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On EU banks, Solvency or Liquidity? - Or BOTH?
I look at the financial statements of the big banks. 10-Qs and the like. I’ve concluded that, for the most part, it’s a waste of time. There are usually 70 or so pages of numbers and discussion. Tons of data. But what is missing is a realistic appraisal of what the assets are actually worth.
Rather than go blind looking at small print I just look at market capitalization and assets. The balance sheet assets are a good proxy for what has to be funded. The market cap (shares outstanding X current market price) is the only number one can look at that is “real”. It is real because the “tape” and the market say so. It is a much more reliable number than what the accountants, auditors and management tell you.
Market cap is critical because there is a presumption that a big bank can go to the equity market and issue preferred and common stock equal to about 10% of the existing market valuation. A big equity valuation is a cushion in troubled times.
Societe Generale, Paris is a big bank that has been much in the news this week. SoGen is a top tier global bank. They have a very large deposit base and consumer business. They are also a big global trading bank. SG is well managed. I would call it one of the Crown Jewels of the financial picture in France. It is a classic Too Big to Fail.
Having said all those nice things about SoGen I also have to point out that it has a very thin margin of market valuation to support its huge balance sheet. The market cap/asset ratios for SoGen, Wells Fargo and JPM:
Looking at this one sees the problem. SoGen is levered 4-6 X’s the US banks.
Under normal circumstances my way of looking at things is irrelevant. It only becomes significant when there are problems. Today we have problems.
There are monstrous gobs of liquidity in the world. But every day that goes by that liquidity is getting more and more risk adverse. Globally there is about $60 Trillion of funded debt of one form or another. That huge amount has to be rolled over constantly. A very substantial portion of this has maturities of less than six months. It is a “faith based” system. The assumption is that there will always be ample liquidity from the holders of cash to roll over everything without a hiccup. At the moment there is not much faith in that system.
The nice folks at FTAlphaville put up this interesting chart Friday afternoon. It tells the story perfectly. Everything is green except the month of August and the very short end of the funding spectrum. The red area is a Short Squeeze. This is also a big Red Alert!
The lower the equity cap of any financial, the greater the risk that there are funding problems. This is what did in Lehman. Almost overnight they lost their funding sources. (Note: This is what happened to Drexel in 1989. I was there. It took ten days to go from soup to nuts.)
SoGen, being what they are, will not be the first bank to suffer liquidity problems. I used their equity numbers to make a point. It is the second tier Euro banks that are going to get squeezed. I have no doubt but they are already feeling the pinch.
I can’t see this going on much longer. We may have already passed the point where the downward spiral on funding availability is irreversible without global central banks stepping in.
.
That brings us to Jackson Hole. Damn near everyone I read is thinking that Bernanke is going to pull a rabbit out of his hat next weekend. Some new form of monetary stimulus will be announced and all will be well for the markets once again. I don’t agree.
While the US has some major league problems, those issues can’t be addressed by the Fed. There is nothing more that the Fed can do. With short-term rates at zero (and planted there for years to come) and the ten-year at 2% there is nothing left to be done. Or is there?
I maintain the next move by the Fed is to massively open up the dollar swap lines with European central banks. I don’t think Bernanke wants to announce this significant step at Jackson Hole. It is an EU issue and the Fed can’t take the lead on this. Opening the swap lines will prove to be very unpopular in the US. Politicians will jump on it as a bailout of Europe while America is struggling.
Bernanke is going to take some heat, when this happens (I think this is now a certainty, just not sure of the timing). But I also think that Bernanke is pushing (as I write) for this to happen. The only option left for Bernanke is to put another half trillion or so into the global system. He can’t do that in the US, but he has a great excuse today to do it in Europe.
I maintain the forum for this is not Jackson Hole. There is too much theater in all of this already. The Europeans don’t want this to be a circus (more than it already is). They want to be seen as responding to an EU problem, they don’t want to be seen as a slave to Bernanke and the Jackson Hole confab.
