September Arrives, As Does The French "Dexia Moment" - France Nationalizes Its Second Largest Mortgage Lender

Tyler Durden's picture




 

September has arrived which means for Europe reality can, mercifully, return. First on the agenda: moments ago the French government suddenly announced the nationalization of troubled mortgage lender Credit Immobilier de France, which is also the country's second lagrest mortgage specialist after an attempt to find a buyer for the company failed. "To allow the CIF group to respect its overall commitments, the state decided to respond favourably to its request to grant it a guarantee," Finance Minister Pierre Moscovici said according to Reuters. What he really meant was that in order to avoid a bank run following the realization that the housing crisis has finally come home, his boss, socialist Hollande, has decided to renege on his core campaign promise, and bail out an "evil, evil" bank. Sadly, while the nationalization was predicted by us long ago, the reality is that the French government waited too long with the sale, which prompted the Moody's downgrade of CIF by 3 notches earlier this week, which in turn was the catalyst that made any delay in the nationalization inevitable. The alternative: fears that one of the key players in the French mortgage house of cards was effectively insolvent would spread like wildfire, leading to disastrous consequences for the banking system. End result: congratulations France: your Fannie/Freddie-Dexia moment has finally arrived, and the score, naturally: bankers 1 - taxpayers 0.

From Le Figaro:

Here comes another crisis that the new government could do well without. After the latest downgrade by Moody's, the fate of Crédit Immobilier de France (CIF) was sealed. After failing to find a willing buyer, the lender called the State to the rescue.

 

"To allow the group CIF to meet all its commitments, the government decided to respond favorably to its request to grant a guarantee," said Saturday the Ministry of Economy, confirming a report in Le Figaro. "This guarantee will be implemented subject to the approval of the European Commission and Parliament, which will be seized within the next Finance Bill," says the statement of Bercy. As in the granting of state guarantees for Dexia, the government needs the approval of Brussels under the State aid procedure.

 

The government supports the establishment to avoid panic on a large French issuer. Because if the CIF is a small branch network with 300 branches, more than 30 billion euros in loans bear its signature. However, the downgrade by Moody's gave investors the right to be reimbursed for certain bond lines. Therefore unable to refinance since the first degradation of the note in February, was moving rapidly towards the liquidity crisis. Friday evening, a board of CIF followed up with the inevitable next step.

Just so the French government doesn't look like it is folding like a cheap lawn chair after all those loud populist campaign promises, there was a casualty:

The government has set conditions for their intervention. One of them has already been met. Claude Sadoun, CEO of the banking system, leaves office. His successor will be chosen by the state. It is up to the banking group, owned 56 SACICAP, regional companies and local communities around the world HLM - prepare a resolution plan that will be presented in Brussels.

In other words, France just had its Dexia moment, roughly one year after the Belgian bank suffered the same fate, and 4 years after America's had its own Fannie/Freddie mortgage lender nationalization incident. Looks like history will rhyme yet again.

Finally, we can only hope the name CIF sounds familiar to our readers: after all, this first major shift in the insolvency contagion in the direction of Europe's core was predicted here, to the dot, just over three months ago.

From May 20, 2012

The Mortgage Crisis Hits France Front And Center: Are French Bank Nationalizations Imminent?

Name the plunging bond below:

If you said some sovereign or corporate issue based out of Spain, Italy, Ireland, Portugal, or even Greece you would be close... but no cigar. No - the bond in question is an issue of Caisse Centrale du Credit Immobilier de France (3CIF), which together with its sister entity CIF Euromortgage (CIFE), is  a 100% subsidiary of Credit Immobilier de France Development (CIFD), which as Fitch describes it, is a French "housing loans specialist, with business exclusively directed to France." CIFD is in turn owned by Procivis Group, which just happens to be France's second largest full-service real estate group.

In other words, CIFD, together with its subsidiaries 3CIF and CIFE represent a critical glance into the functioning (or lack thereof) of the French mortgage market. The various CIF mortgage entities are related as per the following Org Chart:

A brief summary on the Procivis Group, of which the CIF entities are a part of, via Fitch (bear with us - this is important):

Business

 

Mortgage financing in France continues to be predominantly distributed through the biggest retail and saving banks in the country. Specialist banks thus have a modest cumulative market share (10%-12%), but benefit from their wide range of products to maintain their franchise. CIFD offered 15 products at end-2011 and has developed some innovative services (eg, price insurance under which the difference between the sale price and the original price paid by the borrower, if negative, is covered up to EUR40,000 by the insurer). Its specialisation and its strong expertise in the French housing market represent key strengths compared with more global peers, as they enable the group to provide bespoke products to its customers. CIFD extends loans predominantly to private individuals, but also caters for investors' needs. The latter accounted for c.21% of the bank's loan portfolio at end-September 2011. While CIFD has its own widespread lending network, approximately 65% of the loans originated by the SFRs in 9M11 were brought in by intermediaries such as real estate agents, building property developers and brokers. CIFD is also trying to extend the number of bilateral partnerships it has with corporates. On top of loans to employees of the French groups Electricité de France and Gaz de France (EUR1.2bn loans combined at end-2010, 9M11 new loans up 30% yoy), the bank launched an offer with Crédit Social des Fonctionnaires in September 2011, targeting first-time home-buying civil servants. CIFD's SOFIAP subsidiary is dedicated to providing housing loans to SNCF employees (French railway company).

