ECB Considering Requesting A Rise In Capital

Tyler Durden's picture

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 12/13/2010 - 14:01 | 801947 TheGreatPonzi
TheGreatPonzi's picture

It doesn't seem to cause panic in the markets, nor in precious metals. Deflation is definitely ruled out. And for those who point out the falling prices of ultraleveraged homes:

"The money supply does not shrink just because somebody's house falls in price, because somebody else's house down the block sold for 10% less this year than it did last year. The money supply has not changed at all. The money is in somebody's bank account. If one person loses money in a transaction, somebody else will be able to buy whatever it was that fell in price. He will buy it because he has money in a bank account. When he writes a check to buy the item, that money is transferred to the seller's bank account. The money supply has not changed."

Mon, 12/13/2010 - 14:14 | 802007 Plainview
Plainview's picture


The property market is not a zero sum game, that is absurd.

Mon, 12/13/2010 - 14:17 | 802021 TheGreatPonzi
TheGreatPonzi's picture

Money supply is not destroyed. The price is destroyed, yes, but not money supply.


Mon, 12/13/2010 - 14:30 | 802037 etrader
etrader's picture

Do we take it the ECB disagree with the  BIS Quarterly Review out today then :-)



Mon, 12/13/2010 - 14:27 | 802057 Plainview
Plainview's picture

If your house falls $100k in December that $100k is not in somebody else's bank account. It has vanished. In a world where credit = money = credit then it is entirely equivalent to the destruction of money.

Mon, 12/13/2010 - 14:35 | 802082 AnAnonymous
AnAnonymous's picture

If your house rises $1M in December, that $1M is not in somebody else's bank account.


The money used to build the house is circulated. Everyone got paid to build the house.

Mon, 12/13/2010 - 15:02 | 802153 TheGreatPonzi
TheGreatPonzi's picture

"That $100k" never existed. It was an artificial valuation, based on nothing. It was not value, and cannot be money, because houses are not money, but assets. What was it, then? A price.

What was destructed was the amount of money someone could have paid for purchasing the asset. There is no physical destruction in the money supply.

In a world where monetary standards do not exist, deflation cannot exist, and has indeed never existed. How many deflations since 1933 in the world? Not heard of anything. How many hyperinflations? Approx. 10.

Mon, 12/13/2010 - 15:09 | 802175 CrashisOptimistic
CrashisOptimistic's picture

I do not think you understand the issue.

If the price goes down, the % of houses underwater increases, and about 45% of those eventually default on their mortgage.

Regardless of FASB, a defaulted mortgage is an asset the bank used to have that it no longer does.  It has the residual value of the house.  If THAT continues to decline, then the value of the asset On The Bank Books also declines, especially if the foreclosed house is liquidated.  The bank then has to buttress its capital ratio.

Money is destroyed.


Mon, 12/13/2010 - 15:32 | 802256 TheGreatPonzi
TheGreatPonzi's picture

I do know there is a destruction of money in the event of default.

But there is no destruction of money caused by falling prices, except very indirectly (falling prices -> increase in underwater homes -> increase in default -> shrink of the monetary supply -> falling prices). Many people on ZH seem to think that when the artificial valuation of homes fall, the monetary supply falls by the same amount.

There has been a 50% decrease of home prices since 2006, reaching 90% in some areas of Florida and Michigan. Though, income and other prices have been steady.

As it is obvious that both the FED and the US gov cannot and will not accept any default from mortgage providers themselves, deflation will not happen.

Mon, 12/13/2010 - 15:01 | 802163 LawsofPhysics
LawsofPhysics's picture

The velocity of money is curtailed however.

Mon, 12/13/2010 - 14:47 | 802116 Bam_Man
Bam_Man's picture

Real estate is not money.

The only way in which the money supply is affected by falling real estate values is when a mortgagee defaults, resulting in a net credit loss to a bank.

When as a result of the loss, the bank acts to re-plenish its capital, then and only then is the money supply affected ("money" must leave the "money supply" to become bank capital).

It is amazing to see how many otherwise smart people do not understand (or pretend to understand, but don't) how this actually works.

Mon, 12/13/2010 - 15:04 | 802161 TheGreatPonzi
TheGreatPonzi's picture

We should also note that the net loss in monetary supply is only 10% of the mortgage par value, thanks to fractional banking.

If a $300,000 mortgage defaults, the maximum deflation in monetary supply resulting is only $30,000.

