After Greece, Here Are The Four Things That Keep Bank Of America Up At Night

Tyler Durden's picture

The Greek CDS auction has not yet taken place, nor has one quantified how many Greece-guaranteed orphan bonds with UK-law indentures have to be made whole (at a cost to Greece of course, no matter how much Venizelos protests), and somehow the world is already moving on to bigger and better risk strawmen. Because if one sticks their head in the sand deep enough, it will be easy to ignore that European banks have gradually over the past year or quite suddenly (as in the case of Austrian KA Finanz) taken about €100 billion in now definitive losses on their Greek bonds and CDS exposure. Luckily, just like in the US, there is now over $1.3 trillion in fungible cash sloshing in the system, allowing banks to 'fungibly' fund capital shortfalls and otherwise abuse every trace of proper accounting, when it comes to a post-Greek default world. The problem is that none of this actually solves the fundamental insolvency issues plaguing the 'old world', but what it does do, is force the accelerated depletion of an aging and amortizing asset base. That's fine - as Draghi said the ECB can "always loosen collateral requirements even more." So while we await to hear just who will sue Greece and Europe, and how much cash will have to be paid out to UK-law bondholders (before the Greek default is even remotely put to rest), here is a listing of what Bank of America (recall - BofA is the one bank most desperate to remove any lipstick from the pig due to its need for more QE) believes will be the biggest risks to its outlook going forward. In order of importance: 1) Oil prices (remember when a month ago we said this then ignored issue may soon hit the very top of investors worry lists?), 2) Europe; 3) US Economy; and 4) China. That about covers it. Oh and massive debt issuance supply too as well as the even more epic straw man that is this Thursday's stress test. Remember: stress tests will continue until confidence in the ponzi returns!

From Bank of America

The risks to our outlook

The successful Greek PSI addresses – but does not eliminate – a key contagion risk for US financial markets. Clearly risks are reduced due to the absence of major debt maturities in the coming years as well as the escrow account for interest payments. However, risks remain as the second bailout package for Greece may unravel if the country fails to deliver on its commitments. With continued signs of strength in the US economy – particularly in the labor market, as highlighted by the February employment report – conditions are in place to resume spread tightening in credit – albeit given how far we have come already clearly at a slower pace. Thus our recently revised tighter 2012 spread target in high grade (150-160bps vs. current spreads of about 200bps) still applies (Figure 1). However, given higher valuations we review the top risks to our bullish outlook for credit – oil prices, Europe, US economy, China, supply, CCAR.

Risk #1: Oil prices

At this stage we consider the risk of higher oil prices – due to an escalation of the nuclear stand-off with Iran – as the biggest risk to our outlook between now and the middle of the year. On the one hand President Obama has suggested that a “window of opportunity” remains for a diplomatic solution, and experts in a conference call hosted by our colleagues do not expect military action in 2012 (see pages 12-13 here). On the other hand, the outcome of the geopolitical conflict at hand appears particularly difficult to predict given the high stakes for Israel. Thus we prefer to position defensively by overweighting oil producers and underweighting oil users that are particularly sensitive to higher oil prices. In our sector recommendations, we are market weight the Oil & Gas sector, reflecting the balancing of a bullish view on oil producers and a bearish outlook on Gas producers. Our tactical CDS trade is to short oil sensitive names against the index.

Risk #2: Europe

Until the PSI this was #1. However, clearly important risks remain both in the short and long term. What we as credit strategists are most concerned about is eroding/lacking public support for the fiscal checks and austerity programs that are being implemented across the Euro-zone. We are particularly concerned about the peripheral countries where unemployment rates are very high. Even if governments support unpopular austerity agreements, there is high risk that sitting governments may lose power to oppositions that are less committed.

Some of these political risks will play out in the short term – others in 2H or 2013 and later. First up is the regional election in Andalusia, Spain, on March 25th where the centre-right opposition looks likely to end a socialist regime that has been in power since 1982. Then on April 22nd we have the French election where the socialist opposition candidate, Francois Hollande, is well ahead of President Sarkozy in the polls. This is a risk for our markets as Mr. Hollande has stated that one of his goals is to renegotiate the EU fiscal compact from last December.

Then the Greek election is May 6th or 13th. Again it appears that the opposition (leftist parties) – which has not committed to the austerity programs – is polling well. While the polls have recently shifted to suggest a slim majority to the current government, as our European fx strategist discuss here, even such an outcome would be risky, as there are often defections in important votes. Thus, while Greece now is getting an improved capital structure with lower debt and maturities that are extended far out in the future (Figure 3), as well as an escrow account for interest payments, the second bailout program could still unravel.