 

Ownership

 

CIFD is owned by 56 Sociétés Anonymes Coopératives d'Intérêt Collectif pour l'Accession à la Propriété (SACICAPs), whose mission is assigned by the state despite their private-sector status, and which together with Procivis Immobilier make up the Procivis group. The SACICAPs use dividends up?streamed from their competitive subsidiaries to grant subsidised housing loans and build social housing in cooperation with local authorities and social housing entities. Procivis Immobilier is France's second?largest full-service real estate group.

 

The SACICAPs are held by numerous shareholders that, by law, have to include local authorities and social housing entities. Shareholders consist principally of local institutions. Fitch does not believe they can be relied on to support CIFD in case of need.

 

Solidarity Mechanisms Within CIFD

 

A cross-support mechanism has been in place since 2004, and covers all the entities of the group. Under this mechanism, each member's commitments are backed by the equity of all group entities, including non-controlling interests. CIFE benefits from this mechanism, but does not contribute to it. Additional solidarity requirements exist through the group's status as a "réseau" (equivalent to a network under French banking law), under which its central body –CIFD – has the power to enforce any measure that it deems necessary.

 

Corporate Governance

 

CIFD is not publicly listed, and the level and frequency of financial disclosure, although satisfactory, reflects this. The 12 members of CIFD's board of directors are representatives of the SACICAPs. The undiversified nature of CIFD's business and the moderate size of its operations help to facilitate control and oversight of the bank's operations by the executive team and the board of directors.

 

Strategy

 

Given the prevailing depreciated economic and market environment, which weighs on lending volumes, interest margins and fees, the bank's profitability is likely to be under significant pressure over the next couple of years. Expanding its insurance solutions, leveraging alternative commercial channels (eg, bilateral partnerships), maintaining a high degree of specialisation, and continuing its cost integration are the cornerstones of CIFD's strategy.

 

Within a continued period of market turbulence, clear emphasis has been placed on maintaining sound liquidity and cautious risk monitoring.

* * *

For the longest time, CIF was well off everyone's radar. All that changed two weeks ago, on May 8, when trading of securities issued by 3CIF and CIFE was suspended at the request of French and Luxembourg regulators, the Autorité des Marchés Financiers and the Commission de Surveillance du Secteur Financier. The result was an immediate plunge as there was little to no additional clarification about the sudden trading halt, leading many to speculate the worst - namely that underlying operations had deteriorated substantially, to the point where little to no collateral and/or cash flow was left to service liabilities.

It subsequently surfaced that the halt was driven by a failure of the bank to file accounts by an April 30 deadline, which in turn prompted speculation that the group's rating would see multi-notch downgrades, something which as explained below, would have profound impact on the wholesale market-funded mortgage lender, as well as on the far broader French cover bond market

Peripheral news only made it worse. As IFRE reports, "A report on French news website Mediapart likened the bank to Northern Rock. Last month, the same news outlet had warned of the risk of a small French Lehman Brothers, without naming the entity, explaining that a severe downgrade could activate some expensive guarantee mechanisms similar to margin calls. Moody’s had indicated in February that it could downgrade 3CIF by up to four notches, as part of a sweeping European bank rating review. The second Mediapart story was published on Tuesday, a public holiday in France. Unsurprisingly, the senior bonds, which remained free to trade, came under huge pressure the following day."

Sure enough not only bonds of 3CIF, but more importantly, of covered-bond issuer CIF Euromortgage were likewise crushed beginning Tuesday:

But the biggest wildcard was what rating Moody's would cut 3CIF to as part of its wholesale bank downgrade initiative announced back in February. Well, on Thursday the rating agency released its updated view on 3CIF, which in many ways was a crushing blow to the company which now has no choice but to be nationalized:

Moody's Investors Service has today downgraded the standalone bank financial strength (BFSR) of Caisse Centrale du Crédit Immobilier de France (3CIF) to E/caa1, outlook developing, from C/a3 on review for downgrade. The rating agency is maintaining the review for downgrade initiated on 15 February 2012 on 3CIF's long- and short-term debt and deposit ratings of A1 and P-1, respectively.

