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AIG Lite: Margin Call Claimed First Foreign Casualty Of Austrian "Black Swan"

Tyler Durden's picture




 

We’ve written quite a bit lately about Austria’s Heta, the bad bank gone... well, bad, or as we’re fond of calling it, Austria’s Black Swan. Recapping, an outside audit identified a €7.6 billion hole in the vehicle’s balance sheet, prompting the institution of a debt moratorium. Unfortunately, Austria’s Carinthia province had guaranteed more than €10 billion in Heta debt, which is five times the state’s operating revenue meaning it is, for all intents and purposes, insolvent and unless Austria wants to go the unprecedented route of allowing a provincial bankruptcy, the sovereign will need to step in in one way or another. The next shoe to drop was the German lender DuesselHyp which itself faced insolvency thanks to around €350 million of Heta debt it held on its balance sheet. 

While we wait to see which “well capitalized” bank will be the next to crumble under the weight of mountainous writedowns occasioned by the sudden souring of “riskless” assets, we get to read the DuesselHyp post-mortem, which shows that the bank was effectively AIG’d by Eurex. Here’s more via Bloomberg:

Eurex, Europe’s largest derivatives market, asked DuessHyp to post additional collateral as the German bank faced writing down its 348 million euros ($375 million) of bonds issued by Austria’s Heta, said the people.

 

The hit to the bank’s capital from the Heta losses and the extra posting of margin forced the lender, laden with swaps, to seek a rescue, said the people. The Association of German Banks, or BdB, on March 15 said it would back DuessHyp, a lender to public entities, and a day later agreed to buy the company from U.S. private equity firm Lone Star Funds…

Apparently, DuessHyp had more than $13 billion in interest rate swaps on its book, a holdover from the bank’s “old” business model which, according to Fitch, involved underwriting “all sorts” of things:

“This is mostly a legacy from the past, because before the crisis they underwrote all sorts of assets from different countries and in different currencies and they used swaps to hedge the risks.”

 

DuessHyp was in the process of changing its business model ever since it had to be bailed out for the first time in 2008. The bank planned to exit low-margin public sector lending and establish itself as a niche commercial real estate lender, it said in its annual reports since 2009.

It appears that due to the 0% risk weighting applied to public debt, the bank was grossly undercapitalized:

Its balance sheet continues to be dominated by legacy assets linked to public sector borrowers -- such as the Heta bonds due to their guarantee from the Austrian province of Carinthia. That allowed the bank to run on very little capital compared to its total assets.

 

With 59 percent of DuessHyp’s balance sheet being public sector loans, which are deemed risk-free under European banking rules, assets weighted for risk amounted to 2 billion euros. That left the bank with a core capital ratio of 11.6 percent by the end of June, more than twice the legal minimum.

 

Meanwhile, its leverage ratio, which compares capital to total assets, was 2.1 percent, or half the average of major European banks, according to data compiled by Bloomberg.

Or, as we put it nearly a month ago: “the very same bonds that are about to lead to a waterfall in impairments are the ones that were, according to EU regulations, ‘riskless.’ One can only imagine how much latent risk Europe's bank have as a result of the supremely idiotic decision to keep a major subsection of European debt as 0% RWA.”

*  *  *

So, now that billions of soured “riskless” debt has claimed the financial lives of an Austrian province and a “well capitalized” German lender, we wonder how long it will be before someone wakes up to the fact that applying a 0% risk weighting across the board — as if every piece of paper that's ostensibly backed by the full faith and credit of a public sector borrower is somehow equivalent to a German bund — may not be prudent. 

We won't hold our breath, but at least the powers that be appear to have picked up the scent (via Bloomberg from earlier this month):

Government debt can no longer be considered a risk-free asset for banks, and international regulators should consider changing the existing legislation, the European Systemic Risk Board said.

 

“If sovereign exposures are in fact subject to default risk, consistency with a risk-focused approach to prudential regulation and supervision requires that this default risk is taken into account,” the ESRB said in a report on Tuesday, citing the majority view among its panel of experts. “Current prudential regulation of sovereign exposures is inconsistent with the conceptual approach that underlies the existing system of regulation.”

 

Mario Draghi, who heads both the ESRB and the European Central Bank, is pushing for a regulatory review prompted by five years of turmoil in government debt markets that almost splintered the euro area. 

