Tuesday, October 11, 2011

No Surprise Here For Me

It was revealed yesterday that the Austrian bank - Erste Group - had $5.2 billion in undisclosed Credit Default Swap (CDS) derivative losses sitting on - or rather "off" - its balance sheet.  Here's a link from zerohedge.com if you would like to read about the details:  LINK

To zerohedge and its slavish readers, this is being described as a "stunner."  But I've been arguing all along that the big banks have off-balance-sheet problems that are potentially far bigger and more destructive than what is revealed by the "on-balance-sheet" public financials.  Indeed, this is no "stunner" to me - in fact I would bet good money that the true economic, what's the best bid for size/mark-to-market, losses are far larger than $5.2 billion.

What is a "stunner" to me is that the research arm of the Erste Group has written some of the most compelling and thorough research available in support of the precious metals market:  In Gold We Trust  One would think that an institution that so thoroughly understands the gold market and the dangers of the current fiat currency system would also understand the concept of "counter-party risk" and the fraud that belies the entire OTC derivatives market.

For some reason zerohedge wants to blame the Erste Group issue on its auditors.  To be sure, the auditors probably know a little about the true condition of the CDS portfolio.  But they operate within the confines of accounting and regulatory rules as set forth by the Government.  Furthermore, accountants are just counters.  It's not their job to go find out the true market values of these securities.  If they conduct a sample audit, that would just consist of calling up the CDS trading desk at maybe two or three trading firms that make markets in these securities and getting price indications.  Trust me, having traded junk bonds for 9 years, which are illiquid but considerably more liquid than CDS securities, a market "indication" often bears no resemblance to the true value of an OTC derivative, especially if the Erste Group (or fill in the bank U.S. TBTF bank) wanted to unload a big position in any specific security.  And THAT dynamic is one of biggest problems with accounting for these types of securities.  Its part of the massive accountability problem that has been destroying our system for quite some time.  One would have thought that this would have changed after the damage inflicted by Long Term Capital and Enron...

Now, with the Erste Group we're talking about $5.2 billion.  The Erste Group's balance sheet (assets/liabilities) is roughly $280 billion in size.  And Erste is not exactly a big player in the OTC derivatives market.  Let's look at one of the big U.S. TBTFs and just do a "broad stroke" comparison.  Bank of America, for example, has a $2 trillion dollar balance sheet - over seven times the size of Erste Group.  And Merrill Lynch - now owned by BAC, was one of the bigger players in the OTC derivatives market.  So just on a "scale" basis, it's very safe to say that BAC is likely sitting ten times the amount of undisclosed losses in its derivatives book as the Erste Group.  I would bet a lot of money that the actually losses are substantially larger than that.

But if you want to look at the work published by Wall Street research analysts showing the "financial ratios and condition" of U.S.  TBTFs, nowhere will you see anything mentioned about off-balance-sheet liabilities.  These wind-up circus monkeys simply transpose the GAAP balance sheet data onto a pretty spreadsheet and say "see, the water is fine, c'mon in."  And then this garbage gets regurgitated in the financial media and through the world of financial advisors and brokers who want to take your money as they mindlessly reference this highly flawed research and tell their clients that the U.S. banks are in good shape...it's pathetic.

But the golden truth of the matter is that lurking below the surface are financial nuclear bombs that could detonate at any time.  See Bear, Lehman, AIG for what this looks like.  And 2008 will have been "the good old days" once this daisy chain of disaster is triggered. Today there's not only the massive exposure to financial sector Credit Default Swaps, there's the massive exposure to sovereign debt CDS.  AND, the OTC derivatives holdings of the TBTFs are much larger than it was in 2008.

So yes, maybe the Erste Group disclosure was a bit of a surprise to some - and a "stunner" to the editor of zerohedge - but if we really dig for the truth and take a look at what's going on in our own backyard, there are not "stunners" buried, but massive catastrophes.


  1. I think ZH was using a "stunner" comment only in the context of stunning to the community outside of the ZH mindset. I think everyone there (and here) expects much much more off-balance sheet destruction to surface.

