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At 50x Leverage And 2% Tier 1 Capital, Is SocGen Truly A Paragon Of Balance Sheet Invincibility?

Tyler Durden's picture


The fact that European banks have just a tad more leverage compared to their US cousins has been well-known for quite some time. One need merely to look at the chart from our February 2010 post to see how American financial institutions stack up relative to European ones as a %-age of host country GDP. This issue came to a very violent head last week when market participants finally realized the painfully obvous, namely that even without direct Greek exposure (and there certainly is a lot of that), SocGen is simply not a viable business model for the long-run courtesy precisely of its tremendous leverage. And unfortunately, while SocGen's CEO was quick to appear on any TV station that would have him and deny rumors of the bank's viability, he had little if anything to say about the bank's actual solvency and leverage. Alas, therein lies the rub. As the attached table created by Jean-Piette Chevalier demonstrates, SocGen is back at the leverage it had back in 2007 at just over 50x. As a reminder, not even Lehman was this bad when it blew up (and that excludes the beneficial boost from Repo 105). In other words, SocGen has a Tier ratio of 2.0%... a number which the bureaucrats at Basel will have no choice but tell the bank must go up. And go up it will... assuming SocGen can issue €84 billion in new capital to pad its equity (on €19 billion of market cap... mmhmmm). Of course, in order to raise capital, SocGen would have to admit that the market was, in fact, correct in its assessment that the bank was undercapitalized, which would then send the stock even lower, and so forth, chicken or egg style. While we doubt any of this is new to the market, we doubt the response will be one of buying euphoria. Luckily, the only thing that can send the price tumbling now is actual selling, as opposed to shorting. And as we all know, nobody could possibly sell stocks: after all it is simply the evil shorters who are responsible for every market collapse in history, never the long idiot money which never did its homework, and suddenly becomes the last bagholder standing and first to bail from what is obviously a disastrously bad investment.

From Chevalier:

The real leverage of Societe Generale is ... 50%!

Indeed, the French bank counts in its equity item 2: Equity instruments and associated reserves which are actually different forms of liabilities related interests subject to some conditions.


Equity published in item 1: Sub-total equity, Group share should be reduced by Equity instruments and associated reserves (item 2) to determine the true equity at fair value (item 3) i.e. 22,535 billion of euros. 


Total liabilities are equal to total assets (item 4) less the true equity at fair value (item 3): 1,135.473 billion of euros.


So, the leverage is the ratio of total liabilities on equity: 50.4 i.e. a Tier ratio at 2.0%.

What would SocGen need to do to fix this minor problem: "To be well-leveraged, it should increase the equity until 84 billion of euros!" Uh, problem is SocGen currently has a market cap of €19 billion. Somehow we don't think an 80% equity dilution is very feasible without the bank being partially nationalized by the state. Chevalier agrees:

French state should be recapitalized (nationalized) this Gosbank because it is too big to fail with liabilities at 1.135 trillion of euros for an annual GDP of France nearly at 2.000 trillion: 1,300 € per inhabitant (64 million)!

So unless the much anticipated deux ex machina finally arrives, and Bernanke has been waiting for 3 years now, so far unsuccessfully, we eagerly await the announcement out of ISDA that a partial government take over is actually perfectly normal and won't trigger any and all associated CDS.


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Sun, 08/14/2011 - 19:27 | 1560022 RobotTrader
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SocGen will get bailed out or nationalized, one or the other.

Gold bulls will love it if the ECB or somebody steps up to bail out this monstrosity.

$2,000 will be in the bag.

Sun, 08/14/2011 - 19:48 | 1560066 Lazlo Toth
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Why do you refer to them as "bugs." It seems very intolerant of you.

Sun, 08/14/2011 - 19:49 | 1560070 WestVillageIdiot
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Did he edit the post or did you misread the word "bulls"? 

Sun, 08/14/2011 - 19:52 | 1560078 Lazlo Toth
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Couldn't tell you as I don't remember that far back.

I think it was an edit as I would have told him that calling them Gold Bulls was bigoted.

If Robo is listening, I liked your earlier photo better.

