The Dow dropped 2% this morning EST as investor confidence in Italy collapsed. Goldman Sachs Group Inc. (GS), the fifth- biggest U.S. bank by assets, has around $2.5 billion of  credit exposure to Italian debt in various direct and indirect forms. Even taking hedges into account, Goldman would still be circa $750M dollars to the bad.

This is big bucks, but way, way behind some of the other big players. Morgan Stanley’s post-hedged exposure to Italy is $1.9 billion, but Top of the potential Pops is JPMorgan’s exposure, at an eye-watering net net after hedges of $5.5 billion.

The trouble with Italy has always been that, while to many Europeans it’s a bit of a joke as a political culture, economically it is BIG. Goldman itself admitted this afternoon that Italy accounted for more than half of the estimated $4.3 billion of  exposure the firm has to the five ClubMed debtors. “Over half” is also the attribution of total debt being assigned by insiders at JPM.

As The Slog has predicted for over a year now, once Crash 2 starts to roll, both speed and size grow exponentially, rather than as a multiple. The problem then becomes that some institutions are better equipped with anti-earthquake foundations than others. Bank of America  for example has Italian-linked exposure at $6.6 billion….but sources disagree as to how much of this it has hedged. The majority think it will be the first to fall over as things get tougher.

Another unknown quantity is Barcap. It is a victim of its own dodgy reporting in many ways. In the 2010 EU stress tests, Bob Diamond’s little toy passed with flying colours…but then produced numbers suggesting more Italian debt exposure than had been suggested by those stress tests. A month ago, however, the investment bank claimed to have reduced its Italian exposure by 30%. But all things are relative: 30% of what, exactly?

Stay tuned. Now the political pinhead-dancing is almost over, there will be real news pretty much every day until the lava has finished flowing.

Staggeringly, there is a brighter side at The Big Top


  1. This rather reminds me of reinsurance at Lloyds, early 1990s,and so called stop loss policies.The hedges may either be unenforcable or of little value.It is for the Eurozone taxpayers to pay up in recapitalising their banks,just as over 25,000 Names did under Reconstruction and Renewal,in 1994.The same applies to the US.The silence from a certain Scottish MP is interesting, n’est ce pas?


  2. A fantastic day for you John,all of your predictions paying off. The uk of course is very much wound up in all of this,we have a large exposure to the IMF,and the ECB. Plus our exposure to EU debt. Why oh why the two idiots at the top of our government,keep us in this hell hole,I will never know,perhaps Germany will make the decision for us,as they have for everything else.


  3. As JW mentioned in an earlier blog about “willful” or “crooked” actions being behind todays blow up in Italian bonds perhaps the “good guys” may have just found another way of crashing JP Morgan (apart from buying physical silver) given their massive 5.5 billion exposure to debt!


  4. Here’s hoping John, I’m well and truly tired of the warm up act.lets get to the main event and get it over with. I never thought the can-kicking would last even this long.

    No doubt part 2 will be incredibly tough, but i for one am looking forward to seeing Cameron, sarko, merkel et al having to eat large amounts of shit after being found out for being the bunch of chancers they all are.


  5. PS – Always worth reading Alex at ‘Financial Crimes’. This is him today on Italian bonds:

    Much wailing and gnashing of teeth in the media as the Italian government bond yield hits 7%. This say the armchair experts with the mikes in their hands is the end of the world as the Italians know it.

    All cock of course. This is the yield on bonds already issued that has increased from 6.667% to 7%. Not great, but in practical terms the higher yields will only hit the Italian government as their borrowings are refinanced, albeit that quite a lot has to be refinanced in the next year.

    The bigger problem is that if you have a debt equal to 120% of GDP you have a problem with refinancing that debt. The fact that you may have to pay an extra 0.36% of GDP per annum in interest in about 10 years when the entire portfolio has been refinanced is neither here nor there.

    And for the benefit of those hacks who might think that markets don’t buy government obligations at yields above 7%, here is a partial list of recent (last 30 years) UK government issues. The coupon is given and the gilts were issued close to par so the implied yield was above 7%.