The announcement of the swap lines will not come from Wyoming. It will happen on a Sunday night. It either happens before next weekend, or the weekend after. Given that things are rapidly unwinding in the EU funding markets I don’t think they want to wait another two full weeks to put a band aid on the problem. They have to do something sooner than that. If they don’t, they risk a full scale liquidity blowout before September. If the blowout were to happen it would be very difficult to reverse. They have to (attempt) to get ahead of the problem before it is a crisis.
I think there is a decent chance this important next step takes place outside of Jackson Hole. It could happen this Sunday night. If I’m wrong, and we get nothing, the European funding markets are going to collapse next week. It will be very difficult to reverse the damage that this will cause. All the central bankers know this. They know that there is not much time left to act. They can’t wait another two weeks.
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Is this the new 'Lend lease' .... helicopters?
And all this after all our (FED) gifts:
The Fed had refused to disclose the specific sums it lent to the banks in 2008 — but was compelled to by the Dodd-Frank regulatory reform law.
The leaderboard (via Bloomberg):
• Morgan Stanley — $107.3 billion
• Citigroup — $99.5 billion
• Bank of America — $91.4 billion
• UBS — $77.2 billion
• Goldman Sachs —$69 billion
• Deutsche Bank — $66 billion
• Barclays — $64.9 billion
• JP Morgan Chase — $48 billion
• Hypo Real Estate Holding — $28.7 billion
• Societe Generale — $17.4 billion
Standard and Poors reaffirmed SocGen's A+ rating just two weeks ago, so it would seem appropriate for SocGen to go under next week.
http://www.sgcib.com/sites/default/files/StandardPoorsSGRating.pdf
As a taxpayer, I am thrilled to back-stop massive loans to the insolvent EU banks and I think the term "swap line" is really cool!
Thanks Global Bank Cartel!!!
double post
A touchstone is what the gold buyers on Wabash Avenue in Chicago use to determine the gold content of the second-hand jewelry they buy and sell.
The touchstone is an abrasive stone/metal file they rub on the gold watch or bracelet. It gives them a colored spot on the stone which they compare to a color chart, like a paint chip brochure in a paint store. The color indicates the karat weight of the gold. A second stripe is made to verify the first color assessment. It is accurate enough that they all use it.
Sometimes, a braclet will have a clasp stamped 14K but the links will be 9 or 10K. You don't want to pay too much for the stamped Karat when 90% of the metal is underweighted in gold.
Germany's Merkel just recently said "no" to Eurobonds, says she won't be pressured into picking up other country's debts.
Bye bye EMU, the Eurozone is going tits up for CERTAIN. There is going to be a massive run on the banks, no question. If you hold Euros, better flush em, it's worthless paper at this point.
There really are some miserable cunts on this site! You could put some of you folks in Hawaii on a free vacation and you would still complain about something. Everyone on here is smarter for reading Bruces work! Keep up the good work Bruce, regardless if you stole a few 401k's from grannies from your time on Wall St!
Bruce, I swear you're out there at 3am with can of spray paint in your hand creating relevant graffiti for your blog. It's the only explanation.
Google search:
"Broken markets,graffiti"
ten rows down under Images.
Everything is on google. You just have to keep looking.
I was happy to find this. Perfect, right?
All I could see were pictures of Blankfein, Dimon, Moynihan, and Bernanke
Actually, the Google Image search was very interesting ... not sure how BK finds them by word though ... that has to be a time investment if it wasn't a hobby before blogging ...
Regards,
Cooter
Hmmm... interesting times indeed !!
I went out and bought some fresh popcorn. I am sooooooo ready to see a great big drama fit unfold.
does anybody else think the FED is afraid to increase asset purchases because the american people will eventually demand that their debt be forgiven, as proposed by Ron Paul and others, the 1.6T or whatever it is that we owe the FED
i think they might be scared shitless that this is a possibility
OT, but interesting and self-explanatory from URL:
http://finance.yahoo.com/blogs/daily-ticker/madoff-whistleblower-big-ban...
