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Passing The Trash - Again

Bruce Krasting's picture




 

I participated in a slow motion disaster back in the early 80’s. I was working for the global powerhouse, Citibank. Walter Wriston was running the show at the time. He “famously” said “Countries don’t go bankrupt.” His thinking resulted in an enormous increase in the bank’s exposure to global sovereign lending.

All of the big global banks followed Citi’s direction. It was one big party. All the bankers were headed to Brazil, Mexico and Argentina. They all had checks ready to sign. Of course, the countries were more than willing to take on more debt.

It was in 1980 that the thinking was forced to change inside Citi. The sovereign loan portfolio  was getting too big too fast. The bank had internal country limits and those limits were filling up fast. The worst thing that can happen to a banker is to reach a lending ceiling. The real return for lending to these countries was not the Libor+1 pricing, it was the front end fees from new loans that fed the bonus pools.

The solution was simple. Sell the loans that were already on the books to make room for the new ones (and the related origination fees). Who did we sell the loans to? Anyone we could, but we created demand from smaller, US regional banks.We sold them sub-participations in sovereign loans.

In August of 1982 the lights went out. All the big sovereign customers of Citi went bust in the course of a few months. The losses at Citi damn near shuttered the bank (many of the big banks were in the same condition). There were no more big fees coming in, and the losses were mounting. What was once a great place to work, became a terrible place, so I left and joined Drexel in 1985.

I spent the next five years buying back the loans that I had sold to the regional banks. At Citi, I had sold the loans at par to regional banks, at Drexel I bought them back from those same banks at 20 cents on the dollar.

Note: During this period I was not a “decider”. A “cog in a wheel”, is a better description of my role in this story. There were thousands of “cogs”, together we produced a crisis that cost hundreds of billions, wrecked a good number of banks and produced what is now called, “The Lost Decade”.

This story is important because it is happening again today. Money Center banks are reducing their holdings of risky loans. The regional banks are increasing exposure.

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It’s not just the big US money center banks that are selling. The EU banks are having a fire sale:

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Once again, the trash is headed downhill. It won't end any differently this time. I looked at my old Rolodex of banks that I both sold and bought bad loans from. Very few of them are alive today. Nothing has changed. Surprised?

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Wed, 06/27/2012 - 22:35 | 2567188 Bear
Bear's picture

Bruce,

It is different this time. First, the Big Banks are all underwater and they have not been as successful at off loading their wares to the Regionals. They have unloaded a huge bag to the FED which now is buried and unable to move anywhere.

On the mountains craps rolls downhill in a rather orderly manner but in the Himalayas it rolls down in avalanches.

Magnitude matters.

Wed, 06/27/2012 - 21:20 | 2567060 chinaboy
chinaboy's picture

What is really sad is that the same thing happen again and again ... until someday we find the whole banking system fall apart.

Wed, 06/27/2012 - 21:13 | 2567044 TraderTimm
TraderTimm's picture

Again, if anyone is serious about circumventing these parasitic middle-men, I suggest trying to grow networks that trade or barter skills/goods, exchange precious metals for the same, uses bitcoin for portable storage of wealth and payment options.

Any one of these done on a large enough scale would end their reign upon us.

Everyone asks what can be done -- well, there it is.

 

Wed, 06/27/2012 - 20:03 | 2566885 world_debt_slave
world_debt_slave's picture

I always like this clip that even a 2 year old could understand

Eliot Spitzer: "The FED is a Ponzi Scheme. Run by Banks". Won't say where $13.9 TRIL went

http://www.youtube.com/watch?v=UhfvE9bNls4

Wed, 06/27/2012 - 18:40 | 2566694 20-20 Hindsight
20-20 Hindsight's picture

Banks = Cocksuckers. 

Thu, 06/28/2012 - 00:26 | 2567372 Bansters-in-my-...
Bansters-in-my- feces's picture

Banks = cocksuckers.....

Huh...?

Wrong.

Cocksuckers= usefull

Bankers....

 

Well.not so much.

Unless it's a cock sucking banker.

Wed, 06/27/2012 - 20:17 | 2566912 azzhatter
azzhatter's picture

right to the point and easy to follow

Wed, 06/27/2012 - 18:36 | 2566684 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

The incentivization of a-morality. Between you and your bonus there is only the situation at hand and it is your job to deal with that situation. Let God sort out the rest. And LET THERE BE BONUS!

Incentivizing bankers for short term gains corrupts even the incorruptible.

