It's bail out time again folks!

Barker | 15/7/16

BL | 15/7/16

Last month, the European Commission issued €150 billion in loan guarantees to shore up the Italian banks. Deutsche Bank chief economist David Folkerts-Landau is pressing for billions more. That's nice. They could save time and commissions and just write the cheque to George Soros.

The day before the Brexit vote Soros shorted 7mm Deutsche Bank shares and pocketed $108 million within days. I'm betting that's just the tip of the iceberg.

The set up

According to conventional conspiracist theory, Brexit was contrived as a political feint to justify the continuation of QE in Europe, and a round of bail-outs for Europe's beleaguered finance sector. Their books are a mess alright. Italy’s banks, for example, have €360 billion in non performing loans (NPLs), which prompted Brussels last month to invoke the loan guarantees under an emergency mechanism. This is merely the precursor to another event which looms: the default of Deutsche Bank, the Bloc’s largest banking institution. Commerzbank AG is right behind them, or in front rather

But the other conspiracy now in play is simply to loot it. Trading is 30% of Deutsche bank's revenue stream (really?), and its counterparties, mindful of risk, are increasingly hedging their exposure. That drives up the bank's costs, the last thing it needs. Once profitability dips below the ability to pay the coupons on its riskiest bonds, the bank becomes a naked hedge play, a feeding frenzy for the vultures.

This is not good

Loan guarantees will prevent that for now. But how long can the EU keep throwing money at Deutschebank? Either until there's open revolt by the electorate or it enacts draconian derivatives rules, something it can and should do. Forget the nonsense about short sellers playing a useful role in the capital markets, or who's on the other side of the trade. Puts and credit default contracts don't kill industry; the drivel from the street which accompanies them does. Market spin can drive valuations higher in a bullish phase or drive them down, in accordance with the whims of the big players with the big positions. Remember the bullish ratings Moody's gave all those toxic derivatives Wall Street was flogging to pension funds and the Norwegians in the mid 2000's? That can be easily reversed. The credit raters won't even have to lie through their teeth this time. It's a dream play.

Which begs the question, why didn’t the EU take any pre-emptive action in the days leading up to the Brexit vote? Or at very least in the wake of it? The Americans have done it. Four days after the Lehman Brothers collapse in September of 2008 the feds drove a truck through Wall Street with a surprise ban on shorting, kind of like that crazed Tunisian did in Nice last week, blatantly manipulating the market a day before options expiration.

 Consider this: As of 1:00 p.m. on 18th September, the ETF which tracks the S&P 500, the so-called SPY, was trading at $113.80. The max pain on the SPY was $127.06 (maximum pain is the price point at which the majority of options expire worthless). The net in-the-money put premium totalled $1.95 billion.

After a rally that Thursday afternoon and the massive gap up on Friday morning, the SPY opened at $126.70. Kachiiiiiiiiiiiing ...! $1.95 billion saved!

That little bit of info comes from my eagle-eyed pal at Chartwatchers, Chip Anderson. He said there were many more examples, including Goldman Sachs (GS), which hit a low back then of $86.85, and rallied at the open Friday morning to $142.51. The maximum pain index was near $141.00. Lots of dough-re-mi saved there too! Imagine the impact this had across all stock, ETF and index options. Rest assured it saved key financial institutions billions and billions of dollars.

Now imagine the carnage created from the reverse of it.

There is a Eurozone mechanism for taking out shorts in emergencies, though sovereign wealth funds are exempt from it. So theoretically, Greece, if it had such a fund, could (ironically!) service its debt to the Troika by laying out the Germans. Alternately, their central bank could finance the trades on the derivatives side from its foreign reserves. At least it's what I'd do if I ran their trading desk.

The point is this: Without oversight on CDS and other speculative short trades Europe's finance industry is wide open to abuse. It's Greece on a bigger scale. The money pumped into the system is siphoned off by the bag guys into offshore accounts while the taxpayer takes it out on their elected leaders.

Brexit is nothing more than the set up for a giant swindle, played on the suckers, and everybody's in on it except the dumb money.

Kb | info@thenotion.ca

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