Market Slumps After European Banks Admit They Can't/Won't Raise Capital; Will Proceed With Asset Liquidations Instead

Tyler Durden's picture

It was about an hour before the market close, which means it was time for the latest FT rumor. Only this time, unlike the 3 or so times before, the bazooka was not only a dud, it caused the inverse reaction of that intended, and led to a broad market selloff. The reason: according to the FT (and certainly take this with a salt shaker if previous experience is any indication) is that European banks have balked at the prospect of recapitalizing at current levels ("Why should we raise capital at these [depressed share price] levels?” said one eurozone bank boss. The average European bank’s equity is trading at only about 60 per cent of its book value.) and instead will opt for asset liquidations. Now, whether they won't, or, as we have claimed since the first day we heard of the ludicrous "recap" rumors, they can't, simply because absent a massively dilutive rights offering, nobody in their right mind would lend to an industry which continues to be locked out of short-term funding markets for the 4th month in a row, is largely irrelevant. As a result no new money can come in: a key prerequisite to any European recapitalization plans. Of course, it is one for a "blog" to say that, it is something else for the FT to confirm it, even if it is a rumor. So what will banks do instead: why proceed with all out asset liquidation, and sell anything that is not nailed down. The strawman is that this is capital needed to fund the banks' requirements for higher capital ratios per Basel III and what not. The truth is that banks desperately need any capital just to operate as a going concern, forget some Basel Tier 1 ratio that will only be relevant in 2016. So yes: the bitter truth comes out - recap out; liquidations in, especially of USD-denominated assets. Next step: the realization that he who sells first, sells best. So yes, the "hope, idiocy and #mathfail" induced rally was fun while it lasted. And now it is back to reality.

From the FT:

This radical approach, led by French banks BNP Paribas and Société Générale, would be copied by lenders across Italy, Spain and Germany, bankers said. “Why should we raise capital at these [depressed share price] levels?” said one eurozone bank boss. The average European bank’s equity is trading at only about 60 per cent of its book value.


However, the banks’ “shrinkage” strategy is likely to prove controversial with politicians and regulators if it led to bankers lending less money to customers, jeopardising the eurozone’s fragile recovery, analysts warned.

As was reported earlier, it was Barroso who had a massively disappointing session earlier today, in which not only did he not announce any of the specifics on the EU bank recap plan (because they do not exist!), but demanded that banks scramble to raise their capital ratio, in essence undoing everything that had been done to the moment.

Mr Barroso stopped short of specifying the target ratio, but people close to the process told the Financial Times on Tuesday that the European Banking Authority, the regulator, is poised to set a higher bar than expected – a 9 per cent ratio of core tier one capital to risk-weighted assets – for banks across the continent. A deadline of six to nine months would be set for forceable recapitalisation by governments, if banks have not reached the ratio under their own steam.

But that, as noted, is merely the strawman to give banks cover before investors who demand to know the reason why banks are now scrambling to sell anything not nailed down.

Banks and their advisers said their scope to raise fresh capital from investors was all but non-existent. “I don’t think anyone has access to the markets now,” said one senior European investment banker. Investors are loath to commit to fresh equity injections, in the knowledge that the new money would simply be soaked up by sovereign debt writedowns, bankers said.

But by shrinking assets – the denominator of capital ratios – many banks believe they can reach the targets without resorting to government recapitalisation. In recent weeks, both BNP and SocGen have signalled plans to offload a combined €150bn of risk-weighted assets. Further businesses could now be sold. Italy’s Unicredit and Germany’s Commerzbank were likely to find themselves under most pressure to deleverage and divest assets, bankers said

The FT then proceeds with details about the latest, greatest and fakest stress test about to be unleashed which nobody will care about, as well as what the targeted cap ratio is. That is all irrelevant.

All that is relevant is that suddenly everyone will start wondering what USD-assets do European banks have in inventory that are about to hit any bid in the market. Some hints: stocks, CMBX and, you guessed, Prime-X.

