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David Stockman's Thoughts on the Coming European Train Wreck
Courtesy of Lee Adler of the Wall Street Examiner
(image credit: Studio Lévy and Sons)
David Stockman, former Director of the White House Office of Management and Budget during the Reagan Administration, has in recent years become a prominent and outspoken critic of the Fed, central banking policies generally, government finance schemes, and other aspects of the world's screwed up financial regimes. Mr. Stockman's perspective on these issues is unique. He played an integral role in government in the early days of the long running credit and government finance bubble which led to the mushrooming multifaceted financial crisis now engulfing the world.
Mr. Stockman subsequently spent many years on Wall Street in the investment banking and private equity arenas, as well as the corporate world, where he gained a perspective on the impacts of government policies on the financial system, and the perverse behaviors that result from bad policy. He has been a proponent of fiscal sanity for decades, even during a time when many politicians and economists believed that deficits didn't matter. He issued stern warnings about runaway deficits 25 years ago which ring all too true today. We now face the dire consequences of the practices he warned against.
After leaving the Reagan Administration, Mr. Stockman wrote frankly and critically about his role and experiences in the Administration in his book, The Triumph of Politics. The book is still relevant today as an historical study of the origins of the economic philosophies and government processes that led to the ever worsening mess in government finance.
As an important sidelight, I also found in the book fascinating insights into the psychology and personalities of not only members of the Reagan Administration, including the President, but of politicians in general. In many ways, the book confirmed my view that politicians have personality "issues" (OK, I am being more polite than usual).
Recently I had the privilege and the pleasure of meeting David Stockman at his home in Greenwich, for lunch and an afternoon of conversation. We were joined by Bruce Krasting, another veteran of Wall Street and the hedge fund world, and an insightful observer and commentator on the current scene (who also has graciously permitted The Wall Street Examiner to repost his commentaries).
The three of us, joined by Mrs. Stockman and Mrs. Adler, had a lively and fascinating discussion over the course of nearly 4 hours. At my age, it's impossible for me to recall all the specifics, and I wouldn't want to run the risk of paraphrasing and misrepresenting the thoughts of others. However, I continue to correspond with Mr. Stockman and he has been kind enough to allow me to share some of his thoughts with you. He is currently writing a book on the financial crisis which I am looking forward to reading. Some of the thoughts he expresses in our exchanges he relates to the ideas he is developing in the book.
In his most recent email to me, Mr. Stockman expounds on some things that illustrate why the European banking system is on the verge of collapse:
The real story of the present is the shadow banking system, the unstable and massive repo market, and the apparent daisy chain of hyper-rehypothecated collateral. It looks like the sound bite version amounts to the fact that the European banking system is on the leading edge of collapse for the whole system. These institutions are by all evidence now badly deficient of the three hallmarks of real banks--deposits, capital and collateral.BNP-Paribas is the classic example: $2.5 trillion of asset footings vs. $80 billion of tangible common equity (TCE) or 31X leverage; it has only $730 billion of deposits or just 29% of its asset footings compared to about 50% at big U.S. banks like JPM; is teetering on $500 billion of mostly unsecured long-term debt that will have to be rolled at higher and higher rates; and all the rest of its funding is from the wholesale money market , which is fast drying up, and from repo where it is obviously running out of collateral.
Looked at another way, the three big French banks have combined footings of about $6 trillion compared to France's GDP of $2.2 trillion. So the Big Three french banks are 3X their dirigisme-ridden GDP. Good luck with that! No wonder Sarkozy is retreating on France's AAA and was trying so hard to get Euro bonds. He already knows he is going to be the French Nixon, and be forced to nationalize the French banks in order to save his re-election.
By contrast, the top three U.S. banks which are no paragon of financial virtue--JPM, BAC, and C--have combined footings of $6 trillion or 40% of GDP. The French equivalent of that number would be $45 trillion. Can you say train wreck!
