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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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They will stuff Ron Paul in a corner and leave him their. The GOP is a Corporate party, just like the Democrats. That is why at the end of the day you see no real difference in policy. My question is why doesn't Ron Paul run as and independant. I think at the end of the day he is just another tool under the GOP's big umbrella of psycho's. They need him, but will never nominate him. Never. So he is castrated by being a Republican. He of all people should know this.
The red and blue teams, with the help of the corporate-bought media, have a lock on enough voters and the electoral process to thwart most any 3rd party from even getting on the ballot in all 50 states, much less winning. And then there is Congress.
All that would likely happen were R.Paul to now run as independent would be to split vote and allow Obama to be re-elected. Then Paul would be forever tarred with the same brush as Nader has been, falsely blamed for letting the "other side" win.
I really don't know, but my hunch is nothing will be announced over the weekend. I carried my shorts, expecting more weak numbers out of Europe early in the week. Maybe if the sell-off is strong enough, we'll see something announced on the swap lines.
I think though even we bears may be getting a bit ahead of ourselves. There's so much bullshit from the permabulls about how this isn't anything like post-Lehman 2008, it's easy to get tricked into thinking that's at all an appropriate comparison. This is more comparable to the period around March 2008 when Bear was being taken down, but markets were still buying the "contained" story. Fear and stress levels are actually a bit higher now than they were then. The Bear scare was followed by quite a rally over the summer until China realized its main markets were in recession and suddenly gave up on commodities. I wouldn't look for anything comparable to that, the situation is totally different and China is already slowing. My thinking is more like, this market could continue to stumble around making these burpy little vomits and then seeming to settle down for quite a while before it finally gets down on its knees, hugs the porcelain altar and heaves its guts out.
It's actually true that banks are in better shape now than they were in early 2008. Less leveraged, more liquid. The dynamic is totally different this time. Then it was more of a Wile E Coyote collapse, when an unsupported bull rally that ran well over the cliff before it suddenly realized it was standing on air, or a bunch of ridiculously toxic assets. This time, it's the inability of governments to sustain over-borrowing that's driving renewed private credit contraction and recession. Stimulus failed but that doesn't make its withdrawal any less painful. It's more of a slow grinding recession, less of a Wile E Coyote sudden collapse. Maybe the sudden collapse of the stock market was a bit misleading in that way. Stock prices discount years ahead, so a change of assessments from slightly up to slightly down makes for a quick, big drop in prices.
"It's actually true that banks are in better shape now than they were in early 2008."
Baloney...
The banks are actually in much, much worse shape than they were in 2008.
They have taken on even more CDS, and have totally cut off interbank lending.
This is a recipe for disaster.
You bet your money on banks. I'm betting mine on stacks of physical PM.
Pay your money. Take your chances.
.
The only money I'm betting on banks is short. I think we agree where things are heading, just disagree over the route we'll take to get there. I'm not looking for the Lehman-equivalent that will shift this sell-off into outright panic. Maybe something like that will happen, but I'm not counting on it. I'm looking for weak economic data to lead us on a long, slow grind down. If I'm wrong and we get a sudden collapse, that's ok, I'll just make money faster.
" If I'm wrong and we get a sudden collapse, that's ok, I'll just make money faster."
If european banks collapse that sets in motion dominos that will make your increased money unable to buy much if anything...(Careful what you wish for)
good points
I couldn't sleep last night. I was wondering what happens after Ron Paul proposes a bill requiring that each and every Central Bank swap transaction be collateralized with physical GOLD?
Very nice. Whether this is what will occur or not, I do believe your analysis of the situation is correct.
Agreed. The fire of immediate concern is European funding. From my decidedly non industry perspective I have to consider that SocGen, like Dexia, UniCredit and others have failed to adequately address their margin of error in short term funding since the last round of emergency swap funding from the fed. Bruce, you are most likely correct in your assessment of the second tier Eur institutions. However much the "seconds" may resemble the S&L's of yesteryear there remains the issue of a superior condition of financial concentration as represented by the super sized institutions like SocGen. In this I must consider that the game plan from the early days of the GFC to provide liquidity, maintain confidence and return to normalcy has indeed failed. This failure does seem to be verged on the precipice of the catastrophic. This time I have grave misgivings that any central bank intervention can possibly address the all important area of confidence. Europe is far more dependent upon the process of special relationship and the confidence that results for it. No small wonder the now seemingly farscial response from European officials whenever someone dare say there is reason to be confident in lack of confidence.
As far as Jackson Hole is concerned Bernanke is indeed low on monetary ammo. I suspect he will focus more upon his view that fiscal policy must remain stimulative in the near term while looking to the medium term for consolation. This forms the rinse and repeat of early GFC central bank action since to confront the rapidly deteriorating condition of confidence in broad OECD institutions and their capacity to right the ship would require him to admit failure. NOT GOING TO HAPPEN. So we'll get more of the same. Swaps, stimulus and hot air, but nothingthat will chart a course to resolution.
