Why Europe's Banks Are in Trouble

Here is an eye opening set of data by way of Paul Kedrosky at Infectious Greed and the sibylline Yves Smith at Naked Capitalism:

The European banks were levered up like the wilder investment banks on Wall Street.

But the AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe. This explains why AIG’s problems had sent shock waves through the share prices of European banks. For the time being the US Treasury has saved, inter alia, the European banking system, but given that AIG is to be liquidated European banks now have to scramble to find other ways of obtaining the ‘regulatory capital relief’ they appear to need urgently.

No wonder the European banks are scrambling so hard for liquidity. And a good part of that demand is for dollars given the markdowns they are being forced to take on their dollar assets being held for customers.

Europe seems to be much further behind the curve in dealing with its problems than the US, as bad as both of them are.

We wonder now how much of the pressure on the Congress is coming not only from Wall Street but also from Europe. This also helps one to understand Section 112 in the plan that calls for Treasury payments to non-US banks.

When push comes to shove, it appears that even Willem Buiter is not completely above the fray, and talking his figurative book:

Those whom the gods would destroy, they first make mad. The US House of Representatives has voted to reject the Emergency Economic Stabilization Act - the $700bn Treasury-funded facility for purchasing and managing toxic assets held by the US banking system.

Opposition to the proposal came from two different sources. A few remaining libertarians and believers in unfettered free enterprise voted against. Even when they recognise the risk that a calamitous collapse in economic activity may result, they view this as a form of creative destruction that is an integral part of a Darwinian market economy... Those who genuinely hold these views are mad, but honest and principled. I wish them a good depression...

A larger body of nay-voters consists of populist rabble-rousers or, worse, politicians who know better but follow the whims, fancies and passions of their constituents, even when this means that before long the real economy risks falling off a cliff...

Sorry for the delay Willem. The bailout check for your banks is in the mail.

"Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it, and the bill has been carefully written to make sure that can happen." - Brad Sherman , D-California"

Wealthy Buying Gold in Unprecedented Amounts Creating Shortages - Financial Times

And so it begins...

The Financial Times
Wealthy investors hoard bullion
By Javier Blas in Kyoto
September 30 2008 19:00

Investors in gold are demanding “unprecedented” amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen.

Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.

“There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career,” said Jeremy Charles, chairman of the LBMA. “The gold refineries cannot produce enough bars.”

The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds.

Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street’s woes. “It is a flight into gold because it is a physical asset,” he said.

“Vault staff are also doing overtime,” another banker at the LBMA meeting said, adding that investors in some countries were paying premiums of up to $25 an ounce above the London spot price to secure scarce gold bars.

Spot gold prices in London on Tuesday traded at about $900 an ounce, more than 25 per cent above the level before Lehman Brothers’ collapse. Although some traders said the rush into physical gold could boost prices, others cautioned that prices were depressing jewellery demand, capping any price gain. Industry executives said gold refineries and government mints were working at full throttle to keep up with investor demand, but acknowledged they were suffering from shortages, particularly on coins.

Johan Botha, a spokesman for the Rand Refinery in South Africa, which manufactures the Krugerrand, the world’s most popular gold coin, said the plant was now running at full capacity seven days a week. “Even so, now and then we have shortages,” he said.

The Austrian mint, which manufactures the Vienna Philharmonic, a popular gold coin in Europe, said it had extended work to the weekends to accommodate soaring demand.

Last week, the US mint suspended the sale of its American Buffalo coin after it ran out of stocks.

Kill the Bill v. 2 - Contact Your Elected Representatives and Let Them Know Your Thoughts

The Senate is expected to vote on their own version of the Bailout Bill tomorrow afternoon.

We hear the Senate bill will finally raise the FDIC protection for ordinary depositors to $250,000. For one year.


Contact Your Elected Officials by Email

The lobbyists are putting high pressure on the key Congressmen.

Financial companies are asking their employees to call and write their Congressmen to support the Bill.

Let them know what you think, whatever that might be.

And come this November, vote.

Under Section 112 of the draft Bill non-US financial institutions will be eligible for assistance if they lent to US banks or home borrowers.

SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES AND CENTRAL BANKS.

The Secretary shall coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101.