Today, even those working at the so called utilities, the largest Banks, are getting ready for a long July 4th weekend out in the Hamptons. Why not? Washington D.C. is a boom town. Why not let the bankers eat cake? The SYSTEM HAS BEEN SAVED!

Right?

Wed, 06/27/2012 - 18:28 | 2566652 shovelhead
shovelhead's picture

The difference is the muppets are enlisting instead of being drafted.

Wed, 06/27/2012 - 17:57 | 2566584 lewy14
lewy14's picture

Bruce, what's going on now has an obvious difference: 

- when you were selling loans to US regional banks, you sold them at par.

- the loan sales going on in Europe now are described as "fire sales" - obviously not at par.

The regionals were dumb money getting shitty deals then. Now it seems they're buying at distressed prices.

Unknown if the prices are "distressed" enough, to be sure, but it seems like the situation is materially different from the one you are recalling from experience.

Thu, 06/28/2012 - 02:10 | 2567472 Cthonic
Cthonic's picture

Not for lack of trying: "Axe sheets are typically circulated by major lenders to participant banks, mirroring primary syndications... But the offer is no fire-sale. The vast majority of loans for sale are high-quality assets, priced near par."  Har har.

http://www.ifre.com/european-banks-dump-asian-loans/1618527.article

Wonder if anyone has bitten.

Thu, 06/28/2012 - 04:54 | 2567564 lewy14
lewy14's picture

Interesting article - thanks.

Still, I'm wondering if it might be the case that the loans for sale are in fact good assets; when an entity is in distress, it sells what it can sell, not what it would like to get rid of - the market for good assets is likely to be better than the market for crap assets.

Yet the article indicates that the secondary buyers are holding out for better discounts. Not, perhaps, because they doubt the quality of the assets, but they sense the desperation of the sellers.

Just a thought.

Wed, 06/27/2012 - 17:48 | 2566563 deerhunter
deerhunter's picture

City of Stockton to file bankruptcy,  one problem ,  anyone working full time for 30days or longer guaranteed health care for life.  Any long term problems with that ???  More cities to come.  Cook County Chicago,  property taxes in some suburbs up 200% as property tax revenues fall and houses worth in most cases 40 to 50 % less than 5 years ago.  Pissed off citizens??? Maybe??

Wed, 06/27/2012 - 22:09 | 2567135 mjk0259
mjk0259's picture

Actually it was 5 years but working for other towns previously could count towards the 5 years. Still, I wish I could get such a deal.

Wed, 06/27/2012 - 23:41 | 2567309 knukles
knukles's picture

Got some bad ass news for some of my uber liberal CA gov't employee golf buds.
They used to say that their pensions were guaranteed by the CA constitution.  A little misunderstanding based upon a CA supreme court ruling that basically said that a governmental entity cannot unilaterally abrogate a contract (Somebody will and can take action thereupon, the entity is not immune from recourse.)
Not a big or new idea, huh?
Well, Stockton gonna be, under Chapter 9, cutting pension and health care payments to current retirees (Currently being discussed and betting is likely to succeed.) so as to be able to provide basic necessary services.
And, the legal action is under Ch 9 of the Federal Code.  And a federal bankruptcy judge can abrogate ANY contract.

So much for the protection under CA law.

Fucking idiots... their arrogance is unprecedented.
The entitlement generation.  Same assholes who hated big gubamint in the 70's, now in gubamint and think they are owed superior financial security for making decisions that dictate how the rest of us (Less than 50% of the country who do not work for the gubamint or receive the dole) must live and behave.  These people make better salaries, better health care and have real pensions.  Unlike the rest of us!!!

Fuck 'em.
Seriously.

Thu, 06/28/2012 - 00:57 | 2567413 Bear
Bear's picture

 

There is no one smarter than a goberment employee. They puff up and say how they sacrificed their life to public service when they could have been making 'much' more in the private sector. Who will get the last laugh?

 

Wed, 06/27/2012 - 17:33 | 2566512 rufusbird
rufusbird's picture

Well said, Sir, well said.

Wed, 06/27/2012 - 17:22 | 2566472 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Back in the day (before Wriston) sovereign debt used to be collateralized by real cash flows: port revenues, import duties, stuff like that. Maybe we can return to that setup: Greek bonds collateralized by tourist receipts at the Acropolis? Italian bonds backed by the VAT on Ferrari sales? Portuguese olive oil bonds. Irish bonds backed by...um...

