BLACKROCK SPEAKS

Our Irish friends hired Blackrock to perform a stress test on their banking system. Today, the results are in. According to the investment firm, the system should have 24 billion euros in additional capital to insulate the banks against future losses primarily from real estate. Now that number is bigger than a breadbox, but I am told that some wag in London remarked that he was pleasantly surprised as he expected the number to be more like 28 billion. You can't make this stuff up.

Anyway, whatever the number is, one can be sure of two things:

1. At the end of the day only the Bank of Ireland and Allied Irish Banks are going to be left standing, and

2. The Irish taxpayer is not going to come up with that sort of scratch.

It is remarkably, really. The additional funds required will bring the total to almost 100 billion Euros; a staggering amount for such a small country. There were today immediate and renewed calls for burden sharing among the unsecured debt holders which produced the expected reaction on the continent; wholesale rejection. Clearly, the fear is great and deep that such efforts will spark sililar attempts in regard to the Euro banks, especially those of Germany and France. The financial remifications would be huge but the political fall-out would be immense, especially in Germany where the old Landesbank network has tremendous state government political involvment. I've probably written too much about this already so for the time being I'm just going to sit back and observe. But make no mistake, the game's afoot and for the Euros it's going to be a very different game indeed.

Closer to home, the Fed released today the names of those institutions that made use of the discount window during the crises of a couple of years ago and the amounts lent to each. It was a long list totaling around $110 billion with the usual suspects and some unexpected names. The Fed fought like the dickens to prevent having to do this but lost a Freedom of Information suit brought by Bloomberg which went all the way up to the Supreme Court which, in agreeing not to review lower court rulings, effective overturned almost 100 years of understanding that the Fed's activities in this area were private. Future activities will be subject to public view but the Fed got a big break when a stipulation was included that allows it to keep such activities out of the public eye for two years.

It seems to me that either the activities are either subject to the light of day or they are not, so if I were the Fed I'd worry quite a bit as to how long this exception is going to hold up. Without taking a position, I think one should think carefully about this. As I have said over and over, banking is built entirely on trust. If in the future somebody decides that knowledge of discount window activities should be made immediately available to the public, there's a pretty good chance that a participating institution will never see the dawn of a new day the moment the public gets wind of their action. The irony is of course that the concept of the discount window, so carefully designed to protect institutions and their depositors would become the instrument for their demise. Unintended consequences: oh hell, I'll take a position. The provision in Dodd/Frank that brought this about is just another example of the stupidity of the entire bill. There, happy now? I am...knew I would be.