Are we going to see the reality of this battle played out in real time as the CB's attempt to head off any hint of a depression/crash/resetting?
It has been played out before
http://www.youtube.com/watch?v=d0nERTFo-Sk
DaddyO
Fed always waits until most of the market pain has been effected
So next Sunday.....or DAX - 20% more whichever happens sooner
Bruce, when the fed pened swap lines last May the Euro was in the low 1.20's...with the Euro in the 1.44 range do you really feel there's enough of a crisis mode/need for this kind of thing, proactively on the fed's part? Don't you think they'd catch a bunch of flak for that at this point?
Doc - if you think Euros v Gold rather than Euro v Dollars the situation is a lot worse now than it was last may.
Thanks Bruce, you have been posting a lot of great food for thought lately.
Europe needs DOLLARS... How many times has that been stated in this thread and how many times have you ignored it?
It ain't called a swap line for nothing... dollars to Europe, swaped for Euros to US...
European TBTF banks need dollars. Fixed
I'm simplistic on these things; so, large-scale CB digital currency transfers - in the trillions - these provide low-interest funds for the banking sector. What effect does this have on commodities, stocks and bonds? Like, if the funds can be used to roll-over existing loans, are they also part of the banking capital? Presumably it can't, directly, be used to retire troubled loans... Or CBs' could do the same for the consumer and wipeout our collective debt which would some sort of impetus for the economy, huh?
But this new money, where does it go?
Bruce - thanks as always. I know you're a currency guy. Do you have any positions this weekend based on your thoughts?
A very persuasive analysis, Bruce. I think the reopening of the swap lines was the obvious next step--almost too obvious. Yet what alternatives does the Bernank have?
Most Americans had no idea what was going on with the first initialization of dollar swaps to Europe. The Fed has already bolstered the dollar/Treasury carry by bolting rates to the floor "at least to mid-2013"--thus guaranteeing that carry traders cannot be caught out by an unexpected jump in rates, and making a sudden spike in the USD very unlikely.
So here we go with the dollar swaps again. And again, the Fed will claim that the effects will be confined to Europe, easing stress in dollar-funded markets. But once again, a huge chunk of those dollars will come back to buy Treasurys, US equities and corporate debt. It's a single step from there to the local economy, driving a fresh round of headline inflation before we even get over the effects of QE2.
Bingo.
Zero.
My confidence level of getting this all right and positioning accordingly, is also about zero. But I have a bunch of dry powder. I think there will be opportunities to put it to work. We may well get "things" that get mispriced by a bunch in the next few weeks.
I'm basically a bottom feeder. Waiting for something to drop down to me....
Agree - thanks. It's impossible to predict the next moves of desperate, egomaniacal puppetmasters who have lost control.
Yep, DB Cooper, you are right about that.
The hedgers and quick flippers right now are being savagely treated in trying to get on the short term winning side of whichever SMA and divergence they are betting on.
Idiots - in time, these so called 'technical analysts' (they are using greater fool theory bullshit, Lords knows that any decent high school algebra student can understand 50,100, 200 SMA and other metrics - it's not technical, its just trend following and looking for divergence). It used to be that relatively few traders and investors had these tools. Now everyone does. So the future is bleak for SMA lovers unless you get real lucky on the whipsaw movements.
I used to subscribe to charting services back in the 1970's just to get plots of my 50 and 200 day SMA. It cost me almost $1000 a year. Hell, anyone can get it for free online with bigcharts, google and all the others with a little tweaking of the input boxes. All real time and free, and you can use minutes, days or any interval you want in multiple views. I trade with about 5 windows open, showing various time frames for my SMAs. Sure, I still follow them and use them as a tool. But I start with fundamentals and knowing their balance sheet, management track record, and plan forecast as best I can. Then I go to taking a look at SMA to get the big picture timing best I can.
Interesting article in today's FT - here is an extract = poor pitifu hedgers are getting bloody noses. Read on:
Please respect FT.com's ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article - http://www.ft.com/cms/s/0/5a63b1a6-c3a8-11e0-8d51-00144feabdc0.html#ixzz1VgWrymQo“For everyone down in double digits it is very hard to make your way back, and who can confidently allocate to a manager now?,” asks one prime broker.
The biggest losers have been stock pickers, those hedge funds running strategies based on the relative value of different shares, or those looking to trade around corporate events.
“Statistical arbitrage, quantitative arbitrage, equity market neutral, delta neutral, and long short equity discretionary are all meant to have very little exposure to the market. It’s not true, everyone says they have no ‘beta’ [market correlation] but the market goes down and they all lose money,” says another prime broker.
