Erste Group Reveals Stunner: Reports Billions In Previously Undisclosed Underwater Sovereign CDS; Who Is Next? And How Much More Is Out There?
Anyone looking at a heatmap of European markets today will see a sea of green punctuated by a very red island in the middle. The culprit: Austrian mega bank Erste, which issued an ad hoc and very unexpected press release, in which it warned that losses in its Hungarian and Romanian books would lead to a 14% hit, or €1.1 billion, to tangible book value, something that in itself is not a surprise to anyone (except the stress test). After all, since early 2010, most have known that due to Swiss Franc-based mortgage exposure, Hungary is next to follow in the PIIGS footsteps, and its collapse has so far been delayed due to lower overall public and private sector leverage. What was, however not only a surprise, but a shock, was that Erste disclosed some major losses on its €5.2 billion CDS portfolio, consisting of "EUR 2.4 billion related to financial institution exposures, and EUR 2.8 billion related sovereign exposures". Why is this a surprise? UK-based financial advisory Autonomous explains: "The fact that Erste had a sovereign CDS portfolio which was not marked-to-market has left many investors scratching their heads. As a reminder the EBA stress test data showed Erste to have zero sovereign CDS exposure within its sovereign mix compared to the €2.8bn it now appears to have ‘fessed up’ to (taking a cumulative €460m hit). They also have €2.4bn exposure to banks via writing of CDS. The bulk is non-PIIGS but banks spreads have moved in the same manner as sovereigns (albeit wider and more volatile)." And there you have it: the bogeyman that everyone has been warning about, yet nobody has seen, CDS written (as in sold) in bulk against other sovereigns and other banks which up until now were only mythical, as they, to quote the EBA (which had Dexia as its safest bank) simply did not exist. Oh, they exist all right, and what they do is create a toxic spiral of accentuating losses whenever the risk situation deteriorates, creating positive feedback loops of ever increasing losses until the next Dexia appears... and then the next... and the next. Expect the market to latch on to this dramatic revelation like a rabid pitbull once the hopium high from today's EURUSD short covering squeeze wears off.
Still, this does not answer the question how Erste managed to squeeze this information by its auditors and the regulators, without having broken most public company, not to mention bank, laws. The answer is simple: the accountants let them do it.
Autonomous with more:
Note the EBA only required banks to declare CDS exposures in its trading book (Erste was not trading these but rather holding them as “credit surrogates”) so they could argue their exposures were strictly speaking correctly disclosed to the EBA. It seems Erste has changed their classification following an IASB paper from July. There is a link to the paper below where the relevant paragraphs appear to be 59-63 - Erste believed previously they were ‘financial guarantees’. With reference to paragraph 62 specifically, our in house accounting expert, notes that CDS do not meet the criteria for designation as a guarantee (as a guarantee must apply to a specific referenced asset held by the buyer rather than simply a referenced name). This isn't something there should expect confusion over - the starting point for all derivatives accounting is FVTPL, with any hedge accounting simply changing where the movements are recorded. Thus the decision to treat these positions as ‘guarantees’ should be considered a very “aggressive” approach.
And, logically, the two immediate follow up questions are 1) who else and 2) how much:
It also raises two broader questions - the scale of protection that has been sold by other banks across Europe and how many other banks have deployed Erste’s accounting approach (and will now be forced to move to mark-to market)? On the latter we have calls in with all the banks we cover cross Europe (more later). On the former I remind you the disclosure on sovereign CDS was a major disappointment in the EBA stress test in July. Despite investor hopes / market pressure at the time, the EBA presented the data in a way which rendered the information almost meaningless. It showed the net of positive market values and negative market values with no data on the notional value of positions. Market values of PIIGS derivatives exposures according to the EBA data ranged between €1.5bn for BNP Paribas and (€800mn) for LBBW.
As we identified in our note at the time (see page 15 - link below) the problem is that the net market value can change very quickly and unfortunately we remain totally in the dark on who has written what. The BIS data is equally as unhelpful - in its latest Quarterly Review (link below), the BIS explained how complicated the data is and how impossible it is to unravel who has written what. This is an obviou
So while Erste group is getting pummeled for being the first to be truthful, granted under duress, with its book exposure, this is merely the first of hundreds, if not thousands, of banks that it will be revealed in the coming weeks and months wrote hundreds of billions of CDS on sovereigns that have since soared to stratospheric levels. While on one hand ISDA may show up and once again make it clear that it only works for bank interests, reconfirming it would never declare a sovereign credit event (for more on the traditional CDS triggers see table below), the truth is that Erste, and soon many other banks' counterparties will demand a pound of flesh in daily variation margin, for even the tiniest amount of CDS exposure, which in turn will lead to a sudden and very dramatic liquidity crunch as unlike quarterly reporting where banks can fudge numbers and data all they want, when it comes to counterparty exposure, other banks know better than anyone just how bad the bank on the other side of the phone is. And will act accordingly.
