In the post "The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications"
I identified the MF Global event as something that the mass media and
many analysts are resisting to do. I called it for what it was - a run
on the bank - plain and simple. I forecasted this "new-ish" style of
bank run (a run where instiutional counterparties cause the drain) about
6 months ago, see The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
there have been runs on the bank in Europe, and it has skipped the pond
to arrive here in the states. It's just that no one want to call it
that, even though that is exactly what it is. On of the pertinent points
about these bank runs is the abject risk it showers the brokerage
account holder in those banks with. Remember, thanks to TBTF, banks
customers are no longer those silvery haired grandmas walking out with
toasters. Which brings me to an interesting story by Jonathan Weil over
at Bloomberg: MF’s Missing Money Makes You Wonder About Goldman
months ago the accounting firm PricewaterhouseCoopers LLP said MF
Global Holdings Ltd. and its units “maintained, in all material
respects, effective internal control over financial reporting as of
March 31, 2011.” A lot of people who relied on that opinion lost a ton
Global filed for bankruptcy on Oct. 31. This week the trustee for the
liquidation of its U.S. brokerage unit said as much as $1.2 billion of
customer money is missing, maybe more. Those deposits should have been
kept segregated from the company’s funds. By all indications, they
PWC botched it with MF Global's relatively plain
vanilla operations and $41 billion or so of assets. What in the world
makes anyone comfortable believing that they will get it right with
Goldman (you know, that other company that MF Global's CEO ran) with
nearly a trillion dollars of assets (not reconciling the myriad off
balance vehicle assets that are in play)? So, if PWC was able (or
willing?) to overlook flaws that allowed $1.2 billion worth of client
money to literally disappear at MF Global, imagine how well they're
manning the ship at an entity roughly 25X larger and more complex - not
to mention that much more influential in coercing auditors and analysts
to "look the other way". For anyone who actually believes that Goldmans
is really so much better than MF Global and can never take the losses
that MF Global did - stop inhaling from pipes passed to you from West
MF Global ran into a liquidity squeeze while betting on the European debt that I have warned my subscribers for two years to avoid like the plague. Goldman is doing the same thing, no?
As excerpted from the model that powers BoomBustBlog subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?
you can see, Goldman traded its derivative book risk for sovereign risk
- just in the nick of time to catch the tail end of a derivative
crisis & the start of a sovereign debt crisis. Excellent job
fellas! Goldman has literally doubled its sovereign assets, starting the
exact year that I started warning in the Pan-European Sovereign Debt Crisis series. BoomBustBlog subscribers covered this scenario over a year ago.
Go to the 26:40 marker in the video...
Italy has a funding issue that nobody was able to foresee, right? Wrong! After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It
France is heavily levered into Italy and Franco-Italiano fortunes are closely linked, right? Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!!
American banks (like Goldman) are on the hook for protecting the damn near doomed French banks right? French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!
But in the end of one, or two, three big banks go down, it's basically a giant pan-global clusterfuck, no?
Guarantees provided by U.S. lenders on government, bank and corporate debt in Greece, Italy, Ireland, Portugal and Spain rose by $80.7 billion to $518 billion in the first half of 2011, according to the Bank for International Settlements.
the question du jour - Can Goldmans Sachs Derivative Exposure,
realistically unhedged, cause the biggest run on the bank in Financial
The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question
“Has the value or the economic quantity of the underlying increased at a
similar pace, and if not does this indicate that everyone on the street
has doubled and tripled up their ‘bets’ on the SAME HORSE?”
Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?
Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history. In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago.
The notional amount of a derivative contract is a reference amount from
which contractual payments will be derived, but it is generally not an
amount at risk. However, the changes in notional volumes can provide
insight into potential revenue, and operational issues and potentially
the contagion risk that banks and financial institutions poses to the
wider economy – particularly in the form of counterparty risk delta. The
top four banks with the most derivatives activity hold 94% of all
derivatives, while the largest 25 banks account for nearly 100% of all
contracts. Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.
absolute terms, JPM leads this list with total notional value of
derivative contracts at $78 trillion, or 1.3x times the Wolds GDP.