Sun, 08/14/2011 - 20:12 | 1560124 max2205
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If RoboT likes gold I'd be taking some profits

Mon, 08/15/2011 - 00:40 | 1560658 TruthInSunshine
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SocGen's implosion is going to be epic, because it's going to be part and parcel of the EU implosion.

We get a second round of fireworks this year, and they're going to make July 4th's display look positively tame by comparison.

The EU's colostomy bag has come loose, and people are complaining about the smell, trying to plug it back in.

In their obtuse state, they have failed to realize that the EU has contracted sepsis, and no amount of intraveneous antibiotics this late in the game is going to get the resistant strain of bacteria coursing through its blood under control.

Prognosis negative.


Mon, 08/15/2011 - 04:15 | 1560812 Pay Day Today
Pay Day Today's picture

Prognosis negative?  My man, this is surely the time to pour blood and treasure in, to not hold back on any treatment no matter how expensive, how unlikely to succeed, or how likely to kill the patient; all heroic measures must be undertaken!!!

Sun, 08/14/2011 - 22:35 | 1560400 Cursive
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@Lazlo Toth

I don't think you can edit a post after someone has replied to it.

Sun, 08/14/2011 - 23:42 | 1560557 Anonymouse
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Love your handle.  You are more than just a general.  You are truly a generalissimo.

Sun, 08/14/2011 - 19:49 | 1560071 Everybodys All ...
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and the French lose the AAA rating in the process.

Sun, 08/14/2011 - 19:52 | 1560080 WestVillageIdiot
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Still calling any of these countries AAA is like calling Pamela Anderson a virgin. 

Sun, 08/14/2011 - 19:56 | 1560090 indygo55
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Huh? I'm sorry. Did you say they were AAA? We really should redirect some of that CIA money into finding out how they do that.

Sun, 08/14/2011 - 19:55 | 1560086 gwar5
gwar5's picture

Thanks Robo, agree wit dat dare. $2000 it is. SocGen probably bailed out.  But should be nationalized, broken up, sold off. 

Until it's fate is decided, that just leaves Germany to deal with the EU and the PIGS. Looks like the end for the EU and EURO.

Sun, 08/14/2011 - 21:37 | 1560277 Hugh G Rection
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The dollar will finish a close second.

Sun, 08/14/2011 - 22:41 | 1560415 Cursive
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But should be nationalized, broken up, sold off. 

Well, it is the "public" bank.  Irony.

Mon, 08/15/2011 - 04:41 | 1560820 falak pema
falak pema's picture

What has the french government scratching their heads as elsewhere is the fact that ALL french banks are underleveraged and being taken to the cleaners by the Anglo-saxon HF play. Killing the Euro zone banks is now part of the financial war being waged by the US oligarchs. There is no way that Merkel and Sarkozy can do what BB can do with his own shareholder banks in US who deal in the world reserve currency. The world cannot take out the US financial ponzi as long as BB prints away; as "its our money and YOUR problem" logic, is still operative. All US oligarchs know this.

Whereas the Anglo-saxon financial oligarchy CAN take out the riches of of sovereign EU; now only sovereign in name. As the ECB has no teeth and the EU sovereigns won't give it that power, considering it too risky for each nation state. Divided they always in front of empires on rampage..even to the gates of hell.

These financial barbarians will rip -off the EU zone, as there is apparently no will to fight in EU. If they do they will only be one step closer to their own subsequent demise. Nowhere to run nowhere to hide, as the USD is programmed to die under its own ponzi deadweight; whether the Euro dies or not.

Its western civilization that is expressing its own death wish. Rising sun of the second revolution says it all...

Sun, 08/14/2011 - 19:28 | 1560026 machineh
machineh's picture

SocGen's microscopic-equity balance sheet resembles those of Fannie Mae and Fannie Mac in 2008.

How did that work out?

Sun, 08/14/2011 - 19:33 | 1560032 JW n FL
JW n FL's picture

can you say Bank run tomorrow!

I wonder if right now the atm machines are not working in over drive due to this story going viral!

here comes the internet switch!

truth in the United States equals Jail or Prison!

