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Top 30 Risky Banks – Does it Really Matter?

December 1, 2017

Top 30 Risky Banks – Does it Really Matter?

The Royal Bank of Canada (RPC) has been added to the list of the top 30 banks posing the greatest risk. The top US bank is JP Morgan which is now the only bank required to hold an extra 2.5% of common equity after its US peer Citigroup moved down a tier required to hold 2% extra.

All of this is very nice, but also misleading. The Stress Tests by no means are realistic. It is assuming a single failure and certainly does not even take into consideration a CONTAGION, which nobody understands and there have been no models that will even simulate such events outside of what we have specialized in. The CONTAGION is what created the Great Depression and Herbert Hoover in his memoirs explain how capital acted “like a loose cannon on the deck of the world in a tempest-tossed ers.” Even the CONTAGION that hit in 2010 when Greece petitioned the IMF for a loan and traders immediately looked to see which country would be next, people do not understand that once blood is drawn, capital responds rapidly in the entire spectrum.

Even during the Long-Term Capital Management debacle in 1998, the crisis was in Russia. That sets off a need for liquidity and then all other markets are liquidated trying to raise cash. This is how a CONTAGION unfolds overpowering the fundamental analysis entirely.

 

Economics to this day still does not comprehend the CONTAGION that hit in 1931. It is the CONTAGION that presents the most significant clear and present danger to society as a whole. This is what reshapes countries and politics. We saw in 1933 Hitler, Mao, and FDR all come to power.

The Coming CONTAGION – CDS Sales Double from 2016

August 31, 2017

The Coming CONTAGION – CDS Sales Double from 2016


The issue of credit default swaps (CDS) in 2017 is running at twice that of last year reflecting rising concerns of another coming crash. The number of hedge funds and banks dealing with highly sensitive credit derivatives has reached almost $30 billion in 2017 up from only about $ 15 billion in 2016 and just $ 10 billion back in 2015. The credit default insurance, which is supposed to pay certain amount of money a particular company or government registers its insolvency. The trading in CDS was blamed by numerous observers for creating the financial crisis that became a widespread contagion in 2008 in particular. 

Hedge funds are now investing in these risky securities in order to achieve returns on the order of magnitude that are difficult to achieve in the current market environment due low interest rates. High-profile funds such as Apollo, Brigade Capital and Blue Mountain are among those who bought tranches with terms of 2-3 years, according to the FT. The real danger with this instruments is that the next crash will be far worse in the bond markets than at any time since 1931 and the prospects of actually being able to collect on these time-bombs is more unlikely since the entire system will freeze. The crisis is one stemming from liquidity and failure to understand the contagion will lead to significant losses. 

The pending view on the stock market remains extremely bearish among professional since their historical view is very myopic and their models rarely extend back before 1971. The was the entire reason Long-Term Capital Management collapsed and set off a crisis that became a contagion. Because they could not liquidate positions in Russian debt, they were forecast to start selling investments around the world to raise cash to cover losses in Russia. Therefore, you can have a great solid investment in an area unrelated to the bond crisis, yet that investment can tank regardless of the fundamentals.

…click on the above link to read the rest of the article…

Fearing Contagion, Russia Bails Out Bondholders in its Biggest Bank Collapse Yet

August 30, 2017

Fearing Contagion, Russia Bails Out Bondholders in its Biggest Bank Collapse Yet 

“The panicky mood has been dampened down,” as other banks are rumored to be teetering.

True to the playbook of bank bailouts, the Central Bank of Russia (CBR) decided to bail out Bank Otkritie Financial Corporation, the largest privately owned bank in the country, and the seventh largest bank behind six state-owned banks.

The Central Bank put in an undisclosed amount of money in return for at least a 75% stake. This is likely to be Russia’s biggest bank bailout ever, well ahead of the current record holder, the $6.7 billion bailout of the Bank of Moscow in 2011.

Otkritie and its businesses would operate as usual, the Central Bank said. The banks obligations to creditors and bondholders, which include other Russian banks, would be honored to avoid contagion.

The controlling shareholder of Otkritie bank is Otkritie Holding, with a 65% stake. The bank had grown by wild acquisitions, grabbing other banks, insurers, non-pension funds, and the diamond business of Russia’s second largest oil producer Lukoil. Otkritie Holding is owned by executives of Lukoil, state-owned VTB bank, Otkritie, and other companies. So clearly, this bank is too big to fail.

