Lest We Forget

Tyler Durden's picture

Via Mark J. Grant, author of Out of the Box,

The Data


The above data is directly from the ECB. The data is current as of last Friday, September 28, 2012. I invite you to do your own analysis. I will give you mine but do your own so that you have a very clear picture of what is happening.

The first thing that might strike your attention is the assets and liabilities. The consolidated balance sheet shows a figure of about 3,240 billion Euros ($4,000 billion) and yet we find assets of 16,303.9 billion Euros ($21,032 billion) and liabilities of 17,334.1 billion Euros ($22,361 billion). You may wonder how this is possible given that it is impossible using American accounting principles and the answer is that the ECB does not count government guaranteed debt as either assets or liabilities when compiling their consolidated statement. This would include sovereign debt, bank debt guaranteed by a sovereign or any securitizations, derivatives or corporate debt where the sovereign guarantees the credits. However if I apply American standards then the balance sheet of the European Central Bank is $22,361 billion. This would be as compared to the Fed with a balance sheet of about $2,300 billion so that the ECB has a balance sheet ten times the size of the Fed.

“Recognition of assets and liabilities - An asset or liability is only recognized in the Balance Sheet when it is probable that any associated future economic benefit will flow to or from the ECB, substantially all of the associated risks and rewards have been transferred to the ECB, and the cost or value of the asset or the amount of the obligation can be measured reliably.”
                                       -The European Central Bank

You may also note the loss for the last quarter; 1,040.2 billion Euros or $1,341.8 billion.  As a matter of calculation, utilizing the last three quarters of data, the annualized loss for the ECB is 4,187 billion Euros or $5,401.2 billion through Quarter I of this year which is the most up-to-date figures available. Now the ECB only has about $18 billion of paid-in capital by the national central banks of Europe so you might consider the leverage at work here both for the assets and liabilities and for the losses incurred.

“Central bank capital still does not seem to matter for monetary policy implementation, in essence because negative levels of capital do not represent any threat to the central bank being able to pay for whatever costs it has. Although losses may easily accumulate over a long period of time and lead to a huge negative capital, no reason emerges why this could affect the central bank’s ability to control interest rates.”
                           -The European Central Bank

The view of the ECB raises some interesting questions. I believe most would agree on two issues; first that the ECB is an insolvent institution and so highly leveraged and under-capitalized that a normal bank would have been in bankruptcy long ago but then a normal bank can’t print money. However it must also be said that the ECB is not a stand-alone institution living on another world and that the national central banks of Europe own it. Second I think most thoughtful people would agree that at some point in time that the financial condition of a central bank matters either in terms of increasing inflation by increasing the money supply or as a matter of valuation if no one or not enough financial institutions will support their currency or if some national central bank opts out on the basis of the economic threat to its citizens. This could be exemplified by Germany. Twenty-two percent (22%) of the obligations of the ECB are liabilities of Germany. This means that Germany ultimately is on the hook for $4,978.2 billion of the liabilities at the ECB which is about $1,500 billion more than their GDP.

The ECB’s balance sheet also indicates a $295 billion loss for Germany as their percentage of the entire loss taken in the last quarter or $1,188.3 billion for the annualized loss. This, of course, can be applied to France and the rest of the countries in Europe and it is certainly possible that at some point some central banker, some politician, some national government will look at all of this and decide that enough is enough. It is also possible that the ratings agencies will decide to include the liabilities of each European country at the ECB and add them to their sovereign obligations which would rate Germany probably at a “CCC” and the rest of Europe somewhere blow that. As to the three major ratings agencies, the same ones that rated CDO’s “AAA” on the basis of diversification, I wonder if in accepting Europe’s fallacious debt to GDP ratios data, their non-inclusion of each nation’s liabilities at the European Union and then the same for the ECB, if we are not being lead down the garden path once again to where the road narrows and the thorns tear at our skin.