    10% Conversion Stock 1996, 13¼% Treasury Loan 1997 , 10½% Exchequer Stock 1997 , 7% Treasury Convertible Stock 1997 , 8¾% Treasury Loan 1997 , 15% Exchequer Stock 1997 , 9¾% Exchequer Stock 1998 , 7¼% Treasury Stock 1998 , 14% Treasury Stock 1998-2001, 15½% Treasury Loan 1998, 12% Exchequer Stock 1998 , 9½% Treasury Loan 1999, 12% Exchequer Stock 1999-2002 , 12¼% Exchequer Stock 1999, 10½% Treasury Stock 1999 , 10¼% Conversion Stock 1999, 8½% Treasury Loan 2000, 9% Conversion Stock 2000 , 13% Treasury Stock 2000, 13¾% Treasury Stock 2000-2003 , 8% Treasury Principal Strip 07Dec2000, 8% Treasury Stock 2000 , 10% Treasury Stock 2001 , 11½% Treasury Stock 2001-2004 , 9½% Conversion Loan 2001, 9¾% Conversion Stock 2001 , 7% Treasury Stock 2001, 10% Conversion Stock 2002, 7% Treasury Principal Strip 07Jun2002, 7% Treasury Stock 2002 , 9½% Conversion Stock 2002 , 9¾% Treasury Stock 2002 , Treasury Coupon Strip 07Sep2002 , 8% Treasury Loan 2002-2006 , 9% Exchequer Stock 2002 , 11¾% Treasury Stock 2003-2007, Treasury Coupon Strip 07Mar2003 , 9¾% Conversion Loan 2003 , 2½% Index-linked Treasury Stock 2003 , 3½% Funding Stock 1999-2004 , 9% Treasury Stock 2003, 10% Treasury Stock 2003, 12½% Treasury Stock 2003-2005 , 13½% Treasury Stock 2004-2008, 10% Treasury Stock 2004 , 9½% Conversion Stock 2004, 9½% Conversion Stock 2005, 10½% Exchequer Stock 2005, 8½% Treasury Principal Strip 07Dec2005 , 8½% Treasury Stock 2005, 7¾% Treasury Stock 2006, 9¾% Conversion Stock 2006 , 7½% Treasury Stock 2006, 7½% Treasury Principal Strip 07Dec2006 , 8½% Treasury Loan 2007, 7¼% Treasury Principal Strip 07Dec2007, 7¼% Treasury Stock 2007 , 7¼% Treasury Stock 2007 WI , 9% Treasury Loan 2008, 8% Treasury Stock 2009, 9% Conversion Loan 2011, 7¾% Treasury Loan 2012-2015, 9% Treasury Stock 2012, 8% Treasury Stock 2013, 12% Exchequer Stock 2013-2017, 8% Treasury Stock 2015, 8% Treasury Principal Strip 07Dec2015 , 8¾% Treasury Stock 2017, 8% Treasury Principal Strip 07Jun2021, 8% Treasury Stock 2021


  6. Cronshd,what you are saying is that desperate sovereign borrowers(like the UK)can come up with a redemption yield that the market swallows.The other side of that coin is the bill for present and future taxpayers,which does not trouble’here today, gone tomorrow’politicians.


  7. And this. is it for real?
    German yields down to 1.70%!
    The hedge funds attacking Italy are handing billions to Germany on a plate!
    Germany with a debt of 2.1 trillion euros is saving billions courtesy of the US/UK hedge funds!
    The more they try to destroy the eurozone at the periphery the more they strenghthen it at the centre.
    Now the ECB has enormous funds with which to buy up Italian debt.
    It is neither printed money nor EU taxpayers’ money.
    It is US/UK hedge fund money!

    I am confused..


  8. “Why oh why the two idiots at the top of our government,keep us in this hell hole,I will never know..”

    If I may be forgiven a moments cynicism, could the answer be that they are already bought and paid for. Of course I am not aware of any evidence to substantiate that except circumstamce. Bearing in mind it is possible to convict of murder, largely relying on circumstanctial evidence, the absence of hard evidence doesn’t mean they are innocent of the allegation of course. After all by definition it would need to be covertly done to be effective


  9. KFC
    thankyou for the link. As ever the Slog comes up with the goods and the commenters follow up with some goodies of their own.

    That is a big thankyou to JW for his hard work; it is tough trying to figure out things through the babble of the DT blog – your insights and inside knowledge make things a lot easier to grasp.


