Is Goldman Preparing To Sacrifice The Next "Lehman"

Tyler Durden's picture

One of the more "unmentionable" conspiracy theories surrounding the demise of Lehman Brothers in 2008 is that this "shocking" event was in fact a well-choreographed and carefully scripted "controlled demolition", with the Lehman Bankruptcy - the event that officially unleashed the Great Financial Crisis - getting the express prior permission of both Ben Bernanke and Hank Paulson, a former Goldman employee, whose motive was the elimination of the one firm that was then Goldman's biggest competitor in the FICC space, and whose subsequent bailout of his former employer (Goldman Sachs and all other insolvent banks) would lead to the preservation of trillions in worthless equity courtesy of the biggest taxpayer funded bailout in history, and with billions in excess reserves parked on Goldman's balance sheet smoothing the bank's transition through a historic recession.

Fast forward to this week when as we reported previously, following a surge in its Credit Default Swaps, the "doomsday" scenario for Glencore is now on the table, because the market suddenly realized that Glencore's most valuable asset, not its mines, or its trading operations, but its investment grade rating, could be stripped away.

This is what we said, after we noted that GLEN CDS had just hit a multi-year wide of 464bps (precisely as we said it would over a year ago):

We expect this CDS blowout to continue.


What's worse, if the company is downgraded from investment grade to junk, watch as the "commodity Lehman" scenario for Glencore, which much more than a simple copper miner just happens to be one of the world's biggest commodity trading desks, comes full cricle leading to waterfall collateral liquidations and counterparty freeze-outs as suddenly the world is reminded that there is a vast difference between a real and a rehypothecated commodity, and that all collateral rehypothecation chains are only as strong as the weakest counterparty!

Long story short: if and when Glencore loses its Investment Grade rating, it's more or less game over, if not for the company's already mothballed mining operation then certainly for its trading group, where "junking" would lead to numerous collateral shortfalls and margin call waterfalls, reminiscent of the ratings agency downgrade of AIG that culminated with the US bailout of the insurer.

Therefore we were not surprised earlier today to see Glencore stock crash to a new record low below 100p even as the CDS blow out continued.


We were, however, very surprised by the catalyst, because the company that managed to successfully hammer Glencore, which in our view is nothing short of the commodity "Lehman" (or perhaps AIG) was none other than Goldman, which earlier today released a report which is essentially blueprint for not only how to take away Glencore's precious investment grade rating, but taken a few steps further, how to unleash this cycle's commodity "Lehman event" (once again, Glencore is first and foremost a trading desk which serves as a counterparty with trillions in derivatives notional exposure to virtually every other commodity using and trading entity in the world) and taken to the extreme, how to "force" the Fed to finally unleash the helicopter money should Glencore's failure be the catalyst the pushes the entire world into a deflationary recession, if not outright depression.

This is what Goldman said earlier in a note titled "Much progress made but the song remains the same"

We update our estimates for Glencore following the completion of its equity placement on September 16, in which it raised its target of $2.5bn. We also update our estimates to incorporate our commodity analysts’ lower thermal coal forecasts ($58/54/52/t for 2015/16/17E) and lower met coal forecasts ($91/85/90/t), which impacts Glencore’s 2016/17/18E EBITDA by c.15-18%... On lower estimates we reduce our 12-month price target to 130p (was 170p).




Since announcing c.$10bn of debt reduction measures on September 7 and completing a 9.9% equity placing, shares have retreated a further 14%. In our view investors are not yet convinced that Glencore has gone far enough to totally allay fears that the industrial assets can service the new lower debt level. Our scenario analysis suggests that using GS estimates for commodities prices and FX rates, Glencore’s IG rating would be secure in the medium term, but our estimates for zinc, nickel and coal prices are higher than spot prices. When we run the same analysis using spot commodity prices and spot FX rates, most of Glencore’s credit metrics would be at the border of required ranges to maintain its IG rating. Finally, a 5% drop in spot commodity and flat FX would see most of Glencore’s credit rating metrics fall well outside the required range to maintain its IG rating, suggesting concerns would quickly resurface. Glencore has a few levers left – further lowering capex, signing streaming deals and releasing more working capital. Recent underperformance suggests that the measures exercised are insufficient and more is needed. We remain Neutral rated but expect continued volatility in the near term.

