Exposing American Banks' Multi-Trillion Umbilical Cord With Europe

Tyler Durden's picture




 

One of the reports making the rounds today is a previously little-known academic presentation by Princeton University economist Hyun Song Shin, given in November, titled "Global Banking Glut and Loan Risk Premium" whose conclusion as recently reported by the Washington Post is that "European banks have played a much bigger role in the U.S. economy than has been generally thought — and could do a lot more damage than expected as they pull back." Apparently the fact that in an age of peak globalization where every bank's assets are every other banks liabilities and so forth in what is an infinite daisy chain of counterparty exposure, something we have been warning about for years, it is news that the US is not immune to Europe's banks crashing and burning. The same Europe which as Bridgewater described yesterday as follows: "You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks." In other words, trillions (about $3 trillion to be exact) in exposure to Europe hangs in the balance on the insolvency continent's perpetuation of a ponzi by a set of insolvent nations, backstopping their insolvent banks. If this is not enough reason to buy XLF nothing is. Yet while CNBC's surprise at this finding is to be expected, one person whom we did not expect to be caught offguard by this was one of the only economists out there worth listening to: Ken Rogoff. Here is what he said: "Shin’s paper has orders of magnitude that I didn’t know"...Rogoff said it’s hard to calculate the impact that the unfolding European banking crisis could have on the United States. “If we saw a meltdown, it’s hard to be too hyperbolic about how grave the effects would be” he said. Actually not that hard - complete collapse sounds about right. Which is why the central banks will never let Europe fail - first they will print, then they will print, and lastly they will print some more. But we all knew that. Although the take home is the finally the talking heads who claim that financial decoupling is here will shut up once and for all.

More from the WaPo's take on Shin's paper:

Shin says European banks grew not only by making direct loans to U.S. businesses but also by sucking up vast U.S. money-market deposits and purchasing U.S. mortgage securities. During the previous decade, “European banks may have played a pivotal role in influencing credit conditions in the United States,” and that helped fuel the U.S. housing and financial bubble, Shin argued in a recent paper.

 

But now it could hurt the U.S. recovery as European banks shrink and bolster their capital reserves. “The European crisis of 2011 and the associated deleveraging of the European global banks will have far reaching implications not only for the eurozone, but also for credit supply conditions in the United States and capital flows to the emerging economies,” Shin wrote in a paper presented at an International Monetary Fund conference in November and which has been widely read among economists.

 

The vast extent of those European bank obligations to U.S. institutions, or counter-parties, helps explain U.S. policymakers’ anxiety as they watch European leaders try to head off a crisis like the one that followed the Lehman Brothers failure in the United States in 2008.

At the end of the day we always go back to the fundamental question: how is counterparty exposure hedged and what happens to European-exposed assets if and when more and more banks implode? Because while assets get written down, the only way to do the same with liabilities is to file for bankruptcy. Of course, there is the equity raise route, which we wish the best of luck to all US (and European) banks that choose to pursue this particular strategy.

Full Shin report (pdf):

 

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Tue, 01/03/2012 - 11:41 | 2028726 maxw3st
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"...insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks." That seems to sum up the situation nicely, on a global scale as well as in the Euro-zone.

Tue, 01/03/2012 - 11:46 | 2028742 tarsubil
tarsubil's picture

Just lean these cards against each other and you can build a house!

Tue, 01/03/2012 - 11:51 | 2028760 bank guy in Brussels
bank guy in Brussels's picture

As Tyler says above:

« ... first they will print, then they will print, and lastly they will print some more ... »

Following what Jim Sinclair said years ago:

« ... QE to infinity ... inevitable ... »

 

 

Tue, 01/03/2012 - 11:59 | 2028781 Oh regional Indian
Oh regional Indian's picture

Of course. A one world government needs a one..... WORLD BANK. Check.

"Private" banks, oxymoron again....cannot be allowed to exist too much longer. And at a fractal level, what they have done to the plebs (stuffed people full of toxic crap), same thing they've done to the Banks, the Rivers, Nature. Toxic entities make easy pusch-overs.

In-toxicating stuff eh?

ori

/2012-the-year-of-anomaly/

Tue, 01/03/2012 - 12:11 | 2028820 redpill
redpill's picture

In the end we'll be left with one giant bank and these assholes are going to pretend it was a coincidence of events.

Tue, 01/03/2012 - 12:58 | 2029049 LiquidityandLunacy
LiquidityandLunacy's picture

Stop with the regurgitating of tylers sentiments.

 

There will not be QE to infinity, I firmly believe that one more massive round of QE will set off the bomb so to speak due to the prices of crude and food.

 

With that said, a full scale world war is just what the doctor ordered and aparently what we are going to get.

