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Congressional Research Service Finds US Exposure To Europe At $640 Billion And "Could Be Considerably Higher"
If there is one thing that matches John Paulson's dramatic conversion to the anti-Midas of our times, it is Tim Geithner's uncanny ability to say something only to be proven to be a pathological liar within months if not weeks (who can possibly forget: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?” "No risk of that."). Now we can add hours. Because it was only yesterday that in testimony to Congress, he said in an attempt to be the latest to defend Morgan Stanley, that "The direct exposure of the U.S. financial system to the countries under the most pressure in Europe is very modest." Really? That's funny because none other than the Congressional Research Service said that U.S. bank exposure to the European debt crisis is estimated at $640 billion, according to Dow Jones. Wait, that is impossible: even Morgan Stanley, the bank that stands to see a bear raid if the CRS' conclusion is valid, said that its net exposure is negligible. And none other than CNBC confirmed that gross exposure is irrelevant, regardless that AIG taught us that in a state of insolvency contagion net becomes gross, and bilateral netting can be thrown out of the window (what happens when that counterparty you hedged your exposure with... goes bankrupt? Ask Hank Paulson, Lloyd Blankfein and Joe Cassano, they know). But wait there's more: "The CRS says, however, there are two other factors that could cause a dramatic reassessment. The estimate doesn't include U.S. bank exposure to European bank portfolios that include assets in the weak member countries. Also, it doesn't account for euro-zone assets held by money market, pension, and insurance funds. "Depending on the exposure of non-bank financial institutions and exposure through secondary channels, U.S. exposure to Greece and other euro-zone countries could be considerably higher." So... someone is lying you say?
What is the take home here? That US exposure is $640 billion or "considerably higher" despite what Morgan Stanley and Geithner are lying? Not at all. The truth is the nobody has any idea how to quantify US exposure to Europe. But it is not only massive, but that all hedges that banks have in place will promptly be rendered worthless when the dominoes, and thus counterparties start falling. So the only conclusion is that anyone who tells you to ignore gross, or that the number is under control, is nothing but a pandering liar. And anyone investing based on such trite promises will guaranteed lose all their money.
More from Dow Jones:
While U.S. Treasury Secretary Timothy Geithner says the U.S. banking sector's vulnerability to the euro zone problems is "very limited," the Congressional Research Service estimate is one of the first public assessments provided by the U.S. government that quantifies the potential risks.
"The direct exposure of the U.S. financial system to the countries under the most pressure in Europe is very modest...very limited," the Treasury Secretary told the committee. Besides, Geithner added, U.S. banks have much stronger capital positions than in 2008, when Lehman Brothers collapsed.
Officials there are now scrambling to bulk up their banking system as a default could freeze lending throughout Europe, forcing the collapse of some banks.
"Given that U.S. banks have an estimated loan exposure to German and French banks in excess of $1.2 trillion and direct exposure to the PIIGS valued at $641 billion, a collapse of a major European bank could produce similar problems in U.S. institutions," the research service warned lawmakers. The PIIGS--Portugal, Ireland, Italy, Greece and Spain--have come under increasing attack by markets fearing unsustainable government debts and weak financial sectors.
The research service papers note their figure is only a rough guess. It includes two types of assets, direct holdings such as loans, and "other potential exposures" such as derivative contracts, guarantees and credit commitments. Analysts say the estimate could be much higher or lower because it's hard to quantify exactly "other potential exposures." For example, a bank could hold two different derivative contracts that effectively cancel each other out.
In conclusion we will ask any TV commentator, analyst, executive or simply bag of hot air to please read the following explanation why bilateral netting is a wrong, wrong, wrong concept when you have a global financial collapse. Unless of course, said bags, execs, etc, have an urge to sound like they have no idea what they are talking about...
The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.
The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.
But don't take our word for it: a former advisor to the IMF told all of this, and much more, to the BBC a few days ago:
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In summation.... The music can never stop.
Billions are archaic by now. We should be thinking in trillions and quadrillions.
