7 Charts Showing The Lock Out Of European Capital Markets And The Surge In Counterparty Risk
It is not 2008. It is far worse. Unlike 3 years ago, the central banks were not all in on "bailing out the world" and thus actually had dry powder to do so, as they eventually did: where will the status quo go for a global bail out this time? Below we present 7 Bloomberg charts, following yesterday's indication of a liquidity lock out, showing all too well the surge in counterparty risk, but more importantly the lock out in European capital markets. To all those who thought that transferring ever more peripheral risk to the European core would have no consequences (sorry, it did: German CDS is wider than the UK for the first time ever), and did not hedge appropriately, our condolences.
First, overnight lending rates = counterparty risk... although we already knew this. Just see any of our CDS updates over the past month.
And 6 more charts: "Since July 15, investors have sought refuge in the ECB’s overnight deposit facility, which peaked at 1.45 trillion euros Aug. 8. Short-term funding stress also can be observed in the spread between 3-month USD Libor less the 3-month Euribor basis swaps, which has widened to negative 90 from negative 27 at the end of June. When this spread widens it increases the FRA-OIS spread, a sign of stress in European bank funding markets, further depressing the front end of Eurodollar futures contracts and intensifying pressure on EU banks."
Last, as a reminder, tomorrow we get an update on borrowings under the emergency punitive 7 day loan line from the ECB where last week we found one bank had borrowed $500 million in what is most obviously a dollar shortage, confirmed later by the resumption of Fed FX swap lines which do nothing but alleviate USD funding shortages.
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No global bailouts. Try global thermonuclear war. Great game, btw.
But the only way to win is not to play.
Agreed, Quintus. In a rigged game, only the house eventually wins.
Did someone mention me?
Look at the $NYTV volume chart today!
Scary stuff!
Fuck banks. All this mess is from Woodrow Wilson being blackmailed for tagging his secretary.
hmm... must investigate further.
Do you have a reference for that?
Benjamin Freedman is the most common source of this. Supposedly he was blackmailed with a demand for $25,000 with the threat of an alienation of affections lawsuit, which was conveniently paid in exchange for promises of future favors -ie Supreme Couurt appointments, US entry into WW1, Federal resrve, income tax, etc.
History books are king to the idiot Wilson, but he was the worst President in US hsitory - when it's all over the triumvirate of Clinton/Bush/Obama may collectively give him a run for it though.
.
Wasn't Wilsons secretary male?
Joseph P. Tumulty
Engage them in a game of tick-tack-toe
A paradox like that must have a name in game theory. Nice. Very zen. If you do not fight, only then can you win.
Vivek
It's called the Joshua/WOPR/Falken paradox.
They`re trajectory headings for Multiple lmpact Reentry Vehicles. - What does that mean? - l don`t know, but it`s great!
Ghanji pissed me off. Once he'd blast continuous propaganda your way, he'd never stop. Khadaffy was cool. As long as you bombed him occasionally, he was happy.
http://en.wikipedia.org/wiki/Nuclear_War_%28video_game%29
...QE3=WMD=NWO
oh the horror, DOW +147
Ben is working his little ass off hitting that printer button trying to push it above 11,000.
so he doesn't have to announce QE3 this weekend (too great a danger to his own institution, as he said at end of last press conference), to allow for stuff to settle down so they can be called in again as heroes
You know what would be awesome, if there was like a rate that told you the interbank offer rate at some random location where a lot of banks are located. Say like London. This could like tell me what the London Interbank Offer Rate is over a given period of time. I think I'd call it LIBOR. That would awesome. Alas, no such rate exists. Here's dreaming.
What would be even better would be if your hypothetical interbank rate was not blatantly fudged by the banks who produce it in order to send whatever message of stability and normalcy they want the wider public to swallow.
aka LIeBOR
That's the part I really don't get. I know some are claiming that right now is a rigged sell-off to justify more printing. But why not manipulate the rate which you're already manipulating to reflect that? Unless everyone important already hedged out all interest rate risk and movement in this rate would instantly cause the banks to be decapitalized.
Someone poured a bunch of cement in to their liquidity.
That sucks.
Nobody wants to miss the next rally
Who needs wars when you have HFTs and gold-collateralized Eurobonds?
Transitory contained liquidity problems. Won't last 15 minutes.
More Bennibux on Friday...
Dexus Ex Bitchez
Eurozone is the right hand here folks.
What is the left hand doing? Besides bombing the bejeesus out of freedom hating mooslims, what is the left hand doing?
Black swans always fly out of left field.
Could it be that there will be one more attempt to leave Asia holding the bag? Asia is floating on carry currencies, mainly. And exports in the self-same denominations. We will fall really really hard. Internal demand is a joke, another credit pumped joke.
Interesting times indeed.
Vivek
http://aadivaahan.wordpress.com
I always enjoy your posts ORI. Interesting times for sure.
Thanks and likewise Centerline. Though it seems you err on the side of brevity and me low-key-ciousness? ;-)
Vivek (ORI)
get it over with already.
The crash has been postponed until Friday. Please check back later.
As RBS and Barclays seem to be winning this race, can you call this still a Europe catipal markets article?
I mean.... England... pound...
THEY LIVE ON A FREAKING ISLAND FOR *** SAKE!
You want to know how the story ends? Easter Island..... Where the heck did these big stone heads come from? Musta been space aliens..............gasp surely the inhabitants did'nt eat each other. Where was Malthus from again?
Moral: never live on an island in TEOWAKANI without a damn good boat.
I'm long gold an silver physical, but I sure wish gold would get a smack down so I can get more. This run is over done. Come on margin hikes.
