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Monday, August 15, 2011 11:44 AM

BNP Paribas leveraged 27:1; Société Générale Leveraged 50:1; Sorry State of Affairs of U.S. Banks; Global Financial System is Bankrupt

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BNP Paribas leveraged 27:1

Jean-Pierre Chevallier reports on his Business économiste monétariste béhavioriste blog, that BNP Paribas leveraged: 27!.

The real leverage of BNP Paribas is … 27.2!

Indeed, the French bank counts in its equity item 2: Undated Super Subordinated Notes eligible as Tier 1 capital which are actually a form of liabilities related interests subject to some conditions.
Chevallier posts a series of graphs taken from consolidated financial statements to support his claim.

Société Générale Leveraged 50:1

Yesterday Chevallier reported Société Générale leveraged: 50!
The real leverage of Société Générale is… 50!

Indeed, the French bank counts in its equity item 2: Equity instruments and associated reserves which are actually different forms of liabilities related interests subject to some conditions.

Equity published in item 1: Sub-total equity, Group share should be reduced by Equity instruments and associated reserves (item 2) to determine the true equity at fair value (item 3) i.e. 22,535 billion of euros.

Total liabilities are equal to total assets (item 4) less the true equity at fair value (item 3): 1,135.473 billion of euros.

So, the leverage is the ratio of total liabilities on equity: 50.4 i.e. a Tier ratio at 2.0%.

Société Générale did not respect the rules of prudential borrowing as they were defined by Alan Greenspan.
As above, Chevallier posts a series of graphs taken from consolidated financial statements to support his claim.

Blaming the Shorts

What did officials do in the wake of share price collapse? You should know the answer, blame the shorts: France Selectively Bans Short-Selling of 11 Banks; Spain Bans Shorting and Derivatives Based Shorting;Why the Bans Will Fail

Shorts did not play games with tier-1 capital, banks did. Shorts did not leverage 50-1, banks did. Officials blame the shorts.

Moreover, Société Générale had the gall to "deny all rumors" as noted in European Banks Hammered; Societe Generale "Denies All Rumors"; French Bank Option Prices Soar; Credit Default Swaps on France Under Attack

Are they denying this excess leverage? Apparently. Without stating what the rumors were, they denied all of them.

This prompted me to say "Societe Generale did not even say what they were denying. The bank simply denied everything. Whatever the rumors are, I assure you at least some of them are true. This denial sounds just like Lehman's denial to me."

More than anything else, excessive leverage sunk Lehman.

Excuses for various things got so silly, I asked Do These Idiots Realize How Stupid They Sound?

Things matter When They Matter

Things don't matter until they do. In the past few weeks the market decided these things finally mattered.

Everyone should realize that nearly every bank is playing games with tier1 capital, still hiding assets off the books in SIVs, and not marking commercial and residential real estate loans to market.

Sorry State of Affairs of US Banks

For a look at the sorry state of affairs of US banks, please consider

July 18, 2011: Bank of America Clobbered on $50 Billion Capital Shortfall Related to Mortgage Losses

August 10, 2011: Bank of America CEO Discusses Letting Countrywide Financial Go Bankrupt as Separate Legal Entity; Conference Call Shows Signs of Delusion

The Fed, SEC, and FDIC all turn a blind eye to leverage that is still excessive, to assets still not marked-to-market, and to assets still hidden off the books in SIVs and by other means. They do this to support share prices.

Share prices of US and French banks, shows the market has had enough of this practice.

Time is up, more capital needs to be raised. Banks should have done so when share prices were up and they could have easily., Now they will do so when prices are down.

Global Financial System is Bankrupt

The entire global financial system is bankrupt. There is no way for these loans to be paid back, and the Fed and Central bankers in general are at the end of the line as to what monetary policy can do.

Please don't tell me that central banks will "print their way out of it". No they won't, but they will likely try.

Simple Facts of the Matter

  1. Central banks can print money but not capital.
  2. Central banks can initiate "swaps" but swaps are temporary.
  3. Of the money central banks do print, they cannot give away, they can only lend it.
  4. Right now, there are no takers of printed money as evidenced by excess reserves deposited at the Fed.
  5. Those excess reserves will not eventually flood the system with cash, spawning off a 10-1 multiplier as many think.

Reserves have little to do with lending. In practice, the major constraints to lending are insufficient capital and willingness of credit worthy borrowers to seek loans.

For further discussion and numerous details and rebuttals of widely believed fallacies, please consider Fictional Reserve Lending And The Myth Of Excess Reserves


Société Générale disputes the numbers and new calculations using the banks' numbers are 28:1 or perhaps 23:1 not 50:1 as noted on Forex Crunch.

My position has not changed much. Something is seriously wrong at Société Générale. Banks do not plunge out of the blue on rumors. I do not know the precise leverage, but shares are acting as if Société Générale has severe capital constraints (which of course they will deny) and/or other major problems.

Mike "Mish" Shedlock
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