My impression is that the most simple solution to the debt crisis in Europe is that the ECB lends Greece, Italy and Spain the money they need at a near zero interest rate. After all, Italy´s and Spain´s government debt to GDP ratio is not worse than for the US. The ECB does not have to borrow money from others in order to do so. They can just print the money and then lend it to Greece, Spain and Italy.
I can´t understand why the ECB should lend money to these countries in a roundabout way by first lending the money to banks which then, in their turn, lend the money to the countries mentioned above. By lending money directly to these countries the banks wouldn´t have to be jeopardized. It would probably also be easier to remit these countries debts in the end if the banks are not involved.
I also can´t see why the Federal Reserve would have to agree to swap dollars for euros. Of course, the dollar would probably appreciate if the ECB would print euros and buy dollars for that money on a massive scale. Therefore, it would might be more expensive to buy dollars instead of swapping euros for dollars. On the other hand, that shouldn´t matter so much ECB is buying dollars for money they have printed. And if the Federal Reserve does not want the dollar to appreciate they will might print more dollars voluntarily. So I don´t think that swapping dollars for euros should be necessary. Is there anybody out there who doesn´t agree with me?
However, in order to prevent similar crisis from happening again, I think that some European banks have to go bankrupt due to irresponsible lending. All equity must be gone in the end.
Another problem is that Greece and Spain most likely will continue to spend money they don´t have if they think that the ECB and/or other EU members will bail them out once again. Therefore, I think that the euro and also the ECB should be phased out within 5 or 10 years. But I doubt that will happen. Instead, the politicians will say that we need a European government that can limit public expenditure and improve tax collecting in Greece and Spain. The worse the crisis get the more they can strengthen the case for a more closely integrated Europe. Politicians in Sweden used a similar method in the early 1990s in order to force people to vote yes to EU membership. First, they pegged the Swedish krona to the Ecu (the forerunner to the euro). Then they raised interest rates to 500 % in order to defend the exchange rate which caused thousands of bankruptcies and massive unemployment. Then they said that Sweden needed EU membership in order to prevent that from happening again. And people bought it. I think that there may be a rather simple solution to problems Greece, Spain and Italy have caused, but I´m not so sure that leading European politicians want it. If they can choose between the simple solution and an economic disaster which takes 20 years of austerity (which, however, results in a more closely integrated EU), I think they prefer the latter alternative.
Perhaps someone will argue that the ECB can not print money and give, near zero interest loans to Greece and Spain without creating a single country out of the EU. Well, that´s also what I´ve been told before. But I have not seen solid explanation for that so far.
(Note: Sweden has still not dropped the krona in favour of the euro. What happened was that the floating exchange rate which followed the 500 % interest rate failure helped Swedish exports recover which saved Sweden since the Swedish economy depends heavily on exporting goods.)
I don't think they are set up to just print money like the US. They are a union in currency , but they are not one country with states. It is a trade set-up more than anythng. Their currency is backed by countries collaboratively with each having a responsible percentage to back the currency. Germany would be left holding the bulk of the responsibility. Our currency is backed by nothing except good faith that is eroding quickly.
I suppose that the ECB would not be able to print as much money as Fed without causing domestic hyper inflation. But I reckon that they would be able to print at least some money like the US and let others pay for it.
If the ECB charter says that ECB can not print money in the same way as Fed does, it should be possible to change the charter.
Relative Newbie Here. I conclude from this lenghty dicussion that Swap Lines are, or will be, open to Europe. That every swap instantaneously "creates" the Dollars used in the electronic swap. That this created money dissappears when the swap is reversed (if that actually happens, and assuming the created dollars are not held on the fed balance sheet and used for other purposes). That this creation of this electronic money implies monetary inflation along with its attendant effects on the markets.
So its a question of how big this "easing " will actually turn out to be. 1 trillion? More?
