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David Faber, Chris Whalen and Euro Banks
I think a lot of Chris Whalen over at Institutional Risk Analytics, so I tuned in CNBC to listen to him this morning. At one point the discussion turned to Europe and Chris made it clear:
David Faber jumped out of his chair and challenged Whalen. He implied that Chris was making things up and spreading rumors. I was a bit surprised. It was if Faber was defending the Euro banks.
Faber is an ass. He doesn’t read newspapers either. Two recent headlines:
My understanding from talking to Europe again the morning is that there is a constant drain of dollar funding from highly rated core European banks. I’m absolutely confirming what Whalen has separately heard.
Behind the problems are US money market funds. They have been reducing their exposure to the big “safe” Euro banks. This process has been ongoing for some time. It's not news at all.
This chart from Fitch shows where the exposures were at the end of June. Note that there is not much outstanding for Spain and Italy, but you can be sure that even those numbers are much lower today. Germany is relatively small; the reason is they don’t pay much for deposit money. But look who is a total of 15% of all US money funds. France.
A US money fund that is either facing redemptions (they are) or who just wanted to reduce Euro bank exposure there is only one place to go; France. And that is what is happening. I have no idea of the volume of this unwind; my instincts tell me it is pretty large. It accelerated today.
It’s only Wednesday. There is a lot of time to worry about this before Friday. Normally big developments in Europe have happened over a weekend. That may not be case this time around. The markets may force the global finance leaders to move more quickly to (try to) stabilize things.
The mechanism is already in place. The US dollar swap agreements can be used at any time. A trillion of liquidity could be provided very quickly. It would require that the central banks of Europe on-lend the liquidity to the commercial banks. That would solve the solvency issue. It would be the equivalent of a Euro TARP. A semi-nationalization of the banks.
I wrote yesterday that I was dumfounded by Bernanke’s decision to extend ZIRP for two years. This unprecedented step has huge risks attached to it. Bernanke is well aware of that. Why did he risk it all? He must have known that there was soon to be a very big sucking noise from Europe. One that would require the USA to lend Europe some very big bucks.
I have some sense of what is going on in the background. Chris Whalen has a much better idea than I. But the big shots at the major banks know exactly what is going on the funding markets. After all, they ARE the funding markets. I can assure you that central bankers and treasury officials are all talking as well.
So if your wondering why stocks are tanking and bonds are soaring it’s because the news on this is already out. It’s just not in print. A thanks to Chris Whalen for putting this so squarely on the table.
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Another good piece. Thank you Bruce.
I suggest keeping an eye on assets & liabilities of US branches of foreign banks. European banks account for about 90% of this group by weight.
If you've watched this space at all you'll recall that most of QE2 found its way to the "cash assets" line of US branches of foreign banks. Their cash went from $354b last November to a peak of $900b on July 13 - that's 90% of QE2's $600b right there. This is basically dollars that the US exported to fund its trade deficit, which normally cycles back to the US as foreign central bank purchases of Treasurys, but because of a QE2-induced pause in that buying those dollars instead somehow cycled back through the European banks, which they downstreamed to their US branches in order to earn the 0.25% the Fed pays on excess reserves.
By July 27, latest numbers available, the US branches' cash assets were already back down to $837b. It will be interesting to see if the trend continues, next numbers out Thursday night.
Keep in mind that this doesn't tell us which European banks have cash stashed at their US branches and which ones don't. And keep in mind this is not bank equity, this is cash that European banks have either borrowed or taken on deposit, and have stashed in an account at the Fed rather than invested. It's also possible that a large portion of this cash could be held by US branches of Asian banks.
i have lost the ability to post on Facebook...
Re: Cnbc
They always talk BS. But it is the BS that people listen to. So ya gotta listen and make yer own decisions...
gh
deleted
"if you can't trust yoru banker, who can you trust," my Father used to say. Luckily, he died several years ago....probably good he didn't see this sytem now.
He knew a different kind of banker. The kind that trudged off to the equivalent of Galt's gulch, and is watching London burn from an aerie in the Pirineus, a pouring of Lagavulin in hand.
The Euro Banks are going to die and many know it.
I'm usually just a smart-ass fuck off on here, but I have a serious question: What are the chances of some European banks publicly going under very soon? Also, what country (countries) is (are) most likely to suffer these bank failures? TIA for answers . . .
My guess is France. But, I think the underlying fear is; depositors do not have any insurance protection. If any bank in the EU fails, it may be the catalyst for a run on all banks.
Try some of Reggie Middleton's posts.
Here's one you might like http://www.zerohedge.com/contributed/your-mark-get-set-bank-run-dominoes...