 

The long-term ratings now incorporate 12 notches of systemic support (previously two notches), based on the rating agency's view that the French public sector is highly likely to provide both financial support over the short- to medium-term and assistance in orchestrating a longer-term adaptation of 3CIF's business model, which is currently unviable. Should such support not be forthcoming promptly, or should attempts to achieve a longer-term solution fail, Moody's would expect 3CIF's long-term debt rating to transition down close to Caa1 (the standalone financial strength rating implied by 3CIF's BFSR).

In other words, Moody's has given France a loud and clear notice that while it will has not yet downgraded the non-standalone ratings of 3CIF, so critical for various collateral call arrangements, absent explicit government support, or an acquisition of the troubled lender by a third party, this downgrade would be imminent as "The long-term ratings now incorporate 12 notches of systemic support (previously two notches), based on the rating agency's view that the French public sector is highly likely to provide both financial support over the short- to medium-term and assistance in orchestrating a longer-term adaptation of 3CIF's business model, which is currently unviable." 

To summarize: 3CIF has an "unviable" business model whose long-term rating would be 12 notches below the provisional and pending downgrade A1 currently retained, or roughly Caa1. Needless to say, a Caa1 rating would unleash a full blown AIG-type collateral call on every entity in the org chart shown above.

Sure enough, Moody's continues:

Should such support not be forthcoming promptly, or should attempts to achieve a longer-term solution fail, Moody's would expect 3CIF's long-term debt rating to transition down close to Caa1 (the standalone financial strength rating implied by 3CIF's BFSR).

It gets worse:

Moody's decision to downgrade 3CIF's BFSR to E/caa1 from C/a3 is based on the rating agency's assessment that the bank is no longer
viable without ongoing financial support and ultimately a more durable solution. While 3CIF's interest margin and asset base have shown some resilience throughout the recent crisis, its business is entirely wholesale-funded, thus making it vulnerable to debt market disruptions and to loss of investor confidence. The firm currently has very limited access to private-sector financing, and the rating agency sees no prospect of that changing in the foreseeable future. Moody's notes that the trading of securities issued by 3CIF and CIF Euromortgage was suspended on 8 May 2012 at the request of the French and Luxemburg regulators, the Autorité des Marchés Financiers and the Commission de Surveillance du Secteur Financier.

 

The rating agency notes that the group has a policy of maintaining a liquidity buffer equivalent to at least six months of financing needs. This should leave the group with sufficient liquidity to meet maturing debt obligations for several months. However, given recent developments, Moody's believes that there is a high risk that this liquidity buffer will erode steadily over that period. These significant liquidity risks imply that the group is likely to become wholly reliant on liquidity support from the French public sector, and ultimately to require some form of more permanent solution, which would likely involve a merger, strategic investment, or other joint venture with a third party facilitated by the government. Moody's believes that the group's adjusted BFSR/standalone credit assessment at E/caa1 reflects this risk. The developing outlook reflects the uncertainty surrounding the strategy of the bank and the authorities' plan to address the weakness in the bank's funding profile, as well as the potential for the group's financial strength to be materially improved, if a credible strategy were to emerge.

Which means that France's new president has one option only: to step in and bail out a bank within days of his inauguration, or else see the first domino of the housing market tumble.

At the same time, Moody's has raised its assumptions of systemic support to reflect its view that the French public sector is highly likely to provide liquidity assistance over the short- to medium-term if required by 3CIF, in order to allow time for a longer-term solution to be identified and implemented. Moody's also considers it likely that the French public sector will provide assistance in orchestrating a longer-term adaptation of 3CIF's business model. The rating agency's expectation of a strong willingness on the part of the government to support 3CIF reflects the importance of the bank's lending activities to the French housing market, especially in assisting less privileged households, and the broader implications of further disruptions in 3CIF's operations. A further factor underpinning Moody's assumption of government support is 3CIF's public sector ownership via the 56 "sociétés anonymes coopératives d'intérêt collectif pour l'accession à la propriété" (SACICAPs), which are social housing companies that operate under private law with a locally-anchored and diversified ownership, spread across "colleges" including social housing associations ("organismes HLM") and local governments ("collectivités territoriales").

Moody's logic explained: everyone hates banks and bankers, but when their jobs is to "assist less privileged households" bailing everyone out is ok. Better still, would be if someone were to come and purchase CIFD outright. Sadly, as Retuers reports, this isn't happening:

The issuer has been put up for sale with HSBC acting as an advisor to the borrower, financial daily Les Echos reported last Thursday. HSBC has refused to comment.

 

The search for a buyer has so far proved fruitless. Caisse d'Epargne, part of the BPCE Group, and Banque Postale, which is currently looking to grow its retail covered bond business, were considered strong possibilities. BPCE, however, has ruled itself out, while Banque Postale has declined to comment.