It's hard to sit and wait for a "dip". The feeling of "I should have sold or not being long enough" is most difficult to endure. "this run is over done". Nah, not really.
the bernank will buy that libor back down, it is transitory.
"...and thus actually had dry powder to do so,..."
Dry Powder. Plenty of it around.
"I got a monetary plan and it involves a lot of toner."
Did anybody read this excellent aritcle about the SLV on SeekingAlpha?
http://seekingalpha.com/article/289219-stay-away-from-the-slv-etf
SLV is for the unwashed, Goldmoney is for the washed.
I don't see any trouble. The interest in keeping Europe up is too big to let it fail. The Bernank will drop a line, just like with that 1.2 trillion. Comes good. Boring world we live in.
No QE3, but "Operation Twist circa 1961" will be the plan. I fail to see how this will stop a DOW plunge to 600 or less. When do we short T's?
my humble advice: start dollar cost averaging into TBT now!
A true crash is Netflix falling to $50. Until that happens we are still in a bubble. Imagine the shitstorm that would be Netflix dropping to a p/e of 10.
on the first chart, how about an explanation
these are the overnight lending rates that each of the banks are offering the market? or overnight rates each of the banks are getting in a particular market? which one?
Psssst, hey you, pssst, what ever you do, dont look at the charts...
All this bankster badness pales in comparison to the celestial object approaching our planet from the southeast. Go to google sky and search 'Mercury". Click the infrared tab, look in the left-upper quadrant of the map.
its full of stars, my god, its full of stars
Mises seems to have covered all this meaningless paper money bullshit pretty well in 1931 -
"Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand."
SQUID,
No, But we have just a FEW from him, and others.
"A great industrial nation is controlled by it's system of credit. Our system of credit is concentrated
in the hands of a few men. We have come to be one of the worst ruled, one of the most completely
controlled and dominated governments in the world--no longer a government of free opinion, no
longer a government by conviction and vote of the majority, but a government by the opinion and
duress of small groups of dominant men." --President Woodrow Wilson
"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President
[Wilson} signs this bill, the invisible government of the monetary power will be legalized....
the worst legislative crime of the ages is perpetrated by this banking and currency bill."
-- Charles A. Lindbergh, Sr. , 1913
"Some people think the Federal Reserve Banks are the United States government's institutions.
They are not government institutions. They are private credit monopolies which prey upon the people
of the United States for the benefit of themselves and their foreign swindlers" -- Congressional
Record 12595-12603 -- Louis T. McFadden, Chairman of the Committee on Banking and Currency (12 years) June 10, 1932
its a ra ra ra ra ra rally!
Bailing out "the world"! Naahh, more like bailing out the banksters and the "investment class," isn't it?
Surely there's more free, i.e., taxpayer money for them. Common people--98% of humanity--can't live without that, right?
C'mon, we've still got our priorities straight!
ah counterparty risk
and who are some of the counterparties to those Euro banks on overnite loans?
for starters, US state investment pools (including local govts and school districts in the state) and pension funds who are tied to them via securities lending programs.
if someone pours cement in the money flow system, as someone colorfully noted above, then the securities lending programs risk a freeze up as well
and the kicker is that under securities lending programs, the state investment pools/pensions funds are on the hook for hundreds of billions of dollars
and that will be how the problems of, say, SOCGEN, can pay a not so welcome visit to your local school district
market is ripping
nobody cares
here's how a typical securities lending program works with a state investment pool
the pool, which serves as a money market like fund for state agencies, local govts and school districts, borrows million in cash from various banks. security for this loan is provided by assets within the state pool which are transferred to the banks. a servicing bank, say State STreet, invests the borrowed cash in a cash pool and purchases various securities from, in many cases, the bank that loaned the money in the first place.
this cash pool, theoretically, generates income. Most of the income is transferred to the banks who lent the cash in the form of a 'rebate.' The amount of this rebate goes up when there is a liquidity scare, to entice the banks to loan the cash in the first place. In late 2007, as the economic crash was getting geared up, banks were taking over 91% of the cash pool earnings.
A fraction of the cash pool earnings goes to the state investment pool that think it is making extra money. IN the example above, the state investment pool was taking less than 8% of the cash pool earnings.
meanwhile, as much as 100% of the risk of investments in this cash pool going bad rest with the state investment pool that borrowed the cash.
net net, securities lending provides the banks with the following benefits:
1. the get their hands on assets inside the state investment pool (say treasury or gse paper) which they can use for shorting or other money making ventures
2. they have to loan cash to the state investment pool, but they get this cash back when they transfer their own paper (commercial paper, as well as asset back paper they've sponsored), while
3. having a place to market/park their commercial paper and asset backs (this is where much of their off balance sheet crud is hidden), while
4. retaining most of the income flow from their off balance sheet/parked commercial paper/asset backs
Meanwhile, the state investment pool:
1. gets a tiny fraction of earning from the cash pool, while
2. holding the bag for credit loss on the bank assets inside the cash pool.
what a deal huh?
meanwhile, the original loan of cash transactions are terminable at will. so, for example, if a bank says 'get me out' the state pool has to return the cash literally overnite in order to get back the assets which it 'lent out' in exchange for the cash. If the cash is available, fine, but if not because it has been invested in longer date, illiquid bank paper, then tough luck... for the state investment pool, state agencies, local govts, school districts and, of course, the taxpayers whose taxes provided the state investment pool in the first place.
What a deal indeed! Reminiscent of shit in Iceland, me thinks--the naive getting sold by innovative banksters. Thanks for the explanation, Dave!
no problemo, Bob
thanks for reading