Wednesday, 6 June 2012

Markets won't wait

So, Europe's banks still have no access to money because they won't lend to one another. They won't lend to one another because the risk of unquantified, hidden liabilities is unknown. Unquantified, hidden liabilities include a share of the world's $500 trillion in the Russian-doll's nest of derivatives that fuelled the boom. In addition, the Open Market Value of the property against which Spanish banks have secured their loans is about half the value the banks are using. Best estimates of the UK banks' share of the residue of worthless derivatives, once all the trades have been collapsed back, is about $10 trillion. As the Mail reports today, the aggregate value of all the privately owned residential property in the UK is only $8.6 trillion; in other words, if every single penny of our own equity in our homes were assigned to the banks, they would still all be bust. 

The reaction of European governments has not been to let the banks fall, but to convert bank debt to public debt, by socialising the banks' losses. Except that many governments, being completely broke, need to borrow the money to buy the banks' debts and the markets will only lend to them at prohibitive rates of interest. In the Eurozone, the answer being proposed is to pool all government debt, allowing Germany to strengthen the weak periphery - but this requires fiscal union, which needs, erm, political union.

The timescale for this is away in 2013 and 2014 at the earliest. The timescale for a government-forced split for UK banks between retail banking and casino recklessness is even further - 2017. This is all fantasy; the markets simply won't wait. Soros gives it three months, I give it until August. However, we can get through this - if we're ruthless. We need a Bill ready to go, to pass all its stages in 24 hours, to split the banks immediately, with a mandatory penalty of whole-life imprisonment upon conviction for any banker who attempts to subvert funds away from the retail bank sector. Let the casino arms fail, and take their $10 tn of worthless derivatives with them.  


Barnacle Bill said...

It is action such as you describe Raedwald that should have been taken by the Buffty frae Kirkcaldy but he bottled that one as well.

Whilst it is pleasing to see the MSM finally waking up to something we bloggers have been saying for years.

Namely that our banks are bankrupt.

It is the though of who is in charge now and to whom we look for action/relief that sends a shudder down my spine!

Jackart said...

Except that it wasn't dodgy casino banks which went bust, but common or garden mortgage banks.

The "worthless derivatives", CDSs for example were the only debt markets to stay liquid during the crisis.

Glass Steagal UK would not have prevented the crisis, and may have made it worse.

cuffleyburgers said...

Raewald - what Jackart said.

The problem in Spain for example are the cajas - a substantial part of the original problem in the US and UK was Freddie Mac and Fannie Mae and the likes of Northern Rock and HBOS.

Even in Germany the Landesbanks are wobbling.

For me the real problem is:
a) the determination of the PTB in the EU that the euro shall not fail combined with
b) the belief that bankers should not lose money on sovereign loans combined with
c) the belief that bankers shoud also not lose money on their loans into property bubbles

As far as I can see what we have here is what the Italians call, "the dog chewing its own tail" . The amounts of money as you point out are so grotesquely big that the normal palliative of pissing taxpayers' money into the breeze will obviously not work.

I think we should just collapse the whole thing - a three week orgy of bankruptcies, netting out positions, and "meeting triumph and disaster and treating those two imposters just the same" during which we can expect half the world's banks to go bankrupt and the other half to buy them after which we can resume normal life.

Anonymous said...

"Aint gonna happen" is it.
The political trash are in this up to their necks.
They would go down with them ,they will,but they have chosen to hang on a bit, all they have done is buy themselves some time.
There is no event that can save them now.
Local co-op banks are the answer.
We pull our money out of the big banks then put it back in our own.
Now that would be true deregulation.

Raedwald said...

Cuffleyburgers - I don't deny the extent of the junk real estate sold to junk debtors problem as being at the heart of all this, nor that short-termist, opportunist politicians over the globe allowed it to happen; greed, avarice, recklessness all over.

I like the idea of a global collapse, a general default; the other two ways of getting rid of the $500tn of derivatives (inflate it away or write it off) are either too painful or too long term. Shareholders and bondholders will take massive hits, many wiped out but hey they've had their cake already

Just so long as we don't end up with a few massively powerful banks - a multiplicity of dull, plodding retail banks is what's needed, separate from the pirates.

Johnm said...

Except that the banks do not have any resouce to pay their depositors. They are extended way past that, to the extent that they can only pay their depositors about 3% of what they have deposited in the banks. It's called "fractional- reserve-banking", with a small fraction. As long as the FR ponzi-scheme/scam trundled along with unknowing customers/depositors everything was fine. Now they know. Of course, if the banks go down, so does your one of its assets. They may never have actually lent you any money, but you still borrowed with the house as security. Think about it. Practically every business would be unable to function. No wages paid. Every loan still needing repayment.

stuartrc said...

Raedwald dear boy,

The £10 trillion number you quote is rather misleading. This number represents the gross notional value of the derivatives and not their net preset value (or settlement value).

If we take interest rate swaps as an example the agreement is usually that one side pays fixed rate interest on the notional amount and the other side pays floating rating interest on the notional amount. The fixed is usually the BOE base rate and floating is usually 3 month libor. The settlement amount is the difference between the fixed and floating legs or the swap i.e.

settlement amount = ((fixed rate - floating rate)* notional amount))/4

note the i assume market convention of quarterly settlement hence divided by 4.

So our banks actual liability to the IRS market is actually something like 0.05% of notional (assuming fairly close correlation between libor and base rate) or £5 billion.

And that assumes the banks are on the wrong side of every single trade which is unlikely!

As for Europe - well your analysis is spot on

Raedwald said...

stuartrc - the UK net liability of $10tn is the FT's figure. I appreciate your efforts to spin this, but that's the UK's net liability of the global $500tn when all the trades are collapsed down.

Your suggestion that our net liability is $5bn rather than $10tn is, frankly, absurd.

Tarka the Rotter said...

Well, mandatory life sentences for corrupt bankers is one thing, but what about the politicians who set the framework within which the banks operate? How about the same medicine for all politicians who cock up?

stuartrc said...


I'll be honest the use of the word "spin' annoys me because it implies I have an agenda - which I don't apart from a degree of accuracy.

I stand by my view that using the gross notional figure of derivatives you are overstating the risk the UK is exposed to. from the Bank for International Settlements

"After an increase of only 3% in the second half of 2010, total notional amounts outstanding of
over-the-counter (OTC) derivatives rose by 18% in the first half of 2011, reaching $708 trillion
by the end of June 2011
(Graph 1, left-hand panel, and Table 1).1 Notional amounts
outstanding of credit default swaps (CDS) grew by 8%, while outstanding equity-linked
contracts went up by 21%.
Gross market values2 of all OTC contracts declined by 8%, driven mainly by the 10%
reduction in the market value of interest rate contracts. CDS market values were almost
unchanged. Overall gross credit exposure3 dropped by a further 15% to $3.0 trillion,
compared with a 3% decrease in the second half of 2010."


So I stand by my statement that you grossly mislead on the financial risk OTC derivatives create by using an inappropriate metric.


Anonymous said...

Quite frankly, the whole descriptive (OTC, derivatives, CDS etc) shows exactly WHY we're in this bloody mess in the first place.
WHO the f**k invented this cr@p???

Cascadian said...

Your analysis is sound, EXCEPT we know Camoron's government is inept and could never manage such legislation on short notice.

However counter-intuitive it may seem, perhaps it is time for individuals to remove their assets from the high street banks and deposit them in Iceland. They appear to be the only jurisdiction that have learned the lessons from 2008.