organise a meet up on Wall Street, with tents and guitars in tow.
2. Every “Joe Donut” (as Stacy puts it) to withdraw every cent they can from their
Guitars will only work if you enjoy the music enough to forget the rest of the problems. Deposit withdrawal will significantly quicken the pace of banks being forced to recognize the true value of the stuff on their books though, for it will take away the mom and pop funding that they have grown used to employing to kick the can down the road ever so farther.
For those who haven't read the piece, Research: BoomBust BNP Paribas?, please do. It excerpts several pages of our BNP research which lays out the bank run scenario quite clearly. On top of that, BNP has other problems besides that plain old Bear/Lehman liquidity thing. I outline some of those for you in my next post. In the mean time, stay tuned, stay alert, and stay subscribed to BoomBustBlog.
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Nate what is the difference between 1million $1 dollar credit card purchases and 50 purchases of $20,000?
It's okay to fly in the face of common wisdom; but don't fly in any small planes. The French bankers are mobbed up; and nobody will ever understand what went wrong.
Reg is spot on. I see it the same way for a long time. Whoever implodes first the other currencies will be flooded as a safe haven. I think the USA has one advantage the other two do not, and that is we are the world reserve currency otherwise I would say we would implode first. But you never know.
Reggie usually I find myself agreeing, and learning, from you.
But your US bias has me unnerved.
Yes, China has huge problems. Yep, shit will hit the fan.
But, lucky for them, we need the shit they produce.
So, we may come out on top, but still find out we can't afford aspirin, batteries, lightbulbs and toilet paper. And we find it is all price pegged to China, not Benny.
Who's going to feel like a winner then?
"But, lucky for them, we need the shit they produce."
The US has millions of illegal aliens who are (still) Mexicans. They did not come here overnight, but in ones and twos, in a few dozens across the border and via vans with tinted windows over many years. And now they are here and we have to deal with them, and their new children. It would be very disruptive to throw them all out overnight. However, a growing number of states has made it very inconvenient for them to find a job and to reside there. And now they are leaving, in ones and twos. At first, you don't notice there are fewer of them. Then one day, not a single one shows up at Home Depot looking for day labor work. And then in some areas, they are almost entirely gone.
The same is true for what US manufacturing capacity went to China. So many hot-shot CEOs and CFOs found out the hard way that just because you can hire semi-skilled Chinese labor for $130/month, that doesn't mean that when you build a new factory in China that your products are going to really cost enough less to make up for all the grief it costs. This is especially true when you find out that some ex-Chinese employees are now making a knock-off of your product and using copies of your own molds and tooling. And then you find out about trying to get your contract enforced in a People's Court.
When taken in its totality, going to China was not all that great an idea. Now sometimes the next plant is being built in the US. Slowly some of this capacity is coming back. In ones and twos. It would come back a lot faster if we did not face ObamaCare(tm), and such regulator uncertainty. Not to mention SOX, the SEC and other madness. I have hope that as the Era of Liberal Madness fades away, those who take their place will have a bit more sanity and can repair the damage.
we literally DON'T need the -Shit- (& it is), that China produces.
No pain, no gain.
Let's get our manufacturing capacity back.
Very very simple; very straightforward; cut off Chinese imports; period. zero. cold-turkey. nada. nuffink. Result; investment and new businesses; we're quite capable of making our own shoes and t-shirts; the only reason we don't is that "free trade" was purchased by some Corporatists to improve their profits by off-shoring; there is nothing inevitable about it; we did it, and we can un-do it.
I own a manufacturing business.
I also have done extensive research on our everyday necessities that are now nearly 100% made in China.
Do you have ANY idea how long it would take to get us back to where we were in 1999?
Do you have ANY idea of how many US businesses (smallish ones, not the big dogs) have been shut down over BS in the past year?
Do you have ANY idea of how hard it will be for a food company to open its doors here?
Wow, hubris runs brains everywhere I guess.
Once the dollar falls you are going to see the folly of your thinking, I have absolutely no doubts at all.
We gifted them the business, gifted them the knowhow, trained their experts and then sold them our equipment below cost.
Someday we (might) get manufacturing back. But it won't be someday soon and TSHTF long before it will even be possible.
Ponzi on.
Excellent post Reggie. I think you are better at bank analysis than stock trade timing!
Good comments Reg. The can has been kicked sky high.......it will hit the ground dead can bounce.
"although we all know Greece will not be alone if or when it does default."
Who is "we" ?
How are those Apple puts working for you, you got awfully quiet about that one, you sure were chirping like a bird with your I told you so posts when it showed a little weakness. With the markets slammed the past month and a half and APPL setting all time highs, it is time for you to be a man and give a mea culpa post on your AAPL blunder.
people will never demand ownership of their own society by turning the tables of capitol on the banks and polititians cuz thier told to do so would destroy civilization... so train the plebs to be grateful i guess
.
and an endless global war on terror for every one
I'll look forward to it Reggie and those mellifluous tones of yours!
DavidC
Currency union. Failure to fix Greece must destroy the currency union by definition. We're well past French banks now.
I still have to hear or read a sound & convincing argument why any debt/banking problems would "destroy the currency union by definition".
This seems to have become an article of faith in part of the financial press.
Or perhaps I have to invert the issue to fit the Financial Casino Terminology: Does the exit of Greece from the EuroZone fulfill this "Destruction" argument? Does it make you money from your bet? If yes, then of course you are right.
Because the countries cannot remain united while some of them pay the on-going welfare check for Greece. Greece has been a basket case for the entire twentieth century; the only reason it's in the news is the stupid, emotionally driven, decision to include it in the Euro-Confederation. Greece used to devalue every 18-20years; and just carryon. Now there's a choice between pay their bills for them; forever; or remove them from the zone. The union will only be a "little bit" destroyed if this is done rationally; but people are not rational and will probably pursue impossible "solutions" until it goes ":flop".
