Quantum Pranx


As the world crumbles: The ECB spins, the Fed smirks, and US banks pillage

with 2 comments

by Nomi Prins
Posted November 21, 2011

OFTEN, WHEN I TROLL AROUND WEBSITES OF ENTITIES LIKE THE ECB AND IMF, I UNCOVER LITTLE OF STARTLING NOTE. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies.

That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic – an interactive Inflation Game (I kid you not)  where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens.

What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it’ll happen) swoops in to provide “emergency” loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of  tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then…..you see where I’m going with this.

We’re doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries.  It’s not about inflation – it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It’s not the ‘inherent’ weakness of national economies that a few years ago were doing fine, that’s hurting the euro. It’s the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our subprime market through a series of toxic, fraudulent, assets.

Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri,  entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip” (The paper does not ‘necessarily represent the views of the IMF or IMF policy’. )

The paper is full of mathematical formulas and statistical jargon, which may be why the media didn’t pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out.  And it’s fascinating stuff.

Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US subprime asset crisis, and more specifically, the advent of  Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set.

The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.

Greek banks bought US-minted AAA assets and leveraged them. Norway did too (through the course of working on a Norwegian documentary, I discovered that 8 tiny towns in Norway bought $200 million of junk assets from Citigroup, borrowed money from local banks to pay for them, and pledged 10 years of power receipts from hydroelectric plants in return. The AAA assets are now worth zero, the power has been curtailed for residents, and the Norwegian banks want their money back–blood from a stone.) The same kind of thing happend in Italy, Spain, Portugal, Ireland, Holland, France, and even Germany – in different degrees and with specific national issues mixed in.  Problem is – when you’ve already used worthless collateral to borrow tons of money you won’t ever be able to repay, and international capital slams you in other ways, and your funding costs rise, and your internal development and lending cease up, you’re screwed – or rather the people in your country are screwed.

In the IMF paper, the authors convincingly make the case that it wasn’t just the US subprime asset meltdown itself that initiated Europe’s implosion, but the fact that our Federal Reserve and Treasury Department adopted a reckless don’t-let-em-fail doctrine. Even though Bear Stearns and Lehman Brothers failed, their investors, the huge ones anyway, were protected. The Fed subsidized, and still subsidizes, $29 billion of risk for JPM Chase’s acquisition of Bear. The philosophy of saving banks and their practices poisoned Europe, as those same financial firms played euro-roulette in the global derivatives markets, once the subprime betting train slowed down.

The first fatal stop of the US bailout mentaility was the ECB’s 2010 bailout of Anglo Irish bank, which got the lion’s share of the ECB’s Irish-bailout: $51 billion euro of ELA (Emergency Loan Assistance) and $100 billion euro of regular lending at the time.

After the international financial community saw the pace and volume of Irish bank bailouts, the game of euro-roulette went turbo, country by country.  More ‘fiscally conservative’ governments are replacing any semblance of population-supportive ones. The practice of  extracting ‘fiscal prudency’ from people and providing bank subsidies for bets gone wrong has infected all of Europe. It will continue to do so, because anything less will threathen the entire Euro experiement, plus otherwise, the US banks might be on the hook again for losses, and the Fed and Treasury won’t let that happen. They’ve already demonstrated that. It’d be just sooo catastrophic.

In the wings, the smugness of Treasury Secretary Tim Geithner and Fed Chairman, Ben Bernanke is palpable – ‘hey, we acted heroically and “decisively” to provide a multi-trillion dollar smorgasbord  of subsidies for our biggest banks and look how great we  (er, they) are doing now? Seriously, Europe – get your act together already, don’t do the trickle-bailout game – just dump a boatload of money into the same banks – and a few of your own before they go under  – do it for the sake of global economic stability. It’ll really work. Trust us.’

Most of the media goes along with the notion that US banks exposed to the ‘euro-contagion’ will hurt our (nonexistent) recovery. US Banks assure us, they don’t have much exposure – it’s all hedged. (Like it was all AAA.) The press doesn’t tend to question the global harm caused by never having smacked US banks into place, cutting off their money supply, splitting them into commercial and speculative parts ala Glass-Steagall and letting the speculative parts that should have died, die, rather than enjoy public subsidization and the ability to go globe-hopping for more destructive opportunity, alongside some of the mega-global bank partners.

