In the post "The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications" I identified the MF Global event as something that the mass media and many analysts are resisting to do. I called it for what it was - a run on the bank - plain and simple. I forecasted this "new-ish" style of bank run (a run where instiutional counterparties cause the drain) about 6 months ago, see The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
Well, there have been runs on the bank in Europe, and it has skipped the pond to arrive here in the states. It's just that no one want to call it that, even though that is exactly what it is. On of the pertinent points about these bank runs is the abject risk it showers the brokerage account holder in those banks with. Remember, thanks to TBTF, banks customers are no longer those silvery haired grandmas walking out with toasters. Which brings me to an interesting story by Jonathan Weil over at Bloomberg: MF’s Missing Money Makes You Wonder About Goldman
Six months ago the accounting firm PricewaterhouseCoopers LLP said MF Global Holdings Ltd. and its units “maintained, in all material respects, effective internal control over financial reporting as of March 31, 2011.” A lot of people who relied on that opinion lost a ton of money.
MF Global filed for bankruptcy on Oct. 31. This week the trustee for the liquidation of its U.S. brokerage unit said as much as $1.2 billion of customer money is missing, maybe more. Those deposits should have been kept segregated from the company’s funds. By all indications, they weren’t.
PWC botched it with MF Global's relatively plain vanilla operations and $41 billion or so of assets. What in the world makes anyone comfortable believing that they will get it right with Goldman (you know, that other company that MF Global's CEO ran) with nearly a trillion dollars of assets (not reconciling the myriad off balance vehicle assets that are in play)? So, if PWC was able (or willing?) to overlook flaws that allowed $1.2 billion worth of client money to literally disappear at MF Global, imagine how well they're manning the ship at an entity roughly 25X larger and more complex - not to mention that much more influential in coercing auditors and analysts to "look the other way". For anyone who actually believes that Goldmans is really so much better than MF Global and can never take the losses that MF Global did - stop inhaling from pipes passed to you from West Street inhabitants!
MF Global ran into a liquidity squeeze while betting on the European debt that I have warned my subscribers for two years to avoid like the plague. Goldman is doing the same thing, no?
As excerpted from the model that powers BoomBustBlog subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?
As you can see, Goldman traded its derivative book risk for sovereign risk - just in the nick of time to catch the tail end of a derivative crisis & the start of a sovereign debt crisis. Excellent job fellas! Goldman has literally doubled its sovereign assets, starting the exact year that I started warning in the Pan-European Sovereign Debt Crisis series. BoomBustBlog subscribers covered this scenario over a year ago.
Go to the 26:40 marker in the video...
Italy has a funding issue that nobody was able to foresee, right? Wrong! After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It
France is heavily levered into Italy and Franco-Italiano fortunes are closely linked, right? Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!!
American banks (like Goldman) are on the hook for protecting the damn near doomed French banks right? French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!
But in the end of one, or two, three big banks go down, it's basically a giant pan-global clusterfuck, no?
Guarantees provided by U.S. lenders on government, bank and corporate debt in Greece, Italy, Ireland, Portugal and Spain rose by $80.7 billion to $518 billion in the first half of 2011, according to the Bank for International Settlements.
Here's the question du jour - Can Goldmans Sachs Derivative Exposure, realistically unhedged, cause the biggest run on the bank in Financial History?
The notional amount of derivatives held by insured U.S. commercial banks have increased at a CAGR of 22% since 2005, which naturally begs the question “Has the value or the economic quantity of the underlying increased at a similar pace, and if not does this indicate that everyone on the street has doubled and tripled up their ‘bets’ on the SAME HORSE?”
Think about what happens if (or more aptly put, "when") that horse loses! Would there be anybody around to pay up?
Sequentially, the derivatives have increased every quarter since Q1-05 except for Q4-07, Q3-08 (Lehman crisis) and Q4-10 while on a YoY basis the growth has been positive throughout recorded history. In Q2-2011, the notional value of derivative contracts increased 2% sequentially to $249 trillion. The notional value of derivatives was 12% higher than a year ago. The notional amount of a derivative contract is a reference amount from which contractual payments will be derived, but it is generally not an amount at risk. However, the changes in notional volumes can provide insight into potential revenue, and operational issues and potentially the contagion risk that banks and financial institutions poses to the wider economy – particularly in the form of counterparty risk delta. The top four banks with the most derivatives activity hold 94% of all derivatives, while the largest 25 banks account for nearly 100% of all contracts. Overall, the US banks derivative exposure is $249 trillion and is more than four folds of World’s GDP at $58 trillion.