It is only a matter of time before these French and other European banks, which are stuffed with sovereign debt backed by no capital due to the zero risk weighting of the Basel lunacy, topple into the abyss of the shadow banking system where they have funded their elephantine balance sheets. And that includes Germany, too. The German banks are as bad or worse than the French. Did you know that Deutsche Bank is levered 60:1 on a TCE/assets basis, and that its Basel "risk-weighted" assets are only $450 billion, but actual balance sheet assets are $3 trillion? In other words, due to the Basel standards, which count sovereign and other AAA assets as risk free, DB has $2.5 trillion of assets with zero capital backing!
This is all a product of the deformation of central banking and monetary policy over the last four decades and the destruction of honest capital markets by the monetary central planners who run the printing presses. Furthermore, this has fostered monumental fiscal profligacy among politicians who have been told for years now that the carry cost of public debt is negligible and that there would always be a central bank bid for government paper. Perhaps we are now hearing the sound of some chickens coming home to roost.
The facts speak for themselves. Thanks to David Stockman for sharing these insights.
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CONFIRMED: The Trillion-Dollar Lawsuit That Could End Financial Tyranny
Who hasn't forgotten all about this one - now don't fib, and tell us you had been thinking about this shocker every day for two years! Divine Cosmos has done a commendable job in its restructuring for resurrecting before us again. Will we get justice this time around? Only YOU can Prevent Government Coverups!
http://chasvoice.blogspot.com/2011/12/confirmed-trillion-dollar-lawsuit-...
Stockman is sitting there, in the interview, with a bar of gold secure in his anus and two bars between his wife's legs. All you need to know!
The train wreck is certainly on its way to the US. Think like a GIANT.
Since everything is gonna go to hell in Europe. What to do, what to do? PM's, ProShare short funds. Foreign stocks. Dust off the furniture in the mountain cabin? Re-stock the pantry with canned goods? Damm, the creek has gone dry. That means I gotta lug water, whew! What about the catamaran? I can take off from San Diego, but where? Baja California, Mainland Mexico. A Waterworld scene is very possible! Don't have any RPG's. By the way boys and girls, the cat in da movie is right here in San Diego Bay............Good Day
Whatever else you may have wanted to say about Stockman, you could always count on his honesty.
The first step is to outlaw credit defauly swaps. The second step, to outlaw non-bank banking activity, so that it can stand a chance of being regulated in the public interest.
Dont believe WOLVES ..in SHEEP CLOTH !
THe Comments by STOCKMAN.. another member of the US MAFIA is NOTHING BUT RUBBISH !
I have commented on that in other forums.. but will repeat THIS : I CITE from CBNC which CITE from GOLDMAN SACHS REPORT :
” At the heart of the question for the U.S. has been counterparty risk — or the chance that one side won’t be able to live up to an agreement — and how much damage will be wrought in the event of a massive European debt default.
Goldman puts the counterparty figure at $1.8 trillion, which is 3.3 percent of the total outstanding debt in the U.S.
Should eurozone banks cut their lending to the U.S. by 25 percent — a round estimate — that would cut about 0.4 percentage points from growth. That in turn would cause a retrenchment among domestic banks that probably would see U.S. gross domestic product lose about 1 percentage point total.
With consensus for U.S GDP growth around the 2.5 percent range, that roughly accounts for Goldman’s projection that the overall rate will be 1.5 percent
AHHHH ... there we have it the US ( and UK ) EUFEMISMS are TRUE DOUBLE SPEAK
US " COUNTER PARTY RISK " BOILS DOWN to THE RISK THAT EUROPEAN BANKS WILL NO LONGER LEND MONEY TO THE USA...
( and then there is the UNSPOKEN FEAR .. that The European Banks even may ask to get some of the 2.3 TRILLION US DOLLAR they already have DUE from US BANKS ....NET.... BACK )
There the FOX slipped out of THE BAG ... i think it wasnt deliberate .. it just happened ... Ha ha ha ha
Nice picture, train wreck indeed.
My favorite sentence:
"These institutions are by all evidence now badly deficient of the three hallmarks of real banks--deposits, capital and collateral."
If I followed their example, I would be unemployed and getting a home equity loan on my underwater house to go on a bender in Vegas.
If it is insane for an individual to do it, why not an institution?