Expect many more risk flaring episodes in the weeks ahead once this revelation is properly digested.
And as noted above, while probably very much irrelevant now that IDSA has made it clear in the aftermath of Greece it is merely a figurehead for various banking interests, and will never pronounce a sovereign EOD, here is what in theory, should trigger credit events for various types of CDS.
And from the Erste press release, here are the long-overdue details on its CDS exposure:
Background on the CDS portfolio (protection sold)
In the years up to 2008 Erste Group built up a diversified portfolio of off-balance sheet sovereign and bank risk positions (CDS sold), which – as credit surrogates (financial guarantees) – were held at amortised cost. As at 30 September 2011 the total volume amounted to EUR 5.2 billion (at amortised cost):
- EUR 2.4 billion related to financial institution exposures, and
- EUR 2.8 billion related sovereign exposures
- About 14% or EUR 0.7 billion of the total volume is related to banks and the sovereign in Greece, Portugal, Spain, Ireland and Italy
Following an interpretation issued in a staff paper of the IASB dated 28 July 2011 concerning the classification of CDS as derivatives versus financial guarantees, the management board of Erste Group decided to reclassify the aforementioned portfolio as of 30 September 2011, resulting in a mark-to-market valuation of the entire portfolio. Historical accounts will be adjusted as follows: the cumulative effect of EUR -149 million for the business years prior to 2010 will be booked against equity at the start of 2010; in the business years subsequent to 2009 the valuation result of this portfolio is included in the line item "Net Trading Result”. The overall impact from the reclassification amounts to EUR -176 million pre-tax (EUR -132 million post-tax) in 2010. In 1-9 2011 the negative impact from valuations and from losses on disposal amounted to about EUR -234 million (about EUR -180 million post-tax).
With a view to minimise income statement volatility, Erste Group plans to sell these assets in an accelerated manner, taking advantage of windows of opportunity as and when they arise. As a substantial part of these assets are sovereign exposures, the disposal will have a correspondingly lower impact on risk-weighted assets.
Erste Group has also significantly reduced – mainly as a result of asset disposals – its net exposure (sovereign, bank, corporate and retail) to Greece, Portugal, Ireland, Spain and Italy from EUR 5.1 billion at year-end 2010 to EUR 3.6 billion at 30 September 2011; 81% of this exposure is related to Spain and Italy. Sovereign exposure to Greece, Portugal, Ireland, Spain and Italy was reduced from EUR 1.9 billion to EUR 0.6 billion, while bank exposure declined from EUR 2.3 billion to EUR 2.0 billion; corporate and retail exposure remained unchanged at about EUR 0.9 billion (mainly Spain and Italy). As of 30 September 2011 95% of Erste Group’s sovereign exposure to Greece, Portugal, Spain, Ireland and Italy is carried at market value.
PS: You know the drill: Austria-Erste CDS compression trade...
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cockroach theory. Where there is one there is always many many more.
Ya know, "hundreds of billions of CDS on sovereigns that have since soared to stratospheric levels." is not a European invention. This is a Wall Street (read Goldman Sachs) invention. they really did steal the world.
Do you not think you are being unfair on Cockroaches using them in this analogy?!
take a cockroach to lunch, BiCheZ!
la cucalmuerzo!
In other announcements.....the new spokesman for the EU is Gomer Pyle.
......SURPRISE, SURPRISE, SURPRISE!!!
Beat me to it!
---
Also, @ fuu,
Yum, may I have dozen please? "Para llevar a la casa."
Cene en sólo!
hmmmm. I should have been a bankster...and make millions
We already know that all Euro banks have tons of off-balance sheet horseshit. The timing of their 'announcements' is the only wildcard. It's always an accidental discovery.
I hope these motherfuckers burn along with all fiat.
In all seriousness, is there a possibility that these banks are burning the red-headed step children off their books before Basel III really starts to impact them.