However, in relative terms, Goldman Sachs leads the list with
total value of notional derivatives at 537 times is total assets
compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).
what does this mean? Well, it should be assumed that Goldman is well
hedged for its exposure, at least on academic basis. The problem is its
academic. AIG has taught as that bilateral netting is tantamount to
bullshit at this level without government bailout intervention. If there
is any entity at risk of counterparty default or who is at the behest
of a government bailout if the proverbial feces hits the fan blades…
Ladies and gentlemen, that entity would be known as Goldman Sachs.
As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...
is much more highly leveraged into the derivatives trade than ANY and
ALL of its peers as to actually be difficult to chart. That stalk
representing Goldman's risk relative to EVERY OTHER banks is damn near
phallic in stature!
As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... ,
this is not a new phenomenon. Quite to the contrary, it has been a
constant trend through the bubble, and amazingly enough even through the
crash as banks have actually ratcheted up risk and assets in a blind
race to become TBTF (to big to fail), under the auspices of the
regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture).
So, what is the logical conclusion? More phallic looking charts of
blatant, unbridled, and from a realistic perspective, unhedged RISK
starring none other than Goldman Sachs...
to think, many thought that JPM exposure vs World GDP chart was
provocative. I query thee, exactly how will GS put a real workable
hedge, a counterparty risk mitigating prophylactic if you will, over
that big green stalk that is representative of Total Credit Exposure to
Risk Based Capital? Short answer, Goldman may very well be to big for a
counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties
out there (and yes, there are a lot of y'all - GS really gets around),
expect to get burned at the culmination of that French banking party
I've been talking about for the last few quarters. Oh yeah, that
perpetually printing clinic also known as the Federal Reserve just might
be running a little low on that cheap liquidity antibiotic... Just
giving y'all a heads up ahead of time...
This is the question du jour: Does Goldman have the same bookeeping issues that MF Global did, and is PWC overlooking it?
Well, I pounded the table, screaming for years that Goldman's losses don't add up. Guess what???? As excerpted fromThe Financial Times Vindicates BoomBustBlog's Stance On Goldman
read this headline from the Financial Times and said to myself, "Okay
Reg, Don't say 'I told you so'". Thus, you won't hear it from me, at
least not this time. As reported today in the Financial Times: Goldman reveals fresh crisis losses and Goldman’s republished results present a new picture
has revealed details of about $5bn in investment losses suffered during
the crisis for the first time this week, in a move that will deepen the
debate over companies’ financial disclosures. The figures, issued as
part of internal reforms aimed at silencing Goldman’s
critics, show that the bank suffered $13.5bn in losses from “investing
and lending” with its own funds in 2008. But Goldman’s regulatory
filings and its executives’ comments to investors at the time pointed to
about $8.5bn of losses arising from its investments in debt and equity,
as markets were rocked by the turmoil.
Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs???“
and I did it without being privvy to Goldman's financial innards. It
was more or less common damn sense. Goldman and its employees do not
walk on water, they do not shit gold, and they cannot perform miracles.
If one takes an objective approach to their equity analysis, and simple
plug the numbers into a spreadsheet (objectively) you would have come up
with the exact same conclusions that I gave my subscribers all of these years. Let's reminisce, shall we?
what is GS if you strip it of its government protected, name branded
hedge fund status. Well, my subscribers already know. Let’ take a peak
into one of their subscription documents ( Professional" width="16" height="16" border="0" /> Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb
- 131 pages). I believe many with short term memory actually forgot
what got this bank into trouble in the first place, and exactly how it
created the perception that it got out of trouble. The (Off) Balance
to popular belief, it does not appear that Goldman is a superior risk
manager as compared to the rest of the Street. They may
mistakes and had to accept the same bailouts. They are apparently well
connected though, because they have one of the riskiest
sheet compositions around yet managed to get themselves insured and
protected by the FDIC like a real bank. This bank’s portfolio looked
quite scary at the height of the bubble.
And back to the FT article...
diverging figures, which do not change Goldman’s overall results for
2008, are because of the fact that, like many rivals, the bank did not
provide a full breakdown of profits and losses from activities carried
out with its own resources.