Relative performance is the consolation. One fund of fund manager specialising in long/short funds reports that the best 10 to 25 per cent of managers are down by about 30 to 40 per cent of the wider stock market moves.
But one of the most high profile managers, John Paulson, was forced to reassure investors in his flagship advantage strategies that he had not been hit by redemptions after one fund lost a tenth of its value in the first week of August alone, to stand down 31 per cent for the year.
The global economic system will hold up so long as people accept the value of the USD that Big Ben prints-- and at this point they still do.
BK.. your analysis is always spot on. It's not only SocGen.. the three biggest Italian banks all have stock values of around $1.00/share. Whoops. It might be more than $500B.. perhaps an even 1T is whats needed. Somebody needs to inform the Germans to stop preventing the ECB from doing this themselves.
I don't think this sunday anything will happen. I don't even think next week. Obama is on vacation and this needs his presence.
Europe is on it's own. The euro needs to go down because it's getting to strong versus the dollar, and Europe still needs to do something with the PIGGS because this shit is getting worse by the day.
These is also the dollar and euro faith that needs to be adressed. PM's are to high to launch a nuke on the currencies by doing a QE.
So if next week we see a all out attack on PM's, a QE will follow. If not, we'll have to wait at least 2 to 3 more weeks and that is still IF they'll do it.
And if I where the FED, I'd wait it out UNTILL THEY ASKED ME TO REACT. I wouldn't stick my neck out for the 3th time and play the bad guy in this game.
Somebody's else his head needs to roll.
I agree. Bruce has missed the soaring yen and more importantly the surging yuan. Typical New York bullshit. They'll bankrupt their city to bail out a trade. There never were any bailouts to begin with. The Fed needs to hoard dollars now in order to stamd ready for the impending debt crises of state and local governments. All eyes on TREASURY now.
Gold should be silver redux. Reach a rocket-driven high and then brought down hard like silver. The metals may rotate in and out of boom/crash mode but maintain the inexorable rise over time. It's all a profit making scheme and a diversionary tactic when the CNBS talking-head's eyes need to be averted momentarily.
From Ed Steer:
I must admit that I was really disappointed in the Commitment of Traders Report in silver. I had expected a further improvement in the Commercial net short position, but got pretty big deterioration instead...so all these positive-looking open interest numbers that I've been reporting in silver since the cut-off on Tuesday, August 9th have meant nothing.
The Commercial traders, which includes the bullion banks, increased their net short position by 5,340 contracts, or 26.7 million ounces of silver. They did this by reducing their long position by 1,839 contracts...and added 3,501 short positions. I wasn't able to contact Ted Butler after the report came out, so I'm not sure what the disaggregated COT report showed, as it gives far more detail than the report I follow. Maybe Ted sees a silver lining in the numbers that I don't, as the price action during that time period certainly gave no hint of this sort of deterioration.
COT means merde.
When push comes to shove, all that COMEX crap fades.
If you don't have the physical in hand, you don't have anything.
So, if you want to speculate about foolish traders not covering their backsides,
Well, take it outside and let the chips fall were they may.
.
Of course all that is true. But you have to deal with what statistics you are given -- with a grain or two of salt.
RR, I'm talking about next week or 2's action.
Long run, PM's will rule the world instead of cotton for sure.
But the PM's have a second risk to the economy. They'll be the first derivatives to blow up. You know the Silver futures gaps in 2012 and I expect the same shit to happen in the gold futures playground.
But the FED is a short term thinker. They don't expect to change the facts, they expect to change mentality. The mentality of the people so they refocus on the stuff they want. And you can't do that by sticking to a 5 year plan.
My understanding is that the European swap lines are already open. After opening them, shutting them, and then having to re-open them again mere months later, the FOMC decided to leave them indefinitely open.
In other words, I believe that as it stands now the NY Fed can extend swap lines to the ECB and the non-Euro European central banks anytime they request, without any further FOMC decision. I'm not aware of any amount limits.
So if there's an announcement, it will likely come from the ECB, saying that it's decided to ask for big swap lines. Or perhaps we'll just read about it in the Fed's weekly reports, like we did with the recent $200m swap line to the Swiss.
Yes. The EU would "Ask" The US would "Agree". This gives Bernanke cover. He didn't do anything. He lived up to existing commitments of the Fed. He has no other choice.
So that is his political cover. But he gets what he wants. To put another $1/2T++ into the system.
Maybe that`s why China buys EUR.
Bruce,
I absolutely agree and the w
WSJ floated a story yesterday,
That the markets won't be happy at the hole.
Lines will be opened by Wednesday.
Bruce,
I absolutely agree and the w
WSJ floated a story yesterday,
That the markets won't be happy at the hole.