That is why, we should make tabula rasa..
Someone obviously got spilt up from the Occupy Wall Street demo...
Goldman did not invent CDSs. They were first offered up by bankers in trust and subsequently by JP Morgan. Originally they were intended as big-ticket risk control for multinational corporates and were supposed to come with the same due dilligence as any insurance policy. JP Morgan and later Citi, were particularly instrumental in deploying them for more general puposes including mortgage securitisation. Of course, by the time CDSs blew the financial system up 'everybody was at it', but it was not Goldmann that invented them.
Lets at least try to get our facts straight.
Loads of 'Come to Jesus' moments bitchez as banksters now run to get bailed by the sheeple.
Were you the dude who called this earlier today? Somebody came out earlier and said watch Austria and Eastern Europe. Whoever it was, kudos.
GE wrote that stuff.
In relation to Bulgaria I think I said something....which makes me wonder if something in Bulgaria has gone pop. Was a day or 2 ago though wasn't it? Too much vino and I forget.
'Dick Darlington
Vote up!
1Vote down!
0Austrian "jewel" Erste Group Bank Ag (EBS AV on bbg) getting hammered today after announcing losses in it's Eastern Europe operations and markdowns of it's PIIGS holdings'
Congrats Dick Darlington, call of the week.
Good eye, Gene, have a green!
I'll give you a green for that Dick.
I wrote a comment about it in the post on the Max Bank and the greek bank recap/aid. ATX was beaten up by this, Erste booked a big loss on goodwill writeoffs from eastern Europe, I expect more to come. Austrian banks have 300 bn € exposure to mortgage loans in eastern Europe, and most of them are pegd in EUR or CHF and it is a big pile os steaming shit. I am from a eastern Europe country.
It is interesting that the whole eastern european aspect has been largely ignored....or perhaps by design kept out of the news because things could be substantially worsethan the larger 'realm' is aware?
Things are a lot worse than it is presented, a lot of mortgage dept is under water, and there is a lot of currency risk even with the big interventions by the SNB. It could became very ugly
Very Bullish
No doubt about it.
yeah, there is a lot of "hidden" nasty out there. i have gotten burned today already for 5k, but i believe i'll short again -20 /es this time from 1185.
Sorry... this story missed the bad-news-cutoff last week and is no longer admissable. The market has put in its lows for the year. Better luck with these sad, outlier stories, next summer.
didn't you get the memo? humor is only allowed on redES+greenGC days
so another 5% up tomorrow?
Unless we can just get another 8.5% in the scheduled afternoon melt-up today to equal the stellar performance of Columbus Day 2008 (per previous thread).
Up 2.2% ..then the down sessions will start again...
HEY no problem! Europe is engineering a $6 trillion Euro leveraged super-fest....hell just borrow some from them! PLENTY to go around! The world is flush with CASH all is well!
And if $6 trillion is not enough they can still be re-leveraged to 60.
Trees do grow to the sky in the land of unicorns.
Fiat fuck fest - Fisting the public since 1913.
T-Shirts?
The EBA didn't have Dexia listed as the safest bank. Intesa Sanpaulo listed Dexia as the safest out of the 21 "peers" it selected.
Whew! I can't wait to hear about the others. Being the leper with the most fingers ain't that high an endorsement.
...the bearing snickers...
Yuh!.. cheap bearings are always noisy...
ZH got the facts wrong. It hurts the credibility of the site and the message when that happens. The message doesn't change whether or not Dexia was ranked at the top, so why give critics ammo with sloppy / false reporting?
Facts are important, especially for a site outside the MSM.
yeah, but tyler put the Intesa Sanpaulo list over the weekend, so i think he just mis-spoke, altho you seem to be technically correct, imo, kote
like you, i do not consider the ideas to be too damaged or "changed" by the glitch, which i have removed here:
"And there you have it: the bogeyman that everyone has been warning about, yet nobody has seen, CDS written (as in sold) in bulk against other sovereigns and other banks which up until now were only mythical, as they, to quote the EBA (...[deleted dexia mention]...) simply did not exist. Oh, they exist all right, and what they do is create a toxic spiral of accentuating losses whenever the risk situation deteriorates, creating positive feedback loops of ever increasing losses until the next Dexia appears... and then the next... and the next. Expect the market to latch on to this dramatic revelation like a rabid pitbull once the hopium high from today's EURUSD short covering squeeze wears off."
but you are correct, i think, in worrying that someone might "report" what zH & tyler are saying, here, and "push" the glitch, just for the sake of confusing disinfo, to make it look like tyler is trying to pull something or "denigrate the EBA" or whatever
so, thanks; i missed that the first time; and yes, this is an important zH/durden call
I heard on the CNBC today that the blogosphere is spreading all these rumors about I-banks like Morgan Stanley........must be a reference to Zerohedge.
