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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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jumped out at 1178. got back my loss plus 2k. live to play another day.
Not sure why this is even news worthy. They can just print more and keep the game going, isnt that the new deal??
What makes you think so? Bankers and their central banking puppets have to learn the difference between money and value. They can create and confer the first, but not the second. ...That wont stop them from trying, however.
In other words, if the first several trillion didn't solve the problem, how will a few additional trillions work any better?
This is news b/c it reveals the monster in the closet is not the bad debt per se' but the derivatives larded on top of it. Derviatives that until now, were not recorded on balance sheet. It's a BFD.
A real surprise? Apparently accounting is really a skill lost forever.
According to Jamie Dimon it is also unAmerican. Who needs to account for liabilities when they can be counted as assets.
The value of the CDS is not limited by the value of the debt being insured. So 1 billon of debt might have 10 billion of CDS written against it. The net effect of CDS on the banking system may be zero (because for every winner there is a loser). But a default could mean that some companies will be completely wiped out while others profit handsomely.
If history repeats itself, in the end it will turn out that Goldman is holding a big chunk of the CDS. For example, Greek CDS were extremely cheap earlier in the decade when Goldman was helping Greece to hide its deficits from the other Euro members. If you knew back then that Greece was fudging its books, wouldn't it make a lot of sense to load up on those CDS at a time when everyone else thought that Greece's finances were solid?
Market values of PIIGS derivatives exposures according to the EBA data ranged between €1.5bn for BNP Paribas .
bollocks. Back when AIG was bailed out exposure was more like 10-20bn apiece for big euro banks, just for AIG CDS.
the figure is astronomical because it was used a a regulatory workaround, as a "hedge" that was never meant to be called.
instead of holding reserve /cash /stock / or physical for coverage, banks just wrote each other blind otc credit protection.
on CDS alone I'd say many bank has more exposure that it has in valuation. for total notional derivatives, I'd say trillions.
they can't put it on exchange, cause then we'd see how exagerated and inflated the total insurance was, say 100x the capital.
Lots of people were shocked when they discovered that the U.S. Social Security fund was nothing more than a few unbacked paper promises. No assets. Next up is realizing that banks are almost the same deal. The real function of the big banks at this point is to move real assets to the bankers and convince customers that their "money" is in the bank. It isn't.
There is very little difference between these banks and Madoff's scheme - only a matter of degree. A fraction of money coming in goes to service withdrawals, the rest goes to the bankers. Don't believe it? Wait a while. All the machinations and monetary devices and part of the subterfuge.
Net of collateral and hedges, biatchez!!!!
And where are the trolls today? General Jim said it years ago and is right on. QE to Infinity. There is no other choice now. Too late to turn back and there is no one out there who believes in the truth and the fact that we must at some point pay the piper. But pay him we will.
Green for QE to Infinity, so true.
HARRRRRRRRRRRRR.....FRY the shorts! ROFLMFAO
That was an interesting reaD? HEY! Can someone to tell the CNBS contributers to quit " Bull Shitting" , every one. Farcical it is!
I suspect the euro will take a serious run @ the 200 day moving average before it runs hard down to the friday close.
These 3rd world Eastern European countries that brokers were pumping a few years ago may turn around and bite the A*S of investors.
Romanians and Hungarians are good at gymnastics and teaching those Bears to ride bicycles but economic growth...I'm not so sure.
GL to them in any case!
Brilliant stuff.
One thing:
Not when the EU is involved in any way, shape or form.
The EU's nomenklatura and their eurofanatic followers - especially when it comes to their "Euro" - are the world's most degenerate liars. They make Bernie Madoff look like Mother Theresa by comparison.
They will fight to the end to cover up these hidden CDS exposures, and they will go to any lengths. That is a promise.
Euroland Stress Test II ring any recent bells? (You know, when the euro "bigshots" were caught lying and rigging the test the first time around, and did the same damn thing this summer - where Dexia passed with flying colors?!)
