About 48 hours ago, I was part and parcel to a documentary on rating
agencies and their effectiveness (or lack thereof) in ascertaining risk
in investment opportunities on a timely basis. IT was an interesting
interview in my (see pic of the perpetually smiling pundit in his
office, to the left) about an interesting topic that was heavy in the
headlines during the subprime debacle days, but a slap on the wrist from
congress and a couple of years of disinformation does wonders for the
American short term memory. Of course, the Europeans may still be a
little salty, but likely for the wrong reasons. After all, EU officials
actually believe the rating agencies are being too tough on the faux
sovereign states of the want to be union. The fact of the matter is that
rating agencies are STILL moving in slow motion and using kids gloves,
as was articulated in the piece Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? In
said piece, I included excerpts from the presentation given to a large
banking audience in Amsterdam that literally proved to be a template of
rating agency downgrades and negative watches - just 7 to 12 months in
Pray tell, how can a small time entrepreneurial investor
and blogger consistently outrun ALL THREE of the rating agencies and
virtually of sell side Wall Street over a period of nearly 5 years?
Reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
Rhetoric question for those in the know. Now, let's turn to the front page headlines in the MSM, carried by both:
and Bloomberg: Biggest French Banks’ Ratings Cut by Moody’s -as excerpted...
BNP Paribas SA (BNP), Societe Generale SA and Credit Agricole SA (ACA)
had their credit ratings cut by Moody’s Investors Service, which cited
funding constraints and deteriorating economic conditions amid Europe’s
Moody’s cut the long-term debt ratings for BNP Paribas and Credit Agricole by one level to Aa3, the fourth-highest investment grade. Societe Generale’s rating was cut to A1, the fifth highest. Moody’s
also cut the standalone assessments of financial strength of the three
banks, while saying there’s a “very high” chance they will get state
support if needed.
funding conditions have deteriorated significantly,” the ratings company
said in a statement. The likelihood that they “will face further
funding pressures has risen in line with the worsening European debt
The banks’ woes put at risk France’s
AAA rating. Standard & Poor’s warned this week that the country’s
top credit rating risks being downgraded, citing banks’ funding
constraints among the reasons. French banks have been forced to borrow
from the European Central Bank as their access to U.S. money-market funds has dried up on concerns about their holdings of European debt.
“The stress comes from the closing of the dollar taps, which constitute a part of the banks’ needs,” said Francois Chaulet, who helps manage 250 million euros ($333 million) at Montsegur Finance and owns the three banks’ shares.
$681 billion as of June, French banks have the highest holdings of
public and private debt in the five crisis-hit countries of Greece, Ireland, Italy, Spain and Portugal, according to data from the Bank for International Settlements.
But.... Wait a minute! Didn't a blog warn of liquidity and capital issues in the French banks in EXPLICIT detail about... Uhmm.... SIX MONTHS AGO? To wit...
Thursday, 28 July 2011 The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
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.
made the effort that the rating agencies are trying to drive home, that
France itself is very susceptible to contagion through its banks. There
go those agencies again, running up to a smoldering pile of ashes with a
fire hose to spray profusely yet wondering why they couldn't save the
Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer
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. See also The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
I then provided a deep dive of the French bank we feel is most at risk. Let it be known that every banke remotely referenced by this research has been halved (at a mininal) in share price!
- French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
- Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers
Okay, back to our regularly schedule MSM...
BNP Paribas doesn’t need new capital, spokeswoman Carine Lauru reiterated. Societe Generale (GLE)
said it was “surprised” by the Moody’s decision, adding that it was
“confident” it can meet regulatory capital goals through its own means.
Credit Agricole spokesman Denis Marquet declined to comment.