Sun, 08/14/2011 - 19:57 | 1560093 gwar5
gwar5's picture run tomorrow, bitches!



Sun, 08/14/2011 - 20:01 | 1560098 indygo55
indygo55's picture

there was a blog that said Fox news reported that Bennanke was meeting with European leaders this weekend preparing to bail them out. I clicked on the link and the story was gone. Sorry. Anyone heard about that?

Sun, 08/14/2011 - 20:50 | 1560211 indygo55
indygo55's picture

there was a blog that said Fox news reported that Bennanke was meeting with European leaders this weekend preparing to bail them out. I clicked on the link and the story was gone. Sorry. Anyone heard about that?

Sun, 08/14/2011 - 19:36 | 1560037 carbonmutant
carbonmutant's picture

NYT is blaming a fictional series of articles in Le Monde entitled “End of the Line for the Euro” because it named real banks, like Société Générale.

Sun, 08/14/2011 - 19:41 | 1560048 magpie
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1929 had those articles too ?

Sun, 08/14/2011 - 19:53 | 1560082 slewie the pi-rat
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yes, but only in the talkies & newsreels;  not in the police gazette

Sun, 08/14/2011 - 20:30 | 1560039 Manthong
Manthong's picture

Gee, if investors run for the exits on the EZ banks, would not it then follow to the average rocket scientist regulator that banning short selling on silver and gold should similarly cause people to stop anything panicy ?

I'll pour another one now.

Sun, 08/14/2011 - 19:38 | 1560042 carbonmutant
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Societe Generale “categorically denies all market rumors,” Emmanuelle Renaudat, a spokeswoman for the French bank said in an interview. She declined to be more specific.

Sun, 08/14/2011 - 19:41 | 1560047 Freewheelin Franklin
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...a number which the bureaucrats at Basel will have no choice but tell the bank must go up.


Eh, Basel smasel. Who listens to them? The French have their gal at the IMF.

Paging Ms Lagarde.

Sun, 08/14/2011 - 20:38 | 1560186 Anton LaVey
Anton LaVey's picture

Please excuse my expletives, but this old battleaxe is the most incompetent French Economy Minister ... EVER. And that is saying something!

To think that this old prune is now the head of the IMF, with a pending corruption investigation in France, no less, is IRONY beyond belief!

It's enough to make old cynical me a believer in a random deity. The kind that make people go mad before they crush them forever...

Sun, 08/14/2011 - 19:46 | 1560059 swissaustrian
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What´s the share of deposits in terms of total liabilities?

Sun, 08/14/2011 - 19:47 | 1560064 gwar5
gwar5's picture

OOooH, My!  50 x leverage, and only 2% Tier 1? 

Yeah, I guess they are insolvent. Reggie Middleton is buying drinks for all ZHers next week.

And that's probably only the tip of the iceberg when it comes to leverage and hidden economic IEDs.

Good for gold.  If the CBs have their sovereign gold leveraged 100:1, this means it could be even more.

Sun, 08/14/2011 - 22:17 | 1560347 JW n FL
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Reggie pulled Tyler in on the synthetic short route last week when Reggie's info did not go viral! LOL!!

Sun, 08/14/2011 - 19:52 | 1560077 AUD
AUD's picture

assuming SocGen can issue €84 billion in new capital

This is one of the main problems, you can't 'issue' capital, you can only issue debt. It means more leverage not less & will be seen when the share price falls further.

Sun, 08/14/2011 - 19:52 | 1560079 chump666
chump666's picture

Societe General... but German banks are notoriously overleverged and underfunded risk engines.  So you got a two way sexual tension with Merkel and Sarkozy funded by French/German bank paranoia.

Major market selling on the horizon again.

Sun, 08/14/2011 - 19:54 | 1560085 WestVillageIdiot
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Right now the stock futures are up and gold and silver are down.  It's a crazy world.  I guess that makes it exciting.  Just think how bored we would all be if this stuff was rational. 

Sun, 08/14/2011 - 20:20 | 1560145 chump666
chump666's picture

funny thing, if you see the irrational pattern, you can live with it, deal with and except it.  The problem is over half of the investment community with government thrown in for good measure and CB's sprinkled on-top...are all in denial; this bizarre Keynesian fantasy land crap is unfolding.