Tyler, don't start all these rumors for all these banks! CNBS (aka Pravda) won't like it.
totally irrelevant, the bank is already nationalised and besides Merkozy promised, all will be well, hush little one...
Oh look what I just found down the back of the sofa.
This is a completely asinine situation.
What did you find, another $1 trillion dollar bill? Hooray, the world is saved once again!
I think you mean a $trillion platinum coin.
The banking industry needs to give out bonuses to retain their talent. The talent is the best and the brightest in the whole world. Yet, they manage their business this way. Whoops, I found another debt that will bankrupt our bank if you don't bail us out. It is amazingly stupid to expect the same "talent" to solve the problem that caused the problem.
@ SheepDog
No, the trillion dollar bill is NEXT week!
Hey - this is bullish for metals!
Erste had previously consulted with Tim Giethner regarding disclosure of the CDS's.
No, no: It's actually more asinine than that.
The basic content of the press release is, "We just asked around a bit and found out that CDS are derivatives. Sorry, guys. Our bad."
And if ISDA never actually declares a default, those who bought the CDS protection are fucked. There's no way out. It's going to end up being "backstop" everything bazooka time.
All 'backstopped' on the backs of the people who cant even find a job.
And all the while crooks telling the people.....
You have never had it so good!
be greatful damn you...
And government money flows the stupidest most aggressive accounting banks
It explains why Austria backs EFSF - better to receive than give
There is a joke the Germans tell about Austrians - when an Austrian says to you "guten morgen", he's just lied twice.
I suspect there are all sorts of horror stories on the books of some of their banks, but they are good at keeping secrets among themselves...
A Kredit Anstalt moment awaits many, it would seem.
KA "...had suffered serious financial trouble in 1929, but various governmental and other sources had leaped to its aid, driven by the blind expediency of the moment telling them that such a large bank must not be permitted to fail. ...The Austrian Government also guaranteed some of the Boden bank's investment. This shored up the shaky bank temporarily. The crisis came when Austria turned to its natural ally, Germany, and, in a world of growing trade barriers and restrictions, declared a customs union with Germany on March 21, 1931. The French Government feared and hated this development, and hence the Bank of France and lesser French banks suddenly insisted on redemption of their short-term debts from Germany and Austria.
That ringing in your ears is an echo. This excerpt is from Rothbard, http://mises.org/rothbard/agd/chapter10.asp but Anderson is the one who coined "The Tragic Year," referring to 1931, the darkest year of the Great Depression. The collapse of KA kicked off a chain reaction of messes around the globe.
The current problems at Erste may not rise to the KA level (yet), but someone has blinked, and that's all it will take when a system is as fragile as this one is.
says a little somethin' somethin' about the Austrian School of Economics, huh?
market doesnt give a crap about insolvent banks. the fact that dexia was bailed out only strengthens the investors resolve to BUY BUY BUY!!! there..is...no...perceived...risk...in...the...markets...when sovereigns....are...there...to...save...the...day!!! this is NOT 2008, because every investor now understands the game plan. BAILOUTS!!! its risk free investing. dexia set the tone. an austrian bank with cds underwater is a sideshow to investors!!! austria will BAIL THEM OUT if need be......only when the biggest sovereigns themselves explode will there be panic. for now, moral hazard is all the rave. invest em if you got em........
WTF is going in??? Fucking sellouts!!!
Why da fff haven't you Tylers covered this???? All that bitching and there you go... selling out!!!
What a bunch of c*ks*kers!!!
Officially announced on October 3, 2011, the "Occupy the Federal Reserve" movement called for by pro-freedom pundit Alex Jones and augmented by "End the Fed" movements nationwide, is set to begin this weekend. Despite the implications of large crowds convening upon America's central bank, run by the very corporate-financier interests that have abused Wall Street and stirred up the "Occupy Wall Street" crowds in the first place, not a word of it has been spoken in the Western media - in fact a Google News search for "Occupy the Fed" retrieves the following, cartoonish headline: "Occupy Wall Street finds sympathy in the Fed."