Risk #3: US economy

To us, the US economic risk appears more back-loaded toward the last part of the year than of immediate concern. In fact, due to automatic fiscal tightening to the tune of about 4.5% of GDP in 2013, our economists have an out-of-consensus outlook for a slowdown in economic growth to 1% in 4Q, as companies anticipate the tightening. While we are mindful of this risk, we think that our markets are unlikely to be affected by this fiscal tightening before perhaps the fourth quarter – and we think there are mitigating factors. The ultimate impact to our markets will depend on the prevailing level of economic growth – for example, a decline in growth to 1.5% from 2.5% will be much more benign for corporate bonds than a drop to 1.0% from 2.0%. However, clearly the US economy faces significant fiscal policy risks – not to mention another potential debt ceiling debacle toward the end of the year or early 2013.

Risk #4: China

China is a perennial constituent of our list of biggest risks. However, as usual we put this risk toward the end – not because of a small expected impact but because it is less likely to materialize this year. Early this week the markets were spooked by China lowering its official GDP growth target for the year to 7.5% from 8.0%. However, this move was expected by our Chinese economists as they discussed it two weeks prior to the move. Also, notice how actual growth in China almost always exceeds the official target growth – sometimes considerably such as in 2007 where the economy grew by 14% compared with a target of only 8% (Figure 4). Thus the new lower growth target is still consistent with our outlook for a soft landing in China with growth of 8.6% this year.

However, longer term we, as credit strategists, remain concerned that something has to give to ease the imbalances in China, including high real estate prices.

Other risks: Supply, CCAR

There are many other risks to our bullish outlook for US credit including supply overflow. First we highlight supply. This year we have seen heavy supply volumes in high grade – for example this week we saw $42.8bn pricing, the second busiest week on record after the week of Jan 26, 2009 (Figure 5), which saw $44.8bn in supply (but including $21.5bn of government guaranteed financial debt). Not counting government guaranteed issuance, this week was the busiest on record. Clearly heavy supply volumes can weigh on spreads, but rather than this being bearish for credit we would call it instead “less bullish”. This is because the higher than expected supply volumes we have seen this year result directly from very favorable excess demand conditions for corporate bonds. Thus the same technical that helps drive credit spreads tighter creates increased supply volumes.

Next week – most likely on March 15th – we expect the Fed to release results from the bank Comprehensive Capital Analysis and Review (CCAR), including the harsh stress tests. Our bank equity analysts expect this to be largely a non-event as companies have managed expectations. Because bank capital positions have improved significantly (Figure 6), we expect any adverse implications of the CCAR to be concerned with banks’ abilities to return capital to shareholders, more than a lack of capital. This highlights that increased regulation and monitoring is mainly an equity story while working to make credit safer.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
financial apocalyptic contagion's picture

sup BofA can suck my dick

Manthong's picture

“this move was expected by our Chinese economists as they discussed it two weeks prior to the move”

Hey, there’s an unemployment problem in this country.. why don’t you hire American economists for the job?

And, did they at least discuss it in English?

Winston Churchill's picture

Corzine is available ,he should be able to vaporize their problems.

chump666's picture

Wow BofA nailed it, now Citi you doomers top it. 


Yen Cross's picture

Chumpp did you catch that analyst on CNBS calling for a SPX 1500 and a BAC of 17 dollars by the end of 2012?

  He has a Funkey Beard and Likes Wells Fargo and JPM!

chump666's picture

No I didn't see it.  But 1500 on the SPX.  He is dreaming, can't he see that despite the huge amount of liquidity  and USDs in the system markets are capped?  Pretty much by the oil price.  ZH is right, Th FED who haven't got control of anything except a trading range for equities, even that is showing volatility now. Which will pull back on any hopes of QE on the fact that inflation is here, Europe will probably go hyper in parts as will China (re: China will widen their CNY trading range).

Also war any day Iran/Israel will 100% send oil to 150.  The FED won't do anything.  So, equities will roll over into their correction again, that may sell off hard on any external panics.  Say Spain/Italian/Portugal yields begin to climb again CDS spreads etc after the CDS 3billion euro trigger on the Greek 'good-for-a-week' fix.

Sh*t is starting to get warm.

Yen Cross's picture

 Good job ! You caught the trading range expansion. bRENT IS ALREADY 125!.  Tyler mentions credit spreads every morning.

  What about the Greek ( undeclared/English & RailRoad)  March 23'rd bonds?  You and Slewie KICK ASS!