So far the solvent economies have been bailing out the insolvent economies. But if you add up all the debt of all the insolvent economies, it would take more money than there is in the world to bail out all of them.
At some point the solvent economies will have to take on a massive amount of debt, greater than their GDP, in order to bail out the insolvent economies. Or let them go to hell.
So if all the economies step away from the Euro and the Union and go back to their own currencies the union is shot.
It is a simple matter of mathematics. It is impossible for Europe to go on the way it has for the last 30 years without a crash. And it is too late for them to get their house in order and pay back all the money they owe. It is just a question of how long they can keep kiting checks and bailing each other out before the whole racket blows sky high.
I would doubt a country would choose to leave and there is no way of kicking them out so the most likely destruction is from capital flight due to the failure of the governments and banks. Remember all investment is made on the basis of confidence, when there is no confidence there is no investment whether it be a bank or country or currency. To give an illustration, would you invest your money in present day Somalia?
Reggie,
This probably started with Cantona last year:
http://www.youtube.com/watch?v=loAkxdji-G4
Now the fact that BNP & SocGen & CreditAgri are all French banks shouldn't really surprise anyone.
I'm a Spurs fan but what a guy!!!
"gold is a popular trade now, but even if gold maintains its relative value to fiat currencies or appreciates - and is not in an bubble, if the states are truly serious about cramming fiat down your throat, you will have your gold forcibly repriced, taxed to hell, or confiscated in some form or fashion anyway"
Wishful thinking. You're obviously a fiat hit-man but imo the days of paper-toilet monies are over.
Imagine China or India or Russia opening gold buying outlets in each and every embassy they have all over the world. Us westerners will face confiscation by our gov or selling at a good price to a foreign nation. Checkmate, Reggie mate!
"there is a strong chance the US may end up on top again"
You mean belly-up? I "admire" your persistent efforts to destroy Europe and the Euro but can you seriously imagine that the U.S. with their 200 000 billion dollars in debt (google Myret Zaki) can survive this mess?
Put your cock back in your trousers and throw the paper towel in the bin. Financial onanism is over!
"...you will have your gold forcibly repriced, taxed to hell, or confiscated in some form or fashion anyway."
Could be difficult to tax and confiscate what's quietly buried in a hole in the backyard.
Burying your gold won't stop them from re-valuing/repricing it if it comes to that.
Exactly. The 1933 confiscation didn't work too well, as evidenced by all the pre-1933 US bullion coins on the market today. It seems that millions and millions of them avoided confiscation and avoided any lose of value.
Sell you fiat paper. Save gold.
It seems that millions and millions of them avoided confiscation and avoided any lose of value.
While very likely many where NOT turned in, the vast majority of US Gold legal tender(not bullion) coins where repatriated from Europeans.
They bought and held millions,for their own protection, and many were taken there to avoid the orders.
When they became legal again, and prices had gone UP Well over face value, they were repatriated.
Congrats on being on with Max!
Break a Leg Reggie!
New item in your series of interest:
Working Paper No. 11/218: Growth Spillover Dynamics from Crisis to Recovery Author/Editor: Poirson, Hélène ; Weber, Sebastian Summary: Can positive growth shocks from the faster-growing countries in Europe spill over to the slower growing countries, providing useful tailwinds to their recovery process? This study investigates the potential relevance of growth spillovers in the context of the crisis and the recovery process. Based on a VAR framework, our analysis suggests that the U.S. and Japan remain the key source of growth spillovers in this recovery, with France also playing an important role for the European crisis countries. Notwithstanding the current export-led cyclical upswing, Germany generates relatively small outward spillovers compared to other systemic countries, but likely plays a key role in transmitting and amplifying external growth shocks to the rest of Europe given its more direct exposure to foreign shocks compared to other European countries. Positive spillovers from Spain were important prior to the 2008 - 09 crisis, however Spain is generating negative spillovers in this recovery due to a depressed domestic demand. Negative spillovers from the European crisis countries appear limited, consistent with their modest size.
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25249.0
Keiser is wrong about credit cards.
He is right that money is loaned into existence (ie. deposit and loan at banks are created at exactly same time, unlike conventional economics texts that state the deposit happens first). But using a credit card is either a)against ones own money in the bank (debit) or b)american express, visa, etc. which unless the buyer of coffee has zero money in their account and needs to take out a loan to pay back the credit card co., does not create new credit. Hence vast majority of credit card purchases of coffee do not increase the money supply (now if you bought a new car on credit card that would be different story)
Wrong. Visa, mastercard create a loan and leverage it for how ever short a time + prevent cash payers from paying a lower price, forceing money creation.
So even if you have the money in an account, its the creation at the point of sale thats inflates the money supply.
Even cash payers add to the money supply if that business accept credit, because in the end its counted as credit sales and banks loan, IRS taxes and money is created on those credit sale.
The only way to stop that cycle is for the business to only accept cash payments.
I did not know that. Thanks
(Though clearly that mechanism is not really responsible for higher coffee prices...)
Global CONtagion is already underway. The US is 10X worse off than the Eurozone.
The entire global Ponzi is none other than 'Global ENRONization' with multiple sets of books- cooked- residing in off-shore shells full of liabilities.
lol, Max "you had a strap on?!"
I liked Reggie better when he wasn't so full of himself.
His modesty and kickass analysis were appealing.
Now he spends most of his time trying to tell us how awesome he is.
Reggie: You're good. Damn good. Now get back to what you do best. ( Bragging isn't on that list. )
True...but you just have to put with it. Genuis level has it's quirks.