Aside from all of that I feel compelled to ask the central questions that should have been asked prior to the American Financial Crisis. We all had the data, we all saw the sub-prime mess, we all saw the leverage, we all saw the money handed out for nothing and the non-disclosure documents, we all saw the lack of credible ratings supplied by the ratings agencies and yet we went on like it would all continue forever. We ignored it all. We turned our backs but then; we got scalped and so the prime questions must be asked:

Are we wise men or are we fools?

Did we learning anything from the last go round?

Should we act now before we are scalped again considering we only have one head?

“Logical consequences are the scarecrows of fools and the beacons of wise men.”
                       -Thomas Huxley

Then I would turn your attention to the derivatives owned by the ECB. We are given a net number. There are no gross figures included. We have no way of knowing how much leverage the ECB has on its plate or whether the shorts are accurate off-sets against the longs. One more piece of data to consider! Then look at the investment portfolio of the ECB. Assets of 5,034.7 billion Euros ($6,494.7 billion) and liabilities of 7,833.9 Euros ($10,105.7 billion); a 36% deficit.

Finally after all of the screaming and shouting of having Greece maintain a 120% debt to GDP ratio, a miserable failure in both projection and policy, what do we find at the European Central Bank? It is right there in black and white and it is for all of the countries in Europe not just those that utilize the Euro or it would be much higher; a debt to GDP ratio of 183.3%.


I began this piece at 3:00 A.M. on Sunday. It occupied my entire day. It will be read by most of you in just a few minutes and disposed of as you go on to other activities. It will be dismissed; perhaps not out of hand but dismissed none-the-less as perhaps an interesting note but one not applicable to our current circumstances. Yet I wonder if it would not be wise to give my musings more thought as I fear that the tea is brewing and the hot water may boil over and I point to just how this could happen.

As the Fed and the ECB create massive liquidity it is apparent that not only can they not fund off-planet but that we cannot invest off-planet either. Consequently capital is created, injected into the system and invested in earthly ventures. There are some that may think this is a state of perpetuity, that it will go on forever and that liquidity to cure solvency is a never-ending time line like the stars in the heavens. Uncountable, unknowable and within the purview of a higher being. However prudence demands that thought be given to how it could end and what it would mean and what should be done in case the bough breaks.

The game could end if a major European bank falters; the inter-locking schematic of European sovereign and bank debt and the political realities of a Europe where governmental “suggestions” cannot be denied would pull severely upon the construct. You may wish to note Credit Agricole in France or Deutsche Bank in Germany where leverage is around 70 times their capital. Then if any country, including Greece, actually decided to depart from the Euro, regardless of the pandering offered by the EU, the devastation would be quite real. There could be social unrest in Greece, Spain or Portugal with the outlier being France and this would cause great consternation. Great Britain could decide to actually have a referendum and then vote to leave the EU and this would be another major blow. With the Netherlands and Finland already having publically said “No” to using any more of their money for Greece or any other country there could be such a division between the haves and the have-nots that a core funding country decides to exit. We have already seen a rise in Nationalism and we could see a new set of politicians in Germany, Austria, Finland et al where the hue and cry is that country for their own citizens so that the deepening recession on the Continent changes the politics towards more insular regimes. None of the above, in my opinion, are so far afield that they should not be considered and all of these possibilities could be “game changers” for the Continent.

Besides the banking system and the political system keep your eye on gold and other core commodities. If there is a rush into these assets and out of stocks and bonds then you will get a hint that people are losing faith in the entire system. Also watch U.S. Treasuries as the safest of havens in an uncertain world because if prices begin to spike again it will suggest an increase in the “Fear Factor.” The recent revolt in Catalonia is also something to watch as any move towards succession will not only damage Spain but all of Europe in its severity as the wealthiest region in the country leaving the nation and could even spark some kind of civil war. Italy may also come into the spotlight and even France as their socialist government wallows in its own political jargon.