  2. China’s Pan Asia Gold Exchange: A New Playing Field for Speculators?

    International investors will also find access to the RMB through these gold contracts once they are allowed to purchase International Spot Contracts on the PAGE.

    In addition, the PAGE aims to establish an over-the-counter gold market, where its gold price fixed at 8:00 a.m. every morning local time will be recognized as the daily opening price of the global gold market.

    A recent Forbes magazine editorial written by Robert Lenzer believes the impact of the PAGE will be huge, because it will enable the RMB – instead of U.S. dollars – to become the dominant currency in one of the most important speculative commodities for the first time. Furthermore, the PAGE’s integration with global gold market operations will likely head the spot market in gold for China away from London’s Metals Exchange or the New York Mercantile Exchange and Commodity Exchange (COMEX).


  3. China's Bank Situation Deteriorates

    Oct. 11 (Bloomberg) -- Jim Chanos, the hedge-fund manager who's been betting that Chinese bank stocks will tumble, said a rally spurred by government purchases of the shares hasn't changed his bearish outlook.


  4. Embry - If We Repeat 2008, Stocks Could Fall 40% From Here

    When asked about events around the world and how they are impacting gold and silver, Embry responded, “This Dexia Bank failure just showed how vulnerable the European banking system is. This was one of the banks that stood out in their stress tests and then two months later they have to recapitalize it and nationalize it. This probably brought home to people that we are talking trillions of euros to recapitalize the banking system over there to keep it functioning.”


  5. Erste Group was not sufficiently "on the team."
    This banking/financial system is so insolvent, so corrupt, that every participant has a hidden skeleton or two ready to be exposed when convenient.

  6. Dave,
    WOW, your comments which are based on experience and high probabilities are of immense importance to the reality of the situation. Today I expressed to a friend that the US debt is impossible to pay off. He didn't believe me. I don't know this for a fact but throw in derivatives and unfunded liabilities and I would not bet against it. I fear for all. Thanks for the insight. I just wish I could bring friends to the reality of the situation but the bearer of reality has no place in their world. See no evil ... sad

  7. "So yes, maybe the Erste Group disclosure was a bit of a surprise to some - and a "stunner" to the editor of zerohedge"

    I see ZH went right over the Golden Truths head. Dave should know a sites "personality" before trashing it and its readers. I read about 15 different sites a day and recently added this one, but I am dropping it. So far it has not disclosed anything the others offer or offered any great in site the others have not revealed.

    What made me decide to drop this site is the adolescent insults to other sites and it readers. Disagree all you want, debate all you want, but forget the insults...it's childish.

  8. Masters of deception...wonder what other vehicles are set up offshore???

    Goldman Sachs let off paying £10m interest on failed tax avoidance scheme

    Leaked documents show top tax official shook hands last year on secret settlement described by sources as a 'cock-up'
    In the 1990s, Goldman set up a company offshore in the British Virgin Islands. This entity, called Goldman Sachs Services Ltd, supposedly employed all of Goldman's London bankers, who were then "seconded" to work there.

  9. OWS: The Risks Facing America Today

    This time support is coming from surprising places. Like former corporate activist (and buyer of companies!) Asher Edelman.

    The corporate media and politicians are still claiming that "we made a profit from TARP" and that "everything was repaid."

    This is a bald lie. AIG didn't repay their money. Neither did GM. Money was shuffled around in a complex shell game to appear that all was repaid but in fact what happened was that you, the taxpayer, were looted.

    You were looted through higher prices at the gas pump, higher prices at the grocery store, lower wages and at the same time zero interest rates so those of you who were prudent got ****ed THREE TIMES instead of twice!

    Representative government? Where? By anywhere from 100:1 to 300:1 the people demanded that TARP NOT pass. That the banks that did foolish and in some cases criminal things be forced to eat the consequences.

