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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.
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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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Perhaps I was not precise enough:
Given his insight into the financial world,
what does BK recommend doing in the current situation OTHER THAN what Bernanke and his BIS-Bilderberg cohorts would like?
That's up to BK to write about if he so chooses. He is one of, if not the best contributor here. He doesn't need you to tell him about convictions.
I always enjoy reading BK. It is his insights that I appreciate.
This criminal, corrupt, and illegitimate ruling mafia class must be removed. For views on this subject I enjoy reading George Washington.
I'm not advocating anything. Just guessing on what might happen next.
Good work BK. I think they might still announce the opening of swap lines at Jackson Hole; mainly because the majority of people have no idea what it will mean, thus they will be able to get away with it.
Bruce
Excellent, thought-provoking, article as demonstrated by the on-topic thread.
I am surmising that the political dynamics of Europe are a bit more complex than in the U.S. We have seen where a two party system with a central bank able to print money (the world's reserve currency, at that) has gotten us. With Europe's banking system teetering on the brink, dependent on not just the ECB, but disintegrating political self interests, and bailouts from China, the U.S. and even Russia, positive outcomes are hard to imagine. Their economies are declining and impacting forward PE ratios which would point to a downward spiral in stock prices both for the banks and their customers. If the Europe PTB choose to kick the can further down the road, how much time can they buy. What happens a few months from now when Russia demands gold for gas? Any house of cards becomes more precarious with each additional card added. While we may be looking for the collapse of a bank or a sovereign default to set the overall collapse in motion, it could come from an industrial bankruptcy. Just as likely, the collapse will start with the mass realization of its inevitability.
i actually believe it's a helluva good, educated guess Bruce. Should i lock in some more Pamps from Apmex before tomorrow night, or wait. Anything that even smells of fraudulent activity(everything these days) will send AU up, up, and away. Thanks
APMEX has been known to stop selling at times like this! Don't expect them, or anyone to knowingly take a loss.
fair enough,
but you are doubtless capable of holding their (Bernanke, et al) feet even more to the fire by pointing out what ought to be done OTHER than their likely plans.
EIther gradually phase in a commodity money system or face The Great Implosion™, take yer pick.
fat finger.....
Me thinks you too right O Bruce-O. I don't think 500B is enough to make a difference tho. More like $1.5T. Extraordinary events require extraordinary actions. Fun to watch though.
Completely agree. We're going to see the Fed-ECB swap line opened and opened big. There's no upper limit on that thing (original terms have been preserved through the extensions). Bear in mind that we also have the cash from QE2 in play. It was originally intended to secure reserves in banks experiencing a run on eurodollars due to the risk of a Greek default in 2010 but as the situation stabilized, that cash had nothing to do so went speculating. Now it's being pulled back in so there's ~630 billion already on deck in Europe.
I have seen one estimate (Prof. Mason) that the real number is closer to 1.5 Trillion eurodollars, pumped indirectly through QE2, that's already on deck in Europe. Big number, but still not even close to what will be required if there is complete panic, widespread runs, and a CDS cascade. Guess there will need to be an additional 1.5 - 3 Trillion before this whole thing can be stabilized.
Oh that's going to play well in the US where we are getting deeper into this depression. And this will be done in a vacuum with no effect on either the dollar or commodities...not likely. Face it, the boys are running out of twine and duct tape. If they print the day will come when it is a basket of commodities and not the dollar...tell average joe six pack that the reason for his $10.00/gallon gas is because the greeks need to retire at 45 or 50...yeah.
Yes, $500b is the low end of the range.
Well somebody needed the 150 mill swap the other day via Swiss. Thats a peewee amount of cash. So the spigot is open.
The Fed scammed the europeans last crash when he sold dollars high and got euros cheap. Then the euros were sold back pricey as the dollar crashed. The swap line is a scam
WTF?I tought the swap line are already open with Europe. I tought it was just a surprise that the SNB was the first to make use of it.
>The swap line is a scam
No...the Federal Reserve is a scam. It's who they are.