 

An acquisition of 3CIF by La Banque Postale, a government-backed institution, could be an indirect nationalisation and would have the added bonus of avoiding any involvement from the French Treasury.

Alas, as IFRE adds, Banque Postale just denied any such speculation:

Caisse d’Epargne, part of the BPCE Group, and Banque Postale, which is currently looking to grow its retail covered bond business, are strong possibilities for a merger, a source said on Wednesday. However, a spokesperson for BPCE dismissed the suggestion that it might be a suitor.

Which leaves just one option:

A direct nationalisation would likely mean some form of capital injection - an unpalatable outcome given the new government rhetoric and the fact that the existing owners' stake would have to be wiped out. CIF is 100% owned by 56 regional cooperative entities.

Oops. And to think that Hollande was so dead set on an outright war with bankers... The realization that his very first act of any importance would be an outright nationalization just makes things so very amusing.

The saga could have political implications for newly-elected president Francois Hollande who promised the French electorate he would not bail out the country's financial institutions at the expense of the taxpayer.

 

"3CIF have no choice but to be nationalised," said a senior official at a French bank. "It has already done the rounds with French banks and it looks like no one wants to buy it."

 

The nationalisation option was echoed by other bankers, who point to 3CIF's conservative residential mortgage lending operations as well as its reliance on wholesale funding.

And while Hollande's dithering would likely have disastrous implications for one specialist mortgage provider, the reality is that the fallout would be far, far greater, if CIF Euromortgage were to suffer the same fate as its pari passu sister entity. Because as the following thoughts from BNP confirm, the fun is just getting started.

On 30 June 2011 CIFEUR had covered bonds outstanding with a total volume of €24.8bn. 74% of the collateral of these bonds consisted of CIF senior mortgage securitisation tranches, the rest of the cover pool comprised of a mix of Mortgage Promissory Notes, Replacement Assets and external European RMBS tranches. At the end of 2011, the over-collateralisation stood at 6.7%. The covered bonds are currently rated Aaa by Moody’s (on review for downgrade) and AAA by Fitch. The issuer states that its annual covered bond funding needs range between €3 to €4bn.

 

According to a report from Fitch from July 2011, proceeds from the senior securitisation tranches and external RMBS tranches are accumulated in an account held by 3CIF. The internal guidelines of CIFEUR specify that its exposure must be towards banks that are rated at least P1/F1, a downgrade of 3CIF below that level could therefore force CIFEUR to find a different account bank. This in turn would mean that cash flows accumulating from the asset side would have to be held outside the group. If 3CIF acts as swap counterparty for CIFEUR, a downgrade of 3CIF could also create the need to find alternative swap counterparties.

 

The suspension of the covered bonds, which is an unusual step, has caused spreads to widen both in the group’s unsecured and covered bonds.

 

We expect spreads in CIFEUR’s covered bonds to remain under pressure as long as the uncertainty about the reasons for the suspension and the speculation about the group prevails. Despite this uncertainty, we hope that the systemic importance of the covered bond product in France (market volume is in excess of €300bn) would be reason enough for official bodies to deal with this matter in a manner that avoids market disruption and reputational damage as much as possible.

Bottom line: absent Hollande breaking his key election promise, not only does the French mortgage market "get it" once Moodys follows up with the non-standalone rating downgrade (forget French Fitch - they will never issue a report that will results in the slow-motion death of the French mortgage market), but the contagion immediately spreads to the entire French covered bond market on the sudden uncertainty whether the French state will backstop the hundreds of billions in related bonds, putting the entire concept of a "covered bond" in jeopardy, with potentially sweeping consequences to a trillion+ market.

As to questions of how CIFD allowed its funding and liquidity to, stealthily, get to a point where the entity needs an immediate nationalization of its suddenly "unviable business model", here it is from Fitch:

Liquidity is managed through a significant ECB-eligible-for-repo asset portfolio (EUR1.8bn after a haircut at end-November 2011). Moreover, through CIFE, the bank has the ability to package covered bonds from its own loan portfolio, which could be used as collateral for repo with the ECB, although packaging would require a three- to four-week delay. The two sources of liquidity provided a combined EUR3.2bn buffer at end-November 2011, which would have allowed the bank to sustain an eight-month period without any access to wholesale markets while maintaining the projected new lending volumes at the same time (against an internally set six-month limit). Instances of closed secured funding exist (end of 2008), and CIFD has successfully used its packaged loans for repo transactions with the ECB. Since 2008, CIFD has stopped buying RMBS and now favours covered bonds.

Ah yes, nothing like the ECB quietly stepping in and providing "liquidity" in exchange for repoable collateral of worthless value... until the stakes get so high that the lack of even one cent in incremental pledgable collateral results in something nobody could have foreseen, namely a full blown bank run.