 

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Tue, 03/31/2015 - 13:25 | 5945779 dariomilano
dariomilano's picture

fuck draghi

Tue, 03/31/2015 - 13:28 | 5945787 AlaricBalth
AlaricBalth's picture

Of course Government debt in the eurozone, such as Austria, cannot be considered a risk free asset. They cannot print their way out of their own ineptitude due to the fact that they have lost their financial sovereignty.

Tue, 03/31/2015 - 13:41 | 5945813 y3maxx
y3maxx's picture

...More Wars are now definately on our Planet's horizon.....Simply where is the next one after Yemen....

Tue, 03/31/2015 - 13:48 | 5945859 Wolferl
Wolferl's picture

Just reunite Austria and Germany and everything will be fine.

Tue, 03/31/2015 - 14:54 | 5946109 eatthebanksters
eatthebanksters's picture

legacy assets...there's a lot of those...everywhere!

Tue, 03/31/2015 - 16:48 | 5946567 A Nanny Moose
A Nanny Moose's picture

Creditanstalt?

Tue, 03/31/2015 - 13:29 | 5945780 Mr. Bones
Mr. Bones's picture

Government debt can no longer be considered a risk-free asset

 

That sounds...heavy.  Ignore that man behind the curtain.

Tue, 03/31/2015 - 13:27 | 5945782 Son of Loki
Son of Loki's picture

It's the trickle down effect, ne pas?

Tue, 03/31/2015 - 16:57 | 5946611 ah-ooog-ah
ah-ooog-ah's picture

trickle down effect, as in  "I see the real state of this balance sheet, and feel something warm trickling down my leg" ?

Tue, 03/31/2015 - 13:27 | 5945783 flyonmywall
flyonmywall's picture

Would be interesting to see if Deutsche Bank has a paltry "few billion" exposure to Greece, and how that will be handled.

If a 350 million "impairment" brought down some minor bank, a few billion impairment should be good for quite a fireworks show.

I'll grab the popcorn.

Tue, 03/31/2015 - 13:29 | 5945790 KnuckleDragger-X
KnuckleDragger-X's picture

This is just the start and Europe isn't the only place with problems. Bondholder will start heading for the doors soon and then on to the "liquidity crisis" and the CB panic bailouts....the thrill of it all....

Tue, 03/31/2015 - 13:30 | 5945792 ebworthen
ebworthen's picture

AIG'ed?  Will DuesselHyp be bailed out from the public treasury, the CEO given a raise, and non-stop commercials run on T.V. and the Internets about what a great company they are and you should give them your money?

Nobody does corrupt cronyism better than the U.S.!  We are number one!  Amurika!

Tue, 03/31/2015 - 13:31 | 5945795 jdtexas
jdtexas's picture

Stick with energy in portfolio because it's one of the most mobbed-up that guarantees return

 

U.S. Russian MOX Nuclear Fuel Project to Continue Sen. Lindsey Graham Defends Project

Tue, 03/31/2015 - 13:44 | 5945810 ThroxxOfVron
ThroxxOfVron's picture

"Austria’s Carinthia province had guaranteed more than €10 billion in Heta debt, which is five times the state’s operating revenue meaning it is, for all intents and purposes, insolvent"

 

Wrong.  Corrupt Politicians put their constituents asses on the line -again.

 

"Its balance sheet continues to be dominated by legacy assets linked to public sector borrowers -- such as the Heta bonds due to their guarantee from the Austrian province of Carinthia. That allowed the bank to run on very little capital compared to its total assets.

 With 59 percent of DuessHyp’s balance sheet being public sector loans, which are deemed risk-free under European banking rules"

 

Money was borrowed by the Corrupt Politicians -to cover bare-nekkid crony asses on full gauche display- because the taxpayers are tapped.  Now that those loans are defaulted guess who is on the hook for even more -the same taxpayers.

 

Let Carthinia repudiate this assinine guarantee or go broke ala Detroit.  The taxpayers certainly do not want to pay 6 times the taxes that they have been to bail out this bank!

Pull the plug on this bullshit or it will never fucking end!

Tue, 03/31/2015 - 13:44 | 5945838 centerline
centerline's picture

Oh it will end alright.  Only the damage will be far worse the longer this farce continues. 

Tue, 03/31/2015 - 14:04 | 5945905 tsuki
tsuki's picture

According to the Deutsche Wirtschaft Nachrichten, Austria is refusing to tax-payer backstop.  Says Carthinia will be bankrupt by the end of the year, so, Oh, Well, senior bond holders will be taking a loss (first time ever).  Also, Austria is cancelling the savers' deposits guarantee.  It is creating a fund where the banks will have to deposit guarantee monies. 

