Europe Bailing Out Banks - Moral Hazard

[Reality Check]

Europe is now faced in Spain with the same problem the United States faced in 2008 and 2009.

Let the banks go bankrupt, wipe out the bank's shareholders, wipe out the bank's bond holders, and nationalize the bank before re-privatizing under very strict regulation as was done in the Great Depression in the U.S.A.

or,

Reward the stock holders and managers of the banks that ran their banks into bankruptcy by allowing them to keep control, use tax payer money to absorb all past and future loses at the bank, and allow the crooks who caused the problem to receive all past and future profits from the bank, as Presidents Obama and Presidents Bush both did in 2008 and 2009, in the United States.

Of course in the United States this free give away of tax payer money happened almost exclusively with "Investment Banks" which were not covered by government deposit insurance before the banking crisis in the United States and were not regulated like the non-Investment banks were prior to the crisis. These investment banks were deemed "to big to fail" and the moral hazards of rewarding the bad guys, giving the bad guy's a bonus, giving the bad guy's all future profits from the bounce, and giving the bad guy's a pass on criminal prosecution when fraud was involved in the bank looting were deemed the lesser four evils of five evils.

The current Spanish government is pointing out, correctly, that it does not have the ability to both borrow money & bail out the banks on the one hand, and stay in the EU under the current EU member country budget rules on the other hand. The conservative Spanish government is attempting to use austerity to solve the Spanish governments non-bank problems, but they point out nothing but leaving the EU can solve the Spanish problems if Spain must borrow money to bail out the banks itself and also meet the EU deficit rules for member countries.

[Reality Check]

It should also be noted that in the United States during the Great Depression of the 1930s the Bank Depositors also lost everything when a bank run occurred prior to the Federal Deposit Scheme being implemented after the nationalization of banks ( bank holiday ).

This wiping out of the depositors might, or might not, be necessary in the case of the Spanish banks, if the shareholders and bond holders were wiped out as part of the government bail out.

But it is an understatement to say that the ability of many European Banks to raise money on the bond markets and stock markets would be very costly and for some non-existent if the stock holders and bond holders of the Spanish Banks were wiped out as part of a bail out.

[John]

Here's a mainstream article that shows that the "systemic risk" of
U.S. banks is as bad as it was before the crisis of 2007-8.

It goes on to show that banks in Europe and Japan have even more
systemic risk.

Here are the top 10 global banks by their systemic risk rankings,
according to Engle.

Mitsubishi UFJ (Japan): $151 billion
BNP Paribas (France): $134.27 billion
Credit Agricole (France) : $131.3 billion
ING Group (Netherlands): $118.7 billion
Deutsche Bank (Germany): $117.58 billion
Mizuho Financial (Japan): $117.5 billion
Bank of America: $112.3 billion
Barclays PLC (UK): $109.6 billion
Banco Santander (Spain): $106.4 billion
JP Morgan Chase (US): $105.4 billion

What that tells us is very sobering. Systemic risk is alive and
kicking, and it's been living at not just America's biggest banks, but
those of Asia and Europe. You can see that the bank with the highest
SRISK in the world - the one that would need the most money to weather
a crisis - is Japan's Mitsubishi UFJ, with Japan's Mizuho Financial
not far behind. If there's another "Too Big to Fail" book and movie,
it won't be about Tim Geithner storming around the Treasury yelling at
American subordinates; it will have a distinctly international flavor.

But what does this all really mean? The big picture is sobering.

The Ghost of Big Bailouts Past seems to haunting the banking system,
and it's calling up the fellow spirits of the dead - the panic, and
bank runs, and lack of confidence that made the end of 2008 such a
spooky time. Spain and Greece are dealing with issues - depositors
pulling their money out of banks, a chilly bond market - that look
like Bear Stearns and Lehman Brothers in their last days, only dressed
up for a costume party in the Eurozone.

2008 keeps rattling its chains. This week there emerged details about
how Bank of America may have hidden the losses at Merrill Lynch to
speed their November 2008 gunshot wedding. The old 2008 Bailout Crew
- Tim Geithner, Hank Paulson, Ben Bernanke and Neel Kashkari - brought
the old band together again for a reunion tour recently, probably to
talk about how the eurocrisis is making everyone remember the bad old
days of Too Big to Fail. Meanwhile, the beat of "have we learned
nothing?" still goes on at big banks. JP Morgan, one of the most solid
banks in the country, is figuring out if it was hiding its own risks
to indulge a star trader. Morgan Stanley, the weakest of the big banks
that made it through the 2008 crisis, is facing a potentially steep
downgrade by Moody's, which has to do with its heavy load of
derivatives and a steeply dropping stock price that chief executive
James Gorman finds "inexplicable."

http://www.marketplace.org/topics/busin ... icas-banks

[Reality Check]

"Systemic Risk" for the United States Banks is still there because:

They were not really bailed out in 2008, or 2009, or since then; Instead the U.S. Federal Reserve ( the United States Central Bank setup by the U.S. government - the FED ) loaned the banks Trillions of dollars against 100% of the face value of the so called "toxic assets" that in reality are worth only a small fraction of the phoney 100% value ( pennies on the dollar ) if they were held on the banks books at market value.