Something tells us we have seen this before... Oh yes - Greece, Ireland, Portugal, Spain and of course Italy. In other words, as CIF was running out of real assets, the ECB allowed it to hypothecate via the repo market whatever dregs it could scrounge, (even if that meant bonds which are a liability yet promptly converted into an asset by the magic of shadow banking's repo operations), on and off balance sheet, and pledge to Mario Draghi in exchange for 100 cents to the Euro collateral value: precisely what prompted us to explain back on March 21, when the market was at its 2012 highs, "Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming)."

At the end of the day, Europe's main problem was, is and continues to be the active disappearance of any and all cash and money good assets, as well as collateral, as it is increasingly pledged (or re-pledged once repo mechanisms get involved) to other financial institutions, and primariliy to the ECB, in exchange for short-term funding (read loans, further explained here "Encumberance 101, Or Why Europe Is Running Out Of Assets").

Alas the can kicking time is now over. And what many took for sacred previously, such as the French mortgage market, has suddenly, just like every other contraption of modern financial markets, been shown to be simply the latest naked emperor in a city full of in kind dressed supreme rulers.

And what it all boils down to is this: will Hollande, for all his pompous rhetoric, immediately do what the market expects him to, which is to unleash the French nationalization machine, first with CIFD, and soon, many other insolvent banks, or, will he stay true to his word, and watch as risk assets crash and burn all around him. Perhaps the question is better posed to the French citizens: is their hatred of bank bailouts greater than the fear of facing the fair value of all assets absent central bank and sovereign backstops?

Which, incidentally, is the number one question that will once again face everyone in the "developed" world. Back in 2008 the answer was made clear, even with a solid dose of buyer's remorse in the years that followed. What will it be this time around? Because if Greece has so far been the only country willing to let it all go, and prepare to exist in a world unburdened by a bank-imposed status quo, the only reason for this is that Greek citizens have already lost so much, that the opportunity cost to overturning the status quo is virtually nil. What will it be the taxpayers of all other developed, pardon insolvent welfare-state, countries?

0
Your rating: None
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 09/01/2012 - 16:34 | 2755368 Thomas
Thomas's picture

French toast.

Sat, 09/01/2012 - 16:45 | 2755377 BlackholeDivestment
BlackholeDivestment's picture

666 is what it will be 

    that is plain to see

                                 Mark of the Beast 

                                            ...BITCHEZ!!! 

...umm, that's burnt French Toast.

Sat, 09/01/2012 - 16:52 | 2755397 Colombian Gringo
Colombian Gringo's picture

Only when I see a return of the Guillotine for the Banksters will  I consider investing in

France.

 

Sat, 09/01/2012 - 17:38 | 2755461 Troll Magnet
Troll Magnet's picture

ok i'll say it.

FUCKING BULLISH, BITCHEZZZ!!!

Sat, 09/01/2012 - 17:44 | 2755467 Stackers
Stackers's picture

Next cover of the Newsweek ...... " We Are All GSE's Now "

Sat, 09/01/2012 - 19:35 | 2755562 Manthong
Manthong's picture

Fanifredidexia??

Sounds serious.

Sat, 09/01/2012 - 19:48 | 2755577 Pure Evil
Pure Evil's picture

Hollande The Socialist, who knew?

Is that anything like, Obama the Usurping Marxist Kenyan?

Sat, 09/01/2012 - 21:15 | 2755682 Ahmeexnal
Ahmeexnal's picture

It's about time the bank runs started.

GAO finds 16 trillion scam from the FED to it's shareholding banking buddies:

http://www.silverdoctors.com/gao-audit-reveals-fed-gave-16-trillion-to-t...

Sat, 09/01/2012 - 23:24 | 2755788 SMG
SMG's picture

More like Hollande The Muppet.  They all are.  Lord help us.

Sun, 09/02/2012 - 02:29 | 2755903 Ghordius
Ghordius's picture

It's boring for some, but I always fear confusion:

President Hollande is the leader of the French Socialist Party. This guy is proud of being called socialist. They are Social Democrats, btw.

If the US had a similar political setup as France, I believe 15%-20% of Americans would have a similar party with a similar political agenda.

Sat, 09/01/2012 - 20:27 | 2755624 AurorusBorealus
AurorusBorealus's picture

What's your FICA score?  666? Higher?

Mon, 09/03/2012 - 01:42 | 2757121 Buck Johnson
Buck Johnson's picture

Your totally correct, it's about over and we will see craziness.

Sat, 09/01/2012 - 16:46 | 2755385 Squid Vicious
Squid Vicious's picture

I think it's still called Freedom Toast in the bowels of the Capitol Building, circa 2003

Sun, 09/02/2012 - 00:59 | 2755857 Colonel Klink
Colonel Klink's picture

Uh I think anything in the bowels of the capitol building is called shit!