Since the American Financial Crisis the world has lived off the largesse of the major central banks. It has been a slippery slope and each capital injection or “save the world” speech has been met by risk-on and higher markets as liquidity floods the system. It is a judgment call on my part but I think we are about done with the effectiveness of moves by the central banks. At close to zero short terms rates and the effects of the Quantitative Easings wearing off I do not think that the Fed has much more than it can do that will be helpful. After promises of “unlimited” from both the Fed and the ECB have infatuated the marketplaces and died away; I ask what else could be promised past what they have already laid upon the table. “Not much” is my honest conclusion and so the “Greatest Magic Show on Earth” may be over and the cat is now out of the bag. Recession in Europe that is worsening, a major downdraft in China, Japan and Korea, the end of the great spectacle of the Central Banks and I think a recession in America is on a very near-term horizon.

I apologize for alarming you on this Monday morning. It was in March 2008 that I began to warn amount the American Financial Crisis. You may say what you like but the call was correct. We have shimmied and slithered since then mostly due to the liquidity provided by the world’s Central Banks but there are limits; there are always limits. I can smell the breath of the Beast once more and I can hear him breathing just behind my back. I began today’s piece with a factual accounting of the ECB and the state of its financial condition. I remind you of the American Financial Crisis and what caused it. I take time today to intone the words of the Prophets once more:

“Lest we forget; lest we forget.”

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GetZeeGold's picture



Forget what?


jekyll island's picture

I can't believe he got up at 3AM to write this drivel.  Let me sum it up:  Economies are fucked, probably gonna fail.  There might be a movement into gold.  Sheeple will drive up price of treasuries because they think they are safe.  Whatever started in 2008 is still going on.  

There, I saved you 5000 words.  

CDSMonkey's picture

Maybe if he didn't wake up at 3am, he wouldn't make the mistake of calling the one column losses

JPM Hater001's picture

The Name: Jionne

Yup.  Wake up people.

Payable on Death's picture

We learned that there are no consequences for the connected. Bailouts, bitchez.

100pcDredge's picture

What we forget, of course.

Eireann go Brach's picture

What a bunch of stupid ignorant bastards many ZH readers have to be, instead of actually taking a minute to reflect an opinion on an article that is very good, the dumbo race for "my comment is first and most scathing" is what drives you most!

I am more equal than others's picture

Beavis and Butthead -  the authentic uuuuhhhmerica couple - dumbass!

DrDinkus's picture

I certainly don't dismiss your piece, Mr. Grant.  I have just gotten extremely tired of this game of 'Euro Roulette'. I know the pain is coming, sort of like going over a waterfall blindfolded. Where are we in the river?

midtowng's picture

I personally didn't realize how fucked the ECB was. Just another element in the downfall of the Euro. When the Euro implodes I think the only way to imagine it would be comparing it to an asteroid-hitting-Earth movie special effect.

MillionDollarBoner_'s picture

You're not in the river. You're in a barrel. Benny and Mario are pissing all over you.

Thought it was kinda warm, huh?

Salah's picture

The 2008 disaster started with the Russians sudden invasion of Georgia, in August 2008.   A "natsec event" that all the globo-paperhangers could not control, predict, or game-plan.

It came just days prior to a fantasic alignment of planets in early September, and totally spooked the herd...result was Lehman and even more of a stampede.

Next similar window is just prior to last half of April 2013, where Mars will be at its very most destructive in Taurus, with alignments across the board in last week and early May....watch the fuck out.  Especially if there's a significant natsec event prior.


Overfed's picture

Astrology? Seriously?

falak pema's picture

That super Mario is in a class of his own...is undoubtedly true, but that Trichet was already oiling the ECB pump to that extent, makes me dubious.

'Cos your analysis suggests the  situation was similar in Trichet's days...!

Something tells me the squid ink was an exponential injection pump since 2011. 

Trichet was more an old maid running a tight boutique; or at least that was the official impression. 