Lukoil is also one of Otkritie’s largest clients. So Lukoil CEO Vagit Alekperov said in a statement that he saw no risks for Lukoil associated with the bail out, and that Lukoil supported the Central Bank’s decision.

In July, according to Reuters, Kremlin-backed rating agency ACRA downgraded Otkritie to a BBB- rating, citing the “low quality of its loan portfolio.”

On August 17, Moody’s placed Otkritie on review for possible downgrade, citing two big issues:

  1. “The recent elevated volatility of the bank’s customer deposits, which puts pressure on its liquidity position and negatively affects its funding costs”
  2. The bank’s “increased involvement in financing the large financial and industrial assets of its controlling shareholder Otkritie Holding.”

…click on the above link to read the rest of the article…

Contagion: Home Capital Bank Run Spreads To Another Canadian Mortgage Lender

May 1, 2017

Contagion: Home Capital Bank Run Spreads To Another Canadian Mortgage Lender

As discussed first thing this morning, the fate of Canada’s largest alternative mortgage lender, Home Capital Group, appears to have been decided over the weekend, when in the span of just one week, over 70% of the company’s deposit base had been withdrawn, effectively mothballing the business, leaving just a sale or liquidation as the two possible outcomes even as a $2 billion emergency line of credit keeps the company afloat, at least until HCG’s $12.8 billion in GICS mature some time over the next 30 to 60 days.

Predictably, the news of the ongoing bank run once again spooked shareholders, who sent its stock sliding by 10%, and wiping out two-thirds of the company’s market cap in under 2 weeks.

A bigger red flag emerged when concerns about possible contagion appeared to have been justified Canada’s Equitable Group, another alternative mortgage lender, said Monday it had started seeing “an elevated but manageable” decrease in deposit balances, traditionally a polite way by management to admit a bank jog is taking place. The company said that customers had withdrawn an average C$75 million each day between Wednesday and Friday, and while the withdrawals so far are modest, and represented 2.4% of the total deposit base, the recent HCG case study showed how quickly such a bank run could escalate. And while liquid assets remained at roughly C$1 billion after the outflows, the company also announced that it had taken out its own C$2 billion credit line with a group of Canadian banks, just in case the bank run was only getting started.

…click on the above link to read the rest of the article…

Ragin’ Contagion: When Debtors Go Broke, So Do Mercantilist Exporters

July 7, 2015

Ragin’ Contagion: When Debtors Go Broke, So Do Mercantilist Exporters

Papering over the structural imbalances in the Eurozone with bailouts or bail-ins will not resolve the fundamental asymmetries in trade.

Beneath the endless twists and turns of Greece’s debt crisis lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999.

The key imbalance is between export powerhouse Germany and its trading partners, which run large structural trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain.

Those outside of Europe may be surprised to learn that Germany’s exports ($1.5 trillion) are roughly equal to the exports of the U.S. (1.6 trillion), and compare favorably with China’s $2.3 trillion in exports, given that Germany’s population of 81 million is a mere 6% of China’s 1.3 billion and 25% of America’s population of 317 million.

German GDP in 2014: $3.82 trillion

Chinese GDP in 2014: $10.36 trillion

U.S. GDP in 2014: $17.42 trillion

Germany’s dependence on exports places it in the mercantilist camp, countries that depend heavily on exports for their growth and profits. Other (non-oil-exporting) nations that routinely generate large trade surpluses include China, Taiwan and the Netherlands.

While Germany’s exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero. Without strong export growth, Germany’s economy would have been at a standstill. The Netherlands is also a big exporter (trade surplus of $33 billion) even though its population is relatively tiny, at only 16 million. The “consumer” countries, on the other hand, run large current-account (trade) deficits and large government deficits. Italy, for instance, runs a structural trade deficit and its total public debt is a whopping 137% of GDP.

Here’s the problem when debtor/importer eurozone members such as Greece go broke and default: Who is left standing to buy all the mercantilist exporters’ goods? Ultimately, much of those goods were purchased with debt, and when debtor nations default, the credit spigot is turned off: no more borrowing, no more money to buy Dutch, German and Chinese exports.