Santelli is the only guy worth listening to - he slams Leisman at every turn because he knows Leisman is a dick...They are blaming Rickie's Tea Party for the debt ceiling BS....what a joke! As an aside, I would be looking at buying APPL somewhere in the $345 range for a trade to $347 and then short the shit out of it for a cover at $300.
It's a long weekend in lots of Europe this weekend - France, Greece, Italy, Spain, Cyprus and probably others. But not Germany. Markets in the "holiday" countries would have a long weekend to "stabilise" lol
Noz
I did'nt think anybody was working in Europe. Doesn't summer vacation end in a few more weeks.
Bruce,
Very nice post as always. The brokers/dealers need stability in their MM/cash accounts to control their risk so one would guess they've weighting it more to short term US treasuries and high quality corporate paper, but there might be a supply issue if every MM fund tries this same approach while equities are being sold off like crazy. After all we are only getting about $200B new debt/month and a lot is too long duration to be useful for MM funds needing fast redemptions to cover margins and redemption requests in brokerage trading accounts. Never thought I'd be complaining about the small size of $200B debt issuance (LOL). In Europe there certainly seems to be an institutional driven bank run going on in Europe which was my thesis when I shorted BCS, DB, and STD back in February. Covered too soon though. I never thought they'd go this low. But I thought the same thing when I was shorting C, BAC, Bear Sterns and Lehman (think I covered at $10 and it continued down to $3) during the last crisis.
A good thesis is usually easy-the timing not so much.
fuck faber, emu as we know it DEAD
feel me bruce? not a big step to agree...
It's not that he was born an ass, it's just that he has been working with them for so long
Of all the losers at CNBS when I used to watch, he seemed like the odd man out and I often wondered why he stayed and/or why he didn't get bumped up in the network ranks
I think he is either the type of person who looks the part but just doesn't have the IQ or worse he's got the whole package but lacks the motivation and drive - of course I could be wrong and he could be the brains of the whole operation - I recall him repeatedly warning viewers not to buy Lehman at $2 and I followed his advice
I miss Joe Battipaglia
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RIP Joe
but he was a ringer for Ritholtz
I always got those two mixed up
bruce, good post as always. your insight is appreciated.
Euro-TARP, now that would be classical insanity.
Let's hear it Bruce, are you going to be in Europe with a big blank cardboard check, spouting the merits of paying record bonuses for failed European greed as civil society is gutted, just like you did in the US version?
People on CNBC are talking a lot of BS, who knows why. May be it would have been better to read the commentsaries on IRA instead of watching the "Volksverdummungskanal"*: Chris Whalen argues on Reuters.com this week, "Basel III in the age of sovereign default," that if credit default swaps for the US are trading over 50bp per year, then sure looks like the marketplace is voting for a "BBB" bond ratings equivalent for Uncle Sam.
Maybe he had to say something gloomy about the EU if he wanted to be on CNBC again?
*Volksverdummungskanal is German and means something like peopledullingchannel
'A very big sucking noise from Europe ... would require the USA to lend Europe some very big bucks.'
That's the conventional wisdom in government circles. And it's horrendous.
Making US taxpayers subsidize Trichet's Folly is heaping insult on injury.
If this happens, the FOMC should be indicted for racketeering.
I woud like to see the USA to lend dollars. Last time I checked the USA was bankrupt. Unless, Ben has a printing press!
Was reading Mauldin's newsletter a week or so ago and he mentioned something along the lines of "Congress has made it clear to the Treasury/Fed that they don't want to see major capital infusions via the open swap lines into European and Asian banks like they had in 2008."
This was the only mention I've seen of it but it should be worrisome because Europe doesn't seem to be able to plan it's way out of a corner, no less solve this issue. I'm not saying we fund them but their funding is drying up and a USD rally could be massive without those swap windows to drive fast central liquidity. I don't mind a stronger dollar but massive currency swings are not helpful in an already high vol scenario.
Doesn't this imply that the long treasuries will get whacked? I think I'm missing something in the connection.
Why us, why the US? Why can't the world force China to cover so it doesn't require even more fiat? Too big to fail includes China and as Rome goes, so goes the world.
Because the returns are still likely to be a greater if the US lends to Europe.
Maybe they'll get them to contribute more in the next Eurasian war? Maybe they'll help circle China? Want to do something that might upset Russia in the Caspian area? Europe gets her oil and gas from Gazprom but mat be willing to pay the price if the leverage is great enough. There are a host of opportunities that are available to the US with the Europeans "onside".
Of course David Faber is an asswipe. He is a talking head that trys to provide mkt insight rather than just be the reporter he is.
Only the Great Santelli and Kudlow (he's been off of the Columbian marching powder for years...god bless 'em) have a clue of what they are talking about.