CDSMonkey's picture

Loss for last quarter?  I think that the balance sheet net has nothing to do with annual gain/loss and if anything the ECB has been generating profits - 1) they aren't mark to market, 2) they have been paid interest and principal on every bond they own outright, and 3) LTRO has a massive positive carry for the ECB

virgilcaine's picture

Back in the Box. Clear , rational thought is a hindrance in this market.

miker's picture

I agree with his sense of foreboding.  We are beyond numbers.  People pretty much know the score now thanks in part to blogs like ZH. 

So while the Fed and banks will manipulate the stock market higher, the average person will yawn or become more defensive.  Most everyone now knows the system is rigged and based on two huge bubbles blown within the last 2 decades, few are willing to gamble again. 

Obama knows bad stuff is coming.  He has almost a meglomaniac type of personality (from his father's side) and believes he is destined to be there.  Much like FDR.  Let's hope he can do the job. 

LMAOLORI's picture



Yea he's alot like FDR who made things worse. Do what job finish destroying the currency and the country with his spending? 

America’s Greatest Depression Fighter(No, it wasn’t Franklin Delano Roosevelt)

We may not be technically able to default but he can sure turn us into Zimbabwe

JPM Hater001's picture

"but he can sure turn us into Zimbabwe"

Awe, that would feel so great right about now...

StockHut's picture

Central banks and governments are going to do absolutely everything to prevent the deflationary spiral that Mr. Grant speaks of.  However, at some point the market will have its way.  I would advise an investment allocation of 30% cash (ready to deploy at a big downturn), 45% large cap a.k.a. crony capitalist stocks, 25% hard assets (gold, silver, art, etc.)

You can't be fully out of the market waiting for the tide to finally turn, simply because you cant rule out what governments and central banks will do to keep this absurd status quo moving along.

Vegetius's picture

The pain is indeed on its way, lets look on the bright side ?

“Alice laughed. 'There's no use trying,' she said. 'One can't believe impossible things.'

I daresay you haven't had much practice,' said the Queen. 'When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast.

CrimsonAvenger's picture

This article fills me with sadness on two fronts: one, as a reminder of the total economic shitstorm that is upon us; and two, the absolutely zombified state of the mainstream media, none of whom, whether WSJ or your local paper, even think to look at publicly available facts like these and ask basic questions.

CDSMonkey's picture

yes, except he seems to have his facts on profit and loss at the ECB wrong, so just as bad as the MSM who throws out good facts and figures without analyzing them, this reaches bad and erroneous conclusions

giggler123's picture

Did we learning anything from the last go round?

Yep - TBTF means someone else is gonna pay so no worries ;)

Rainman's picture

October non-surprise.....the corrupt and incompetent SEC is going after Egan-Jones for telling the truth....!!


LMAOLORI's picture



They did the same thing last time obama's administration is all about malicious prosecution of anyone telling the inconvenient truth and no prosecution of it's bankster friends. Egan Jones doesn't get paid off by obama's friends at the banks so they are a prime target.

SEC Keeps Ratings Game Rigged


Why Can't Obama Bring Wall Street to Justice?

Two months into his presidency, Obama summoned the titans of finance to the White House, where he told them, "My administration is the only thing between you and the pitchforks."

The bankers may have found the president's tone unsettling. Candidate Obama had been their guy, accepting vast amounts of Wall Street campaign money for his victories over Hillary Clinton and John McCain (Goldman Sachs executives ponied up $1 million, more than any other private source of funding in 2008). Obama far outraised his Republican rival, John McCain, on Wall Street--around $16 million to $9 million.As it turned out, Obama apparently actually meant what he said at that White House meeting--his administration effectively would stand between Big Finance and anything like a severe accountingTo the dismay of many of Obama's supporters, nearly four years after the disaster, there has not been a single criminal charge filed by the federal government against any top executive of the elite financial institutions.

in full http://www.thedailybeast.com/newsweek/2012/05/06/why-can-t-obama-bring-wall-street-to-justice.html

Jethro's picture

I did'nt write this column, my doppleganger did.

Urban Redneck's picture

One of the biggest shortcomings of the accounting system is how CONTINGENCIES are accounted for.