I am locking in some major selling within a week...hopefully, I gotta eat and buy tequila, or some good vodka

Sun, 08/14/2011 - 19:54 | 1560084 anynonmous
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GDP better than expected

so it is rally time

but make sure to ignore the

  GDP deflater

Sun, 08/14/2011 - 20:25 | 1560151 chump666
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I give the Japan conjob maybe three mths, then it has a fiscal meltdown like it has never seen before.  It will need a massive bailout, by that stage China implodes and can't help. US offers help to via the IMF, but needs to raise the debt ceiling again (2011).  Begining of the US fiscal meltdown.

There you go, Peyote and crystal balls

Sun, 08/14/2011 - 21:08 | 1560236 anynonmous
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read this


say what we will about Pimpco

El Er has been a straight shooter since his 'use  the ATM ASAP' comment on CNBS in 2008

be afraid

Sun, 08/14/2011 - 21:32 | 1560269 New_Meat
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Mo b good.  Billy, indicates the "approach"

Sun, 08/14/2011 - 19:55 | 1560087 zorba THE GREEK
zorba THE GREEK's picture

France is the biggest Ponzi in the EU. Of course their largest bank is insolvent.

Just what a bunch of snooty people deserve.

Sun, 08/14/2011 - 20:42 | 1560193 Anton LaVey
Anton LaVey's picture

Ah, yes, another intervention by another know-nothing.

I'll let you know, kind sir, that BNP is the biggest French banck BY FAR. SG is just a distant second (or maybe even third).

Oh, and just in case you think 'snooty' France will get what it deserves, I have two words for you: 'Germany' and 'UK'. If you think sh****y SocGen is a disaster, just wait until you see the mess Barclays, HSBC and others will leave behind (Deutsche Bank anyone?).

'Nuff said.

Mon, 08/15/2011 - 00:44 | 1560660 TruthInSunshine
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If SocGen has sepsis, and it surely does, HSBC has ebola and is bleeding from the anus and eye sockets.

Tue, 08/16/2011 - 14:50 | 1566355 Anton LaVey
Anton LaVey's picture


Sun, 08/14/2011 - 20:03 | 1560104 Hugh G Rection
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Of course French Banks are insolvent. The US still has the receipts for the toxic derivatives.

Sun, 08/14/2011 - 22:30 | 1560386 Bay of Pigs
Bay of Pigs's picture

But didn't Kudlow said they were all doing just fine last week on the BlowHorn?

50X? Ha doubt Larry.

Sun, 08/14/2011 - 20:11 | 1560119 pan
pan's picture

It's not looking good for the paper bugs.

Sun, 08/14/2011 - 20:13 | 1560123 Withdrawn Sanction
Withdrawn Sanction's picture

Lehman was 40:1 (2.5%), as I recall, before it imploded--assuming you could have believed its capital numbers any better than SocGen's.

Sun, 08/14/2011 - 20:15 | 1560128 buzzsaw99
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As long as nobody looks at the asset side of the balance sheet too closely everything will be fine.

Sun, 08/14/2011 - 20:40 | 1560189 KennyG09
KennyG09's picture

Kuato FTW!!!

Sun, 08/14/2011 - 20:54 | 1560216 buzzsaw99
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Start the reactor, free Mars.


Sun, 08/14/2011 - 21:42 | 1560284 KennyG09
KennyG09's picture

Open your mind! Open your mind!!!!

Kuato is a boss.

Mon, 08/15/2011 - 10:34 | 1561432 Tense INDIAN
Tense INDIAN's picture

as long as nobody Panics the system will be ROLLOVER 



its all about phsycology now

Sun, 08/14/2011 - 20:15 | 1560129 booboo
booboo's picture

Why them lousy cheese sniffing frogs, the Germans ought to march right in there and.......ah, nevermind, bad idea.

Sun, 08/14/2011 - 20:16 | 1560133 infiniti
infiniti's picture

Equity instruments and associated reserves consists of preferred shares, perpetual preferred, and deeply subordinated notes. Not sure how the author concludes that the entire amount should be deducted from equity.

