Imitation is the sincerest form of flattery. The bailout bill discussions in the US have apparently emboldened politicians on the other side of the pond to suggest massive rescue efforts.
As we have said, one of our colleagues who has high level regulatory contacts in the US and Europe has been telling us for quite some time that European banks are in worse shape than ones in the US. That is plausible because they are more highly geared (ie, have less equity for every dollar of assets on their balance sheet), so their ability to take losses or writedowns is correspondingly lower. They were also active buyers of US mortgage-related paper, particularly the late-in-the-cycle, really drecky stuff. And some also have exposure to overheated domestic real estate markets, most notably Ireland, Spain, and England.
The calls from France are nevertheless curious, since heretofore (to my knowledge, people with insight into the French banks are encouraged to speak up) UBS is the European bank that is on most observers’ short list of financial firms that look to be at risk of real trouble, and much of the Spanish banking system has been on near-life support from the ECB. However, BNP Paribas is a major derivatives player, so they could have taken big hits on the Lehman failure, and SocGen took its well-covered loss from rogue trader Jerome Kerviel.
From the Times Online (hat tip reader Saboor):
France heaped pressure on Gordon Brown last night by floating an ambitious plan for a ¤300 billion (£237 billion) bailout fund to rescue crippled banks across Europe.
As the world held its breath on the fate of America’s $700 billion bank bailout plan, President Sarkozy was seeking the backing of European leaders for his own lifeboat.
Mr Brown also faced demands for action from British banks, furious that the Irish Republic’s unilateral guarantee of all bank savings on Tuesday was robbing them of precious deposits. The British Bankers’ Association, which represents high street banks, said that the move was anti-competitive and that it was raising the issue with Dublin. Some banks would like to see the UK respond with its own explicit guarantee….
Mr Sarkozy, whose country holds the European presidency, is seeking Mr Brown’s support before an emergency summit, scheduled tentatively for Saturday, with Silvio Berlusconi, the Italian Prime Minister, and Angela Merkel, the German Chancellor. His proposal was greeted with scepticism in Britain and outright hostility in Germany. It appears to involve the creation of a Europe-wide emergency fund that would be used to prop up banks when national governments are unable to intervene.
Ms Merkel said that Germany could not and would not issue a blank cheque for all banks, “regardless of whether they behave in a responsible manner or not”.
Amid the confusion and bickering between governments, France denied at first that it had put forward a proposal for a fund at all and then, after admitting that it had done so, denied that it would cost ¤300 billion. Paris said that the figure had come from the Dutch Government. Officials in The Hague said that they had no idea what the French were talking about.
Mr Brown is expected to announce his new crisis committee today or tomorrow at the same time as his reshuffle to replace Ruth Kelly, the Transport Secretary, who has asked to step down. Ed Miliband, one of Mr Brown’s key lieutenants, could be promoted. There is still a question mark hanging over Alistair Darling’s future as Chancellor.
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I've made a few comments along this line on various posts, but I wish someone would draw a * diagram of the options/plans out there.
I'm a finance outsider – between the fluff on CNN, the noise on CNBC and the insider debate of technical finance specifics, I can't get a real picture of how the different proposals would really unwind.
Reading various suggestions/proposals and being unfamiliar with the authors, its hard to tell whether the logic they use to arrive at their predicted outcomes is sound, let alone being able to tell if they're just "talking their book," or of intellect or standing to bother listening to.
There is a massive gulf out there between the line DC & the MSM are feeding the public, and the finance insider discussion – I don't know where the ego-blinded garbage on CNBC fits in (probably exactly where CNN does in my work in government, nowhere.)
I know this blog has been flooded by people armed w/ just enough scattered knowledge to be dangerous (not helpful nor wanted), but they're here b/c there's no middle ground. This may be an empty wish, but it'd be great if someone could illustrate the potentialities. I imagine the investment or media firm that does this now, and makes a big show of it, will gain real public confidence in the rocky fog ahead.
Similar illustrations of the roots of this would be helpful too.
* I can't recall the name of the diagram I'm thinking of. I had a science professor who was big on them. Basically, you start with your object/circumstance in the middle and branch out from there the various scenarios and their multiple potential conclusions.
Apple:
Eat it – enjoy it and get nutrition, live; enjoy it but get sick, die.
Don't eat it – eat something else, compost apple, have richer soil, seedlings more likely to thrive next harvest, live; eat nothing else, not get nutrition, die.
Perhaps there is an equal dose of politics and pragmatism?
An opportunity to coax Britain into the Euro in exchange for participation?
The French have been very quiet about their banks. BNP Paribas, Sociète Génerale, Natixis. I have not looked into them individually, but there are only so many ways banks could have made easy money over the past decade and it is my instinct that at least one of those champion nationales will require government recapitalization.