 

…click on the above link to read the rest of the article…

Greek Contagion Spreads As Several Italian Bank Stocks Failed To Open

June 29, 2015

Greek Contagion Spreads As Several Italian Bank Stocks Failed To Open

While things have normalized since the open thanks entirely to the SNB’s aggressive EUR-buying, CHF-selling intervention (good to see that central banks have read the BIS’ report and have learned from their prior intervention mistakes), earlier this morning we got a snapshot of what happens if and when the SNB, and then the ECB itself, finally lose control when as a result of the Greek crisis the contagion promptly spread a few hundred kilometers west to Italy where as the WSJ reported, “several Italian banks failed to start trading on Monday as fears over a Greek debt default induced many investors to shed peripheral stocks, including Italian, with banks suffering the most.”

As the paper reported sales orders on Italian stocks, in particular financial stocks, piled up before the market opening. At the start, the sales orders were so numerous that the system couldn’t manage to process them, something that often happens when specific news causes a sell-off on a stock.

Theoretical prices for Italian banks–the prices at which they would have started trading–hovered around losses of 8% to 10% at the beginning of the trading session.

UniCredit SpA and Intesa Sanpaolo managed to start trading some time after the market opened, but were suspended immediately, accumulating losses of around 6% compared with Friday’s closing prices.

Ironically, in an attempt to avoid just this kind of selling panic, on Sunday, Italy’s banking lobby head Antonio Patuelli dismissed fears of contagion on Italian lenders, saying the country’s banks’ direct exposure to Greece was less than EUR1 billion.

For now the SNB has stabilized things but how much longer will this artificial “stability” continue especially if the just concluded speech by Jean-Claude Juncker managed to antagonize Greeks even further and pushed all those who were on the fence about this Sunday’s coming Greferendum, solidly into the “No” camp.

 

“Calm Reigns” Everywhere As Greece Inches Closer To Default, China Crashes

June 19, 2015

“Calm Reigns” Everywhere As Greece Inches Closer To Default, China Crashes

In what is perhaps the most glaring instance of central bank intervention yet,Reuters today captured the market mood as follows: “Calm ruled Europe’s stock and currency markets on Friday as Greece inched closer to a default later this month….the euro was down just 0.3 percent against the dollar and major European stock markets gained in early trade.” Why is Europe (and by extension US futures) so desperate to show green today even with a Greek default imminent? The same reason we explained back in January when we said the ECB and the Fed would do everything in their power to eliminate all Greek “negotiating” leverage which from day one was the attempt to create market contagion from Grexit. Unfortunately for Greece, the ECB’s QE intervened and blew a hole right through its plans, and now, it finds that not only do markets not care about the Greek contagion about which even Janet Yellen warned, but in the US hit all time highs!

The inverse, however, is certainly not true as ECB “sources” leak each and every day just how bad the Greek bank run is, and promptly put this information into the public domain in hopes of accelerating the already terminal bank run which unless halted will lead to capital controls and ultimately the fall of the Tsipras regime: precisely what the Troika has been after all along, as we also explained all the wayback in February. Sure enough, just a few hours ago Reuters “sources” reportedthat after €2 billion exited the Greek financial system in the first three days of the week, on Thursday the outflow hit what may have been a record €1 billion in one day.

…click on the above link to read the rest of the article…

 

 

 

Russian Currency Crisis and Defaults Could Create Contagion in West – GoldCore United States

December 17, 2014

Russian Currency Crisis and Defaults Could Create Contagion in West – GoldCore United States.

Russia’s currency market witnessed further huge volatility again today.  The finance ministry said it would start selling foreign exchange which are primarily in dollars. This appeared to reduce selling pressure on the battered rouble.

The fall of the rouble this year has been severe, with a 50 percent fall against the dollar and of course gold this year. The slide has been precipitous as in the past two days alone, it fell about 20 percent against the dollar and gold.

On Monday, the ruble fell 10% against the dollar and gold followed by another crash of 11% on Tuesday, despite a massive rate hike.

The heavy selling pressure this week, made the central bank sharply increase its key interest rate by an unexpected 6.5 percent or 650 basis points. The move did little to buttress the currency in the short term as speculators and traders continued to sell the rouble.

…click on the above link to read the rest of the article…

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