"Drivin' that train, high on Cocaine..."
http://www.youtube.com/watch?v=mQF8CILMt8c
Best interview I've ever heard about the root cause of this economic mess (central banks!). Stockman nails everything here:
http://media.chrismartenson.com/audio/david-stockman-2011-09-30.mp3
A train wreck is bullish for the economy.
It requires replacement of the crashed train and repair of the tracks and structures that were damaged.
As this FIAT world fades into nothingness.. a new episode in the evolution of FIAT is already beginning.
Why is money relevant?
I believe in "zero sum gain"; somebody looses then somebody wins. It is a simple process. In this game nothing has really been lost but more like overvalued. Now it is coming down to a current market value and some things will be very low and some have no value at all.
What is owing minus current value of stuff equals what is due.
Somebody, or group will come in a buy up all the assests they can get their hands on for pennies and that included government assests. The government will not take over the banks (at least on paper) the mother of all banks will. Call it what you want, IMF, WB, BIS, etc. It is all owned by the same people. The descendents of Mayer A. Rothschild.
Its not zero sum. Its labor. Savings are accumulated labor from the past. Debts are obligated labor in the future. What do we have the most of, and what does that mean?
I too believe that economics is a 'zero-sum' game. But it is complicated and not understood by most because gains and loses are spread over time. For example, the notion' and doublespeak for what passes as discourse on 'unfounded liabilities' is pure nonsense, because future liabilities are paid out of future income and those liabilities represent assets and future purchasing power of those who receive them.
The real issue is that those with assets are not willing to 'pay' a nickel to support the system, they accumulate wealth(which is spending by millions) and use it to run financial schemes to further bleed the system of money--there is no money velocity at the top. Debt fuels the economic system; but, what again few understand is that debt is a function of wealth accumulation--that is why, supply side economics is Voodoo economics.
Agree except it is not just that one clan of people. How many families exactly make up the ueberwealthy which have massive amounts of wealth and they have the control to keep their wealth (!). The "tools" that Ben Bernanke always refers to are THEIR tools. These tools benefit THEM. They will fight tooth and nail with all their tools to maintain their status quo and not loose any value in the process.
I don't know what that means -- "I believe in zero sum game." It does exist but it's not an absolute. What happens when the only participants are you and your daughter or son or spouse. Is it still what's more for them is less for me? What about if folks actually gave a shit about their neighbor or community or what happens in the world?
Only the greenback to save us all now!...Time to throw in the golden towel.
I didn't read this but will soon. All I have to say to david is WTF. I'm the far left.
He was a major tool working behind the scenes for one of the prime architects of this debacle.
Now, because he's jumping up and down in the middle of the street waving his arms, we're supposed to pay attention to him.
Well, fuck him too.
Yes it is true that he was tool and major architect of Reaganomics, but, he jumped off that train a long time ago.
All That Glitters...Will Not Solve Europe's Debt Woes
What will happen to French and German banks?
After a period of pretend the banks will be nationalized and restrutured. There is no other way out of this 'box'. bankrupt banks will be wiped out along with equity of insolvent banks. Bank bondholders will be given equity in 'new' banks with assets written off. The banks will take the hit along with their lenders b/c there is no one else to take it.
Derivative contracts will be unwound and premia redistributed back to purchasers. Nothing will be paid on 'good' contracts as potential payers will be bankrupt. Consequently, all derivatives over a certain small amount will be worthless.
Bottom line: finance is kaput. Making money with money as a 'job' is also kaput.
Without finance to create borrowed 'capital' and profits, industrial enterprises will also fail. Support for centralized industry such as marketing and chain-store retail will also fail. The advantages of 'economy of scale' have already vanished, what remains is the clearing away of industrial 'dead wood'. Where there is no local supply, there will be no supply. This does mean a gigantic opportunity will appear for those with skilll and motivation, to provide services and products now made available from China, paid for by carry trade and central bank credit.
Without the onrush of credit, the fuel supply for the world wills shrink dramatically. No fuel means no cars, jet vacations, second 'homes', malls, office towers, freeways or overseas shipping. A new world will emerge, completely without 'luxury' and 'leisure', very much unlike the one we've all inhabited for decades and gotten used to.