In absolute terms, JPM leads this list with total notional value of derivative contracts at $78 trillion, or 1.3x times the Wolds GDP. However, in relative terms, Goldman Sachs leads the list with total value of notional derivatives at 537 times is total assets compared with 44x for JPM, 46x for Citi and 23x for US Banks (average).
So, what does this mean? Well, it should be assumed that Goldman is well hedged for its exposure, at least on academic basis. The problem is its academic. AIG has taught as that bilateral netting is tantamount to bullshit at this level without government bailout intervention. If there is any entity at risk of counterparty default or who is at the behest of a government bailout if the proverbial feces hits the fan blades… Ladies and gentlemen, that entity would be known as Goldman Sachs.
As excerpted from Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 2 and 3...
Goldman is much more highly leveraged into the derivatives trade than ANY and ALL of its peers as to actually be difficult to chart. That stalk representing Goldman's risk relative to EVERY OTHER banks is damn near phallic in stature!
As opined earlier through the links "The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk... , this is not a new phenomenon. Quite to the contrary, it has been a constant trend through the bubble, and amazingly enough even through the crash as banks have actually ratcheted up risk and assets in a blind race to become TBTF (to big to fail), under the auspices of the regulatory capture (see Lehman Dies While Getting Away With Murder: Introducing Regulatory Capture). So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...
And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just giving y'all a heads up ahead of time...
This is the question du jour: Does Goldman have the same bookeeping issues that MF Global did, and is PWC overlooking it?
Well, I pounded the table, screaming for years that Goldman's losses don't add up. Guess what???? As excerpted fromThe Financial Times Vindicates BoomBustBlog's Stance On Goldman
I read this headline from the Financial Times and said to myself, "Okay Reg, Don't say 'I told you so'". Thus, you won't hear it from me, at least not this time. As reported today in the Financial Times: Goldman reveals fresh crisis losses and Goldman’s republished results present a new picture
Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.
Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs???“ and I did it without being privvy to Goldman's financial innards. It was more or less common damn sense. Goldman and its employees do not walk on water, they do not shit gold, and they cannot perform miracles. If one takes an objective approach to their equity analysis, and simple plug the numbers into a spreadsheet (objectively) you would have come up with the exact same conclusions that I gave my subscribers all of these years. Let's reminisce, shall we?
So, what is GS if you strip it of its government protected, name branded hedge fund status. Well, my subscribers already know. Let’ take a peak into one of their subscription documents ( Professional" width="16" height="16" border="0" /> Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages). I believe many with short term memory actually forgot what got this bank into trouble in the first place, and exactly how it created the perception that it got out of trouble. The (Off) Balance Sheet!!!
Contrary to popular belief, it does not appear that Goldman is a superior risk manager as compared to the rest of the Street. They may
the same mistakes and had to accept the same bailouts. They are apparently well connected though, because they have one of the riskiest
balance sheet compositions around yet managed to get themselves insured and protected by the FDIC like a real bank. This bank’s portfolio looked quite scary at the height of the bubble.
And back to the FT article...
The diverging figures, which do not change Goldman’s overall results for 2008, are because of the fact that, like many rivals, the bank did not provide a full breakdown of profits and losses from activities carried out with its own resources.
Interesting, $5 billion of losses goes unreported, yet there was no change to the years results. I wish I could lie about $5 billion of losses that didn't allegedly exist, make them disappear again after I come clean, then have the media applaud me for my honesty - all at the taxpayers expense as I bonus myself into that new 63 foot Azimut. You know, the one that doesn't come with the hot international girls with w 6 pack license and bikinis. Hey taxpayers, its your money that bonused these boats!!! Italy has a pipeline straight to the American taxpayers wallet through the Goldman bonus pool. Okay, let's finish excerpting the aticle...
The revelation of the 2008 loss on its investments supports Goldman’s argument that it did not profit from the crisis.