Isn't the French welfare state already buttressing French bank's loan portfolio by lowering their risk (especially systemic risk)?
Say there are two well managed banks--one in a purely capitalist environment and the other in a socialist environment. Why should these ratios be expected to be equal?
Solvency or Liquidity?
I think it's INsolvency and ILliqudity, and I don't see much difference between them, so I'll just say insolvency.
Bottom line there's simply too much debt. $60 trillion worldwide sovereign debt is too much for the worldwide banking system to handle. And it's probably more like $100 trillion, more like $400 trillion counting off-balance-sheet unfunded promises.
If it's all rated AAA they can kick the can a while longer by printing and debasing currencies further. It's a race to the bottom for currencies anyway, so printing and debasing and rolling debt over is the accepted norm.
The unique problem they're facing now is loss of AAA rating. People around the world are realizing there's just too much debt. Rating agencies are starting to downgrade it, and where it isn't being downgraded, capital sources are getting cold feet, saying "no more", withdrawing any further funding, like Germany and China for example.
This leaves currency printing as the only way to keep kicking the can. Printing and debasing has been the accepted norm, like QE1 and QE2 in America, and the ridiculous "Euro bond" idea in Europe, another form of QE, but printing and debasing is running up against a wave of sovereign insolvency, raising the possibility of currency collapse now, a new problem they've never had before.
So now it's sovereign debt downgrade combined with possible currency collapse. This is why Bernanke is scared shitless about QE3. It might collapse the US dollar. ECB faces the same frightening possibility, further printing might collapse the Euro. Japan faces the same frightening possibility, further printing might collapse the Yen.
Slow debasement is fine. Currency collapse is not fine. Sudden complete loss of confidence is not fine. It turns slow controllable debasement into uncontrollable Weimar and central bank collapse.
But that's where we are now. At the precipice of currency collapse. At the edge of the cliff looking over at the dark abyss below.
Who will go over first? Fed? ECB? BOJ?
Any major move by the Fed, either swap lines or more buying of any US bonds will effectively politically place the Fed in a striatjacket in the future.They also have a huge duration risk NOW.Gov Perry's comments underlie a deep suspicion of the Fed by almost everyone but those directly receiving its largess.Any large scale buying of Foreign debt will probably result in a immediate political crisis for the FEd,so there is not a chance in the world that the the Fed will do this.BY doing something large now ,the Fed will cease to exist as a viable force in the future,which is probably a good thing.
SoGen in particular, is dead meat.Keeping it open is a political decision not a economic one.And US banks are also in deep trouble.If they were ever forced to mark their assets to realistic levels,every one of the largest banks would be insolvent .Extend and pretend on a nationwide and bank level is a policy which is going to stop.The real question is whether this crisis will unleash a counterparty disaster via credit default swaps.which will destroy the world's financial system.
+1 PGGB for Bruce. Excellent work, maybe an Intergalactic highway, ahem, stimulus announcement? I doubt it, but the whole liquidity theme song is building....Halleys 5th concerto?
(PGGB=pan galactic gargle blaster)= liquidity
The thing about the physical gold that I now own is that I will not sell it.
It is my hedge for total disaster.
And every once in a while, I buy more coins.
That's something to ponder, because I am not the only one. Gold's trajectory long term is up partly for that reason.
Bruce, way to go on your analysis.
Watch all sorts of leveraged short panic covering this week with lots of yo yo moves both directions. Many leveraged longs have already capitulated is my belief. If not, they are SMA chart blind or in denial.
It is will volatility to the max.
Fundamentals are a key this next 3 months. If you just trade SMA,s, good luck. We all know the market is in free fall and charts are short. But just remember what happens when the herd is pretty much all one way. Greed rules, and bounces are fierce.
For anybody thinking that last week was a dead cat bounce, dream on. It was a burp at best. The cat has a lot more spring than that. It's going to be fun these next few weeks. Good luck to all.
BK, thanks for yet another good analysis. Keep up the good work!