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CashCowEquity's picture

whore themselves out....raise $ that way.....o wait they already did

DutchZeroPrinter's picture

Who will be the buyers? Nobody!

camaro68ss's picture

Let the bodys hit the floor, Let the bodys hit the floor, Let the bodys hit the floor, let the bodys hit the.....FLOOOOORRRRRR!!!!

trav7777's picture

60% of book value?  ROTFL

These banks are FUCKING BANKRUPT.  They HAVE NO BOOK VALUE.  They are trading at infinity times real book value.

Ancona's picture


I think I broke my schaudenfreude.

strannick's picture

Didnt anyone from Countrywide explain to these euro-banksters that you cant actually go ahead and sell assets, cause then the bidless 'bid' will show what they are worth in a mark-to market world, which is next to nothing?

Better instead to keep the crappy assets on the books, pretend they're worth their weight in gold, and wait for some shady Slovaks to push Sulik down a manhole so as to get on with the ECB bailout.

Mr_Wonderful's picture

Yeah, that is exactly the problem.

And it´s actually a very big problem for the FED as well.

They´re sitting on tons of pretty much wortless crap that they took off the hands of their owners, private banks. Now interest rates race upwards, resulting in fall in price of their supposedly good stuff, Uncle Sam´s paper. Since they´re leveraged like 60-1 against their capital they´ll probably be rendered technically insolvent fairly quickly if stocks continue rising and bond prices falling. In turn forcing them to start selling part of their bond portfolio thus contracting the money supply.  It´s a big conundrum, no wonder that markets have been getting increasingly unstable in the last months.



richard in norway's picture

usd denomatited assets. i think that means muni bonds and mbs

Mr_Wonderful's picture

Stock and bond prices obviously tend to move in opposite directions. As stocks rally they signal stronger economic activity and profits ahead, leading to increased demand for credit which in turn results in rising interest rates and thus falling bond prices.

This is a very big problem for financial institutions that are heavily leveraged against their capital. Never mind that part of their portfolio is pretty much worthless crap that isn´t priced to market.

It´s a very big problem for the mighty FED as well. As a matter of fact it is leveraged like 60-1 against its capital. It has capital of about 50 billion dollars against a bond portfolio of 3 trillion dollars. This is much worse than Lehman Brothers.

If money continues rushing out of bonds into stocks at the present rate I think the FED will be rendered technically insolvent fairly quickly. Except, that the brain-boxes that they are, last January they adopted an accounting change which allows them to book any losses on their portfolio as a liability to the Treasury, AKA the taxpayer. They would then simply book future profits against that liability and all would be well again. How they expect to balance this mess out is beyond me – frankly.

jeff montanye's picture

off topic but thank you so much durdens.

J 457's picture

Is money rushing out of bonds into stocks...?  Hmmmm.  Not quite.  The FED can never be insolvent as long as they print $$.

Quaderratic Probing's picture

Self hypnosis they believe their own BS

Western's picture

What's the natural logarithm of 1?

Miss Expectations's picture

trav, You had 2 up arrows and I just clicked the up arrow and your count went up to 22!  I must have special powers.  Let me continue on down the thread...

Libertarians for Prosperity's picture



Trav7777...  I am more than a little alarmed by your ignorance of simple mathematics, as demonstrated by your comment above.    

Anything multiplied by zero is zero; so, in fact, the "bankrupt" banks are NOT trading at infinity times book value. That's just silly. Had you put an asterisk after your post and made a coherent reference to the Dirac Delta function, I would have given you a mulligan, thinking perhaps you were just having difficulty trying to express an infinite value at a singular point (0). But you didn't - and because of that, I'm forced to believe that you simply don't have the slightest understanding of basic mathematics.

