Liquidity Isn't Capital

Tyler Durden's picture

At the start of April, ECB's Draghi noted, "let's keep in mind that it [the LTRO] is not capital", adding that "if a bank does not have capital, it would be better to raise it now". Given the rapidly fading glow of LTRO's liquidity flush, the seemingly 'wasted' ammunition that Spanish and Italian banks have fired at the sovereign bond bears and the complete and utter lack of capital raising that has occurred, perhaps it is no wonder that credit spreads on the major European financials have exploded back to near their wides once again (LTRO-encumbrance aside). As Barclays notes today, the major financials alone look set to need over EUR120 billion in capital to bring their credit risks down to acceptable levels to be able to openly access capital markets once again. This means a median 30% of current equity market capitalization has to be raised. Just as we pointed out again and again, not only is the LTRO an encumbrance of bank balance sheets (and therefore increasingly subordinates all existing bond-holders implicitly reducing recoveries in a worst case scenario) but it delayed much-needed decision-making by giving the banks an 'out' for a few months.

The sad reality now is that liquidity is simply not capital and given the decompression in senior credit spreads, subordinated credit spreads, and the surge in LTRO stigma (as well as huge compression in equity prices), it seems the investing public is also seeing this. Either banks shrink their balance sheets dramatically (with the ensuing credit contraction driving Europe into a much deeper recession) or they raise capital, hugely diluting existing shareholders (since we can only imagine who would be willing to fund these black holes at anything like current market prices). To rub a little further salt into that wound, tomorrow will bring ECB margin calls and given the collapse in Italian and more so Spanish bond prices, there has to be some anxious margin clerks making calls right now given the ridiculously fine haircuts that were imposed on these bonds.


Source: Barclays

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Shizzmoney's picture

These aren't the droids your looking for?

hedgeless_horseman's picture



Liquidity Isn't Capital...

...unless you are a bank in the business of fractional reserve lending, then it most certainly is...until it is not, then socialize the losses, wash, rinse, repeat.

Attention sheep, the central banks and the banks are on the same side, and they are working against you, and with each other. 

This is not a government document, it is a bank loan (note) from a private bank and you are the cosigner:



LawsofPhysics's picture

Thanks HH,

don't forget about the counterparty risk associated with that document.  Get out of risk and get physical sheeple.

taniquetil's picture

But IMF Chair Lagards said everything was fixed!


And his holiness Bernanke said printing was good for the economy!


Are you telling me I can't trust elected officials anymore?

Vince Clortho's picture

Trust no one.  Especially elected officials, keynesian PhDs and central bankers.

On a side note: The "two party system" in the U.S. is a sick joke.

firstdivision's picture

Soon the FRBNY will be the largest shareholder of AAPL....through secondary sources of course.

Stoploss's picture

This is the part when your pushing that bent up shopping cart around, with the right front wheel a flapping in the breeze, right before it locks up on you, causing you to to almost break a rib when you hit the push bar.

Something like that.

Just aint good.

PaperBear's picture

Absolutely nothing has been fixed and more good money has been thrown after bad money.

Seize Mars's picture

Liquidity Isn't Capital: quite right. You can't print oil, you can't print manufacturing machines.

Let us never forget: fiat money is the most irresponsible far-reaching scheme ever. Period. A child would be admonished for this silly and obviously unsustainable idea. Remember when Neil Armstrong said "Isaac Newton is doing the driving right now?" Well right now, John Law is doing the driving.

Liquidity isn't capital, indeed.

Ghordius's picture

fiat money is an instrument of war and power projection and any empire competing against fiat-armed nations needs/wants it for short and medium term advantage. One nice example of short term advantage: devaluations.

Sometimes a nation can even transform a devaluation into a long term advantage, for example by keeping the industrial base mostly at home.

of course, if an empire does not restrain it's financial arm in the deployment of this instrument you have a "John Law" environment.

and if an empire allows unbacked/unregulated derivatives in the equation we have a total disaster. I wonder if banksters, in their typical ignorant fashion (knowledge hampers confidence), ever heard of MAD.