However, all contingencies are NOT equal, and certain contingencies may mitigate or offset other contingencies.

ebworthen's picture

The ECB has derivatives and is levered?

Wow, crazy, crazy, crazy.

So they sound like they are levered something like 333 to 1.

Halfway to 666 so we must have another year to go.

dwholland77's picture

Thank you for your touch of reality, its much appreciated.  One needs to stick one's head of the rabbit hole every now and then.

ZeroAvatar's picture

No, the naked ape ignored all the signs.  He wanted to buy blow, and buy Harleys with ape-hangers.  He listened to 'Daydream Believer' by the Monkees 'cause he stuck his fingers in his ears and went "La La La La La.....I can't hear you". 


His monkeyshines show no bounds.  Once the fraud and corruption reach King Kong levels, it will all crash. 


Until then, Homo Sapiens Sapiens has an economic monkey on his back, along with the blow habit.


He'll continue to ignore reality, and watch the really tough little monkeys on the big screen.


It makes me wanna go Ape-Shit.

TrustWho's picture

Yes, fools hooked on hopium. Humans are a herd animal that are easily driven to slaughter.

The powerful get caught by their egos and actually believe they can control the masses with their hopium. The fix is on until the gods bring thunder, the herd is startled, the stampede starts, and most are slaughtered.  

bill40's picture

The problem with most of the peole who were able to foresee the crisis is that they were right for the wrong reasons. It was foretold that incontinent state spending was the cause of impending doom.

In the end it was private credit creation, aided and abetted, by bought, corrupt politicians and central bankers who brought it all down. Sack the lot of them and confiscate their assets. Close down tax havens with military force if need be.

There is plenty of money for a prosperous society, it's just that its' been stolen and the people have nothing they can do about it.

Winston Churchill's picture

I do not know about everyone else,but I could use another 18 months to be as

prepared as possible.Is the Hopium strong enough to give me it ?

Monk's picture

I told you Keynesianism has nothing to do with this.


Bicycle Repairman's picture

"We all had the data, we all saw the sub-prime mess, we all saw the leverage, we all saw the money handed out for nothing and the non-disclosure documents, we all saw the lack of credible ratings supplied by the ratings agencies and yet we went on like it would all continue forever."

But we also knew we were making money front-running the bubble.  We also knew that the bubble might go on for a long while.  We also knew if we told the truth, the bubble would pop then, and we'd get the blame.    We also knew the bubble is all we have. 

shovelhead's picture

Excuse me,

Is this where I put the usual 'everybody is stupid except me' post?

I just want to, ya know, fit it with the crowd.

I picture a circle of sheep each pointing to the one next to them.

(Sheeple was avoided as it's long past the expiration date.)

Oddly enough, large numbers of people have a life beyond the machinations of Central Banks and will get wet when it rains because they didn't look at the clouds forming overhead.


Whining won't make them carry an umbrella.

CDSMonkey's picture

The leverage is astronomical though...eventually this winds up in printing since they can't handle the losses

Radical Marijuana's picture

Are we wise men or are we fools?

It does not matter much which you are. You will end up the victim of the well-established systems of fraud and robbery anyway. If you are wiser, then you realize that you are being lied to, and you do not believe in that bullshit. However, it does not matter, since the bullies still force you to behave like you believe it. If you are a fool, then you believe in the bullshit, and you do not feel so bad that you are forced to agree with it.

All these well-established systems are runaway dishonesty, backed by violence. It makes no real difference if you understand that or not, since there is nothing you can really do to change anything important anyway. There will still be more debt slavery, and more wars based on deceits!

As far as I can tell, the ONLY effect of learning about how the real world is controlled by the Fraud Kings, and automatically getting worse, as their REAL AGENDA GETS IMPLEMENTED BY THE ACTUAL EVENTS, is that the wise men feel sadder about that than the fools. However, nothing else changes ... The established systems simply automatically get wors, faster, while knowing that does not enable changing it at all.

As long as the enough people can be fooled enough of the time, it does not make much difference whether or not you are too!