Thanks, as ever, for the thoughtful article Bruce. Do you see bank runs on retail banks in Europe in the offing?
Noz
I have had a sense since yesterday's close that Monday and Tuesday might be the crux of this disaster---gut stuff is bothering me. All I know for certain is that this deathstar is coming apart and you can forget about what so and so is going to do or what the strategy is or any other theories; no one is in control of this shit although there are advantages if you are on the inside. No way carry this coffin much farther------
No idea---just waiting to see----that 'dry powder' idea is the best idea for now----this oldman has a lot more patience than money---so patience is his true capital
good luck to each of you brave souls---you deserve to win just for having the courage to play their game
Must not leave out the Chavez call on the bullion...MSM says 10 tons...unfortunately that is not the case....me thinks the EU bullion banks are gonna be choking as if a chicken bone is stuck in their throat.
While Venezuela President Hugo Chavez may have little to gain from seizing the half he did not already own of the only private gold miner left in the country, bringing home the 211 tonnes of gold reserves, worth $12.3 billion, held overseas, is a different story altogether.
CTV news reports bullion traders are preparing for one of the largest transfers of physical gold in recent history – about 17,000 standard 400-ounce bars – from Europe back to the South American state. While billions of dollars worth of gold is traded every day, only a tiny proportion of it moves from vaults in London, New York and Zurich.
what a clever weapon Chavez just played!
Sword in the gut.
The guy knows how to fuck.
i would guess, chinia put this bug in his ear ...and what are his choices if he gets stiffed?? will it teach the rest of the world not to ask or will it make them demand theirs also??
Self inflicted? Only time will tell.
My gut is that currencies are coming unglued. Last week may have been the calm before the storm.
I doubt Ben says anything public tomorrow. I sure hope he doesn't.
In all this mess we know other things are going to happen. Next week might be currency time to go weird. ie non trending. Euro should go higher basis interest rates but econ is contracting to crashing. Much of the world is in the same boat. Hoping they won't get blind sided.
Currency charts might get to look like the VIX charts.
Haven't the slightest idea what it would do to Gold. A case can be made for even more institutional buying or the decline in purchasing power of current heavy hitters.
Gold stocks, so far, are getting lower operating costs and high sales prices so profit margins are rising markedly. But overall market PE's are crashing.
One thing for sure, when one gets up in the morning the direction of the markets has usually been cast. Hard to get accustomed to it.
Cheap, way out of the money calls and puts can provide a little insurance. In olden days before HFT a trader could use stoploss orders.
Ben & Timmy are working late this weekend printing $2 Trillion to pump into banks (and EU Bonuses) via Swap arrangements.
I know this...I read it in my tea leaves today.
Bernanke and the Fed may just let the Euro go belly up. This would screw Europe and all those bailouts from China and poof another war! This time PIIGS against the northern countries, China would be coming to claim their collateral and the USA could kick back until our troops are needed in Germany.
The Euro could just go boom and then the USA and China would be the last two standing. China could come in and bail Euro out on the word of Biden stating we will assist and then we could welch on the deal. All sorts of things going on in my head tonight. Need more Crown!
Remember, never waste a crisis! Obama will want to bend this to his advantage. Could he translate opening the money gates into somehow increasing jobs in the U.S.? Could he introduce something with this flooding Europe with money that helps him make up with his liberal base? Could there be a new program announced in conjunction with this that is quasi military, quasi WPA, that somehow can be used to hire some unemployed college grads?
How does he put all this cash into Europe and gain some of the above? Maybe the U.S. sends a massive force of "Freedom Ambassadors" (one for every $1,000,000) to assist Europe's solving long term problems. To assist in small business startups? To retrain and rebuild their military?
Bumbling BB will step in to save the Euro propblem because a squeeze will end up on the SHIBOR in China. China is NOT capable of manipulating the SHIBOR very well. If China chokes, panic in town. So... Bernanke appera to be saving the Euros while really saving our "FRIENDS" the Chinese government.