Le Figaro et Le Monde contain denials about a French “paulson plan”
At the same time the CAC40 is down 50% since its peak in mid 2007. Banks are not finding that easy money in equity markets anymore.
Unemployment and public works projects dominate public discussion, so there is not the hope they can rely on captive small to medium sized businesses on taking out loans.
Companies like EDF, Suez, Alcatel, SNCF, Airbus, Areva either get their capital from the government or international private equity and international banks.
French banks international operations are also not a source of hope. Where Banco Santander has exposure to South America, the French banks are losing market share internationally particularly with China’s no-questions-asked policy in China.
All signs point to eventual problems for French banks. If they had prepared for this, they would have the cash free to be participating in some international acquisitions right now. Sometimes what you don’t see is the most important information
I’ve been trying to take a break from the stress of trading and analyzing in this environment, and to spend more time smelling the ironic moments.
For example, yesterday Willem Buiter condemned the House failure to pass the bailout as “madness” and welcomed those against it to our Great Depression.
Yet today he condemned the increase of the FDIC backing from 100K to 250K as a ‘moral hazard.’ He advised that individuals with more than 100k monitor their banks’ solvency and move the money around as required.
Isn’t that a delicious bit of irony?
Each individual, without regard to their disposition, training and access to data is to be expected to do what the banks themselves could not do with other banks, having much better training and access to information.
And the banks still cannnot do it, which is why the credit markets are seizing. But my gran ought to be able to take a crack at it.
Simply delicious, the twists and turns of a priori reasoning foundering on the rocks of substance, and the sudden panic grasps for ‘anything that works.’
Its the little things that make life worth living.
To this layman, it seems like we’re in a giant game of chicken where it’s not clear who the drivers are and my best guess changes at least daily. Say the Paulson plan–asset swaps instead of equity injections or nationalization, coupled with unlimited authority–was crafted specifically to withstand the political heat that bailing out European banks would bring. Then with the vote in the House still a wild card, one might conclude that the Congress has caused the Europeans to blink, and perhaps even swerve.
Jesse.
That was great, thanks!
Although you point out a sophisticated irony, there is also a more superficial one. It was Buiter who chewed out the Fed at Jackson Hole for being subject to “cognitive regulatory capture” as in identifying overmuch with the world view and priorities of its charges.
Buiter appears to be hoist on his own petard.
Yves
LOOK AT THIS…
http://online.wsj.com/article/SB122291076983796813.html
I thought it might be a joke. It’s not.
Yves,
a pétard, indeed.
Hi carrick,
Aren’t they the same ‘experts’ who got us in this mess? Why do you believe them? Because they claim to be “experts”?
A good analogy is reduction in LDL cholesterol/ increasing HDL cholesterol to prevent heart attacks- turns out it does not work. All those doctors who were telling you to avoid fatty foods were also lying. Remember all those doctors telling you that low fat diets help you control weight- now it turns out that is exactly what you do not want to do. Same with those who tell you that controlling blood sugar with drugs without reducing carbohydrate intake reduces your risk of complications.
I can go on and on.. the sad reality is that the so called “experts” have been the wrong more often than right. This peculiar ability is due to the fact that becoming a publicly renowned expert involves preaching popular dogmas that have no relation to reality.
Don’t be intimidated by experts who tell you that you are too dumb to understand. The reality is that anything you cannot explain to a motivated adult of normal intelligence is probably BS.
2 questions that are underexplored.
1. Europe doesn’t have the institutions to do a bailout. How will this play out as the plumbing starts bursting over there?
2. Will our bailout leak into europe? I.e. are the europeans hoping that we will bail out their banks through the back door?
irony, indeed.
Thank you for this great site. I still have mixed feelings about America because of my american friends and this kind of blogs.
What the current administration is doing to America international image and position is litterally horrendous.
Two issues that have been explored
1) Why are some European banking and insurance companies bursting or on the verge of? The answer is “investment” (sic) in the US.
2) Who is in charge? This is a national issue. Do the way you want. This is tax payer’s money. One who is national not EC level.
Two questions that are underexplored.
1) Why this question of EC funding has arised at political? Probably because of our nutty neo-con “finance minister”, Madame Lagarde.
2) Why has Deutche Bank called for intervention at EC level? Probably because their losses are too high to be absorbed at german level. At least politically.
Francois said:
What the current administration is doing to America international image and position is literally horrendous.
Quite. Note that in another recent post, an excellent analysis by FairEconomist make it clear that the Hanke-Panke plan will help Bank of Goldman City and so forth, and accelerate the destabilisation of the economy.