    Again, as I've said for four years: We need a banking system because we do indeed need a way to clear payments so you can pay a bill or buy gasoline and food - so commerce can flow. We do not need these banks that committed these acts.

    But rather than do the right thing, our politicians were bought and paid for on both sides of the aisle. It's particularly telling - and galling - that when allegedly being "grilled" by Hank Paulson in 2008 the banksters left the meeting smiling and yucking it up.

    First they ****ed you, then the government paid them to **** you again.


  10. If you think about this...these very same ebullient pension managers and allocators(a majority) don't even consider gold an asset class...what does that spell?

    Pimco's Prediction For Pension Plans: "Pain"

    What do these levels imply? In the early nineties, plan sponsors, if
    biased in their forecast, were generally biased toward conservatism.
    From 1997 through 2007, expectations, although a bit rosy at times,
    were largely within the realm of reasonableness. In our view, a
    long-run equity risk premium of 11% is pure jibber-jabber. It is
    wishful thinking. I dare not predict the level of the S&P 500 ten
    years out, but an ERP this high suggests the S&P would have to reach
    unprecedented levels. If this is what plan sponsors are counting on,
    I, like Clubber Lang, predict Pain.

    Rocky III was released Memorial Day weekend, May 1982. Times were
    tough – real tough. The U.S. was in the depths of recession. Inflation
    was at 7% and the 10-year Treasury was priced to yield 13.7%.
    Unemployment was at 9.4% and heading higher. Part of the reason Rocky
    III resonated with its audience and was a box office smash was they
    too were beaten down and overcoming obstacles to rise against

    Rocky rebounded from his loss to Clubber Lang, but he did not rely on
    hope in preparing for his rematch. Hope is neither a training plan nor
    an investment strategy. Anyone familiar with the Rocky series’
    ubiquitous training montages will know the keys to success are hard
    work, sweat, an adrenaline-firing score, and some measure of pain. The
    answers to our pension problems are not all that different. I pity the
    fool who expects an easier answer.


  11. The Fix is In - Put The Politicians' in Jail

    Newt Gingrich targets Democrats who have colluded with lobby groups and the housing industry as criminals that need to go to jail. However, his logic can easily be applied to most every Republican who is Peddling influence for personal profit.


    proscription anyone? http://en.wikipedia.org/wiki/Proscription

  12. This is pea sized compared to what's out there!

    SEC Charges Bank Executives with Hiding Millions

    The SEC did not specify which executives were facing criminal charges.

    The SEC's civil case involving the San Francisco-based bank alleges its former chief executive, Thomas Wu, Chief Operating Officer Ebrahim Shabudin, and Senior Officer Thomas Yu concealed losses on loans from the bank's auditors. That led the bank to understate its 2008 operating losses by about $65 million, the SEC said.


  13. Thanks for your blog - I do enjoy it.

    A question....

    The most likely "solution" in Europe everyone is talking about would perhaps look like this...

    Banks will be re-capitalised by Government so that Greece can default and private bondholders need to take at least a 50% haircut!!

    How would this effect Gold/Silver as there will be creation of money as well as destruction?

    And could it possibly be enough and would it stop the rot in all other countries?

    Somehow I know the answer already - but when this hits the markets there will be a big perception management event going on. We can guess what that will be?

    Thanks for your reply.

  14. (Dave)

    Thanks for the feedback. I do appreciate it.

    Regarding your question. 1) I'm not convinced the banks will take a haircut until it actually happens. So far to date, every penny of bank losses have been shifted to the Governments/taxpayers. I was just chatting about this with someone earlier and I pointed out that most people don't realize that Geithner gave the Fed a "back-stop" on all the shit the Fed bought from the banks. So the Taxpayer will eat that shit too.

    The same game is being played in Europe, only it's the taxpayers in all the countries, collectively.

    Let's wait and see what ultimately is put into action, because so far it's been empty rhetoric and "promises" of a plan. Ultimately I believe there will a lot more money printing on BOTH sides of the pond and that will take gold and silver to highs that only a few of us believe are possible.