  10. KFC
    isn’t it always interesting how the best laid plans go wrong … hedge funds attacking the euro find that they are making it stronger and more defensible by Germany ? …


  11. The problem is that Nick thinks France is amongst the countries that should be allowed to form the New Euro – neuro.

    Unfortunately, France shares more with the Club Med countries than just its southern coastline.


  12. Jerwooooo
    Osborne does, however, keep having epis about EU incursions against the City.
    But I sense that this is because he wants Cameron’s job.
    Think Venizelos.


  13. I read a very interesting blog recently ( I think on Zero Hedge) that the gross positions of these investment banks with regard to sovereign debt is just that. They are absolutely not effectively hedged because the counter-parties to the hedge will not be able to honour their part of the contract in a financial panic.
    AIG which insured sub prime mortgage debt was supposed to be the hedge for these investment banks in the 2008 panic, collapsed and had to be bailed out by the fed. Were it not for the bail out those hedge positions would be worthless.
    Now if you are a dangerously over leveraged investment bank exposed to sovereign debt and your hedge positions are with another dangerously over leveraged investment bank equally heavily exposed how safe are you in a panic ?


  14. Same rules apply as always: any insurance or guarantee is only as good as the ability of the insurer to pay up if necessary.


  15. @kfc:
    I’m sure they wouldn’t want to pay up — and in the case of the fantasy voluntary 50% haircut for the private holders of Greek bonds they’d be entitled not to, because it was a voluntary haircut by the banks — but my previous point was that if the calls on CDSs were so great (like they were with AIG in the US), they might go belly up and cannot pay up.
    The same thing applies to any other insurance or guarantee.


  16. Is anyone not confused KFC – here’s the dots as I see them

    BoomBust believes if if Rome falls then a French bank is in grave danger
    Reuters reckons there’ll be an inner Prussian-Franco sanctum
    KFC reveals the US/UK Hedgers are piling into German bonds

    Rome falls, Paris Bank fails, inner Prussian-Franco sanctum is withdrawn

    (I made this bit up)
    Merkel does Plan B, welcome the Thaler, delirium maximus in Frankfurt
    Sarkozy seen standing outside top floor window of Palais de l’Elysée


  17. Great comments. I tend to come here for information and analysis now. Better than the papers. Links are good. Thought provoking.

    Perhaps self-reinforcing group-think though? Though I am really struggling to see how the credit expansion of the noughties isn’t going to turn into a very nasty bust. Anyone have any solutions?


  18. Here we go again. More mention of the EU introducing capital controls within the EU countries to offset capital flight from their grotesquely mismanged economies.

    “The big elephant has started stampeding. Italy will make the imbalance in Target2 unsustainable to ECB if there is capital flight from the country to other countries in the union. Its anyone’s guess where the breaking point is for the ECB. However, there will be a point where capital controls will have to be placed if a capital flight pushes the imbalances in Target2 to the limit.”

    You couldn’t make this up…


  19. “Perhaps self-reinforcing group-think though? Though I am really struggling to see how the credit expansion of the noughties isn’t going to turn into a very nasty bust. Anyone have any solutions?”

    I don’t see much group-think on The Slog…..plenty of diverging views and even a few disagreements.

    On solutions…IMHO what we have seen going on so far across the EU/E-zone elites has been largely within the free market financial system (market manipulation), even if outside the democratic system.

    But I do not dismiss the possibility that they might attempt to impose some sort of political controls on to the markets to prevent them trashing E-zone countries & banks. That article you posted already mentioned capital controls possibly being introduced to save the ECB from its Target2 racket and that’s not the first time I’ve seen it mentioned.
    Why would they do this?
    – because the EU elites are overwhelmingly socialist and such governments almost always resort to controls when their policies fail, as they always do in the end.
    – IMV there is no negotiable solution to the EU crises of sovereign debts. investors don’t want to buy it any longer. sooner or later, events will have their day and we will be left to deal with the consequences.


  20. “Sarkozy seen standing outside top floor window of Palais de l’Elysée”

    Well, wouldn’t you do the same thing if the alternative was Germany running for the trees and you left alone to take care of the PIIGS? lol


  21. Good red meat served hot. This is where you truly shine John; hope that doesn’t sound back handed. I have one quibble: Crash 2 is really Crash 3, Crash 1 was in the ’30s. It is rainy, cold and miserable here in Vancouver today–just saying.


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