But indeed, to sum up, only defaults on home credits can cause a net loss in the monetary supply.

Mon, 12/13/2010 - 15:11 | 802193 Bam_Man
Bam_Man's picture

The resulting decline in the money supply is equal to the amount of BANK CAPITAL destroyed by the borrower's default. Period.

The amount of bank capital destroyed by the default depends on a lot of things - primarily the percentage of the bank's mortgage principal that can be recovered through a foreclosure and re-sale of the property. 

Mon, 12/13/2010 - 14:01 | 801955 kaiserhoff
kaiserhoff's picture

I have an idea.  Let's strap all the boats together.  Then, when one starts to sink..., oh, wait a minute.

Mon, 12/13/2010 - 14:01 | 801956 TruthInSunshine
TruthInSunshine's picture

Can't they borrow from The Royal Bank of Scotland or HSBC?

Oh....that's right.

Mon, 12/13/2010 - 14:05 | 801974 hedgeless_horseman
hedgeless_horseman's picture

In my dream from a few years ago the second crash is the the much bigger crash, and it hits much, much, closer.  Specifically, it wipes out JP Morgan Chase.

Mon, 12/13/2010 - 14:11 | 801998 CheapKUNGFU
CheapKUNGFU's picture

HH, obvisously you dont have dreams with unicorns that shit rainblow colored skittles - now do you?


JPM is TBTF, or werent you listening?

Mon, 12/13/2010 - 14:18 | 802018 Cdad
Cdad's picture

Now why in the world would the ECB require more capital in a full monty bull market such as this?  Assets are rising in value...are they not?

Would someone please tell me that I am awake?  Non of today's financial news items are supportive of today's price action in the markets, especially that absolutely nonsense rally in the Euro...all while the VXX slowly rises even though Goldman is selling VIX and everyone is convinced that burritos are worth $9 no matter how painful the constipation resulting from the consumption of said burrito is because "It's health food."

Now I am not a rocket scientist.  I confess that.  Neither am I professional stock broker....but my brain matter, as far as I know, is not in a state of decay from walking around looking at the wall paper on my Iphone.  I know enough to know that, in the long run [which is about 6-36 hours here in the New Amerika]...PRICE IS THE ONLY THING THAT MATTERS and VOLUME IS THE ONLY TECHNICAL STATISTIC THAT CANNOT BE MADE TO LIE!  I feel better for yelling that last part.  My apologies.

Last I knew, in case I am still sleeping, capital raises were really bad for banks, especially those that are all f'n levered up on lies and junk paper pledged literally infinity times to each other.  Right?

So either I need some coffee and NoDoze right now, or we are about to have a kick butt rally!  Right?

Personally, I think the VXX creation units machine is out of service today...which does not bode well for perceived risk in the market later on in the session...when I hope to be more fully awake....and even more short $9 burritos and long Roto Rooter.

Hi ho...


Mon, 12/13/2010 - 14:25 | 802049 Sophist Economicus
Sophist Economicus's picture

I have your solution -- Eat more raw meat and buy the *^%&ing dip!

Mon, 12/13/2010 - 14:24 | 802044 Jason T
Jason T's picture

Insolvent.. bankrupt... disintegrate.. collapse..

I smell another American revolution required.


Back to sound money national credit system.  

Mon, 12/13/2010 - 14:35 | 802067 knukles
knukles's picture

The ECB is going to get the capital from all the the EU/EMU member countries who are going to contribute real money to the ECB as capital to be funded from proceeds of bond issues that each member country floats in the bond markets so that the ECB can buy the bonds the member countries just sold in the bond market to raise the funds to fund the ECB to buy the bonds they just sold in case nobody else will buy the bonds they just sold.

Plus, they need the capital so that they can pass their own fucking stress tests, too.  You know, the ones that don't mark anything to market and assume an instantaneous 100% recovery rate on the 0% loss rate assumed. 

Mon, 12/13/2010 - 14:42 | 802100 traderjoe
traderjoe's picture

Pretty much 'sums' it up. Sounds reasonable to me. /s

Mon, 12/13/2010 - 14:36 | 802077 jahbless
jahbless's picture

Internships Are The New Entry Level Job?

no worries you guys - CNN has solved it for us!

At 32, I was worried about getting back to work, but thankfully I can just strap on my (splashproof) Sony Walkman and bop down to the local bank for an internship.

I'm shooting for 120k pa + bennies, natch.