 

Circa current day and for about the past 30 years.

Sun, 09/02/2012 - 08:10 | 2756043 Chuck Walla
Chuck Walla's picture

Merde!

 

FORWARD SOVIET!

Sat, 09/01/2012 - 16:40 | 2755373 lolmao500
lolmao500's picture

How long before Obama nationalizes JPMorgue or GS? Or probably it's the other way around that's gonna happen. GS will privatize the government.

Sat, 09/01/2012 - 18:23 | 2755451 Zero Govt
Zero Govt's picture

it'll be 'politically unacceptable' to directly bailout JPM (again?) and GS (again??) so here's how it's going to work

nobble a large bank (easy to do as they're all leveraged to fuck) and under the guise of a "rescue" funnel vast amounts of funny money into the dead dinosaur to bailout the other dead dinosaur (GS or JPM) who is taking them over

turd sugar coated, everyone can wash their hands and look like firefighters instead of firestarters, the elite stumble on drunk, more rotten and bloated than ever

Sat, 09/01/2012 - 20:36 | 2755639 Meesohaawnee
Meesohaawnee's picture

what do you mean politically un acceptable? thats what QE is.. a bank bail out. Call a spade a spade

Sun, 09/02/2012 - 10:02 | 2756139 theTribster
theTribster's picture

Already did, most Gubmints have been privatized by GS. They own the world and JPM owns all that's in it, we are fucked unless and until we take out the bankers and the current financial system - period.

Sat, 09/01/2012 - 16:42 | 2755376 midtowng
midtowng's picture

Reality won't have arrived in Europe until Greece defaults.

Sat, 09/01/2012 - 16:47 | 2755388 JLee2027
JLee2027's picture

When you give somebody more money so they can repay you a prior loan, they have already defaulted.

Sat, 09/01/2012 - 17:01 | 2755403 BlackholeDivestment
BlackholeDivestment's picture

...is that not the nature of the derivative beast? lol, or is that just a Goat?

Sat, 09/01/2012 - 17:32 | 2755450 hedgeless_horseman
hedgeless_horseman's picture

 

 

When you give somebody more money so they can repay you a prior loan, they have already defaulted.

I think The Bailout Game was explained pretty well in The Creature From Jekyll Island:

Chapter 3
Protectors of the Public

Summary

The game called bailout is not a whimsical figment of the imagination, it is for real.  Here are some big games of the season and their final scores.

 
In 1970, Penn Central railroad became bankrupt.  The banks which loaned the money had taken over its board of directors and had driven it further into the hole, all the while extending bigger and bigger loans to cover the losses.  Directors concealed reality from the stockholders and made additional loans so the company could pay dividends to keep up the false front.  During this time, the directors and their banks unloaded their stock at unrealistically high prices.  When the truth became public, the stockholders were left holding the empty bag.  The bailout, which was engineered by the Federal Reserve, involved government subsidies to other banks to grant additional loans.  Then Congress was told that the collapse of Penn Central would be devastating to the public interest.  Congress responded by granting $125 million in loan guarantees so that banks would not be at risk.  The railroad eventually failed anyway, but the bank loans were covered.  Penn Central was nationalized into AMTRAK and continued to operate at a loss.  

 
In 1970, Lockheed faced bankruptcy, Congress heard essentially the same story.  Thousands would be unemployed, subcontractors would go out of business, and the public would suffer greatly.  So Congress agreed to guarantee $250 million in new loans, which put Lockheed 60% deeper into debt than before.  Now that government was guaranteeing the loans, it had to make sure Lockheed became profitable.  This was accomplished by granting lucrative defense contracts at non-competitive bids.  The banks were paid back.  
.
.
.
In 1982, Chicago's Continental Illinois became insolvent.  It was the nation's seventh largest bank with $42 billion in assets.  The previous year, its profits had soared as a result of loans to high-risk business ventures and foreign governments.  Although it had been the darling of market analysts, it quickly unraveled when its cash flow turned negative, and overseas banks began to withdraw deposits.  It was the worlds first electronic bank run.  Federal Reserve Chairman Volcker told the FDIC that it would be unthinkable to allow the world economy to be ruined by a bank failure of this magnitude.  So, the FDIC assumed $4.5 billion in bad loans and, in return for the bailout, took 80% ownership of the bank in the form of stock.  In effect, the bank was nationalized, but no one called it that.  The United States government was now in the banking business.


All the money to accomplish these bailouts was made possible by the Federal Reserve System acting as the "lender of last resort."  That was one of the purposes for which it had been created.  We must not forget that the phrase "lender of last resort" means that money is created out of nothing, resulting in the confiscation of out nation's wealth through the hidden tax called inflation.  