 

While tylers endgame (as I understand it, dow zero, riots and violence coupled with USD zero then an awakening) I do agree with, the steps to get there are unrealistic with crude holding at 102 during a recession.

 

One more QE and all of the kings horses wont be able to put this together again.

Tue, 01/03/2012 - 12:50 | 2029010 innertrader
innertrader's picture

That was the perfect analogy!  How funny.... how sad and how true!

Tue, 01/03/2012 - 13:36 | 2029239 innertrader
innertrader's picture

"You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks."     ......... and now we have insolvent sovereigns supporting insolvent sovereigns and insolvent banks supporting insolvent banks!  With the 50% of tax payers, who still actually pay taxes, on the hook for ALL of it!

tarsubil: "Just lean cards against each other and you can build a house!"  tarsubil, You got me to thinking.  When I was a kid I remember building one to four stories once... it took me a long time to build before it crashed and when it did, it crashed in a nano second.  But then again, I was having to deal with the "REAL' world, not magic (money)out of a hat stuff! 

Did Madoff model his business plan after the federal reserve?  ....... but forget that he wasn't a magician and couldn't create money out of thin air?

I was speaking with an x-president of a small privately owned bank recently and he was telling me about how he actually went to repossess cars etc.  It gave him a completely different perspective on loaning money.  I've been thinking, maybe that is what ALL bank presidents need to do..... especially the president of the federal reserve!  It seems the further these banksters get from reality the more it cost the tax payer!

So, Europe holds about 3 Trillion net in US "paper" and China 1 Trillion plus.... hummmm, wonder if any of those presidents have repossessed a car?

I think I need to take a walk...

RUN RON RUN!

Tue, 01/03/2012 - 16:08 | 2030069 augmister
augmister's picture

In November, you will have a choice to vote for Mr. Romney, the Republican Goldman Sachs candidate for President of the United States, or Mr. Obama, the Democrat Goldman Sachs candidate for President of the United States.

Forget politics, just follow the money.   Your world as you knew it is GONE. So now what are you going to do to SURVIVE?   Wake up and smell the mud you have boiling on the stove, where you once had a coffee pot!

Tue, 01/03/2012 - 11:47 | 2028747 Everybodys All ...
Everybodys All American's picture

The banks are going to quietly go to sleep one by one. Slow and very very drawn out. I would not be surprised that month after month employees of these banks are let go.

Tue, 01/03/2012 - 11:50 | 2028758 john39
john39's picture

but don't worry, the banker cabal will fix everything with one huge world bank and a global digital currency.   /s

Tue, 01/03/2012 - 11:51 | 2028759 Popo
Popo's picture

At what point does Bernanke actually start to admit that he's printing?   Or more subtely:  At what point does Bernanke begin to suggest that "just a little" printing might actually represent a valid strategy.  At some point he's going to spin his only option as if it's a good one.

...at which point the shit-show is officially on.

 

Tue, 01/03/2012 - 17:37 | 2030464 ViewfromUnderth...
ViewfromUndertheBridge's picture

fwiw...I think Operation Twist was just a cover story for replacing Chinese and other foreign buyers of longer term USTs...as the maturity date of foreign owned debt gets lower and lower the closer the point you are looking for gets.

Tue, 01/03/2012 - 13:27 | 2029194 f16hoser
f16hoser's picture

International fore-play!

Tue, 01/03/2012 - 11:43 | 2028732 chistletoe
chistletoe's picture

I made myself some popcorn this morning.

I used the same pyrex bowl, in the same microwave, that I have been using for just this purpose, for many years.  After it popped (well, most of it), I took it out, took the cover off, poured on real melted butter and salt, put the cover back on, shook it, took the cover off again, and picked up the bowl to carry it over to the table.  I was using a cloth towel as the bowl was still too hot to handle.

 

Suddenly, the whole thing just exploded.  Glass, popcorn, kernels and salt went flying every which way.  I was quite surprised.

 

No popcorn today, folks ...

 

Tue, 01/03/2012 - 11:50 | 2028755 francis_sawyer
francis_sawyer's picture

Jeez dude...

Finally a BLACK SWAN occurs & to watch it, you have to pick up your popcorn up off the floor and eat it with glass shards...

STBU

Tue, 01/03/2012 - 11:54 | 2028770 Eally Ucked
Eally Ucked's picture

Cloth towel had to be wet, wasn't it? They try not to piss on towel!

Tue, 01/03/2012 - 13:17 | 2029155 VyseLegendaire
VyseLegendaire's picture

Interesting metaphor for the inevitable implosion of the regular QE cookathon. 

Tue, 01/03/2012 - 13:29 | 2029202 f16hoser
f16hoser's picture

Everything works fine until one day it doesn't work fine. Today is the day (2012).