Mon, 12/13/2010 - 14:41 | 802097 spank-of-america
spank-of-america's picture

"Under U.S. law, unpaid internships must serve primarily as educational training experiences. An unpaid intern cannot replace a regular employee, and the employer cannot profit directly from the work of the intern."


Yeah, I'm sure there's none of that going on.

Mon, 12/13/2010 - 14:34 | 802079 RobotTrader
RobotTrader's picture

I keep looking for Eric King and Jim Rickards oft-discussed "Total systemic collapse of the economy", but so far I'm not seeing it. Instead, I'm watching BBBY getting heatmapped, within a hairsbreadth of breaking out to new 2-yr. highs.

Mon, 12/13/2010 - 14:43 | 802107 traderjoe
traderjoe's picture

Silver up 3.5%, outperforming BBBY. 

Mon, 12/13/2010 - 14:36 | 802081 DollarDive
DollarDive's picture

Greece and Ireland have been bailed out to the tune of almost €200 billion while many parts of Europe are straining under intense austerity programmes. Reuters quoted one of its sources as saying that it was not clear whether any new money would come from the central banks or from government.


.... If it doesn't come from governments - through either savings or printing then where does it come from ? .....Thin air ? 

Mon, 12/13/2010 - 14:37 | 802087 DollarDive
DollarDive's picture

Sell bonds to raise money to buy bonds to sell bonds to buy bonds to sell bonds to buy bonds to sell bonds to buy bonds to sell bonds to buy bonds........

Mon, 12/13/2010 - 14:39 | 802094 Cleanclog
Cleanclog's picture

How long before the US Treasury contributes to the ECB so they don't have to ask as much from the banks in a capital raise?  After all, banks come before citizens.  New world order.

Mon, 12/13/2010 - 15:01 | 802160 cheesewizz
cheesewizz's picture
Irate Irishman Explains Debt





Mon, 12/13/2010 - 15:14 | 802196 francismarion
francismarion's picture

According to a teutonic friend of mine with his ear to the ground that I talk to every day, Germany thinks the euro is a good idea but not at any price.

Mon, 12/13/2010 - 15:38 | 802275 Biggus Dickus Jr.
Biggus Dickus Jr.'s picture

The price of breakup is catastrophically high. Does anyone have an idea how Germany could do it without collapse?

Mon, 12/13/2010 - 15:36 | 802272 Biggus Dickus Jr.
Biggus Dickus Jr.'s picture

So the die is cast. Print away bitchez. Last senior central bank with a shred of credibility wins the world. it looks like the dollar and its natural hedge gold will rule the world for our generation at least.

Mon, 12/13/2010 - 16:26 | 802481 TexDenim
TexDenim's picture

Well, to the extent the European banks are demonstrably undercapitalized, how could this be a bad idea?

Mon, 12/13/2010 - 16:32 | 802508 Josephine29
Josephine29's picture

This situation of in effect the credit rating of the European Central Bank has been raised by those who analyse its position for some time. Only last week I read this on the subject of its Securities Markets Programme.

As the SMP buys ever more bonds that one day will need some form of restructuring or even default then the balance sheet of Europe’s central bank looks ever riskier to me and it is quite conceivable that we could be in an era where central banks as well as private-sector banks need bailing out. In a strategic sense the ECB is in a hole and it is digging rather than trying to get out of it.

Thu, 12/16/2010 - 13:29 | 803985 M.B. Drapier
M.B. Drapier's picture

Ah yes, the overblown pawn shop. For the benefit of mugs like me following along on our fingers at home, though, can someone explain where the result of €5.8bn of capital on €1.924tn of assets comes from? The latest consolidated Eurosystem balance sheet - according to Buiter, the balance that really matters - gives €78.2bn capital on €1.924tn assets (24.7x leverage). The ECB proper's subscribed capital is €5.8bn (and as of the 2009 annual report it only actually had €4.1bn of that, plus a couple of bn in profits), but as of the 2009 report its assets were just €138bn (giving 21.5x leverage).

Of course, that would be the case in an ideal world where data actually mattered, and capital deficiencies could not be plugged up by just printing some more worthless linen.

Unlike the Fed, though, there will be a big fight before the ECB actually gets to print away significant losses. Raising significant capital - say tens of billions - to cover losses would also spark a huge fight. Come to think of it, even using national CB assets that appear on the consolidated balance sheet to cover big losses at the central ECB might create some controversy. (Of course the ECB has managed to turn this weakness into strength.)

Do NOT follow this link or you will be banned from the site!