Six hundred billion dollars only amounts to about $2000 per soul from one to 109 in the U.S. That would be about $6000 per family in obligations to save the world. Seems like a great bargain, especially so since recent market activity has indicated that everything is finally swell once again back home.
What is so sad is what Bernanke said about US bank exposure to Europe - It is not exact but something along the lines of "US banks have limited DIRECT exposure to Greece, Spain and Portugal BUT the economy is at risk due to the increased volatility resulting from Europe " The BUT, then should have read BUT has trillion of INDIRECT exposure to banks/countries that are at risk to the PIGS. Reminds me of his view that SUBPRIME was contained. SAD
Bernanke is starting to learn from Greenspan. The more vague and cryptic the statement, the less likely it is to come back and haunt you later.
Don't know if anyone else posted this at zh but have a look.
It's Alessio Rastani, the guy who told the truth that Goldman Sachs rulz the world, responding to the badgering of some useless thickie MSM pundits and ignorant 'critics' on ITV:
(best chuckle is the Berlusconi quotation at the end ... wait for it)
http://www.youtube.com/watch?v=W4mGtec6qUc
They´re saving the world ceaselessly not at their expense but at ours the taxpayers. This is not a fair marketplace. It´s a license to steal. Our custodians that we pick in corporate funded, owned and controlled sham elections totally play along with this.
It´s a bubble that is doomed to burst.
Times are changing very fast. We´re in a rising wave of technolical advances and productivity ncreases. The world is swimming in oversupply of about everything, notwithstanding the recent ded cat bounce of commmodities from their 1-2 year lows.
An oversupply of just about everything except the one thing the world really really needs....
Sound money!
time to tell the greeks to go sailing
640 billions is nothing when you have gazillions at the press of a button. He was actually being honest this time.
Fuck Off MilliondollarBonehead .
Fed empolyees not welcome here.
OK, leaving aside the wit of Million Baller Donus (PLEASE), do you all not think there is something rather obviously wrong with the headline itself? Congressional Research Service Finds US Exposure To Europe At $640 Billion And "Could Be Considerably Higher"
Another way to word this is that the US exposure to the mess in Europe is $640 billion at MINIMUM. It does not leave the option of being lower than that, only that or perhaps a lot more, aka unlimited, open ended.
This was also coded into the story: "The direct exposure of the U.S. financial system to the countries under the most pressure in Europe is very modest...very limited,"
To me that means the banksters and other corporate entities, unless we now officially consider there to be no longer boundaries between government, treasury/Fed, and the FIRE private industry. So the story in effect leaves out the trillions in fed and treasury exposure. Which begs a question in my mind, we know that the fed and treasury have both backstopped and outright lent to Eurozone governments and banks, but was that lending in dollars or euro? It is important since if they abandon the euro over the weekend what will the repayment actually be worth when they send a few shiploads of euro back but in the meantime are now doing business in francs and DMarks, lira? It would be like loaning them dollars and being repaid in confederate dollars.
And what is the point if any in this piece? After the Lehman collapse the Fed gave and/or backstopped over 16 trillion in loans to financial institutions to keep them "solvent" making a total mockery of that word, if the EZ goes under what difference will it make what US exposure is public or private? Bernanke will just do the same thing again, and since there was no outcry or even slight kerfuffle over a mere 16 trillion this time they can more than double down, just do not let any of it leak out to Main Street and we have the economy set on cruise control. And of course by then unemployment in Europe will be 40% so when we hit 25% people will just say we have it great, Europeans are way worse off than Americans, and while Asia has close to full employment nobody makes enough to buy a bowl of rice. Proof once again that the American elite know their shit.
Huh. What's the combined tangible common equity of all US banks?
A billion here, a billion there, and pretty soon, you are talking about a fuck of a lot of money...
As we have been saying here for months U.S. exposure is complete enough so that all economies are coming down together. It can't be stopped and this is exactly what the bankers intend to do within days. -- Michael C. Ruppert
http://www.collapsenet.com/154.html
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