I wouldn't believe Kudlow if he told me the sun is going to rise tomorrow... and I don't care if he is on drugs or not.
He is a bigger pompus azz than D Faber, and that is saying a lot.
Ole Kudzu Kudlow is a twisted fella these days. Just the other night he was in a tizzy about how the Euro banks should be printing to beat hell. Just the opposite of what he advocates for the U.S. and mercilessly thrashes The Bernank for. Poor guy. Kudlow is gonna go psycho one night and blow a gasket. It's great to see his advocation of policies that got us here, the refusal to believe that his sacred cows will bail us out, and his weird love of gold! All those things just can't be comfortable in a rational mind.
Bruce -
Given the low level of interest rates, running a money market fund is "return-free risk" for most big mutual fund complexes now. The CIO and the risk officers have no incentive to have weak bank names in the portfolio, because it could cost them their jobs, not to mention cost the fund complex a fortune if the "buck gets broken". And most of them aren't even making money on these products now.
Believe me, the CEOs of these fund complexes understand this issue because most spent several sleepless nights in 2008 on the same problem.
So these fund guys are de-risking aggressively. It happened on a larger scale in 2008 and before in 2002 and 1998. It's happening again now. It's particularly dangerous now because of how the European banks funded themselves; many have a lot of notes maturing this year for some reason.
This is a hairy situation.
Keep getting calls from the banks to move my MMs into trash. Said 'just stick it into checking', and they backed off. Banks are very afraid of increasing demand deposits.
speaking of hair
Thanks for this important explanation.
Hairy sums it up pretty well.
Europe will do everything, including TARP to be like the US! This permits the EURO to remain competitive for industials and to continue to export Porsches and Gucci cloth.
LOng life for Gold and Silver!
how long can the CBs keep this up...are they willing to print dollars equivalent to the entire value of all the derivatives?
I think its about the time someone like Lehman, the unpopular, unpowerful kid gets thrown under the bust, and then there is a few weeks of scurrying to try to get out of the way before bus starts driving again headed for them...
Question is, what country is Iceland this time around, what bank is Lehmans?
The CBs will keep it up until you are eating cat food -- or their banks mysteriously burn to the ground.
Pretty sure BAC is Lehman. Why else would other banks, the NY Fed, PIMCO, the SEC and AIG sue them?
One word: Countrywide Finance. (Purchased by BAC) (it would be like exxon purchasing enron)
Otherwise they'd be better off than WFC (well's) or JPM. Why? Less fraudulent loans sold and on their books.
Oh, but didn't JPM buy Washington Mutual and WFC Wachovia? Both Banks with a shitload of bad MBS before being saved. Did everyone forget those bad MBS and loans on their books? They're starting to remember now.
David Faber should be in jail from his question to that justice department guy a year ago. I can't remember the exact question he asked, but he implied that the Justice Dept was corrupt, and the justice attorney fired back at Faber and made him piss in his pants. Faber disappeared from CNBC for a long time after that, and it appears he is back in all his bullshit glory - doing his Charlie Gasparino imitations. The guy is a total ass.
Yes let's just throw everyone that questions our government in jail. Forget about the fact the Justice department is corrupt, and concentrate on the fact that we are trying to get rid of the 1st amendment and we should all piss our pants if an all powerful goverment official takes notice of us.
And I'd say too much of the Justice Department is incompetent and functions at the behest of politicians, ergo K street.
How's that? (Oh, I won't be pissing my pants over that...)
I'd love to see the clip on that.
While I agree that Chris is one of the biggest, best and intellectually honest (un-bought) minds on the Street, at the same time I have to say, NO WAY. I'm not saying his strategy won't work, but I am sick of policy makers pledging the U.S. balance sheet all over town and outside it to investments that are destined to go rotten.
Folks need to start stepping the F away. That is the only way to clear all of the problems. I quoted it here before and I'll quote it again:
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people” - Andrew Mellon
Ok , give up your reserve currency status and we will call it quits.
I agree with Mellon....we need a triple Lindy here!
Easy for Mellon to say. He was filthy rich!
Ask a farmer, etc....
put it another way -
you want to hang on a rack for years while the vampires bleed you, say 10 gallons a year?
or bleed half a gallon now while the vampires slash out dying from the stake through their hearts?
Alex...Wow, just wow...again wow.
Whalen's been on this for a long time and probably the most reserved even handed critic of the banks. There are plenty of CNBC appearances and KWN interviews where it is clear what he thinks. Talking his book...whatever...just call it putting his money where his mouth is.
Let's see...CW+BK versus Faber. I have no idea how you could lose that bet, none.