Paribas, France’s biggest bank, slid as much as 4.9 percent before
rebounding 2.7 percent to 31.95 euros as of 3:03 a.m. in Paris. Societe
Generale, the No. 2 bank, fell as much as 4.9 percent and was trading
1.5 percent lower at 18.84 euros. Credit Agricole, which tumbled as much
as 4.5 percent, was up 3.1 percent to 4.75 euros.
today, BNP Paribas had fallen 35 percent this year, Societe Generale 53
percent and Credit Agricole 52 percent. That compares with a 33 percent
drop in the 46-company Bloomberg Europe Banks and Financial Services Index.
The European Banking Authority said yesterday that France’s four
largest lenders have a 7.3 billion-euro shortfall in capital, less than
its 8.8 billion-euro estimate in October. The new capital is needed to
reach a 9 percent core Tier 1 capital ratio by mid-2012, after marking
their sovereign bonds to market, it said.
downgrade today follows reviews the ratings company began in June and
extended in September, when it cut the long-term credit ratings of
Credit Agricole and Societe Generale while leaving BNP Paribas
unchanged. Standard & Poor’s
placed ratings of European banks, including BNP Paribas, Societe
Generale, Groupe BPCE and Credit Agricole, on watch Dec. 7 for a
possible downgrade amid a similar review of 15 countries in the region.
banks’ liquidity woes have intensified as their U.S money-market fund
access has dried up. The eight largest prime U.S. money-market mutual
funds cut holdings in French banks by 68 percent in November, shifting
investments to Swiss, Swedish, Canadian and Japanese banks.
bank holdings declined by $11.7 billion to $5.56 billion, according to
an analysis of fund disclosures by the Bloomberg Risk newsletter. The
eight funds have reduced French bank debt by $76.8 billion in the past
The decline in short-term lending by U.S.
funds has forced French banks to increase their borrowing from ECB more
than four-fold over the last four months.
Hmmm.... I heard of
this dilemma before. Let me think. It's right on the tip of my tongue.
Oh yeah! That's right, I remember now. It was a reserarch report that I
issued to my subscribers 6 whole months ago and described in the public
portion of BoomBustBlog for all to read. It was aptly titled...
is a chart excerpted from our most recent work showing the
asset/liability funding mismatch of a bank detailed within the report.
The actual name of the bank is not at issue here. What is at issue is
what situation this bank has found itself in and why it is in said
situation after both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM!
Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).
problem then is the same as the European problem now, leveraging up to
buy assets that have dropped precipitously in value and then lying about
it until you cannot lie anymore. You see, the lies work on everybody
but your counterparties - who actually want to see cash!
this European bank as a proxy for Bear Stearns in January of 2008, the
tall stalk represents the liabilities behind Bear's illiquid level 2 and
level 3 assets (including the ill fated mortgage products). Equity is
destroyed as the assets leveraged through the use of these liabilities
are nearly halved in value, leaving mostly liabilities. The maroon stalk
represents the extreme risk displayed in the first chart in this
missive, and that is the excessive reliance on very short term
liabilities to fund very long term and illiquid assets that have
depreciated in price. Wait, there's more!
The green represents the
unseen canary in the coal mine, and the reason why Bear Stearns and
Lehman ultimately collapsed. 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 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
sure many of you may be asking yourselves, "Well, how likely is this
counterparty run to happen today? You know, with the full, unbridled
printing press power of the ECB, and all..." Well, don't bet the farm on
overconfidence. The risk of a capital haircut for European banks with
exposure to sovereign debt of fiscally challenged nations is inevitable.
A more important concern appears to be the threat of short-term
liquidity and funding difficulties for European banks stemming from said
haircuts. This is the one thing that holds the entire European banking
sector hostage, yet it is also the one thing that the Europeans refuse
to stress test for (twice), thus removing any remaining shred of
credibility from European bank stress tests. As I have stated many time
before, Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run!
biggest European banks receive an average of US$64bn funding through
the U.S. money market, money market that is quite gun shy of bank
collapse, and for good reason. Signs of excess stress perceived in the
US combined with the conservative nature of US money market funds
(post-Lehman debacle) may very well lead to a US led run on these banks.