The Creature from Jekyll Island, G Edward Griffin.  2002 American Media, Westlake Village, CA. p 63-65.   Previously lifted here.           

Sat, 09/01/2012 - 23:49 | 2755805 MiltonFriedmans...
MiltonFriedmansNightmare's picture

The book of which you speak is the bible and should be required reading for all high school seniors.

I mention it to everyone I meet.

Sat, 09/01/2012 - 17:09 | 2755411 Peter Pan
Peter Pan's picture

Lending money to repay a previous loan is nothing compared to the US government where new loans are taken out to pay the interest and then more loans to pay the interest on the interest.

Sat, 09/01/2012 - 17:34 | 2755437 BlackholeDivestment
BlackholeDivestment's picture

LMAO Pete, and the ''Vote 2 Party Dial 666-ADD-Debt'' offers of temptation, founded upon the strong delusion, define the market algo spike byte from the market Apple Whore of Babylon, and the words ''you shall not surely die''. LMAO.  

http://www.youtube.com/watch?v=0A5t5_O8hdA

Sat, 09/01/2012 - 20:34 | 2755632 AurorusBorealus
AurorusBorealus's picture

 

Come hither; I will shew unto thee the judgment of the great whore that sitteth upon many waters:

With whom the kings of the earth have committed fornication, and the inhabitants of the earth have been made drunk with the wine of her fornication...

http://statueofliberty.org/Statue_of_Liberty_Picture.html

For all the nations have drunk
    the maddening wine of her adulteries.
The kings of the earth committed adultery with her,
    and the merchants of the earth grew rich from her excessive luxuries.”

Sun, 09/02/2012 - 00:45 | 2755852 Joseph Jones
Joseph Jones's picture

In Revelation John the beloved refers to Jerusalem as "Babylon."  Babylon can not possibly refer to the Romish "church" because the Hebrew (not "jew"ish because there is no such thing as the word j-e-w till the play by Sheriden in 1775 A.D., yes sorry you stupid or naive goyim but Jesus was certainly not a j-e-w) temple still stands in Revelation whereas Constantine started the Romish "church" in 4th C. A.D. 

Sun, 09/02/2012 - 01:31 | 2755872 bank guy in Brussels
bank guy in Brussels's picture

Not right about the first use of the word 'Jew' ... In Jesus' time the Romans and Greeks were using the similar words in their languages, for the Roman Empire it was the Latin 'Judaeus' ...

English form 'Jew' shortening the Latin, seems to go back to the 1200s ...

From Webster's re the word 'Jew':

« Middle English, from Anglo-French ju, jeu, from Latin Judaeus, from Greek Ioudaios, from Hebrew ... Judah, Jewish kingdom
First Known Use: 13th century »

Sun, 09/02/2012 - 03:22 | 2755908 Ghordius
Ghordius's picture

you, you Judean Resistance League suicide squad leader, you

Mon, 09/03/2012 - 08:25 | 2757361 YuShun
YuShun's picture

Furthermore, Christopher Marlowe wrote The Jew of Malta in 1589 or 1590.

Sat, 09/01/2012 - 22:42 | 2755764 Walt D.
Walt D.'s picture

P.I.K  = default

Sat, 09/01/2012 - 17:21 | 2755438 debtor of last ...
debtor of last resort's picture

You will default before Greece. Just like me.

Sat, 09/01/2012 - 19:10 | 2755541 supafuckinmingster
supafuckinmingster's picture

Midtowng: "Reality won't have arrived in Europe until Greece defaults."

 

Greece defaulted already earlier in the year. But it was called a private sector creditor haircut or some such horseshit.

A rose by any other name and all that.............

Sat, 09/01/2012 - 16:43 | 2755379 vinayjha
vinayjha's picture

It will be interesting to see how french people react when 75% tax is in force. 

http://www.freefdawatchlist.com/2012/08/weekly-outlook-sept-4th-sept-7th-dow.html

Sun, 09/02/2012 - 17:38 | 2756691 Ghordius
Ghordius's picture

The highest marginal tax rate in the US during Isenhower/Nixon was 91%.
75% will not cause a second storm on the Bastille.

Sat, 09/01/2012 - 16:44 | 2755382 Squid Vicious
Squid Vicious's picture

I'm gonna say this is... bullish!!

Sun, 09/02/2012 - 10:57 | 2756204 machineh
machineh's picture

Isn't that what Tyler already wrote:

'September has arrived which means for Europe the rally can, mercifully, return.'

Oops, I read 'rally' for 'reality.' Maybe it's all the same anyway ...

Sat, 09/01/2012 - 16:48 | 2755389 blunderdog
blunderdog's picture

Ah, for the good old days, when folks were still worried about Europe's THIRD largest economy.

Sat, 09/01/2012 - 17:13 | 2755391 Dr Benway
Dr Benway's picture

LOL. The self-professed socialists and capitalists are in reality both cronyists, and their actions identical.