And looky here:
2012 like Herman Cain, a former Federal Reserve chairman, makes such pandering farcical if not entirely offensive to the American people's intelligence. Not only are Americans calling this hubris-filled bluff, but so are foreign pundits overseas.
Some of you morons around here been fawning abt this Cain scumbag.
WTF!!??? You like being slaves or is it that you know once this Ponzi comes down you'll have to get real jobs??
muahahagahahahaga!!!
Many decaf brands are just as tasty as the real thing...
@PAPERBUGSBURN--------EXACTLY!!!!!!!!!!!!! +10000000000000000000000000000000000000000000000000
FUCK...........HERMAN........CAIN..........
Fuck Herman Cain the FED asspuppet.
hard to believe the Fed is an equal opportunity employer....
Seriously, you can see the piano wire coming out of the back of Cain's coat. What a massive jerk off.
muahahagahahahaga....Is that Swahili?
Well, like my friend Chuck used to say...
BTW: Hey Europe... how are those Timmah Stress Tests working out for you?
So now the question is, who wants to hold the vapor pump confidently into the EFSF super secret vote overnite?
Just keep bringing the bad news - it is kerosene on the short-seller bonfire that is engulfing the hedge-fund and blog community...Just keep buying them with rapidly-eroding fiat just like Zimbabwe.
BUY BUY BUY...
What it really does is accelerates the moment of coordinated global (and pretty much ceaseless) money printing. That's it.
Hey! who invited you to your own party? can't we just say uneducated and immature things without you jumping in? ;0)
LOL and green!
@tyler, you meant to say coordinated global money printing and gold molesting...
I dont agree 100%, Europe is just being forced to chain itself tightly together as 1 for the big implosion, so that none of them can wiggle out of it.
1 world govt, 1 world currency....soon.
My thoughts exactly. These types of announcements will only accerate as the banks suddenly discover more bad debt in and effort to be transparent and forthcoming. The rape of the taxpayer and theivery of real wealth continues. Bloody sheep. I still maintain that the energy and water issues around the world may end up causing more problems than any financial crap in the immediate future. Confrontations in both areas are imminent in many locations already.
Precisely.
We await the "Mother of All Shock and Awe" printing campaigns.
The interlocking of the banks through all these derivatives does seem like a deadly setup for sudden apocalypse. But I don't agree that the PM's will be simultaneously crushed. If so, why bother with them so much now? Why not wait for the final moment to devastate the PM longs.
Notice how the CHF weakened against the EUR late last week and last night? Nice buffer for today's EUR issues. Same with PM's I think. Scare out as many as possible before the big moment.
That is the status quo hopium game plan. Only way to stop it is stakes through the hearts of our fiat printing parasitic central bankers!
TD, yes, I believe that may be a plausible read...the setup, then the con.
Most of these entities stuff this crap into SIVs when they have to do reporting (or similar devices). They then claim 100% ownership in the SIV at stated book, then once the report is run they "buy back" the investment to their books. The more crap these financial "wizards" dream up, the more it makes me believe in alien reptilian lizards (AKA "the Grays") in high places.
But seriously, with so many warped tricks up their sleeves, one has to wonder why they have to confess anything at all, let alone reconcile their books or admit losses, etc.
Causes me to wonder...WHY? Then I have to look at the end result and find out who that benefits.
I wonder if Merkl and Sarkozy will be fast of enough to recap the banks? Things that indeed make you go hmmmmmm....
It's all smoke and mirror. When the shit does hit the fan, it won't happen in Euroland. At least thats what Marc Faber says.
http://marcfaberblog.blogspot.com/2011/10/real-threat-to-global-markets-is-china.html
ALL theyre doing in Europe right now is chaining themselves tightly together for the coming collapse so they all sink, and all are forced into the same 1 world govt, thats all, if people want to pile their money into stocks based upon this theyre insane.
blah blah blah socialism blah blah blah socialize the losses blah blah blah fascism. too many words sheepdog1
mmmm... waffles and goulash, ghoulZ!
Belly up to the trough fo the slop runs out.
Don't you wish there was something we could do kick this motherfucker over the edge? I am tired of talking about imminent collapse. GET ON WITH THE COLLAPSE.
Initiate a bank run by pulling all of your funds from the major banks.
wash, rinse, repeat ...
Initiate a bank run by pulling all of your funds from the major banks.
kill the paper shorts by buying physical silver.