Deep In The Heart Of Texas

by: Mark J. Grant

[Personal Note: I am in Dallas now. I will be here until Wednesday. This is the land of big belt buckles and the land of big hair. Heck, one woman pulled some kind of comb from her purse that wasn't much smaller than the yard rakes we use in Fort Lauderdale. My neck is also sore. I went to check in at the front desk and every time the clerk said, "Y'all" I kept looking over my shoulder to see who else was there. Yee haw!]

Since I am in the land of Texas, I am going to respect their dialect. Normally I would say that I want to discuss the Banco Popular (OTCPK:BPESY) (OTCPK:BPESF) Tier I bond fiasco again but instead, we are going to "circle back" to it.

Steer clear!

These Tier I bonds are not investments, whoever issues them. That is my opinion. They are purely a speculative play that is little different from playing craps. Either you win something: the yield, or you lose everything: the principal.

One lousy bet.

Given the structure of these instruments, the ratings agencies are playing sub-prime idiocy, once again, though the subject has changed. The bonds, in my opinion, have absolutely no business reflecting the ratings of the issuer on a stand-alone basis because the design is fatally flawed.

"All or nothing" propositions are not allowed by most investment committees and I think they would be appalled if they understood what the portfolio managers had bought. On top of that you can add the political nature of these securities. Both the EU and the ECB can change the outcome of who gets paid, and when, by flicking their wrists one fine Barcelona morning. Further, the local depositor bond holders will always take precedence, because of political considerations, and consequently institutional holders, of this class of assets, are consistently going to be at the back of the line, and hung out to dry.


You want to spend your days wallowing in blood, fine, keep buying these things. You are a gown-up. I can't stop you. Don't sell 'em either, of course, you are a "buy and hold" investor.

Are you gonna cowboy up or lie there and bleed?

- Some Texas varmint saying

So, if you have some masochistic tendencies there are some other so called bonds that you might try. How about Spain's Liberbank Tier I bonds, trading at about 60 cents on the dollar and just ripe for some Banco Popular fun and frivolity. How about the Monte di Paschi (OTCPK:BMDPY) floating rate note perpetuals? You can cover your pension fund obligations here. The DM, according to Bloomberg, is 2,018. Yep, step right up. This European snake oil will cure anything. The Street calls them "CoCo" bonds. I call 'em "LoCo" bonds.

Ride em' Cowboy.

Wolf Street says,

Italy is brimming with teetering mid-sized banks that, like Banco Popular, are perfect candidates for a bail-in. Of Italy's 500 banks, 113 are at risk (with a "Texas Ratio" of 100 or more) and 24 are seriously in trouble (with a TR of over 200%). They include the two mid-sized Veneto-based banks, Banca Popolare di Vicenza and Veneto Banca, which have already received billions of euros in taxpayer assistance but are still desperately trying to avoid a bail-in. To qualify for more public funds they were instructed by the European Commission last week to find an additional €1 billion in private capital.

Then on Sunday, they always make these announcements on Sunday, Bloomberg reported that the 20%-21% haircut on their bad loans, agreed to be Monte di Paschi and the ECB, didn't come up with any buyers for the non-performing loans. I am sure you are shocked, just shocked, and so am I, of course.

You can lead a horse to water, but you can't make him drink!

The Economist states,

In December the European Central Bank (ECB) estimated that Monte dei Paschi would need €8.8bn ($9.2bn) in capital to withstand the "adverse scenario" in last summer's test. The Bank of Italy reckoned that the state's share would be €6.6bn. That included €2bn to compensate retail investors in the bank's junior bonds, many of them ordinary customers. European state-aid rules say that they should lose their money along with shareholders. Technically, they will. In fact, to preserve their savings and avoid a political outcry, they will be deemed to have been "mis-sold" the bonds: they will receive shares which will in turn be swapped for new, safer bonds.

Now I want you to read that last bit again. "Mis-sold" the bonds. As an institutional investor you are going to get cut off at the knees while the local folks get all of their money back and have a good laugh on the institutional fool as they have another glass of wine in the Piazza. You will have been caught drinking Kool-Aid after retching on the sidewalk. I am just saying, but I ain't approaching, if this is what you are doing. Way too much Bull.

Never approach a bull from the front, a horse from the rear, or a fool from any direction.

- Texas Wit and Wisdom