  Spain is nothing! Ireland and Portugal come FIRST!  Did you catch the payment hold out on Hungary?

chump666's picture

that and we don't know how far the CDS trigger will force payouts and counter party risk etc (may not be a drop in the ocean).  Austrian bank just got slammed with a bailout over the CDS trigger (someone got paid...big time).  Bernanke will disappoint the market, that an oil is bid again. Bull trap.  I mean since the S&P now trades off the Dow trying to trade over 13000, how many topside failures can the market take?  Big slide tomorrow. 

We hope.

Yen Cross's picture

 Thanks Chump you gave me some good nuggets to think about! I think that 13K sideways trade is about to slide as well. I have to admit though. I think the market is going to chop into April and then take a SHIT going into Memorial Day!

   Volume should drop even more. That Austrain bank was counter party to just under 1000K.  Small, but the big reconing will come on the 23'rd. That 107 (undeclared/ English), is just under half of the bailout. That shit is what will blow spreads out! I saw the ECB was back on the bid in Bonds yesterday! Addictions never end up well.

K_I_T_T_Y's picture

Interesting article on the WSJ .

So the EU-Banks are all hedged according to the article, so now I have 2 questions:

1) With whom did they hedge their positions? Obviously with banks from outside the EU. US, Swiss or Asians?

2) At which conditions did they hedge? same as first position? or with worse conditions (strike)?

The article was meant to reassure, but I am slowly getting freaked out....

Conman's picture

Do we really think any banker has trouble sleeping? With the central banks as a unlimited piggy bank, they got nothing to worry about.

Conrad Murray's picture

Maybe the thought of 168gr moving at 2700 fps gives them pause now and again.

Conman's picture

haven't seen it yet. Even in the birthplace of democracy bankers run unimpeded.

sessinpo's picture

I tell you what. I love my winchester ammo. Even after 500 yards, it still have over 1500 fps. These bonded rapid expansion php (hollow point) will take a head off. Heck, I just like shooting my guns.

non_anon's picture

WTF is BofA still around, I remember when Ken Lewis told us about the shotgun wedding btwn them and Merrill by the Fed. This fucking circus of sickness has to fucking end, fucking now!


edit: WTF is Hank Paulson, Tim Geithner, Jon Corzine et al still running loose?

Teamtc321's picture

Chant it!! Hope and Change, Hope and Change!!

disabledvet's picture

I know i've posted this a million times...still "this is all modern day financial engineering" is to me:

UP Forester's picture

And here I thought their 4 biggest worries were:

1) Securing enough blow for the St. Patty's party
2) Securing enough hookers and small boys to go with 1)
3) Finding enough suckers to keep Uncle Warren in bath salts
4) Making sure the candidates they fund get into the Whore House and keep the charade going

XtraBullish's picture

What keeps Tyler up at night is the money he is losing trying to short the E/S LMAO!

Stoploss's picture

19 weeks and that's all u got? LOL!! Ooooooooohhh, scary.  Try to come up with a believeable bio if you must use one, then support it with something other than kindergarten follies. This won't even get a response.

Try again.

Yen Cross's picture

 Gotta love those shitty AUD home loans and Business Confidence #'s.  That aud/crude correlation lasted about one week!

JuicyGrabs's picture

If Marine le Pen wins elections in France it`s pretty much game over for EU. She`ll get in 2nd round with Hollande.

Yen Cross's picture

 I wouldn't touch that piece of crap euro. If I did, it would be short off that H/S neckline around 1.3150 with an initial target of 1.3050.  4 hour chart. I'm not trading it, but if I were, that would be a starting point.

 I'm going to short  one of the crosses in Europe.  And it sure as hell isn't eur/jpy.

Yen Cross's picture

I have 5 eur/chf positions Slewie. You will be the first to know. No not chf yet. I love ya brother, I'll make sure any interventions run your way!

slewie the pi-rat's picture


looky what i found, Y/C:

Zero Hedge cites Fed's market rigging, China's dumping dollars for oil and gold | Gold Anti-Trust Action Committee

GATA cites two articles, the first is the into about biderman going bat-shitByTheBay, and then china rolling its green stamps into gooey + shiney

Yen Cross's picture

 Thanks Slewie. You are exactly right. China is unloading U.S. debt. They are stockpiling tangibles. FWIW they lowered the yuan ( value to)/usd peg  yesterday significantly. I haven't had time to shop the Bidderman shite, but I will after the Asian market settles down.

  New season of South Park Wednesday! Comedy Central!