Sun, 08/14/2011 - 20:45 | 1560204 machineh
machineh's picture

I'm not either. SocGen claims equity of 4%. But then, how much unrecognized impairment of its assets (such as peripheral European debt) has taken place?

Two percent could be right for the wrong reasons. Or even zero percent. The asset side is the real mystery.

Sun, 08/14/2011 - 21:54 | 1560301 Eally Ucked
Eally Ucked's picture

Maybe this will be helpful:
"If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory redemption feature at a future date, the substance is that they are a contractual obligation to deliver cash and, therefore, should be recognised as a liability. [IAS 32.18(a)] In contrast, preference shares that do not have a fixed maturity, and where the issuer does not have a contractual obligation to make any payment are equity. In this example even though both instruments are legally termed preference shares they have different contractual terms and one is a financial liability while the other is equity."

Sun, 08/14/2011 - 20:49 | 1560208 tom
tom's picture

Interesting but I agree with Reggie that the hot issue is short-term debt vs long-term assets.

Sun, 08/14/2011 - 20:50 | 1560212 Gwaihir
Gwaihir's picture

So SocGen accounting is done using US GAAP? Ever heard of differences between accounting systems?  

Sun, 08/14/2011 - 21:24 | 1560255 The Count
The Count's picture

As the Geico lizard would say. "Societe General is in a bit of a quandary.



Sun, 08/14/2011 - 21:59 | 1560306 Caviar Emptor
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This is all very stock bullish indeed. Here's why: take the inverse of rational logic, subtract out the truth and supporting data, multiply by 'seasonal factors' and 'animal spirits', add the anti-log of the derivative of Fed money printing ....and Presto! You have the bullish case of a screamer to the moon that is part of a market OF stocks, not a stock market. And when the shill players start yelling they made profits you'll lay your money down for a bet anyway. But don't blame the math if your timing was off, you were simply wrong for the right reasons. 

Sun, 08/14/2011 - 22:48 | 1560432 Religion Explained
Religion Explained's picture

You know what would be even more funny than your post? A soaring market tomorrow proving your thesis correct. (Nobody long for the right reasons would be very funny as well).


Sun, 08/14/2011 - 22:53 | 1560446 cobra1650
cobra1650's picture

Skank of America and SOCGEN both dropped from 14 to 6 in short order.

That bald chiapet 5 ft Cramer put out a piece in Jan 2011..."10 reasons to buy Skank of America".....LMFAO.

Sun, 08/14/2011 - 23:09 | 1560478 Mediocritas
Mediocritas's picture

And when the ISDA drinks the kool-aid and refuses to call it a credit event, it does nothing to change the fact that losses must be realized. Those that hold CDS thinking that it protects them from loss will find out the hard way that the CDS is a mirage and will be forced to eat the loss directly.

So the ISDA failing to declare a credit event does NOTHING to prevent systemic failure, in fact, I think it makes the problem worse as it increases the chaos and confusion out there.

If the ECB doesn't embrace euro-QE here, then markets are about to get toasted, made ever more crispy by the fact that there are fewer buyers from short covering. On that final note, pushing bears further into synthetic shorting simply assures that the market becomes even more chaotic in the lead up to options expiry dates.

If the morons in charge want calmer, less volatile markets, then the best thing they could do would be to just go on a holiday and STOP MEDDLING.

Mon, 08/15/2011 - 00:54 | 1560670 Eireann go Brach
Eireann go Brach's picture

Let the French rot in the stench of their own horrible BO!

Mon, 08/15/2011 - 01:29 | 1560716 navy62802
navy62802's picture

Ah the wonders of fractional reserve banking ... a system in which banks are insolvent by design. Gotta love that idea.

Mon, 08/15/2011 - 03:23 | 1560780 IMA5U
IMA5U's picture

but i thought it was all just "rumors"?



Mon, 08/15/2011 - 05:08 | 1560834 frugartarian
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Hold secret meeting with bernankies, get cheap money. Lend more. Problem solved (applicable to all banks / governments)

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