Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

Ireland has finally admitted the horrendous condition of its banking system. I actually give the government kudos for this, and await the moment when the US, China and the UK come forth with such frankness. That being said, things are a mess, I have forewarned of this mess for some time now. First, the latest from Bloomberg: Ireland’s Banks Will Need $43 Billion in Capital After `Appalling’ Lending

The Next Step in the Bank Explosion Cycle???

Of the many issues that I have been warning about concerning banks, their balance sheets and the risks that they take, one of the (and there are a few) most underappreciated is the currency risk of the “mother of all carry trades”. See Roubini Not Alone in Fearing Dollar Carry Trade and Roubini Sees `Huge’ Asset Bubbles Growing in `Mother of All Carry Trades’.

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

“The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”

As has been the case at least twice in the past, I am in agreement with the man. The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven’t even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk… ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

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More on the FDIC as a Catalyst

In continuing the  train of thought initiated in “The FDIC as a catalyst, or the new Doo Doo 32!”, I am going to release some interesting data points for subscribers and non-paying readers alike.  The FDIC imposed a special assessment charge on all FDIC insured depository institutions in 2Q09- which amounted to 5 basis points […]

In this Difficult to Trade Market, You have to be More than Just Right…

From Bloomberg: Sears Holdings Reports Unexpected Loss After Pension Plan, Severance Costs Aug. 20 (Bloomberg) — Sears Holdings Corp., the biggest U.S. department-store company, reported an unexpected second- quarter loss on pension-plan expenses, severance payments to fired employees and costs to close stores. The net loss was $94 million, or 79 cents per share, compared […]

Super Brokers are forming to push broken products to make those with High Net Worth Super Broke

Sell side brokers and fund of funds pushed tens of billions of assets to Bernie Madoff, for a fee and maybe a commission or two. You know the rest of that story. Funds of Funds charge 1% and 10% on top of hedge funds 2% and 20% – to lose about 21%. Hmmm! The big name brand Wall Street banks charge full commissions (about $10,000 to $50,000 per year for accounts the size of the top quintile of my blog’s reader’s accounts) and give you the privilege such a charge the opportunity to lose between 29% and 41% of your capital! Hey, thanks fellas. With friends like those, who needs enemies. Now, they are bulking up due to their own investment missteps, and merging into super brokers. B of A bought Merrill Lynch, and now Citibank is spinning off Smith Barney into a JV with Morgan Stanley’s brokers. Both of these merged entities will have a sales force of over 22,000 sellers each.  Wowza! That’s a lot of salespeople. Can any of them invest worth a damn, though? Now, what exactly are they going to be selling? After all, to cut costs, brokerages and sell side banks are reducing the size of their analytical staff, which was already reduced significantly in the last Wall Street cyclical downturn after Spitzer got in their ass about conflicts of interest. Even without these head count and talent reductions, investment performance stemming from this salesperson/analyst model was horrendous, and that’s about the nicest way I can put it. We’ll get to that point later, though.

A few grim thoughts for the New Year, as I reflect upon the past year

  • Countrywide was forced into a fire sale vs bankruptcy situation. It was totally insolvent and reeked of non-performing, illiquid and depreciating assets.
  • Merrill Lynch was forced into a fire sale vs bankruptcy situation. It was totally insolvent and reeked of non-performing, illiquid and depreciating assets.
  • Bank of America bought both of these companies. Hmmmm. Look at its share price and balance sheet. Where do we think all of those reeking assets ended up?
  • Bear Stearns was forced into a fire sale vs bankruptcy situation. It was totally insolvent and reeked of non-performing, illiquid and depreciating assets.

A change is gonna’ come

Tribune filed for bankruptcy today. This, by a very smart man who sold his $12 billion commercial and residential real estate portfolio at the very tippy top of the CRE bubble, only to be sucked into another bubble bursting. The Tribue Cos. And affiliates have sold off a lot of assets, fired a lot of professionals and cut back on a lot production – in essence, they are much lesser a producer of actual original content and will shrink further as time goes on.