 

They just call it different things. Socialists would call it nationalizing assets that previously were mismanaged by private sector and be ok with it, and capitalists would call it a vital capital injection to revitalise the housing and finance markets.

 

Besides, by this point everything just seems so inevitable, it's like a well-known endgame in chess like rook-and-king versus king. No matter what jawboning or fingerboning occurs.

Sat, 09/01/2012 - 16:51 | 2755395 chunga
chunga's picture

American mortgage lenders should not be nationalized.

They should be pulverized and upper management thrown in prison.

A Modest Proposal to the MA Commissioner of Banks August 30, 2012

This proposal makes too much sense, is fair, and would go a long way in preventing complete economic collapse.

 

As should be anticipated, those likely to be oppressed by failing to enact such measures will react sheepishly, if at all.

 

On the contrary, those few positioned to enjoy the benefits of such oppression will label this proposal as draconian, highly destructive, and representing the height of arrogance... a "Moral Hazard".

 

This has been their habit and so it shall be.

Sat, 09/01/2012 - 16:54 | 2755399 Mae Kadoodie
Mae Kadoodie's picture

Le Bonus.

Sat, 09/01/2012 - 17:00 | 2755401 Ineverslice
Ineverslice's picture

Ah, yes...September.

Trois...deux...un,  Bank Run.

Sat, 09/01/2012 - 17:00 | 2755402 falak pema
falak pema's picture

this is old news. CIF was taken under the government umbrella some time ago, more than three month ago as ZH had pointed out. The bank has been under napthalene since then under the supervision of the government inhouse pseudo bank Caisse des Dépots. This shows the chickens are coming home to roost in the professional/social housing real estate sectors in France. We are in for a long slow/fast meltdown as without government stimulus and bank credit lines the RE sector in France will start sweating fast. Fortunately there is no glut like in Spain. But what is on the market can get marked down by 30% if the market slumps as it probably will. Its all part of deflation chimes which TBTB don't want to hear. They prefer the Draghi sonata of 'we will fix this recession which is NOT a depression" song; but for how long more? 

 

Sat, 09/01/2012 - 17:15 | 2755426 lotusblue
lotusblue's picture

I agree.This will jump start ALL the housing gremlins we've had in US.Additionally I think

French housing market will collapse much further than %30.

French people will not stand for bailouts so believe mortgage jubilee in offing.Or,, equity reductions.

This may be the catalyst of meltdown in europe if not worldwide!

All the best humans!

Sat, 09/01/2012 - 17:20 | 2755434 falak pema
falak pema's picture

What is amazing here is the bail out. This is a private company of 60 cooperative groups specialised in government subsidised housing through strong political lobbying over thirty years. They were owned by/tied up to no deposit bank. They borrowed money on the market. So the risk of a bank run was minimal here. It was a pure political decision. Someone is trying to stop the housing market from plunging. Its totaly contrary to Hollande's avowed position. I am sure this will start a stink in parliament.

Sun, 09/02/2012 - 18:07 | 2756719 Nassim
Nassim's picture

It is clear to me that it is not just the Socialists who are trying to make things look dandy!

If you read the top of the French Figaro article - le Figaro is definitely not socialist - you will see the following in bold type:

Le gouvernement est contraint de voler au secours du petit prêteur immobilier sous la menace d'une crise de liquidité. Son PDG a quitté ses fonctions après un conseil d'administration de crise.

Here is a translation:

The government was forced to rescue the small mortgage lender under the threat of a liquidity crisis. Its CEO has resigned after a board crisis.

Please note the use of the word petit (small)

It is supposed to be the "second largest mortgage lender" in France so it is a bit ridiculous to call it small.

Sat, 09/01/2012 - 20:08 | 2755602 in4mayshun
in4mayshun's picture

Oh please! People will put up with whatever the bankers dish out. The sheeple have shown what ignorant cowards they are time and time again.
This means nothing in the grand scheme. It will only embolden the criminals even further.

Sat, 09/01/2012 - 17:03 | 2755408 Peter Pan
Peter Pan's picture

When banks go belly up they get taken over by government. When governments go broke, who takes them over? And in any case how can bankrupt governments take over bankrupt banks?

Sat, 09/01/2012 - 17:21 | 2755440 Zero Govt
Zero Govt's picture

When banks go belly up they get taken over by government. When governments go broke, who takes them over?

the bankers usually ...i know, i know, sounds crazy but it's a small (incestuous) world politics

And in any case how can bankrupt governments take over bankrupt banks?

actually it's the other way round, it's a reverse takeover as the banks takeover Govt which was their front sales office anyway and has been for hundreds of years (you just never knew it)


Do NOT follow this link or you will be banned from the site!