Tue, 01/03/2012 - 11:45 | 2028739 Peter K
Peter K's picture

Princeton econ dept. Now where have I heard that one before? Oh yea, isn't that were .....? Naahhhhh, can't be.

Something having to do with Einstein?

Tue, 01/03/2012 - 11:47 | 2028740 Cognitive Dissonance
Cognitive Dissonance's picture

"At the end of the day we always go back to the fundamental question: how is counterparty exposure hegded and what happens to European-exposed assets if and when more and more banks implode?"

A bottom line question everyone in power (and nearly everyone on the sidelines who is still hopelessly captured by the financial system {including me and you}) hopes to ignore until it can be swept away by time and/or inflation.

Here's to ignorance is bliss.

Tue, 01/03/2012 - 11:50 | 2028754 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The above title made me think of this.

Hospital Birth Trauma:

http://www.redicecreations.com/radio/2011/12/RIR-111225.php

Tue, 01/03/2012 - 11:54 | 2028769 Cognitive Dissonance
Cognitive Dissonance's picture

Been a paying subscriber to Red Ice for several years.

Even if we don't 'believe' most of what is presented on Red Ice and many other alternative information sources, we must at least seriously consider it...........if for no other reason than to expand our mind. 

Tue, 01/03/2012 - 12:00 | 2028785 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The above interview is believable, but I listen to a lot of the interviews for creative purposes, and yes, with an open mind.

Tue, 01/03/2012 - 12:15 | 2028838 Cognitive Dissonance
Cognitive Dissonance's picture

Sorry....I didn't intend to lecture you, but rather to plug Red Ice. The free content is a great resource and the paid section just adds to the overall experience.

Tue, 01/03/2012 - 12:19 | 2028845 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

We were both plugging. 

I hope you're doing well, and may 2012 be the best yet.

Tue, 01/03/2012 - 12:26 | 2028868 SWRichmond
SWRichmond's picture

When the post-mortem is written on this clusterfuck, we will have a historic redefinition of the word "asset."  Promises to pay will no longer be considered "assets."  We will also reveal as a falsehood (actually, we're doing this now) this notion of "risk-free rate of return." There is no risk-free rate of return.

"You cannot hedge debt risk by owning more debt." - Antal Fekete.

Tue, 01/03/2012 - 21:13 | 2031090 StychoKiller
StychoKiller's picture

Baked potatoes contain a lot of residual heat, careful when juggling them...

Tue, 01/03/2012 - 11:47 | 2028743 RobotTrader
RobotTrader's picture

Lots of fancy theories and explanations.

 

Most of which are totally unecessary.

All you have to do is follow the charts.

NY Composite clearing to new highs, well above both the 21-day and 50-day.

http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosetti...

Can't fight the bullish trend forever.  Eventually you have to accept the facts.

Most funds are way over invested in bonds and way under invested in stocks.

The market has been fighting off bad news and recovering after each selloff time and time again, even when most guys are abandoning equities in droves.

Tue, 01/03/2012 - 11:50 | 2028757 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The charts....like oil right, like that chart.

Tue, 01/03/2012 - 11:51 | 2028761 CapitalistRock
CapitalistRock's picture

That's another way of saying, "they will print". Debasing the currency lifts all boats in nominal terms, including stocks. Owning some stocks is important for that reason.

The problem is that Deleveraging will cause real problems for some time to come. Stocks will suffer in real terms. PMs, which fewer than 1% of America owns, will become very popular and rise in real terms.

Tue, 01/03/2012 - 12:05 | 2028801 SheepDog-One
SheepDog-One's picture

RoboTarder youre STILL underwater from your last all-in calls around DOW 12,700 over half a year ago....whats your trading platform, an Etch'a'Sketch?

Tue, 01/03/2012 - 12:22 | 2028853 LynRobison
LynRobison's picture

"All you have to do is follow the charts.". RobotTrader, you are amazing (in a bad way).

Tue, 01/03/2012 - 12:32 | 2028893 Ned Zeppelin
Ned Zeppelin's picture

RT: You are better off saying "don't underestimate the ability of these determined central banks to keep the current, flawed party going."  I undertand your purely empirical outlook.  It has been remarkable since March 2009.   But as far as stocks making some big run in 2012 that is triggered by actual, solid growth and the emergence of new economic drivers that also enable the employment rate problem to be tackled, as opposed to the PPT playing around with free money, I just don't see it.  Party tricks (especially those which enable the "appearance" of a healthy equities market) entertain for only so long, and at some point, real growth has to show up.  I think the funds are wise to stick to bonds and stay away from the equities until further notice, and the belief that Euroland will somehow get its act together is strictly faith-based.  The allocation of investment monies you seem to think is coming, perhaps as an example of empirical "reversion to the mean" type thinking, is one I believe represents a paradigm borne of years' of debt fueled growth and low energy prices, and those days are coming to a close.  2012 will be "muddle through," at best, and pray no black swans show up.  

