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: MFs 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 companys funds. By all indications, they werent.
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? Italys 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?
"The Next Step in the Bank Implosion Cycle???"and As the markets climb on top of one big, incestuous pool of concentrated risk…
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?
As excerpted from Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?
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 Worlds 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 govview original article