Needed: shoe leather, a warm coat, a sense of humor, skills and the ability to make friends.
Thanks for your well-put comments on financialization.
Very well put. I host a weekly group of local like-minded folks and we are preparing with these very thoughts in mind.
Cheers.
Here's one of the best accounts of life in a collapsed system on the same level as Ferfal. This one took place in Bosnia and really highlights the sheer misery and ugliness of what you will be up against and what to store. Not at all what you would expect, needless to say. Time to start hoarding bic lighters, duct tape, trashbags, antibiotics, and get as close to your extended family as possible. Learn how to treat wounds--even a scratch can kill. Found this on Chris Martenson's weekly email in his daily digest of 12/8.
http://www.tacticalintelligence.net/blog/shtf-survival-qa-a-first-hand-a...
While I agree with David Stockman's assessment of the current financial situation, I can't get it out of my head that he was a relative failure in the business world.
"During August 2003, Stockman installed himself as CEO of Collins & Aikman Corporation, a Detroit-based manufacturer of automotive interior components. He was ousted from that job days before a Chapter 11 filing on May 17, 2005."
Ref: http://en.wikipedia.org/wiki/David_Stockman
I wish someone would ask him about that!
He was also a failure in government, having created the so called magic asterisk which allowed Reagan to begin creating our current deficits.
I was no big fan of Stockman when he worked for Reagan; I always felt he was one of the green-eyeshade Republicans and did not understand dynamic economics. More to your point regarding current deficits, remember that it is Congress that passes budget bills, not the president. Reagan was saddled with a spendthrift Democratic House that reneged on its promise to cut spending in his first term. It was a Democrat, Bill Bradley, that led the tax reform brigade nearer the end of Reagan's second term. In fact, I recall that deficits were declining when Reagan handed the presidency off to the first clueless Bush. Likewise, it wasn't until the Gingrich-led Republicans took control of the House in 1995 that talk of balancing the budget began. I recall Clinton repeatedly saying that the budget could not be balanced in 7, or 8, or 9 years. Then it happened - sort of - and he suddenly started taking credit for it. As if he had a choice. We are now saddled with the excessive spending initiated by the Pelosi-Reid Democratic Congress put in place in 2007 after the Republicans proved inept (or worse). By the time Barack Obama came along the economy was on a downhill path thanks to Congressional idiocy.
I guess the main point is this: it wasn't Reaganonmics that led to our current economic situation, since it was never really implemented as intended. The problem we've had, going back over 100 years, is the government intervening in and distorting the economic fabric of our country. Learn history, and don't just repeat falacious, simplistic memes.
Don't whitewash the Gipper's admin.
Those fuckers jerked with inflation metrics and all manner of financial regulation big time.
We are still paying the bill for what they did.
The Garn-St. Germain Depository Institutions Act...a liscence to steal depositors' and taxpayers' money
Rising federal debt. The S&L Crisis...
And that's why the only inflation stats you can trust come from SGS and they are pre'82 adjusted.
No one after Reagan has bothered to try to understand what his strategy was going to be because it involved a sharp turn toward smaller government. This is what got him shot. He changed drastically after the assassination attempt, and many of these softened and reworked policies were unsuccessful. America failed to recognize that we caught our first glimpse of the NWO's teeth way back in 81'. If anything they are much more powerful and ruthless these days. This is why we either have waffling lecherous boobs, or radical nut jobs running for office. No one with the insight, courage, and skills to change anything has bothered to run for POTUS, because they aren't willing to become a martyr. I hope this will change in the coming years, after the collapse.
They should ask you why youre quoting wikifuckingpedia.
Julilee bitchezzzzz! Or lose your heads.
Please, no facts or tranparancy.
Rumors of bailouts only.
Scary read.
Medium term it's going to be a shit storm, but nearterm we probably stay in a trading range. Lows may go lower, but 1,100 will continue to provide stiff resistance.