Tue, 01/03/2012 - 21:15 | 2031099 StychoKiller
StychoKiller's picture

For some reason, a combustion engine made out of paper does not last very long...

Tue, 01/03/2012 - 11:47 | 2028745 GeneMarchbanks
GeneMarchbanks's picture

'Yet while CNBC's surprise at this finding is to be expected, one person whom we did not expect to be caught offguard by this was one of the only economists out there worth listening to: Ken Rogoff. Here is what he said: "Shin’s paper has orders of magnitude that I didn’t know"...Rogoff said it’s hard to calculate the impact that the unfolding European banking crisis could have on the United States. “If we saw a meltdown, it’s hard to be too hyperbolic about how grave the effects would be” he said. Actually not that hard - complete collapse sounds about right. Which is why the central banks will never let Europe fail - first they will print, then they will print, and lastly they will print some more.'

Rogoff? Seriously? Try Ha-Joon Chang or Michael Hudson.

Meanwhile Atonement cometh as Bass has repeatedly pointed out. 'Printing' doesn't mask the looting spree and is now even a poor psy-ops operation so you can forget any cover-up. Empire collapses at the periphery first.

Tue, 01/03/2012 - 11:57 | 2028778 fonzanoon
fonzanoon's picture

I read in "Boomerang" how Kyle Bass approached Rogoff years ago about the enormity of the soveriegn debt situation. Bass explained how caught off guard Rogoff was by the numbers. He (Rogoff) seems caught off guard again.He may need to go to the doctor regarding his memory loss issues.

Tue, 01/03/2012 - 12:06 | 2028805 GeneMarchbanks
GeneMarchbanks's picture

An academic with some semblance for 'independent' economic thought, which really says nothing in a world where herding is not only the norm but a basis for verified truth. That is how it is nowadays. Academics play with theory, practitioners quietly go unnoticed.

Tue, 01/03/2012 - 11:47 | 2028746 Boilermaker
Boilermaker's picture

BAC *somehow* just moving away from the $5 per share mark at break-neck speed.

Wierd.

Tue, 01/03/2012 - 11:52 | 2028764 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

I almost feel bad for people trying to short the EUR at $1.30-$1.35....almost.

Tue, 01/03/2012 - 11:48 | 2028749 Kaiser Sousa
Kaiser Sousa's picture

Tyler and Fam....

 

i think this is welll worth a view particularly because of the assesment of "O'Sellout", and the crumblig empire which is - well u know of who i speak...off this topic slightly but not really....

just sharing.....

http://www.oilfreefun.com/2012/01/brace-yourself-american-empire-is-over...

Tue, 01/03/2012 - 12:35 | 2028908 Ghordius
Ghordius's picture

blablabla, empires end when the legions come back home or are left stranded

Tue, 01/03/2012 - 12:01 | 2028774 Quintus
Quintus's picture

Been saying this for many months.  Euro collapses = Wall St collapses next day = dollar collapses.  The web of debt will take everyone down.

Ben isn't handing trillions to Europe because he likes them.

Tue, 01/03/2012 - 12:33 | 2028898 Ghordius
Ghordius's picture

"Ben isn't handing trillions to Europe because he likes them"

how true

Tue, 01/03/2012 - 11:59 | 2028782 Gamma735
Gamma735's picture

But... but the market is up today!  Isn't everything all right now? 

 

"Illusions, Mr. Anderson.  Vagaries of perception." - Agent Smith, The Matrix-Revolutions. 

Tue, 01/03/2012 - 12:00 | 2028783 RobotTrader
RobotTrader's picture

What are you guys going to do if we have a Weimar rally and stocks go completely vertical from here?

 

Like they did after the December 1994 lows?

Keep trying to knife-catch TZA and FAZ???

Tue, 01/03/2012 - 12:04 | 2028796 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

That would mean the dollar has lost its nominal value, which would mean stocks are worthless.  That would also likely mean physical would have been the best way to play the market  :)

Tue, 01/03/2012 - 12:14 | 2028832 SheepDog-One
SheepDog-One's picture

What will 'you guys' do if we have a Weimar rally? 

Well, same as I have been doing, buying and holding PM's and commodities, which have far outperformed everything else but just gets no media attention so no one knows. Its all paper obsession to the media monkeys.

BTW....after the 'Weimar rally'....didnt something kinda bad happen?

Tue, 01/03/2012 - 12:28 | 2028874 TheSilverJournal
TheSilverJournal's picture

I think what Robo is trying to say is it's pretty scary to try and short something, no matter how much value it's going to lose, when measured in a currency which is set to plummet even more.

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