Seize Mars's picture

Every statist says this. "We need fiat, to see us through this time of crisis." Just like the "mystery war," the war of 1812. Hmm, suddenly George wakes up and sends his bottom-of-the-barrel, dregs of society troops to America. Burn down the white house! Show them a real scare. Of course they "lost," but we would up with a bunch of paper floating around. So it looks like George re-conquered America in 1812.

So now, Mr. Ghordius, show me a time or place when somebody "restrained" paper money. It's a lie.

Ghordius's picture

nah, don't call me a statist - just explain to me how you plan to keep an empire without fiat when the others do use the mighty printing presses

Seize Mars's picture

I see. Ok good point. My answer is that we won't keep an empire. It is collapsing right now. So we can choose to close our overseas bases and so on, or we will simply fall apart like the Romans. So voluntary or involuntary it is collapsing. So I understand your question; doesn't the tool of fiat enable a nation to swell into an empire?

The answer I believe is no, one first needs hard assets first that can be debt-saturated second. So the Russians could expand in theory but none of their precious natural resources have been utilized because one can't enforce contracts in Russia. Ditto for China.

So look at the Chinese central bank balance sheet. If you think the FED looks like a shit show...bang if we fall they all do.

LawsofPhysics's picture

Precisely, about time tyler presented something like this.  There is a very real cost for creating capital without adding any real fucking value to the system.

Alcoholic Native American's picture

Cash flow isn't profit but it keeps the game running.

Dick Darlington's picture

Oh dear, all the european darlings gathered on the left side of the chart. Now let's scream together: There's NO STIGMA!

slewie the pi-rat's picture

THERE'S NO fuking STIGMA, bIcHEz!   hahahaha!

battle axe's picture

I am a huge bid for Euro Sovereign Debt, there is your liquidity! (and then the men in white  coats  took me away to Bellvue Mental Hospital)

Python's picture

Some really smart people figured out how to make insolvency an income producing asset, securitize it, then sell it.  Surely these same people can make another fake asset out of liquidity and turn it into gold (for a fee, of course).

DormRoom's picture

If liquidity is flowing into enterprises that can't self-correct because of structural problems, then it's ineffective.  Worse, you need to constantly inject flow to maintain stability.


US & EU needs to fix the structural problems. But both entities suffer from severe political dysfunction.  So the structural problems continue.  And liquidity is used to prop up huge, and growing malinvestments.

mayhem_korner's picture

US & EU needs to fix the structural problems.


I think that "bridge out ahead" sign was passed a long time ago...

LawsofPhysics's picture

as well as capital, asset, and resource mis-allocation.

csmith's picture

Ticker for Spain's biggest bank: STD.


Nuff said.

schatzi's picture

To be fair, LTRO was supposed to give time not capital. Time they sorely need to solve their issues. Whether time alone is enough is very doubtful after having a glimpse at that evidence.

Dr. Engali's picture

No amount of time will allow them to sort through their issues. Look at Japan and how much time they had and they are still having issues. The real time they need is enough time to ramp up the police state.

Ghordius's picture

are you mentioning the "ramp up of the police state" in the US or in the EU?

Dr. Engali's picture

I know for sure it's ramping up here in the U.S and from everything I'm reading it seems to be ramping up in Europe too.

Ghordius's picture

In the UK is somewhat ramping up - I'm thinking at the love affair the Britons have with cameras. In France, some ramping up on the secret services and what you would call FBI-similies. Norway is discussing some small steps.

IMHO, we are at the levels we had before/during the Seventies, and at that time we had the Red Brigates, several anarchist groups, kidnappings of top bankers and politicians, kidnappings of whole olympic teams, mafia bombings, bombs everywhere. I personally knew three persons that were kidnapped (two killed, one released) and I was twice in a train station twenty minutes/two hours away from being in the middle of a bomb zone. We are used to terror.

But on the scale of Homeland Security? Even if we had the will, we would not have the money for this kind of ramp up.

Dr. Engali's picture

I agree with you and your comparrisons to the seventies. Sometimes I am startled by how much this time period resembles that period. It's like I'm reliving it ,except we have a much more dangerous militarized police state.

MachoMan's picture

It's because the system was poised to die then, just as it is now...  it's just the contortions are a bit different now... 