There it is! Many of us who do business in Asia have seen this for years. Corporate America and corporate China are one and the same. The deal is simple, corporate China gets a seat and say on the world money stage and Corporate America gets what it has long wanted - wage parity.
You have all miussed the 900lb Gorilla in the room. If the Eu and the Euro and Euro banks blow, SHIBOR will blow too, the Chinese can't stop that even if they want to. If SHIBOR blows up, China dies fast, panic. The Chinese work hard but they are prone to panic just as we are.
So, if Bumblin BB saves the EU he is actually helping China. like a good little boy, pet. Maybe Hu Jin Tao will give him a bone!!!!
You are right. So is Bruce. Watch for some news before the asian markets open.
Two reasons I support BK's reasoning.
1). USD short sqeeze works for those in the know.
2). EUR 'crisis' needs to become EUR CRISIS before the eurobond or some similiar soverienty destroying political moves can be made. Timing is the bitch though. Merkel has played her assigned NWO role pretty well to date, and they may want to keep her in place. If so this shit may not hit the fan untill October. The flip side is though that the plug gets pulled Sunday, Merkel goes down in September (coalition) and the anti Merkel backlash delivers the NWO crowd a crazed 'emergency powers government'.
Either way, at some pont the EUR must suffer a CRISIS in order to make the next move. Have no doubt that these fuckers LOVE controlled demolitions.
Its' coming and I agree, something is going to happen this Sunday.
so what if the world of pegged money, depegs from USD. sure there will be deflation isntead of inflation in the countries involved. but ALL the inflation that is being exported, will stay at home in USA.
I will tell you one thing straight up.
I like Bruce's analysis.
Most days he nails it dead on.
Occasionally, he misses by a hair or two. Big deal.
But in the long run, he's got it down.
.
Bruce will occasionally have a molment of honesty and truth in his analysis, but he is in fact a wall street shill. After all this is where he made his living. I maintain that fraud is currently the status quo and until that changes, nothing changes. A systematic crash would be great as it would insure that compensation (in whatever form that is) would return to people who are actually worth a shit. I can't wait to put those paper pushing fucknuts to work on the farm. This is what it is all really about, people who create goods and services of REAL VALUE are tired of having their wealth stolen by fucknuts who do not bring real value to the economy. As it stands now, capital continues to be stolen from the taxpayer and mis-allocated, this is why all fiat is now doomed. First gold and silver go parabololic, then things like fuel, food, fresh water, guns, ammo - well you get the idea. Hedge accordingly.
Haven't worked on WS for 16 years. I'm a Commie now.
Your pal,
Ex Shill
Give me a break, you must be new here.
This is evermore book-talking from Shameless-Krasting, who sold America's soul for his bucks, and you chodes lap up this vomit like he speaks to do you good.
One can't even get past the first paragraph:
"But what is missing is a realistic appraisal of what the assets are actually worth."
Google fraud:
1.Wrongful or criminal deception intended to result in financial or personal gain
2.A person or thing intended to deceive others, typically by unjustifiably claiming or being credited with accomplishments or qualities
FRAUD IS THE ONLY PROBLEM THAT MATTERS, DOUBLESPEAK FOR KRASTING WHO MADE A FORTUNE OFF THE BACK OF SELLING AMERICA'S SOUL FOR FRAUD-GAINS!
The rest of you blowhards need to get off your knees and get a clue.
thanks for the great post bruce. didnt i read here that they already swapped $200 billion last week?
i read your comment below, makes sense. and you are saying there is going to be more of that. they have no choice. and, so, and im a naive obviously, but when they swap, if the euro goes down the fed's balance sheet goes down, so they have an incentive to weaken the doelar (as in doe in headlights). plus barry promised to 2x exports.
so it's like a stealth qe3. right?
wild card: Russia.
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/...
-35% yoy
...but that kinda helps bernake, doesnt it? ...wtf? EURUSD 1.50!