I, for one, never claimed they profited from the crisis. To the contrary, I claimed that they lost, big time! This statement seems awfully conciliatory from the main stream media. I know you guys can't (or won't) get as rough around the edges as I do, but come on fellas. 'nuff brown nosing.
Lynn Turner, a former chief accountant for the Securities and Exchange Commission, praised Goldman’s move but called for the SEC to look into the bank’s past disclosures. “This sets a good example that others should follow,” he said. “But it does raise the question as to why the management did not provide this view back then and whether the SEC are going to do something about this discrepancy.” Mr Turner said SEC rules required companies to give investors a view, as seen from “the eyes of management”, of their finances: “For such a discrepancy to have arisen, management must have lost an eye.”
Praise!!! Lost an eye!!! Hold the hell on here. Goldman outright lied, and lied big time. It was an obvious lie, and I pointed it out in full detail to both my blog readers and paid subscribers. As a matter of fact, the losses are most likely STILL on the balance sheet (or hidden off) and will surface one way or the the other. Again I reference subscriber document: Professional" width="16" height="16" border="0" /> Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages
As a matter of fact, it looks just as scary today as it does at the height of the bubble, but since very few people read balance sheets, no one really notices.
You know what most people don’t realize is that it looks quite scary now as well.
“We have a strong track record as an investor,” he told analysts in December 2008.
With their ears stinging from accusations that Goldman is “just a giant hedge fund” or, as Rolling Stone said, a “vampire squid” stretching its tentacles to make money for itself, an internal committee looking at reforms reshuffled the bank’s financial reporting.
-worth of losses came from direct purchases of assets. It also said that it had lost $1.7bn on residential mortgages and $1.4bn on commercial mortgages – half of which is believed to be related to Goldman’s investments.
Overall, the old disclosure points to losses of about $8.5bn in 2008, rather than the $13.5bn revealed this week. So why the discrepancy?
Goldman declined to
... A new profit-and-loss account for 2008 released this week shows losses of $13.5bn on Goldman’s “investing and lending” activities.
In my opinion, any prudent investor should find it impossible to deny the distinct possibility that they could lose the farm with Goldman as well. The similarities with MF Global - apart from having the same CEO and sovereign bets, are eery.
It ain't just MF Global and Goldman either. Who else does PWC audit, but not necessarily find issue with? None other than JP Morgan, whose assets are roughly $2.3 trillion. So, if PWC couldn't find the needle in the $42 billion hay stack, imagine the odds of finding that same needle of loss in a $2.3trillion hay stack. We're talking roughly 50x the chance of making the same error/oversight.
Tell me you Prime brokerage clients, "Do 'ya feel lucky?"
On JP Morgan
Here I am attempting to gain a green card for our entrance into the "Economic Republic of JP Morgan..."
Bloomberg reports (and Reggie clarifies): JPMorgan Joins Goldman Keeping Italy Debt Risk in Dark
JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.
As excerpted from An Independent Look into JP Morgan:
When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide.
Bloomberg reports: Dexia Takes 3.6 Billion-Euro Charge on Asset Sales
That charge taken by Dexia was more than necessary, and most likely not nearly enough. But wait a minute, why did JP Morgan do the exact opposite regarding the exact same asset class?
Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:
I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): JPM Q1 2011 Review & Analysis.
A Few Questions on Goldman Sachs 3rd Quarter 2010 Results That No One Thought to Ask Wednesday, October 27th, 2010
Recommended reading from Reggie Middleton’s BoomBustBlog in the investment banking space…
- Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
- A Step by Step Guide to Exactly How Much Derivatives Risk Each of the 5 Big Banks Actually Have, and How It Could All Go Boom!
- JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!!
- Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!
- We’ve Been Bamboozled by the Banking Industry, but the Chickens Are Coming Home to Roost
- The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
- Are We In a “Banking” Depression?
- As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves
- The Truth Goes Viral, Part 2: Italian Towns Damaged by Derivatives, Downtown Brooklyn Real Estate, Goldman Sachs, JP Morgan, Europe’s Overbanked Status, Reggie Middleton, Matt Taibbi, and Simon Johnson – All in One Video
- Re: Morgan Stanley’s Q2 2010 Results – The Mainstream Media May Be Hazadous to Your Wealth!
On Goldman Sachs
Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?
Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...
Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3: I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...
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