Shizzmoney's picture

Steve Keen talks about the acceleration of debt, and why PRIVATE debt is more of a key economic factor to look at as supposed to gov't debt:

GeneMarchbanks's picture

Depends where you are in the world. If you're an Aussie like him, yeah private debt matters much since the Australian government is much less indebted (relatively speaking). The rest of the west is a different story since the debt is now basically indistinguishable between the two.

eddiebe's picture

I suppose that means that money isnt really money anymore? It still acts like it at the store though, while commodities and gold are languishing. When this flood of con games 'money' finally breaks the dam of illusion and collusion, it will make 2008 look like a sunday picknick at the park with all the fixins. Got gold?

writingsonthewall's picture
"Liquidity Isn't Capital"


I disagree - it IS - as long as you can provide it FOREVER!!!!

(which I think is plan A...or B....or was it C?)

Neo1's picture

A Banksters defeatism nightmare, Being forced to Return to Real Money=United States Note=Lawful Money. The real reason you pay an income tax, is for the privilege of using a private currency. Also known As A:  Federal Reserve Note, Demand from your bank or brokerage, lawful money and the tax goes away, with a tax exemption on lawful money, all of your money is yours. Use the Remedy within the Federal Reserve Act.  Stop being a Slave!!!!!! 

Tax Exemption:  Web search these four different phrases: Redeemed in Lawful Money  or  United States Note  or Redeemed in Lawful Money Pursuant to Title 12 USC §411  or deposited for credit on account or exchanged for non-negotiable federal reserve notes of face value  

StychoKiller's picture

HOW does this help in an era of Direct-deposits?

Sandmann's picture

So Draghi now knows the difference between Capital and Liquidity. That is indeed progress, next he will tell us that he confused Solvency with Liquidity. Who would provide Equity to Banks ? They have fake Capital propped up with CDS to make themselves look like serious businesses, but on a risk-weighted basis they are simply Destroyers of Capital - the Mirror Image of the Real Economy. They are a Black Hole sucking out all physicals from the Universe and crushing them.

Draghi is a Banker and he does not comprehend what he has been doing. Typical Banker does not actually understand the economics of his own business.


eddiebe's picture

I disagree Sandman. These high level banksters know exactly what they are doing and why.

Sandmann's picture

On one level yes, but I really don't think Bankers understand the real economics of their business. They may know the P&L but not the real economics or they would not be attached like barnacles to thev Treasuries of Sovereign States. The funny thing is that Politicians think Bankers know what they are doing, whereas in fact Bankers are Idiots Savants rather than Intelligent.

Koffieshop's picture

Of cause he does. It's just that lying in public is part of the job for a central banker.
The higher someone is up the food chain, the less they can afford to say something honestly as they have to think of the tactical angle of everything.
If you think he is stupid, he is doing his job very well.

A better example is Bush Junior.
His well-meaning retarded redneck image was a cover. It allowed him to appeal to the "common man" and dodge "unwanted" questions.
Just see how he has "changed his ways"

eddiebe's picture

Could also be that Junior has a tell. When he's lying his ass off he can't seem to spit it out.  Think he sleeps at night without knocking himself out? Well yeh, probably. Sociopaths seem to be able to subdue any moral compass they may have. I seriously doubt he inherited one from his old man.

Koffieshop's picture

"Think he sleeps at night without knocking himself out?"

Is the Pope really Catholic or does he see himself as a successful crime syndicate manager?
Are the Israeli elite really race supremacists or are they just playing common sentiment?
Does the gypsy truth-teller really think she can read your hand palm or does she see her act as comforting entertainment?
Does the answer to any of these questions matter?

People seem to be able to stand a lot of cognitive dissonance as long as it means they continue a profitable gig. That's human nature for ya...

Quinvarius's picture

Gold is capital. And just like in 1980, nothing will get fixed as long as gold is held down at a vanity price. It needs to rise to the correct price to back the sovereign paper credibly.

tony bonn's picture

Liquidity Isn't Capital

the headline is an instant classic and iconoclast of the ages

slewie the pi-rat's picture

just keep papering over the cracks in the veneer; we can sit in the salon with all our fabulously rich parrot-like "friends" and no one will comment that the house is rotten to the core, snidely...