Today, the stock prices of the largest US banks are about as low as they were in the early part of 2009, not because of euro-contagion or Super-committee super-incompetence (a useless distraction anyway) but because of the ongoing transparency void surrouding the biggest banks amidst their central-bank-covered risks, and the political hot potato of how many emergency loans are required to keep them afloat at any given moment.  Because investors don’t know their true exposures, any more than in early 2009. Because US banks catalyzed the global crisis that is currently manifesting itself in Europe. Because there never was a separate US housing crisis and European debt crisis. Instead, there is a worldwide, systemic, unregulated, uncontained,  rapacious need for the most powerful banks and financial institutions to leverage whatever could be leveraged in whatever forms it could be leveraged in. So, now we’re just barely in the second quarter of the game of thrones, where the big banks are the kings, the ECB, IMF and the Fed are the money supply, and the populations are the powerless serfs. Yeah, let’s play the ECB inflation game, while the world crumbles.


2 Responses

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  1. The ECB is the money supply in this game. Fine. I think somehow that Frau Kanzlerin Merkel has spotted this, which is why it isn’t being leveraged in the way that France and their not-so-happy banker friends would wish for.

    On the 1st of December comes another whammy. Quieter this time, for derivatives is not a game for the faint hearted. On this day, dealing in such niceties as naked credit default swaps becomes illegal in the European Union (including Britain, aka London).

    The London bankers will be hurriedly ferrying monies to their US based subsiduaries so that they can continue the game of pressure the individual eurozone countries’ bond markets. With London effectively out of the game this coming December, there will be a lot for London to worry about. They have bet the farm on a Eurozone failure, and have been engineering this through manipulating the bond prices. This is relatively easy because you can make money on this, just so long as the bond price continues upwards, through a function called collateral calling. This is where I get a little sketchy myself, for I am new to derivatives and their nastiness. For those of you who know me however, I learn fast and I learn well. You can expect to see me back here again. To cut a complicated story short, the buyer of a naked CDS can ask for money to be paid out on this instrument should the bond price in question go up.

    The problem is that if the bond price goes down, the counter-party can ask for the holders of the naked CDS to pay instead. Whilst little mention was made of the Italian bond sale that went wrong – the CDSs had been bought at around 6,5% and the sale was over-subscribed at 6%. There are a lot of people in Italy with euros that they want a better return than the bank will give them. There are a lot of people in London whose noses got bloodied by this small mis calculation.

    When Italy next goes to the markets, the Italians will be back again. Oh, sorry, that was today. The bond sale was over-subscribed by 50%, so demand is dwindling. The problem is that demand is dwindling too slowly for London. The trap snaps shut next week, and London is already in panic mode to look at the newspapers.

    London’s problem is – and always has been – an unwillingness to understand how foreign cultures do things. To make things easy for themselves, they assume that greed overcomes all. Which is fine until you take local considerations into account. In this case that the Italian manner of expressing greed is to have €8,6 trillion stashed away in savings. That – at a rough guess – is probably 40 times as much money as is saved in Britain today. The sort of savings that the Italians and Spanish have make the bond auctions look a very good deal indeed. What is more, for all the expense, Italians have a history of paying on their bonds. Greece does not, which means for all the ratings agencies kerfuffle over Italy’s credit worthiness, the Italians themselves are more sanguine. It must be rememebered that Italians know both their market and their history, which is more than can be said for the agencies.

    So, with Italy on the one hand and the banning of naked CDSs on the other, it is not looking very good for London. If the bankers and hedge funds have to pay out much more, there isn’t going to be much that they can then send to their US subsiduaries. Indeed it is going to hurt Britain’s GDP figures rather badly, and this means Britain’s gold-plated AAA rating. With that in doubt, which it already is if you listen carefully to Mervyn King, Britain will be paying a lot of money for its borrowing. That of course is taken care of by De la Rue and friends.

    If – and this is entirely possible – the bond markets start to glide downwards, the pressure on London will beging to ratchet up. Once that happens, the corks will start popping and a few hedgies will turn turtle. Contagion need not only be for sovereign defaults aross the eurozone: the British banking system is right in the cross-hairs.

    Advice? Take out as much as you can and put it under the mattress. You can always put it back in 2012 if I am wrong!


    25/11/2011 at 8:46 pm

  2. Wow! I appreciate the time you took to write your comment, and I’m afraid I have insufficient expertise in this arcane field to say anything more meaningful!! Thank you for your input, indeed. Take care.


    26/11/2011 at 11:38 pm

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