Interesting, $5 billion of losses
goes unreported, yet there was no change to the years results. I wish I
could lie about $5 billion of losses that didn't allegedly exist, make
them disappear again after I come clean, then have the media applaud me
for my honesty - all at the taxpayers expense as I bonus myself into
that new 63 foot Azimut. You know, the one that doesn't come with the
hot international girls with w 6 pack license and bikinis. Hey
taxpayers, its your money that bonused these boats!!! Italy has a
pipeline straight to the American taxpayers wallet through the Goldman
bonus pool. Okay, let's finish excerpting the aticle...
The revelation of the 2008 loss on its investments supports Goldman’s argument that it did not profit from the crisis.
for one, never claimed they profited from the crisis. To the contrary, I
claimed that they lost, big time! This statement seems awfully
conciliatory from the main stream media. I know you guys can't (or
won't) get as rough around the edges as I do, but come on fellas. 'nuff
Turner, a former chief accountant for the Securities and Exchange
Commission, praised Goldman’s move but called for the SEC to look into
the bank’s past disclosures. “This sets a good example that others
should follow,” he said. “But it does raise the question as to why the
management did not provide this view back then and whether the SEC are
going to do something about this discrepancy.” Mr Turner said SEC rules
required companies to give investors a view, as seen from “the eyes of
management”, of their finances: “For such a discrepancy to have arisen,
management must have lost an eye.”
Praise!!! Lost an eye!!!
Hold the hell on here. Goldman outright lied, and lied big time. It was
an obvious lie, and I pointed it out in full detail to both my blog
readers and paid subscribers. As a matter of fact, the losses are most
likely STILL on the balance sheet (or hidden off) and will surface one
way or the the other. Again I reference subscriber document: Professional" width="16" height="16" border="0" /> Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages
a matter of fact, it looks just as scary today as it does at the height
of the bubble, but since very few people read balance sheets, no one
You know what most people don’t realize is that it looks quite scary now as well.
FT reports that neither the SEC nor GS had a comment. I would suppose
not. I suggest the SEC buy their entire agency a sitewide subscription
to BoomBustBlog, thus in lieu or reading about Goldman's "Bamboozling"
in the British financial mags, taxpayers could get the skinny directly
from their own government (directly, and in near real time) and may
actually have some faith restored in its ability to safeguard investors
in this period of "the hoodwink", wink, wink. That is, of course, unless the SEC has been permanently captured, see More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture.
“We have a strong track record as an investor,” he told analysts in December 2008.
their ears stinging from accusations that Goldman is “just a giant
hedge fund” or, as Rolling Stone said, a “vampire squid” stretching its
tentacles to make money for itself, an internal committee looking at
reforms reshuffled the bank’s financial reporting.
of losses came from direct purchases of assets. It also said that it
had lost $1.7bn on residential mortgages and $1.4bn on commercial
mortgages – half of which is believed to be related to Goldman’s
the old disclosure points to losses of about $8.5bn in 2008, rather
than the $13.5bn revealed this week. So why the discrepancy?
Goldman declined to
A new profit-and-loss account for 2008 released this week shows losses
of $13.5bn on Goldman’s “investing and lending” activities.
my opinion, any prudent investor should find it impossible to deny the
distinct possibility that they could lose the farm with Goldman as well.
The similarities with MF Global - apart from having the same CEO and
sovereign bets, are eery.
It ain't just MF Global and
Goldman either. Who else does PWC audit, but not necessarily find issue
with? None other than JP Morgan, whose assets are roughly $2.3 trillion.
So, if PWC couldn't find the needle in the $42 billion hay stack,
imagine the odds of finding that same needle of loss in a $2.3trillion
hay stack. We're talking roughly 50x the chance of making the same
Tell me you Prime brokerage clients, "Do 'ya feel lucky?"
On JP Morgan
Here I am attempting to gain a green card for our entrance into the "Economic Republic of JP Morgan..."
Bloomberg reports (and Reggie clarifies): JPMorgan Joins Goldman Keeping Italy Debt Risk in Dark
JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS),
among the world’s biggest traders of credit derivatives, disclosed to
shareholders that they have sold protection on more than $5 trillion of
As excerpted from An Independent Look into JP Morgan:
When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the
quality of JPM's derivative exposure is even worse than Bear Stearns
and Lehman‘s derivative portfolio just prior to their fall.
