Stress Test

A land grab shrouded in a banking takeover, wrapped in a financial crisis "rescue." As always, insiders get first dibs.  (And, yes, there is an MF Global connection.)

Over the past 24 hours, Zero Hedge covered the various key provisions, and open questions, of the Spanish bank bailout. There is, however, much more when one digs into the details. Below, courtesy of Deutsche Bank's Gilles Moec is a far more nuanced analysis of what just happened, as well as a model looking at the future of the pro forma Spanish debt load with the now-priming ESM debt, which may very well hit 100% quite soon as we predicted earlier. Furthermore, since the following comprehensive walk-thru appeared in the DB literature on Friday, before the formal announcement, it is quite clear that none other than Deutsche Bank, whose "walk-thru" has been adhered to by the Spanish government and Europe to the dot, was instrumental in defining a "rescue" of Spain's banks, which had it contaged, would have impacted the biggest banking edifice in Europe by orders of magnitude: Deutsche Bank itself.

First Moody's cut the most prominent Austrian banks, and now it is Germany's turn, if not that of the most undercapitalized German bank yet: "The ongoing rating review for Deutsche Bank AG and its subsidiaries will be concluded together with the reviews for other global firms with large capital markets operations." Punchline: "Frankfurt am Main, June 06, 2012 -- Moody's Investors Service has today taken various rating actions on seven German banks and their subsidiaries, as well as one German subsidiary of a foreign group. As a result, the long-term debt and deposit ratings for six groups and one German subsidiary of a foreign group have declined by one notch, while the ratings for one group were confirmed. Moody's also downgraded the long-term debt and deposit ratings for several subsidiaries of these groups, by up to three notches. At the same time, the short-term ratings for three groups as well as one German subsidiary of a foreign group have been downgraded by one notch, triggered by the long-term rating downgrades."

We finally get to continue what we started in 2008. Becuase the TPTB insisted on kicking the can down the road, the resulting pain will be excruciatingly devastating versus simply horrible! Alas, once you get you short positions/puts/futures in before the inevitably ill-informed short ban, money can still be made. 

The man that called nearly every big bank collapse of the decade says EU nations don't stand a frozen raindrop's chance in hell of bailing out banking systems literally multiples of domiciles' GDP. So now what???

Back when Dexia was nationalized in the fall of 2011, one of the running jokes was that it was the bank that had one of the highest grades in the European Stress Test conducted just months prior. Here is another joke: we now know that Spain's Bankia is the next major financial institution which is being nationalized, and whose bailout costs are literally growing by the hour. Was Bankia one of the Stress Test 2011 failures? Why of course not...  But 5 other Spanish banks were.

Even if everyone wanted it.

For anyone who had doubts that the JPM CIO debacle was only just starting, the just broken news by Bloomberg that the firm has hired former SEC enforcement chief William McLucas "to help respond to regulatory probes of the firm’s $2 billion trading loss" should put all doubts to rest. Because the last thing JPM needs now is to be perceived as engaging in even more regulatory capture (its current general counsel was also previously a head of enforcement at the SEC) . Yet because it is doing precisely this, means that the offsetting cost, namely the fallout that will be associated with the CIO unwind if and when completed (and we will know for sure when the Q2 earnings are released at the latest), will be fast and furious.

Earlier today we mocked Jamie Dimon for announcing the cancellation of his firm's stock buyback program, just two shorts months after March 13, when none other than JP Morgan forced the Fed to scramble and release the full stress test ahead of schedule, after Jamie Dimon decided to frontrun the full FRBNY stress test release (whose sole purpose was to determine under what worst case scenario the Fed was ok with allowing JPM and various other Bank Holding Companies to proceed with dividend raises/stock buybacks) and announce just that - a dividend increase and a stock buyback. Well, in addition to some well justified egg in Dimon's face, today's results actually have some far more troubling implications. Because while we now know that the buyback is over, what we still don't know, because Jamie Dimon refuses to tell us, is just how big the CIO P&L loss as of close today. Yes, there are many speculations but nobody knows for sure. Zero Hedge was the first to suggest based on reverse engineering of what the potential loss drivers may well have been, and subsequently the slower media corroborated, that the total loss would be orders of magnitude greater than the $2 billion announced on May 10. But how many orders? Well, for what may be a critical clue, we go to the Fed's stress test itself. Presenting Exhibit A - page 73 of 82...

Just As I Warned Of JPM's Exposure, Those Other Warnings Will Come To Pass As Well. I pull stuff out of my analytical archives and low and behold, who do I find?

You know I saw this one coming 3 years ago, didn't you??? This ain't the end of the story either. You heard it hear first, again!

As we pointed out yesterday when we correctly summarized that "Spain Appears Unsure What A "Bank Bailout" Means", we said "Spain is to require its banks to set aside more provisions (between EUR20 billion and EUR40 billion) in an effort to overhaul the country's financial sector. This additional need for reserves (or provisioning) puts yet more pressure on the banks' balance sheets as it comes on top of the already EUR54 billion that has been set aside from February. Interestingly the EUR20-40 billion still falls dramatically short of Goldman Sachs' estimate of an additional EUR58 billion that is needed to cover reasonable loss assumptions. We can only assume that the game is to create as large a hole as is possible without tipping the world over the brink and then fill it with the state funds a la TARP (as Rajoy has indicated will be the case)." Well, as it turns out there was no ulterior motive behind the stupidity which is merely ad hoc improvisation of the worst kind that we saw back in Greece in the summer of 2011. Because according to IFR, not only is the bailout going to be woefully insufficient, but also, will be a 100% dud, as "Spain is likely to offer some banks the chance to opt out of some of the reforms set to be announced on Friday following heavy lobbying from the industry, according to two people familiar with discussions." In other words an insufficient bank sector nationalization, which will affect on some, but not those who actually need it, in what is now so clearly just another exercise (think stress test) to give the impression that the Spanish banking system is solvent. In the meantime, absolutely nothing will happen with the hundreds of billions of underwater mortgages carried by the big banks, which will merely fester until they finally become the Fed's problem.

Three rings...count 'em. Or, are those jail cells? New emails show MF's General Counsel Ferber desperate to get Corzine in front of Gensler and keep the zombie Corzine Trade alive.

UPDATE: Added S&P 500 in Gold reversion post LTRO2/Bank Stress Test

Are investors rotating from the 'safety' of Apple to the new 'safety' of Gold and Silver? Because the next time there is a wholesale margin call, which courtesy of soaring margin debt will likely be today, speculators will have to sell the one asset that is outperforming everything. You guessed it...

Unfortunately, nobody in the Treasury seems to want to deal with the mess at Ally Financial before Election Day.  But the question is whether Ally can wait until then.