Weeeeee?
This doesn’t seem good:
The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain’s GDP. Fortis bank, which has been in the news recently, has a leverage ratio of “only” 33, but its liabilities are several times larger than the GDP of its home country (Belgium).
If I read the rest of that post correctly, Credit Suisse and the French financial institutions seem to be in okay shape. The others, not so much.
22 Responses to “Weeeeee?”
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September 21st, 2008 at 2:57 am
Are you reading the rest of that post correctly? The table at the bottom doesn’t seem to be in any particular order.
September 21st, 2008 at 3:43 am
Well, what’s the worst that could happen?
Don’t answer that.
September 21st, 2008 at 4:33 am
The “stock” of canned goods in my garage just shot through the roof. And yes – gin is a canned good.
September 21st, 2008 at 6:59 am
From the VoxEU post: “But at the same time most large European banks also report regulatory leverage ratios of close to 10. Part of the difference is explained by the fact that the massive in-house investment banking operations of European banks are not subject to any regulatory capital requirement. Another part of the explanation must the regulatory arbitrage, for example though the credit insurance offered for example by AIG.”
Without doing the calculations, I would bet that a large part of the difference is that accounting and regulation interact differently in the US and in Europe. In the US, you need sale treatment to get regulatory capital relief. In Europe, you don’t so long as the asset transfer meets certain risk transfer requirements. Furthermore until recently, most securitisations were off balance sheet in the US, but on balance sheet in Europe. Consequently hundreds of billions of euros of assets show up on the balance sheets of European banks which would be off balance sheet in the US, but they get the same regulatory capital relief as they would in the US (kind of, anyway – it’s a bit more complicated than that). The basic point being that, for the most part, the European banks’ leverage ratios mainly look worse because of the differences between US GAAP and IFRS and how they deal with risk transfer. The US figures will look much more like the European figures when the changes announced by FASB this week are implemented in 2010.
September 21st, 2008 at 7:12 am
The Swiss tend to be conservative, so I’m not surprised that Credit Suisse isn’t as vulnerable as some others.
September 21st, 2008 at 7:41 am
There are at least two other disturbing observations in this article. First, the Federal Reserve is now insolvent and must depend on the Treasury for infusions of money. That means that the Fed has lost its independence. Second, “In all likelihood, the large increase in US government debt under way will be matched by increased monetary financing of the deficit.” That means deliberate inflation, doesn’t it?
Are we really going to do this without a reasoned debate? Is there no cheaper way to avoid economic calamity? I don’t feel so well.
September 21st, 2008 at 7:59 am
the German government cannot order (unlike the US Treasury) its central bank to issue more currency.
This is bungled. The Treasury cannot ‘issue currency’. The Federal Reserve can, in theory, but never does. The Treasury in this case is going to borrow the money. It’s right there in black and white. They are increasing the debt limit to accommodate the new borrowing.
It is possible that as a last resort the Fed will monetize this, which doesn’t mean print the money. The Fed has a couple of hundred billion dollars in cash left which it could use to buy up the Treasury paper and thus fund the bailout. This isn’t printing. Still, if and when they do monetize the world will probably move against the dollar and all outstanding Treasury paper, which amounts to near $10 trillion now. Interest rates will spike disastrously. The cure will be worse than the disease.
If the Fed ‘prints’ the money then all bets are off. While currency debasement is the lynchpin of the modern fractional reserve banking system it’s done in an incremental way which everyone accepts. If they know it or not everyone accepts a certain amount of inflation. Inflation is a necessity of the system. Since the Fed was created in 1913 the dollar has lost 97% of it’s value on a purchasing power basis. However the amount of dollars is a huge order of magnitude larger. Everyone is much richer. So we accept it.
To prove inflation is necessary for the system to operate just look at two periods. The Great Depression was a period of asset deflation. Today, right now assets are deflating and the system is collapsing. There is no acceptable level of deflation. Deflation means collapse. Period.
This is monetizing but not printing. Printing is worse and almost unimaginable.
September 21st, 2008 at 8:08 am
The Fed is not insolvent. Think of the Fed as the Treasuries bank account. The Treasury is going to sell bonds in order to fund the Feds operations in the Fannie Freddi operations and others.
There is a compilation in understanding this because the Fed operates the auctions, the sales, of Treasury bonds bills and notes. Then it gives the dollars to the Treasury. It acts as the agent of the Treasury. Rarely if ever has the Treasury raised money this way and told the Fed to keep the dollars. Still, logically it’s just government spending. No different than any other. From sending out SS checks to sending millions to Halliburton for delivering sail boat fuel to Iraq.
By giving the money to the Fed from the sale of bonds they are absolutely rejecting the printing option.
September 21st, 2008 at 9:26 am
question:
are these guys using ‘billion’ in the american (1000 million) or french (million million) sense?
i’m hoping the american sense, because that’s bad enough.
but why would they? does the e.u. in general use the american (”short-scale”) system?
September 21st, 2008 at 10:59 am
Matthew hasn’t gotten the word — the US citizen is ALSO bailing out FOREIGN Banks.
From http://news.yahoo.com/s/politico/20080921/pl_politico/13690
———
“In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department’s mortgage bailout, according to the fine print of an administration statement Saturday night.
The theory, according to a participant in the negotiations, is that if the goal is to solve a liquidity crisis, it makes no sense to exclude banks that do a lot of lending in the United States.
Treasury Secretary Henry Paulson confirmed the change on ABC’s “This Week,” telling George Stephanopoulos, calling the coverage of foreign-based banks “a distinction without a difference to the American people.”
———-
Paulson is right. If you’re being sodomized with a broken beer bottle, you probably can’t tell if it is a Coors bottle or a Heineken.
September 21st, 2008 at 11:03 am
By the way, does anyone have any idea why the SWISS company UBS gave such a big salary to former Senator Phil “Enron” Gramm?
Hey, Phil bankrupted roughly 10,000 of his Texas constituents who worked at Enron –and who saw their life savings go up in smoke from Phil’s whoring.
Trust the Swiss to spot a man with potential.
September 21st, 2008 at 11:14 am
This is a big deal. There is going to be a problem with the Treasury bail-out plan. The problem is that most the toxic debt issued by US banks and institutions are held by foreigners. Unless we bail them out too (and this seems only possible if they have a big enough (?) US presence), then the US banks are going to compete on a non-level playing field because the Treasury will clean-up their balance sheets.
The non-US banks will have 2 choices. Either petition for a bailout from their central bank (good luck with that) or block the US bail-out. How? By bringing an action against the USG in the WTO. My guess: this will be in the works within two weeks.
September 21st, 2008 at 11:30 am
Under the Paulson bailout, foreign banks will also be eligible for the U.S. taxpayer financed bailout.
Well what the hell, it’s a global economy, isn’t it? Why shouldn’t U.S. taxpayers be obligated to support the world’s billionaires as well as ours?
Can’t wait to see Pelosi & Reid buy into this one.
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