Wed, 06/27/2012 - 18:30 | 2566661 shovelhead
shovelhead's picture

Week old haggis borrowed from Scotland.

Wed, 06/27/2012 - 17:32 | 2566502 joemayo
joemayo's picture

...whiskey

Wed, 06/27/2012 - 17:17 | 2566457 onlooker
onlooker's picture

 

This is the insight into the System that us little guys do not have access to. ++++++++++++

Wed, 06/27/2012 - 17:19 | 2566456 Big Ben
Big Ben's picture

Walter Wriston may have caused huge losses for Citibank and its shareholders, but I am sure he retired with a tidy fortune.

This illustrates a major problem with banks and most other publicly owned companies. The CEO's are typically in their 50's or 60's and are nearing retirement. So there is a strong incentive for them to 'goose' the company's earnings in the short term at the expense of the long term interests of the company. If a 60 year old CEO is planning to retire at 65, why would he be concerned if the company goes broke in 6 years?

It should also be noted that Walter Wriston (bless his little heart) was chairman of Ronald Reagan's Economic Policy Advisory Board from 1982-89. And in June 2004 he was awarded the Presidential Medal of Freedom by George W. Bush.

 

Wed, 06/27/2012 - 21:36 | 2567088 Ned Zeppelin
Ned Zeppelin's picture

Just another banker scumbag.

Wed, 06/27/2012 - 17:09 | 2566431 Rainman
Rainman's picture

Great story, Bruce....they need to sell the chicken before it gets chipper.

Wed, 06/27/2012 - 16:58 | 2566389 janus
janus's picture

here's an apropos # for and from bruce:

http://www.youtube.com/watch?v=T4gra-OuONI&feature=related

bread lines strechin round the corner/

welcome to tha new world order,

janus

Wed, 06/27/2012 - 16:53 | 2566370 oklaboy
oklaboy's picture

were do I sign up

Wed, 06/27/2012 - 16:51 | 2566359 cbaba
cbaba's picture

Bruce ;

 

this time problem is much bigger in scale..

 

Wed, 06/27/2012 - 19:02 | 2566746 Bruce Krasting
Bruce Krasting's picture

All of Brazil, Mexico and Argentina was $350B. That is about half of Greece's debt today.

The difference of 30 years is one "0". The $100B that went up in smoke in Mexico in 1982 is now $1,000B.

Billions, trillions. What comes after Trillions?

Wed, 06/27/2012 - 23:29 | 2567288 knukles
knukles's picture

After trillions comes

"Look at the tits on that monster."

Wed, 06/27/2012 - 22:32 | 2567180 malek
malek's picture

 The difference of 30 years is one "0". The $100B that went up in smoke in Mexico in 1982 is now $1,000B.

10-fold in 30 years is 8% annual rate... pretty much in line with what I believe to be the true inflation rate for the US Dollar.
So no real difference.

Wed, 06/27/2012 - 21:44 | 2567104 lasvegaspersona
lasvegaspersona's picture

after trilions comes.... derivatives

Wed, 06/27/2012 - 21:35 | 2567085 piceridu
piceridu's picture

BK, I always look forward to stories in regards to your personal experience in the Matrix. Thanks for sharing yet another one.

 

Wed, 06/27/2012 - 20:47 | 2566987 disabledvet
disabledvet's picture

"this is the big one." Only game on the Planet actually...and you want to be all in and not just in. The simultaneity of both the implosion of the eurozone and the explosion of the Middle East easily make this point in time the most important time since World War II. I find it fascinating that this site is the only media outlet that has "risen to the occasion" and actually covered it. Given the other story here about how bad the ratings is not just at CNBC but all the other news outlets...and amazingly the newspapers as well...only goes t show how pathetic the Publishers of today's media truly are. The IMPORT of all these events is PALPABLE. Obviously the focal point of interest is here at ZH for "the new media fix"...but i find it astounding there's barely even a lame attempt at ginning up the "dramatis personae" of this momentous and tumultuous point in time" in order to at a minimum move media product. I thought this was all these folks business? The irony is "the Big One really is The Big One"!

Thu, 06/28/2012 - 06:06 | 2567597 prains
prains's picture

election year

Wed, 06/27/2012 - 19:48 | 2566854 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

We can just start making currencies in scientific notation. $1x10^n.

Wed, 06/27/2012 - 17:57 | 2566583 Salah
Salah's picture

Great piece....people forget: a deposit in a bank is their liability; a loan (however construed) is their asset.