If the panic doesn’t stem from the US, it could come (or arguably is coming), from the other side of the pond. The Telegraph reports: UK banks abandon eurozone over Greek default fears
banks have pulled billions of pounds of funding from the euro zone as
fears grow about the impact of a “Lehman-style” event connected to a
have revealed that leading banks, including Barclays and Standard
Chartered, have radically reduced the amount of unsecured lending they
are prepared to make available to euro zone banks, raising the prospect
of a new credit crunch for the European banking system.
Chartered is understood to have withdrawn tens of billions of pounds
from the euro zone inter-bank lending market in recent months and cut
its overall exposure by two-thirds in the past few weeks as it has
become increasingly worried about the finances of other European banks.
has also cut its exposure in recent months as senior managers have
become increasingly concerned about developments among banks with large
exposures to the troubled European countries Greece, Ireland, Spain,
Italy and Portugal.
In its interim management statement,
published in April, Barclays reported a wholesale exposure to Spain of
£6.4bn, compared with £7.2bn last June, while its exposure to Italy has
fallen by more than £100m.
One source said it was
“inevitable” that British banks would look to minimise their potential
losses in the event the euro zone crisis were to get worse. “Everyone
wants to ensure that they are not badly affected by the crisis,” said
one bank executive.
Moves by stronger banks to
cut back their lending to weaker banks is reminiscent of the build-up to
the financial crisis in 2008, when the refusal of banks to lend to one
another led to a seizing-up of the markets that eventually led to the
collapse of several major banks and taxpayer bail-outs of many more.
Make no mistake - modern day bank runs are now caused by institutions!
As for BNP management's proclamations that all is find in Franco bankingville...
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 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
- Management is lying being less than forthcoming with the valuation of toxic assets on its books.
- The sheer amount of these assets on the books and the leverage employed to attain them are devastating
- BNP has employed the proven self destructive financing methodology of borrow short, invest in depreciating assets long!
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 Bank Run Liquidity Candidate Forensic Opinion:
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
note page 9 of that very same document addresses how this train of
thought can not only be accelerated, but taken much further...
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
wipe out, or is it? On to page 10 of said subscription document...
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)...
What makes the rating agency
moves, and the fact that the MSM carries it so much more fervently than
my own more timely, relevant and useful research, is that explained this
in detail to bankers and investors in Amsterdam in April - yes, months
even further in advance.
if that is not enough of an advanced warning, there are my proclamations
from the spring of 2010 - a year and a half ago via the Pan-European sovereign debt crisis series.
you can see from the many links below, any prudent investor or entity
who has an economic interest in the outcome of the events of the
quasi-sovereign nations of Europe, the banks domiciled within them, or
the entities that do business with them, is literally out of his/her
damn mind if they subscribe to the rating agencies opinion in lieu of,
or even ahead of that of BoomBustBlog proprietary research. That's
right, I said it, and dare... No Double Dare, anyone to prove otherwise.
As excerpted from the link above, relevant articles posted since January of 2010.
The Asset Securitization Crisis
of 2007, 2008 and 2009 led to the demise of several global banks and
institutions. Central bank induced risky asset bubbles gave rise to,
what was popularly considered and reported as through the popular media,
a rapid recovery. The reality was that the insolvencies that marked the
crisis were passed on, in part, to the sovereign nations that sponsored
the Crisis, and as the chickens came home to roost the Asset
Securitization Crisis has now blown into a full Sovereign debt crisis.
The Pan-European Sovereign Debt Crisis, to date (free):
The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a
What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. –
attempts to illustrate the highly interdependent weaknesses in Europe’s
sovereign nations can effect even the perceived “stronger” nations.
What We Know About the Pan European Bailout Thus Far
- Osborne Seems to Have Read the BoomBustBlog UK Finances Analysis, His U.K. Deficit Cuts May Rattle Coalition
Related reading of interest...
The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free"
Sovereign Debt Yielding 100-200%? Quick Answer: Probably!