Why is Glencore's IG rating so critical? As explained above, Glencore is really not so much the Lehman as the AIG of the commodity world: without an investment grade rating, a self-reinforcing collapse will begin that could ultimately terminate Glencore's trading desk, in the process liquidating one of the world's biggest commodity trading counterparties.

From Goldman:

Glencore’s trading business relies heavily on short-term credit to finance commodity deals and its financing costs would increase if it were to lose its Investment Grade credit rating. In addition, it could even lose some counterparties due to increased counterparty risk.

That's putting it mildly: what a junking of Glencore would do, is start a collateral demand waterfall cascade that the cash-strapped company simply would not be able to sustain.

So having laid out the strawman, Goldman next, very conveniently, explains just what would take for the Investment Grade trap to slam shut:

it would only take a c.5% fall in spot commodities prices for concerns about its credit rating to resurface


While Glencore’s announced measures have allayed near-term concerns about the potential for its credit rating to be downgraded, its high leverage to commodity prices is demonstrated in our scenario analysis, where we estimate just a c.5% drop in spot commodity prices would see concerns resurface about the potential for its credit rating to be downgraded. In addition, given the latest guidance on capex of c.$4bn in FY17, we believe there is limited flexibility for the company to make any further cuts while maintaining its production targets.

Wait, high leverage to commodity prices as the biggest risk factor? Where have we seen this before? Oh yes, in our March 2014 post (saying to buy GLEN CDS) which showed the one thing nobody was looking at at the time; Glencore's, wait for it, high leverage to commodity prices!


For those who enjoy playing with numbers, here is Goldman's real "Doomsday" scenario: the one which sees Glencore's IG rating stripped. As Goldman admits, all it would take is a small 5% drop in commodity prices from here:

If commodity prices were to fall 5% from current levels – which we do not consider to be a far-fetched assumption given the downside risk to commodity consumption in China – we believe that concerns about its IG credit rating would quickly resurface. Under this scenario, we estimate that most of Glencore’s credit rating metrics would fall well outside the required ranges to maintain its IG rating, and as early as the next reporting period (FY15).


Although Glencore has a few levers left in the event commodity prices continue their leg down (such as deferring capex and executing streaming deals), the key point to highlight is that executing these options would take time. That said the recent announcement by Silver Wheaton that it is working with Glencore on the streaming deal highlights that management is focused on bolstering its balance sheet.


It goes without saying that courtesy of HFTs and China's hard landing, a 5% drop in commodities could happen overnight.

So if one is so inclined, and puts on the conspiracy theory hat mentioned at the beginning of this post, Goldman may have just laid out the strawman for the next mega bailout which goes roughly as follows:

  1. Commodity prices drop another 5%
  2. The rating agencies get a tap on their shoulder and downgrade Glencore to Junk.
  3. Waterfall cascade of margin and collateral calls promptly liquidates Glencore's trading desk and depletes the company's cash, leaving trillions of derivative contracts in limbo. Always remember: the strongest collateral chain is only as strong as its weakest conterparty. If a counterparty liquidates, net exposure becomes gross, and suddenly everyone starts wondering where all those "physical" commodities are.
  4. Contagion spreads as self-reinforcing commodities collapse launches deflationary shock wave around the globe.
  5. Fed and global central banks are called in to come up with a "more powerful" form of stimulus
  6. The money paradrop scenario proposed by Citigroup yesterday, becomes reality

Too far-fetched? Perhaps. But keep an eye out for a Glencore downgrade from Investment Grade. If that happens, it may be a good time to quietly get out of Dodge for the time being. Just in case.