Total net derivative exposure rated below BBB and below for JP Morgan
currently stands at 35.4% while the same stood at 17.0% for Bear Stearns
(February 2008) and 9.2% for Lehman (May 2008). We all know what
happened to Bear Stearns and Lehman Brothers, don't we??? I warned all
about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?":
On February 20th, 2008) months before their collapse by taking a close,
unbiased look at their balance sheet. Both of these companies were
rated investment grade at the time, just like "you know who". Now, I am
not saying JPM is about to collapse, since it is one of the anointed
ones chosen by the government and guaranteed not to fail - unlike Bear
Stearns and Lehman Brothers, and it is (after all) investment grade
rated. Who would you put your faith in, the big ratings agencies or your
favorite blogger? Then again, if it acts like a duck, walks like a
duck, and quacks like a duck, is it a chicken??? I'll leave the rest up
for my readers to decide.
Bloomberg reports: Dexia Takes 3.6 Billion-Euro Charge on Asset Sales
charge taken by Dexia was more than necessary, and most likely not
nearly enough. But wait a minute, why did JP Morgan do the exact
opposite regarding the exact same asset class?
Do you remember my recent missive "There’s Something Fishy at the House of Morgan"?
Well, in it I queried how it was that JP Morgan can continuously pull
risk provisions and reserves to pad quarterly accounting earnings at
time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:
invite all to peruse the mainstream financial media and sell side Wall
Street's take on JP Morgan's Q1 earnings before reading through my take.
Pray thee tell me, why is there such a distinct difference? Below are
excerpts from the our review of JP Morgan's Q1 results, available to
paying subscribers (including valuation and scenario analysis): JPM Q1 2011 Review & Analysis.
A Few Questions on Goldman Sachs 3rd Quarter 2010 Results That No One Thought to Ask Wednesday, October 27th, 2010
Recommended reading from Reggie Middleton’s BoomBustBlog in the investment banking space…
- Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
- A Step by Step Guide to Exactly How Much Derivatives Risk Each of the 5 Big Banks Actually Have, and How It Could All Go Boom!
Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of
Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be
When They Say XYZ Bank Can Never Go Out of Business!!!
- Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!
- We’ve Been Bamboozled by the Banking Industry, but the Chickens Are Coming Home to Roost
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
- Are We In a “Banking” Depression?
- As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves
Truth Goes Viral, Part 2: Italian Towns Damaged by Derivatives,
Downtown Brooklyn Real Estate, Goldman Sachs, JP Morgan, Europe’s
Overbanked Status, Reggie Middleton, Matt Taibbi, and Simon Johnson –
All in One Video
- Re: Morgan Stanley’s Q2 2010 Results – The Mainstream Media May Be Hazadous to Your Wealth!
On Goldman Sachs
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?
More on Goldman Sachs
- The BoomBustBlog Review of Goldman Sach’s 2nd Quarter, 2010 Performance: I Told You So!
- On Goldman’s Latest Earnings Results…
- What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone…
- A Realistic View of Goldman Sachs and Their Latest Quarterly Results
- The Brown Stinky Stuff is Splattering Off the Fan Blades and Landing on That Shiny New Building on the West Side Highway.
- No One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times…
- Subscribers can find our most recent Full Forensic report on Goldman Sachs here - GS 4Q09 Final Review and Updated Valuation, current as of January 2010, the month I started reiterating my warnings about this company’s drastic overvaluation.
- Reggie Middleton vs Goldman Sachs, Round 2
- Reggie Middleton Personally Congratulates Goldman, but Questions How Much More Can Be Pulled Off
- Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now!
- Reggie Middleton on Goldman Sachs’ fourth quarter, 2008 results
- Goldman and Morgan losses in the news, about 11 months late
- Blog vs. Broker, whom do you trust!
- Monkey business on Goldman Superheroes
- Reggie Middleton asks, “Do you guys know who you’re messin’ with?”
- Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
- Reggie Middleton on Goldman Sachs Q3 2008
- § As Reality hits, the Masters of the Universe are starting to look like regular bank employees
- Reggie Middleton’s Goldman Sach’s Stress Test: Breaking Ranks with the Crowd Once Again!
- Who is the Newest Riskiest Bank on the Street?
More premium Stuff!