The Euro is literally one storm away from collapse. The EUnuchs will break every rule and law known to mankind, they will sink to whatever depths they feel they need to, in order to try and prop up their inherently and irrevocably flawed euro-experiment. Yes, their ego's are that large, and yes they are that deluded...
What they fail to understand, or care about, is that scams and frauds so big as this eventually collapse. It is 100% inevitable that they will be caught out, and then - the longer the fraud is perpetuated - the worse off everyone in the world will be.
If this pans out like it should in a free world, euroland is toast, full stop...but then a generation of Europeans wouldn't be consigned to massive welfare programs, worse than 1930's unemployment and a loss in their standard of living unseen since the Black Plague pretty much stopped all trade...
My money's on the liars to keep on lying and covering up - until...
I love the credit default, [ spread sheet ] . Priceless! Right out of the ( XLF / banking) Qualification { PAMPHLET } <>?
P.S. Dennis Gartman's ghost told me that the " euro " will reach parity in a " straight line"...
Accounting 101
Erste Bank
Tangible Common Equity (TCE) = 9.3bn
Total Assets (TA) = 214bn
Loan Book = 140bn
Investments ("Liquid") = 53bn
NPL = 10.6bn
Provision for Loan Losses = 6.5bn
"Guarantees" (Credit derivatives) not included...
My grandma did math and knows they are broken...
We need more Suliks around
I have to admit, this rally is really testing my conviction as a bear.
Just feel good that you know you are correct, but please consider the manipulation before placing you bets :)
They will just sell all the garbage at full price to the Fed. Fed takes all the bad stuff and then is collapsed. One world govt ensues.
Shock. Surprise. etc., etc.,
wow, you mean there are problematic off the book derivatives out there? Who would have guessed it?
www.derivativescollapse.com
SeventhCereal
no pain, no gain...
Wow! Nice move on the "secret" bailout plan! The less details provided, the more bullish it is!!!
When we get the one word press release that simply says "Bailout", we'll know we are close! eh eh
So what. While your Keyn(s)ian pres is still infesting the white house I'll stay long on dumb rallies. It doesn't make sense but it makes money.
OK! This is not funny. You go off for a few hours, and the "Tylers" dump a whole pile of steaming POO on the board. Hey Europe...It is ALL ABOUT US...IN THE USSA..NOT YOU...so cut the $hit.
Otherwise we will unleash our fleet of software defective drones upon you...Who knows where they are going?...
BITCHEZ!!!!!!
>Ctrl/sarc<
Only a fool would depend on the coming order to make whole any losses that they might incur when the real financial contagion starts. Many stocks and bonds could go to zero. Many banks may stiff their depositors and/or mete out their monies a little at a time as the value of their ponzi currency melts away, a la Argentina. Pms will never go to zero, and you have them in your hot little hand, not dependent on anybody else's goodwill.
We have these trollish traders chortling about their gains in the market today. These sharp "masterminds" are depending on somebody else's "faith and credit" in this environment? (Do they also trust the whores that they bed at night?).
Real sharpies! Hoohah!!!
There are trillions of dollars in hidden debt. Many banks refuse to write off bad loans and instead just keep the account open and add on interest, while declaring it an asset. Even though, there is no hope of ever recovering the money. This has become a common practice right across the board.
People should read this book, and get out of the system now - because it's not going to last much longer.
READ:
http://www.wix.com/andrewcostell3/simple-wealth-book
ERSTE BANK CEO said he decided to write down all bad stuff in his books in order to be on the safe side for what is coming to the financial system.
He said: "there might be bad things ahead - with a severity no one would even imagine today....."
in german language:
"Es könnten auf uns sehr harte Zeiten zukommen – härter, als wir es uns vielleicht derzeit vorstellen können." Treichl geht davon aus, dass es zu einem Schuldenerlass Griechenlands von 50Prozent kommen wird: "Unsere Hoffnungen, dass es für die Staatsschuldenkrise in Europa in nächster Zukunft eine Lösung geben wird, haben sich in den letzten Wochen sehr reduziert."