What was the real "trigger mechanism" to the Fall 2008 debacle?  Answer: Russia invading Georgia; all the dry kindling was in place

So where's the next 'trigger mechanism'?  (hint: it won't be financial)

 

 

Thu, 06/28/2012 - 00:00 | 2567343 CompassionateFascist
CompassionateFascist's picture

IranWar. <60 days and counting.

Thu, 06/28/2012 - 06:37 | 2567613 Ar-Pharazôn
Ar-Pharazôn's picture

you dream if you think they are really going to attack iran without Russia saying yes

Wed, 06/27/2012 - 16:45 | 2566329 lasvegaspersona
lasvegaspersona's picture

Bruce

Jerry Doyle worked at Drexel at about that time. He currently hosts an excellent AM talk show here in Vegas syndicated across the country. Was he a classmate? 

Wed, 06/27/2012 - 19:06 | 2566755 Bruce Krasting
Bruce Krasting's picture

I don't know Jerry. There were 5000 people working at DBL before it went tapioca. I was there 1985-90.

Tell him I'm looking for some Vegas air time. I do a very good radio rant.....

bk

Wed, 06/27/2012 - 16:47 | 2566326 ebworthen
ebworthen's picture

Then the bill will be passed - by a "united" and "bi-partisan" CONgress - to bail out the regional banks and insurers on the backs of the taxpayers - again.

And in 5-10 years when SS, Medicare, Medicaid, Pensions, and other taxed and fee'd yet unfunded liabilities are cut in half; Wall Street and the Bankers and the Politicians will still be getting theirs while most Boomers are too old to fight - if they are still alive.

Wed, 06/27/2012 - 16:29 | 2566279 Tuffmug
Tuffmug's picture

Big banks just doing God's work in fucking the muppets!

Wed, 06/27/2012 - 22:42 | 2567199 Bear
Bear's picture

Oh, is that where the term MF came from ... Can't get picture out of my mind

Wed, 06/27/2012 - 20:42 | 2566973 philipat
philipat's picture

Let them eat paper?

Love your stuff but PLEASE don't start using "Decider", which always reminds me of "W". And I don't want to be reminded of "W". The President who started the trashing of the Constitution. I know you Americans are short of time and have already destroyed what is affectionaly called the "English" language, but is using "Decion maker" too difficult?

Thu, 06/28/2012 - 01:13 | 2567435 perchprism
perchprism's picture

 

Hey, you limp-spined fag, why don't you bend over and blow yourself if you're in such need for a pacifier?  Since you're not an American, kindly shut the fuck up about the Constitution, thanks.  Tomorrow some of it actually gets restored.

Thu, 06/28/2012 - 04:19 | 2567525 philipat
philipat's picture

Thanks for the highly sophisticated response. I do agree that SCOTUS might restore some constitutionality but it is already too late for the 1st, 4th, 5th and 14th amendements to YOUR constitution, which as a scholar of law, I happen to care about. Unlike, apparently, most Americans.

 

And, incidentally, I note that the repeal of Obamacare doesn't change the fact that the US spends 17% od GDP on healthcare, which covers only 70% of the population and the system has worse fundamental outcomes (Infant mortality etc.) than the average OECD country. In fact, should the other provisions of Obamacare survive, especially the requirement to insure "Pre-existing conditions", then the cost of Medical Insurance for everyone will go through the roof because the typical American grifter will recognise that there is no need to buy insurance until suffering from a costly condition. IMHO that is just another confirmation that the average American is being totally screwed by the system. That is, the 1%. Is this agreat country or what?

Wed, 06/27/2012 - 23:40 | 2567308 mkhs
mkhs's picture

"...is using "Decion maker" too difficult?"

 

Tell me what a "Decion" is and I'll get back to you.

Thu, 06/28/2012 - 03:45 | 2567521 philipat
philipat's picture

Decision maker. Edit function only survives for a few hours. But I think you either got, or completely missed, the point. Please stop destroying my language. Fortunately, in a few years, you will be destroying Spanish instead.

Wed, 06/27/2012 - 17:13 | 2566446 barliman
barliman's picture

 

Give them more credit.

The big banks are willing to fuck ANYTHING they can ... muppets, regional banks, whoever.

"Fuck them all and let Bernanke sort it out!"

The motto they live by.

barliman

Wed, 06/27/2012 - 19:46 | 2566852 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Bruce, your friend is right, countries don't go bankrupt. They do default though. Some countries often more than others.

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