This is not the first time I've had to correct you.  Your chagrin is understandable. 




jeff montanye's picture

nit picker alert.  shaw has prevailed.  electronic fabian socialism is  real. well, at least all irregularities in english (irregularlties is tough, misspelled checked by att. among our president, barack obama.  and they spied for the cia.  however they have charming linesmen) but i digress:  reggie is right, sort of.  it is now go goes have goed, i is you is he is.  see the incindies (sp?) oedipal/electron.

Ned Zeppelin's picture

Buyers: The Fed or some vehicle which leads back to the Fed and/or ECB. A LSAP program would do nicely.

NotApplicable's picture

Swap line operators are standing by. Call now!

Jay Gould Esq.'s picture

So Miss Cleo now has her Series 7?

B9K9's picture

Sigh; so few actually get it. There are two basic alternatives:

(a) deflationary implosion where the PTB loses control.

(b) inflationary explosion where the PTB maintains control.

Do you really think Bernanke, POTUS, Congress & SCOTUS won't pull out all the stops to preserve the status quo? I mean, what good are both the military & police if they can't be used to control the People?

There is going to be a massive devaluation - the LSAP is only an inkling of what's in store. With gas above $10 and food out of reach, that's when price controls & rationing begin. And for those who complain, agitate and/or otherwise annoy the PTB? Ha ha, you get one guess.

Things that go bump's picture

How about us hoarders (food, gold)?  A shirttail relative of mine was reputed to be a hoarder during WWII and people looked down on him (presumably for his lack of patriotic zeal), but that was the worst of it.  I heard that in Europe hoarders who were caught got shot.

Shvanztanz's picture

I think a lot of people got shot that didn't have shit to hoard.

But yeah, if you are smart enough to hoard, you are smart enough not to tell your neighbor.


Manthong's picture

Screw the neighbors - it's my relatives I'm worried about.

centerline's picture

+1.  Put them to work.  Freeloading family that was too dense to listen to reason and prepare is going to have to earn thier keep!

Snidley Whipsnae's picture

"I think a lot of people got shot that didn't have shit to hoard."

Yeah, lots of old scores get settled while the cops are busy keeping the citizens from hanging some azz hats that deserve hanging and some citizens that don't. Another example of ...

'let no crisis be wasted'

When people get hungry do not go out for a look matter how curious you get. If you don't have a radio that picks up the HAM Radio bands plus local AM stations, get one. The first few weeks are going to be a sob...and, when 99% of the remaining citizens look like anerexics it isnt a good idea to walk around looking like Wimpy of hamburger fame. Use common sense.


Mr_Wonderful's picture

It´s very difficult to envisage any meaningful inflation in a debt-driven economy when 1. the debt bubble is bursting 2. unemployment is high and 3. there´s an overabundance of everything, cheap labor included, and technology and productivity race ahead.


slewie the pi-rat's picture

some "blogs" are more equal than others

the 100-day 'swap' from the US banksters has already liquified the worst sewage sludge;  the SNB is supportive; banksters & ministers have been meeting for months;  they just took 90 Billion (dollars?) of dexia's "problem" and gave it public guarantees.  then new "capital" took what was left and designed a new letterhead & co. logo.  as trav sez:  what assets?  the ones which are now gonna force out healthcare and pensions due to the public guarantees of the fuking banksterism crimes and frauds?  the "political" solution 4 europe = the same political solution 4 the USA:  privatiZe the profits and socialize the losses for the fascist uber-elitists

how many choices do you think a bunch of bankrupt douchebags have?  they can talk their way out, buy their way out, or shoot their way out.  we got em trapped up in a box canyon, BiCheZ!


Snidley Whipsnae's picture

Good points slewie... right now they are still trying to buy their way out (printing)... but that only leads to destruction of currencies... not that they are worth a crap now. I should use the term 'loss of faith in currencies', which is hyper inflation. With a few more can kicks we might see hyper inflation while experiencing credit collapse deflation... money and credit disappear from system. Some combo, eh?

I don't believe they will be able to print enough to do a partial system save without triggering loss of faith in the currencies. I could certainly be wrong... they have already pulled off far more than I thought they could.

