Tuesday, October 22, 2013


I have spent too much time as of late talking about that which I never talk about which is politics, or at least political figures.  Not good for Ms. James' little boy, Charlie.  Gets him too riled up.  So I shall be smart and get back to what got me started with this thing:  Banks and Banking with a first installment beginning with what's going on Over There.

Nothing new.  Oh, I know, there are stories about how much better things are and how well Europe is doing, and the new investment we are seeing and that the banks are out of the woods.  Don't believe everything you read in the papers or in blogs.  The crisis of last year has been averted for the time being but real structural problems remain.  Investment is flooding into places like Greece looking for rock-bottom prices and enormous returns, but the soothern tier remains troubled to say the least and the rise of the Euro, or the collapse of the dollar--take your pick--bode ill.  But the banks, ah the banks, wither they go, and the answer is no one really knows.u
In such cases the answer is a classic one: let's have a stress test! Now, one may ask, Haven't we had a bunch of those before?  Answer: yes.  And what did they show?  Well the last one about a year ago came out--for the most part--pretty well.  The only problem was it was as phoney as a three dollar bill and everyone knew it but it served the political purpose of getting things calmed down for the time being until more permanent solutions might be dreamed up.  So, we are going to try it again early next year and this one is promised to be the real thing, according to no less an authority than Mario Draghi, the head of the ECB.  In fact, Sr. Draghi might well be believed this time around because in announcing the test he indicated that there might be some bad news involved in a most interesting manner and raised the specter of what no politician wanted; a "backstop," put in place by individual nations to cover the capital requirements of banks revealed by the test to be in need.  Without such mechanisms said Sr. Draghi, there would be absolutely no chance of fulfilling ECB banks' requirements through private capital markets.  Rage and consternation.

The last thing ECB governments want is to go to their adoring public with another bank bail-out plan.  Much better that a "screw the depositor and bondholder Cyprus II" operation be undertaken, but as Sr. Draghi rightly points out any chance of this happening, however slight, will destroy the market for European banks forever and a day.  Hence, the backstop.  But there is a bit more.  What can be interpreted from the ECB's position is that it fully expects the stress tests to show the need for new bank capital and probably in vast amounts; some estimates have the final figure upwards of a trillion Euros which is a big number in real money especially at these FX rates which today had the Euro at 1.36 to the buck.

It's not that the future is looking all that rosy either.  In the end, the United States plays a massive role in what happens Over There and today's job numbers, despite the drop in the unemployment rate for reasons past-explained, stank.  Probably will next month as well.  Probably will have a general economic slow down as well.  Tapering is off the table and the prospect for stronger dollar to aid Euro exports is history at least for 6 months.  At the end of the day, the European state of banking is a muddle and seemingly will remain so.  Great for me.  I can deal with that a lot easier than I can with Eric Holder getting mad at me.

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