First of all, David, have a little pride. We get you have ENORMOUS respect for the guy. But please ..... you sound like a fairy tale bride on her first night in Greenwich with a hedge fund prince charming. And then financial policy advice from Stockman, who by his own admission, was handing Congress ladle after ladle of ... his special Xmas punch. And this silly article ... oh dear the government made it too easy for the banks to fuck up their balance sheets (and mine as well) while collecting outragous unearned bonuses due to their financial engineering prowess. Zerohedge should be a little more selective in posting fawning, useless self-serving tripe unless, of course, it is for entertainment and fair and balanced reporting purposes. David Stockman would not know integrity if it peed on his towsers.
I have to agree with Mr. Abemko here. I was there and witnessed Mr. Stockman do his "thing." He was the chief salesman of the whole notion that the nation could have huge tax cuts, a huge defense build up not touch the entitlements and still balance the budget. It was called.....what was it called..so many years ago (smile) Supply Side "bitzchs!" Yeah that was it.
Then he went to Wall Street and did the nasty there too. Having matched wits with "David" a time or two I concede he is one smart douche bag for sure. He should likely be listened to as a "convert" and they of course believe it the most. But for Gods sake to NOT make this guy a hero. He is still a douche even though he is a converted one.
DG.
If you were there to witness Stockman's participation in the early stages of the Reagan presidency you should remember that it was Congress that promised spending cuts to go with the tax cuts. The tax cuts were phased in over several years, delaying economic growth. The tax cuts never materialized. Reagan did not use executive power to alter the economy, unlike our present president and all his executive orders and administrative actions. One ought not single out individuals under normal circumstances; there are usually plenty of others deserving equal blame.
+1
You can't be taken seriously on your commentary. Maybe you just got back from the Christmas party so I'll give you a pass.
absolutely nothing new to zh readers but still nice to see that there are still prominent folks who "get it"
Since you get it, can you tell me if this sounds right?
Stockman says the repo market is drying up as a source of funding for these banks. I assume that means they're running out of houses they repossessed and are now selling 'at a loss'. Isn't this the same as the big deflationary land and asset grab they have planned after the crackup, but in slow motion, and for cash flow? After all, in what sense do the banks own these houses? They have deposits on book to cover 10% of the money they created and transferred to the previous owners, but they have no collateral of their own in them. They 'own' them by virtue of having been the place the borrower went to for money printing. So these distressed repo sales represent pure (gross) profit. Do I have that right?
"repos" in this context are not repossesed real estate.
see repurchase agreement:
http://en.wikipedia.org/wiki/Repurchase_agreement
Finance-speak can be confusing at times.
The better to fleece you with, my friend.
David Stockman eats shit.
Nowadays, we're all eating shit. What's your point?
So, the French banks are kinda done or there will be massive rule changes and Risk Sharing Mechanisms?? Seriously, assuming it was not so politically charged....what are some scenarios? CXL the debt to eachtoher? Do they risk making all this seem meaningless is they just hand out checks?? A giant silly game?
The real story of the present is the shadow banking system, the unstable and massive repo market, and the apparent daisy chain of hyper-rehypothecated collateral.
This sounds very familiar. I wonder whether David Stockman is a ZH reader.
buying gold or paper gold or buying something with cash or on credit or rehypothecated cash or a suitcase of real cash or real gold or promisary notes...This really plays hard on my limited brain power. Nothing is worth what it was payed or promised to be payed for.
We have all been marginalized.
Bonuses to the banking leutenents is hush money. This draging out of the shut down of the Europeon economy is all orchestraded. Somebody will come out on top and I mean on the real TOP. Read this
http://www.iamthewitness.com/DarylBradfordSmith_Rothschild.htm
Or, is DS "a" TD?
When all this unwinds -- when all this comes to an end -- it shall not be with a whisper, but a bang which will resonate through every nation on Earth, and whose echo will be heard for the duration of all our lifetimes.
Perhaps we ought take closer heed to Mr. Bass's admonitions, and secure those commodities and small-arms. We have seen the template before: New Orleans, post-Katrina. A complete breakdown of social order...We have all been given fair warning.
Don Birnam, seriously, what are some scenarios?