I bought more pop corn today.

Translational Lift's picture

It's a bitch when reality suddenly appears!!

Shvanztanz's picture

United States Government issues global alert on increased threat of Al-Reality attack. Leading Al-Reality sources have reported a high likelihood of natural disasters, hurricanes and large fuel spills. Al-Reality also issued a threat recently to devalue currency, instigate class war not to mention a staggering 6 1980's TV shows to be made into movies over the coming year. 

Al-Reality has claimed responsibility for every death that has ever occurred, every bankruptcy and every episode of Joanie Loves Chachi ever made.

philipat's picture

And even for a "Massively dilutive" Rights issue, who would underwrite it?

Cynical Sidney's picture

eurozone is in a tailspin. the euro cannot and will not survive in its current form, neither could the european union. US markets will follow close behind, in fact america's financial picture is far worse compared to europe. we have by far the most debt and the size of hidden financial obligations are astronomical. once europe is set ablaze it'll engulf the us, asia and other emerging markets. politicans obviously have no clue how to deal with a systemic failure, they don't know how to unwind trillons of bad debts created by none other than the banksters. there are a few remedies on the table: eg global debt restructure/relief, one time flatline wealth tax to settle their bad fiat debts. i'd like to make it clear that america cannot afford to lead a path toward a civil war, a global war or the establishment of some nwo.

due to the thiefing ways of banksters and their control of their regulatory bodies, banksters executed a hyper over-leveraged buyout of our entire economy, transfering real wealth into fiat debt. thanks to them, he who has the most money has the most fiat debt. if the wealthy are taxed more it is rightfully so, it is not class war. if anything fiat debt and wealth destruction are the real class warfare here

Divided States of America's picture

Next step: the realization that he who sells first, sells best (price)


also means


Next step: the realization that he who buys first, buys worst (price)


also means


No willing buyers

Nascent_Variable's picture

Haven't you heard the latest rumor?  European banks are just hours away from being bailed out by the mysterious and wealthy Chinese investment bank, Fuk Yoo.

Dow 36,000.

NotApplicable's picture

Just as long as it's not Fuk Mi.

walküre's picture

The same bank that just launched the SS Dim Sunk?

Amish Hacker's picture

Not at all. There will always be a willing buyer at some price. If you're the first to sell, you sell to the highest-bidding buyer. The second seller won't get as good a bid as the first, and so on down the line. "Selling best" doesn't guarantee a profit, just that you're going to get the best price possible.  

When a Nash Equilibrium fails, it's a bar fight, and you definitely want to be first.

disabledvet's picture

Really? Forced sales should only be met with our noses upturned? Aren't we snotty-ville tonight. I imagine that includes all that gold that's being used as collateral for "the bank." How about Genzyme which is in the process of being bought by Sanofi-Aventis? Anywho it's just another global calamity. Makes me think...of music actually

Snidley Whipsnae's picture

"also means


No willing buyers"

The crap will fall till it hits bids of a couple of pennies on the dollar. Then TPTB will use their intermediaries to buy when the blood is in the street.

Ghordius's picture

"the euro cannot and will not survive in its current form, neither could the european union"


why? because it has become a matter of faith for some commentators?

try to convince Greece or Germany or Spain or Ireland to leave the Euro

try to convince the UK or Poland or Hungary to leave the EU

complaints don't necessarily results in divorce!

Ancona's picture

Why not whore themselves out. Any hooker will tell you it's a great scam, "You've got it, you sell still got it"! Kind of like gold leasing.....only different.

LongBallsShortBrains's picture

Reminds me of the difference between a drug pusher and a hooker......

A hooker can wash her crack and sell it again.

SilverRhino's picture

Silver's slowly coming back up ... so fuck it. 

redpill's picture

Central Banker: And I would have gotten away with it if it weren't for you meddling silver bugs *shakefist*


Rut roh Raggy!