Lines will be opened by Wednesday.
The upcoming German elections will be a key part of what transpires. Essentially, the ECB/BIS/IMF troika is trying to force the average German worker to open his house to relatives from Greece, Spain and Portugal for an extended period with no limit, even as these relatives are flat broke and cannot/will not contribute to the household expenses.
Don't forget the ruling from the German Constitutional Court on this (the legality of bailouts), due in about a month.
Sure thing. Those "elections" will be about as helpful as all of ours have been. See my comment just above. Good luck with the so-called Will of the People.
Exactly.
Bruce or others - If the Fed does massively open up the dollar swap lines with European central banks, then does that have an effect on the U.S. dollar? Would the dollar get stronger or weaker?
As the Mamas and the Papas sing:
Sunday Sunday, can't trust that day,
Sunday Sunday, sometimes it just turns out that way
Oh Monday morning, you gave me no warning of what was to be
Oh Monday Monday, how yould could leave and not take me.
Every other day, every other day,
Every other day of the week is fine, yeah
But whenever Sunday comes, but whenever Sunday comes
You can find me cryin' all of the time
http://www.youtube.com/watch?v=h81Ojd3d2rY
Bruce:
So the Fed is going to be the worlds lender of last resort? I don't know how long that will last considering the bottom may fall out of the dollar. With 2012 elections looming Republicans look like a lock to take both houses and the white house. Bailing out the world will find stiff resistance from Republicans.
Wasn't TARP initiated under Bush II ?
Ever notice how, once in office, sentiments change? Where was all the Republican aversion to unfunded stuff like off balance sheet wars to enrich the MIC, medi-whatever to placate Boomers, and targeted tax cuts for the political contributor class? It would seem that when the POTUS swears in and gets a good look at the Book of Secrets he starts toeing the line... regardless of Party affiliation or ideology. He finds out that he is a mere cog in a much larger apparatus.
Rocky R, @12:13,
By jove, I think you have nailed it, to a "T".
This has been the story, as long as I can remember, and the only one that went against the grain, got a few lead particles.
A Tad OT:
SocGen, just opened up a new offering for their clients..........Gold.
Whoda thunk?.......
I call this TREASON!
The Bernank and shifty Paulson held a gun to CONgress threatening martial law and tanks on the street if they didn't get the loot.
They once were called toxic, later changed to the more PC troubled assets. Remember we had all "the people" in toxic mortgage trouble? It was a national emergency, goobermint must act or the people would lose their homes...remember?
Well we got it alright, TARP. Toxic/troubled Asset Rescue Plan to save the people. Shifty Paulson and Bubble Bernank had other plans...immediatley send half a trillion bucks+ across the pond to the Bernanks buddy banks. Then all the banksters were showered/bailed with loot, whether they wanted it or not.
Where are we now? Criminal bank accounting has been made acceptable while the banksters continue to recieve the Bernank Bail Bucks, they must cover their gambling debts, don't ya know.
Euro countries will succumb to the belief that their sovereignty must be surrendered to a new Central Bank/Regulator/Tax Collector. They might as well kiss their ass and freedom goodbye.
The once proud now beaten USSA will follow the same path to a New World Bank, a New World Order. Life will be grand, we'll all sit around singing kumbaya. Ya right
This is the Globalist' plan, the Benank plan. How many times do you need to look at the numbers and hear "this debt can never be repaid" before you realize we're all screwed?
We had a chance three years ago to send a thousand banksters to jail, like they did durng the S&L crisis. But nooooo, we bailed the banksters and commended them. All the bullcrap about TBTF turned into TBTLG (Too Big To Let Go). Now we've got to listen to how Moron Barama saved us from the brink! Barama/Bernank only moved the bus on down the road, the wrong road.
Some idiots are offended by the word. Not me, I'll call a spade a spade! It's TREASON:
1.the offense of acting to overthrow one's government or to harm or kill its sovereign.2.a violation of allegiance to one's sovereign or to one's state.
3.the betrayal of a trust or confidence; breach of faith; treachery.
http://dictionary.reference.com/browse/treason
The CONgress passes some budget, the treasury picks it up with all the required signatures. Then, the Bernank complies. And with the new super-congress is sooo much easier.
"We had a chance three years ago to send a thousand banksters to jail, like they did durng the S&L crisis. But nooooo, we bailed the banksters and commended them."
Too big to jail.
Either you're with us, or you're with the financial terrorists. This system must end for there to be freedom. For the system to end, there must be massive pain. Unfortunately, the slaves are still to afraid to bear the pain of casting aside their masters.
Gold & silver are the only real currencies.
"Either you're with us, or you're with the financial terrorists....."
http://www.youtube.com/watch?v=eKgPY1adc0A
Aaaahhhhh....the good ole days.....
LOL