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Bay Area Guy's picture

Paulson should most definitely be in prison. I was no fan of Lehman, but what happened to them was nothing short of a criminal conspiracy.

froze25's picture

Very true, let them fall and then bailout the rest.  Well played Goldman.

jeff montanye's picture

the greatest control fraud in history, the 2008 seizure of the u.s. government's financial/regulatory apparatus by wall street's banks and trading houses to recapitalize themselves and avoid prosecution for their enormous crimes, is tremendously evil.  it will never be prosecuted or its errors corrected until the psychopaths at the head of our society are neutralized.

only 9-11 can do this.  it is the crime that is clear-cut, unambiguously wrong, provable, without a statute of limitations (treason/murder/kidnapping), sufficiently inflammatory (very important) and really comprehensive in its list of perps, especially after the fact (the editors of the new york times don't actually have to go to jail; just most people have to think they should).

mind by mind.  do your part.


Divine Wind's picture




Bullish for PMs, right?

HardlyZero's picture

After MF Global, it is not clear how the markets are safe for buyers, sellers, brokers, banks, etc.

But as always, have your physical setup and safe first before going out to see what's going on.

WordSmith2013's picture

The PRE-PLANNED Financial and Economic 9/11 of 2008

Well explains the events of September and October of 2008:



TongueStun's picture
TongueStun (not verified) WordSmith2013 Sep 24, 2015 5:54 PM

So the Socialist jew Bankster cartel plans in advance? Really? Well butter my buns and call me Barry!

Colonel Klink's picture

Off topic but everyone enjoy the latest multiple pictures of the Weeping Cheeto.

Wonder if Obama breaks him down while he's licking Obama's jack boots?

rccalhoun's picture

larry summers wanted the position to be the bitch

Soul Glow's picture

Yellen's a whore.  So was Bernanke.

willwork4food's picture

All of Congress & the US Senate are whores. Going to be kind of funny when the 'men behind the curtain' pull the plug, demonize central banking structures and fire all those who assumed the man had their backs.

TruxtonSpangler's picture

Colonel Klink, looks to me more like he did too much blow but still wants another toot. Hes thinking "When will this windbag shut up so I can go to the after party"

Richard Chesler's picture

$26 billion in taxpayers monies seems pretty reasonabe this time so the thiving fucking jews can continue to do god's work



Sorry_about_Dresden's picture

Everybody has bits and pieces but everyone needs to put it all together. This was a well coordinated effort by my players. The Reserve Primary Fund, and the Bents Family, were crucial by buying up and rolling over Lehman bonds to the tune of $782 million. When Lehman went tits up.That caused the Reserve Primary, the Bruce Bents I & II, to break the buck which froze the repo market and sent the TED Spread looking ridiculous. Now Hank Greenburg was CEO of AIG until Elliot Spitzer forced him out in 2005 and Hank Greenburg was the whole risk management apparatus at AIG. When AIG went tits up Hank Paulson forced the CEO of AIG, the one who served as CEO after Greenberg, out so Treasury could appoint their own CEO to dilute Hank Greenburg's voting rights on the board and give the board enough juice to vote on paying Goldman Sachs par on every credit default swap. Goldman was the beneficiary with a record $22 billion in bonuses.

Hank Paulson's swan song.

Motasaurus's picture

Was not the "let one fall, so the rest can cash in" the very story behind the Laughing Man Incident in GitS?

It's a well played out trope. 

OldPhart's picture

Serious question.

If we start electing people of character and solid reputation to connedgrease, will we protect them from the guillotines?

I've considered it, but don't want to work with psychopaths on a daily basis.  But someone like me, that I knew was solid, would initially have little effect on the shitshow of government.  It would take a majority of the 535 to end the whorehouse of government, and we still have too many sheep and FSA.

When do we end the call for retribution?  (not that it's in the immediate future...)

Klemens's picture
Klemens (not verified) Colonel Klink Sep 25, 2015 1:41 AM

interesting that the freemasons press take so much attention of the pope.

The catholic church was the only organisation which did fight against the freemasons!

HopefulCynical's picture


Or, to put it a bit more simply: IT'S CALAMARI TIME, MOTHERFUCKERS.

MrPalladium's picture

+100 for the "calamari time" ref!!!

Pazuzu's picture

No shit; wish I'd thought of it. 

old naughty's picture

with all the heavy weights CONverged in dc, well...

NoDebt's picture

"If a counterparty liquidates, net exposure becomes gross [emphasis added by me], and suddenly everyone starts wondering where all those "physical" commodities are."