Crab Cake's picture

"What we as credit strategists are concerned about...." What you should be worried about, as human beings, is what happens when desperate people like me show up in your suburban neighborhood. When the time comes Ill be targeting people just like you, and other "credit analysts" like you. Why? Because you, and all who work and participate in the financial sphere, are fucking traitors. I cant wait to take your stuff to provide for my family, and leave you swinging for your crimes. See you around.

WhiteNight123129's picture

Shouldn ´t the capital position of big banks be contrasted with the one from the NY Fed? We all know this capital position isan artifact of Fed being on the other side, am I missing something?

El Oregonian's picture

#5. The "BEND-OVER" effect.                      

Urban Roman's picture

#5. Zero has a brain hemorrhage and decides to replace "Place". Throws Wall St. under the bus.

toadold's picture

Oil prices could climb even without a war against Iran.  If the Sunni states get spooked they may start increasing their arms buys, i. e. nukes from Pakistan, they may raise prices to finance. What is the effect of China's aquisition of oil supply going to do to the near term pricing?  California and New York are heading toward a crunch because of underfunded pension liabilities.  If they get another credit downgrade could one for the US as a whole be far behind? 
I think someone has their fingers crossed the the feces won't hit the fan before November. Its not a bet that I'd take.  

Yardfarmer's picture


BOA itself should obviously be their own biggest concern going forward. Already in financial intensive care and on life support with IV infusions coming directly from the ex nihilo electronic CB ledger to support the toxic MBS on its balance sheet, this anachronism and zombie is living on borrowed time. 


lsbumblebee's picture

Dick Bove was on Kudlow earlier tonite saying that the stress tests would be a "horror show" for the banks.

If you think so Dick then why do you continue to whore for them?

RockyRacoon's picture

Bove is the front-man for the banks.  How he keeps a job is beyond my comprehension.

But then so are a lot of other things.

exartizo's picture



Who needs stress tests?


A simple email from Kung Fu Pandit will suffice to solve all banking woes ala 2008.

Alexandros's picture

World War III - The First Private War in History

Those who won all battles shall lose the war.

Bilderberg Group and the crimes against humanity.

This is how things work in all countries. Whatever used to belong to their peoples, today it belongs to the multinational companies of the Club. Peoples were betrayed by their given leaderships and they lost everything. Capitals and markets were handed to the Club bosses. If you understand what is going on in Greece, you can understand what is going on in Britain, France, and Germany etc..


FreeNewEnergy's picture

Obviously, this piece of crap was written by a 4th grader full of pink slime from the free lunch program (And you thought there was no free lunch in America).

1. The price of oil won't be a problem when the whole global economy collapses.

2. Europe. Really? You just noticed?

3. US economy. See above comment.

4. China. Who gives a shit about those slanty-eyed slaves, except for people who haven't gotten their new iPad, that is.

Bring it, ass-holes. A collapse so grandiose that the Great Depression will look like a garden party.

oldman's picture


This is the collapse---slow and easy---day by day----up, up ,up, until down, down, down, up again, down again,----day after day until we are more numb than now



There---I 'brought it'                     om

Christoph830's picture

I have a fifth thing that should keep them up at night:  Their own balance sheet

jal's picture

Their own balance sheets are done by the best bookeepers money can buy.

They sleep well.

Marley's picture

How about rampant filing of chapter 7?

bk1037's picture

here is a listing of what Bank of America (recall - BofA is the one bank most desperate to remove any lipstick from the pig due to its need for more QE) believes will be the biggest risks to its outlook going forward. In order of importance: 1) Oil prices (remember when a month ago we said this then ignored issue may soon hit the very top of investors worry lists?), 2) Europe; 3) US Economy; and 4) China.

There is only one thing that annoys me many times on ZH and that is how often TD toots his own horn. TD and his team are sharp analysts, those of us who come here for alternative analysis and insight of financial issues know this. It is possible to refer to past articles without always taking on a vindictive tone when some point of order becomes newly relevant, or someone boasts expertise that ZH had posted on previously. Other than the horn tooting, ZH continues to provide unique perspective on a number of issues not covered adequately in other media. Keep up the good research, others will discover ZH when they continue to see references on other blogs coming back to here as source information.

RockyRacoon's picture

Chill.  Just sit back and enjoy the show.  And contribute what/when you can.  ZH doesn't run on red down-arrows only.

Yen Cross's picture
After Greece, Here Are The Four Things That Keep Bank Of America Up .    < Is it my turn in the barrel today?
RockyRacoon's picture

The soggy biscuit was today's prize.  It's yours for the asking.