Watch Austria.

Tue, 03/31/2015 - 14:11 | 5945935 Stormtrooper
Stormtrooper's picture

The Carinthians and had better take some lessons from the Greeks on tax avoidance or their politicians will strip them of their wealth to save the banksters (hey, isn't it about time for more nail guns and jumpers?)

Tue, 03/31/2015 - 13:43 | 5945828 SmittyinLA
SmittyinLA's picture

Hey man somebody is buying the Dominican Republic issuance of new bad debt to replace old bad debt 

Tue, 03/31/2015 - 13:45 | 5945843 ThroxxOfVron
ThroxxOfVron's picture

The debt of Puerto Rico is hardly better despite the US backstops in place...

Tue, 03/31/2015 - 13:44 | 5945837 booboo
booboo's picture

Tommy was a small frame boy of around 60 pounds and had built the teeter totter with the fulcrum off center and had bet the fat kid his lunch money that he could lift him off the ground with his slight frame. The fat kid took the bet and Tommy sat down and just like he said the chubby boy lifted into the air, blood curddling screaming ensued when tommy hopped off his end and sent the fat kid crashing to the dirt in a cloud of dust and to the hospital with a broken tail bone, Tommy never got paid.

Tue, 03/31/2015 - 13:48 | 5945855 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

I can't wait for counterparty risk to again become a hot topic. Markets keep forgetting about this concept until an event forces them to remember...

Tue, 03/31/2015 - 13:48 | 5945856 Kirk2NCC1701
Kirk2NCC1701's picture

Sounds like the ATT (Asset Theft Team) is on a Road-trip to Arnold's home turf, and they're there to.... "Pump you up!"

Austrians, do you feel "pumped"?

Tue, 03/31/2015 - 13:51 | 5945865 Wolferl
Wolferl's picture

Arnold is Steirer not Kärntner. Didn´t you learn anything?

Tue, 03/31/2015 - 14:07 | 5945899 Kirk2NCC1701
Kirk2NCC1701's picture

Of course I know that. You missed my point: Arnold is AUSTRIAN. That is what I meant by "home turf".

And yes, I know he's from the Graz area (where I have relatives), and some relatives near Klagenfurt. All of which I've visited many times. Nice towns and country-side, with funny people (when they've had a few). :-)

"Pump You Up": https://www.youtube.com/watch?v=6erU9Z3bUc4

Tue, 03/31/2015 - 16:33 | 5946514 Wolferl
Wolferl's picture

So, you probably know that AUSTRIANS are German people living in Upper and Lower Austria.

Tue, 03/31/2015 - 14:12 | 5945940 Augustus
Augustus's picture

Of course the only way to treat all public guaranteed EZ debt is to declare it riskless.

Otherwise someone would have to declare that one government / country is more creditworthy than another.  That would violate the principles of the socialist economic death compact.

Tue, 03/31/2015 - 14:50 | 5946096 ATM
ATM's picture

Nio counterparty is safe meaning anyone or anything holding paper is not safe.

When the first domino falls the rest follow. Only rpoblem is the Totalitarians aren't fully set up to take complete advantage yet. But they're getting really close.

Tue, 03/31/2015 - 15:30 | 5946261 Al Tinfoil
Al Tinfoil's picture

NO PROBLEMO!!!  Under the Fiscal Stability Treaty, each Euro-zone country has guaranteed the debts of the other Euro-zone countries.  So all are safe.  It's like mountain climbers all roped together for mutual safety.  If one climber loses his or her grip, the others prevent a fall.  (Unless the first one to take up the slack is thrown off balance, and the next has to cope with 2 fallers, and falls, and the next has to cope with 3 fallers, and slips...... Oops!).  Then again, there is Greece, and Spain, and Portugal, and Ireland, and Italy, and France, and.....Germany?!?

German banks are catching the Austrian Flu already, exposing the silly Zero Risk Rating of sovereign bonds on bank balance sheets.  No wonder Draghi was so insistent on getting ECB QE started.

More sh#t is trickling into the fan. 

Tue, 03/31/2015 - 16:53 | 5946582 pashley1411
pashley1411's picture

So the 5-year-old turn around plan hadn't had time to gain traction?

 

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