It was widely agreed at the time of the crisis that all bank assets had to be marked down to fair market value or removed from the banks books by the banks selling them off at market value, before the crisis would be over.

Several schemes to sell the toxic assets were proposed by the U.S. government. These included the grossly underfunded 800 Billion bailout fund and the Public Private Partnerships both of which were announced and praised as the solution to this problem, but they were never actually executed, just proposed, the 800 Billion was used for other purposes.

At least that is my understanding of why the Systemic Risk remains. The "toxic assets" are still carried on the books of the banks at a fraudulent 100% of face value.

[Reality Check]

Here's a mainstream article that shows that the "systemic risk" of
U.S. banks is as bad as it was before the crisis of 2007-8.

It goes on to show that banks in Europe and Japan have even more
systemic risk.

The term systemic risk sounds so remote.

What it means is if the bank decided to stop doing business and sold off all it's assets and paid all it's bills before giving the depositors back their money,

how much money would it have left to give bank depositors back.

Any bank where this number was negative and NOT guaranteed by a trusted government would be subject to an immediate bank run.

The systemic risk number is the amount by which that number is NEGATIVE.

In other words these banks are bankrupt, except that a government has promised to make up the difference if they go out of business.

The term systemic risk means the amount the government would have to pay ( the amount the taxpayer is at risk for ) - or looking at it another way - the risk to other banks that do business with that bank on a "trust" basis - what the other banks could lose if they trusted a bank with systemic risk ( a bank that was already bankrupt - but had not yet been closed down ).

At least that is my understanding of what systemic risk means.

[Reality Check]

Here's a mainstream article that shows "systemic risk"
It goes on to show that banks in Europe and Japan have even more
systemic risk.

The article being quoted by John is from 2012 - June 6th -
Immediately below is also an extract of that same quote from John from the same article

Here are the top 10 global banks by their systemic risk rankings,
according to Engle.

...
Banco Santander (Spain): $106.4 billion
...

The only Spanish bank quoted in the article would cost less than $100 Billion Euros to bail out.

But if the shareholders and bond holders of the bank were wiped out the other banks in Europe who also had
"Systemic Risk" would suddenly be treated as bankrupt by potential new stock holders and potential new bond holders.
Such as - again from the article John quoted:

...
BNP Paribas (France): $134.27 billion
Credit Agricole (France) : $131.3 billion
ING Group (Netherlands): $118.7 billion
Deutsche Bank (Germany): $117.58 billion
Barclays PLC (UK): $109.6 billion
...

It is reasonable to assume if those banks were immediately treated as bankrupt they, too, would need immediate European bail outs.

So the generation that is leading Europe would prefer to pretend ( lie ) that all these banks are OK.

If they are OK their current stock holders and bondholders can not be wiped out and their managers can not be jailed - or even fired.

So we reward the bad guys to keep the lies going - for the benefit of the current leaders of Europe.

http://www.marketplace.org/topics/busin ... icas-banks

[Reality Check]

The sad thing here - as John keeps pointing out - sooner - or later - all those

Systemic Risks are going to have to be paid off.

But due to the current generation of leaders in Europe's problem with doing the right thing:

1. The people who are guilty of causing the crisis - often breaking fraud laws in the process - are still in charge of the banks and the rating agencies, getting richer and richer from incremental tax payer bailouts, and still in positions of power and in positions that allow them to commit additional fraud to the tune of Trillions more.

2. The eventual cost to fix the banking crisis is growing by leaps and bounds every month.

[John]

The sad thing here - as John keeps pointing out - sooner - or later - all those

System Risks are going to have to be paid off.

But due to the current generation of leaders in Europe's problem with doing the right thing:

1. The people who are guilty of causing the crisis - often breaking fraud laws in the process - are still in charge of the banks and the rating agencies, getting richer and richer from incremental tax payer bailouts, and still in positions of power and in positions that allow them to commit additional fraud to the tune of Trillions more.

2. The eventual cost to fix the banking crisis is growing by leaps and bounds every month.

Good summary.

John