The whole situation is quite reminiscent of the run-up to the Iraq war. In that case, the debate was limited by the neocon strength in government and the media to a decision between invading Iraq immediately and waiting five minutes and then invading them; other options such as not invading Iraq at all were ignored or ridiculed: the wisdom received from the neocon overlords was that such an idea was not fit for polite society.
In this case, despite severe criticism and plausible proposed alternatives from Soros and so many others, the debate is limited to passing the Hanke-Panke scam or being responsible for the end of life as we know it. Other options are simply ignored. The Senate puts another hundred billion and another few hundred pages on the pig, but fish, chicken and beef are simply not on the menu: there is not enough time to consider doing anything other than completing the destruction of the economy of the United States, adding a nice coup de grace to policies that appear designed to have produced exactly the present crisis situation.
In both cases, a crisis is manufactured and used as an excuse to do great damage to America and of course others also, with normal democratic processes curtailed and precedents set for dictatorial executive power.
One must ask oneself:
“Why DO they hate America SO MUCH?
"satan",
My point wasn't that blind faith should be invested in finance experts, but that Congress and the experts have failed to illustrate to the public exactly how their plans may unfold – Congress & MSM generally emotionally maneuvering us, and finance-insiders speaking to each other in their familiar tongue (technical/insider jargon & unspoken understandings that bypass outsiders' comprehension.) Not to suggest that I want to be taught at, I want a translation.
Several of the people I'm curious about and have seen referenced on here (O'neil, Faber, Hussman), have conflicting views and plans. Fleshing out their ideas is necessary and its ironic & telling that as the middle class is disappearing, were seeing Congress address the public more like ignorant peasants, while the real discussion is saved for the 'elites'* who can handle it (*don't mean to make anyone gag, couldn't think of a better word).
I don't expect the insider world of finance to take on the role of real journalists and elected public officials, but someone should be translating for them, and fueling the discussion of ideas – what are those people called?
This is what I don't see in Congress, CNBC, freelance blogs (not so much), or finance print (I don't follow this at length to be honest.)
I don't invest much faith in being 'rescued' from a fire by an arsonist, but they do know more about structural fires than your neighbor (or Congressperson.) I think you're more correct reserving doubt about their motivations & wisdom, than questioning their knowledge. That said, my point remains that they're failing to transmit what's happening to the public.
As always, informed people evoke good questions and incite discussion (pressure from the bottom up.) That should be accompanying this whole endeavor. We have neither right now. We're getting pressure (fear) from the top down to move this, and its irresponsible & shows incompetence, if not reason for suspicion.
I don't even see broad discussion of how the power in society is heavily shifting, what this means for our political institutions, individuals' power, etc. Something between the blackout & denial, and conspiracy theories – now rather than in a history book.
“…said they had no idea what the French were talking about.” Great. Note to self: try to get hold of my money ASAP, and bury it in my backyard.
French banks:
1/ BNP appears to be one of the biggest banks in the world to have dodged the bullet. It’s mentioned as an acquirer every time a weaker bank needs to be taken over (it made a bid for Fortis over the week-end).
2/ SocGen took a hit with Kerviel, but since Morgan Stanley paid big bucks to hire SG’s former head of Equity Derivatives (who resigned because of the Kerviel affair), the market seems to have decided there must be something in the Equity Derivatives franchise after all.
3/ Credit Agricole is the big French bank at most risk. All it needs is time. It has a big deposit base which can regenerate earnings.
4/ Of the smaller French banks, Natexis has been having the most problems.
5/ Dexia, one of the banks which had to be rescued this week-end, is Franco-Belge. But I’m sure the French think of this bank now as Belgian, not French.
With that said, the French don’t make these proposals unless they think they will benefit. So maybe the high officials know something we don’t.
Warren Buffett says European banks made the mistake of trusting geeks with computer models: http://mathoda.com/archives/433
Chère Yves,
the big French banks face some residual monoline, cdo and cmbs risk but by no stretch of the accounts (but obviously not, judging by some of the commentary, imagination) could they be termed “at risk”. BNP and SocGen are particularly well placed to pick up profitable pieces of weaker players. Even CASA, with the most US subprime exposure amongst its peers, can rest easy on a deposit base throwing of over 30% of its funding requirements.
But what none of them could negotiate are the ramifications of widespread baking failures in neighbouring EU countries (and that’s setting aside the greater interest of such an eventuality’s impact on the French economy).
Heading off the problems with a EU wide fund is naked self-interest – but not necessarily of the type indicating a bomb is about to go off in a major French banking group.
Salutations.
Sarkozy may have suddenly noticed that via Eurobank CDS exposure to AIG, and via the US bailout of AIG, the US has the European banking system by the throat. He would prefer European control over the outcomes for European banks.