For those who may not quite grasp this, it means all your "hedging" against falling prices is null and void and you are left with full-in-the-face long exposure PLUS entities dealing in the physical commodity can suddenly be looking down a long tunnel of "failure to timely deliver" on contracts they've signed.

But, then again, 2016 is the last year for a lame duck president... traditionally a very good year to "clean house" and get the government to bail you out.

FL_Conservative's picture

Do you honestly think, with an Obama Admin and a Yellen FOMC, there's ANY chance they wouldn't capitulate to the Squid and their bretheren?

11b40's picture

Ain't no party like a counter party!

Party likes it's 1999, or was that 2008?

Buck Johnson's picture

Glencore is going to be sacrificed this time for an attempt to control this implosion and also attempt another bailout.  I think the bankers have gone a bridge too far. 

OldPhart's picture

Once Goldman Sacks has control of the commodity market, how far down will the precious be driven, to support the FED wipe out,  do you think?

The central planners's picture

And if she cant print it then fart it, its dirty money anyways

RopeADope's picture

Hank not John.

John is the colossal failure that could not come up with a good trade idea on his own if his life depended on it.

KnuckleDragger-X's picture

Lehman had to die to save GS since GS were actually in more trouble......

Bay of Pigs's picture

What ever happened to Douche Bank anyway?

Edit: Damn, good ole Marty beat me to the punch.

Deutsche Bank – the New Lehman Brothers?

weburke's picture

Sunday blood moon Sunday. Monday,we stare at urban renewal. And the winds of change start to howl.

willwork4food's picture

Which reminds to get my fantasy football going!

OldPhart's picture

Monday,we stare at Turban renewal.


(well, not Turbans, but you get the idea.)

NotApplicable's picture

I remember after the Bear Stearns "bailout" the MSM started asking "Will the Fed bailout everyone?"

Eventually the answer came from Bernanke in the form of "We are not afraid to let a financial firm fail."

At that instant I started wondering who their takedown target was, which of course, did not take very long at all to materialize.

Bay of Pigs's picture

That's when JPM got the FED backstop as well and silver was crushed from $21 down to $9 and gold from $1000 to around $700.

Same shit going on today, only worse in scope and magnitude.

TongueStun's picture
TongueStun (not verified) Bay of Pigs Sep 24, 2015 5:57 PM

This time IS different, silver has already been crushed.

Bay of Pigs's picture

Gold and silver both went down months ahead of the 2008 crash and both started rising months ahead of the stock market bottom (March 2009 when FASB 157 was eliminated).

Lanka's picture

The COMEX price for spot silver could break below $10, but the coin shops would have a $10/oz premium or go on holiday.

Debt-Is-Not-Money's picture

I was fascinated that Bear Stearns was the first to go as Bear was the only large company that failed to respond to the Fed's calls when LTCM almost brough down the house in 1998.

mbutler101's picture

Back in the sub prime era I worked in IT for a mortgage company and some of our conference rooms were permanently taken over by analysts from Bear Sterns mostly. BS bought most of our garbage in lots of 500 at a time and sold it on the secondary know the story how junk was rated AAA and resold to pension funds, 401ks, investors, whoever. Everyone took their cut at every stage of the loan life cycle including the 'regulators' and rating agencies. We were like a canary in the coal mine and went bankrupt because the buybacks (when loans failed to perform in 1st three months) exceeded the expectations of a revolving door of VPs. The domino affect progressed rapidly and other sub primes also failed in rapid succession as the same personnel seemed to show up to do what they did best, drive companies into the ground by taking their cuts in spite of what was in the companies best interests. When they all failed it was the guys that washed the cars, the guys that made everyone's lunch, the dry cleaners that pressed the suits, and all the trickle down average Joes that got fucked too. 

Not if_ But When's picture

Well, you know........he also lied to Congress.  (but that's small potatoes).

Excursionist's picture

Interesting new chemo regimen.  Probably works... think South Park did a riff on this.

Jumbotron's picture




oncefired's picture

Fuck Blankfein, him and Dimon are the ones that should be in jail, they need some time to mingle with Leon and crew, they will make good bitches. Paulson should be strung up by his balls in front of the Whitehouse!