Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
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So, I am hoping some our resident econ wizards can talk with us and explain to us what might happen here in Europe, in response to this almost total financial meltdown in the US. And if you haven't been over to Kos, well there are some excellent articles up now - including a statement from Obama about "no blank check", with 6 points. So the battle lines are forming there. What happens here??

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Sun Sep 21st, 2008 at 03:42:08 PM EST
Here? Nothing. We declare that our bank-based (as opposed to market-based) financial system works well and we press on with deregulation and market liberalisation.


A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Sep 21st, 2008 at 03:44:03 PM EST
[ Parent ]
Bank based finance is a huge part of the reason that Europe isn't having the problems that the US is right now, excepting of course the contagion that's spreading from Wall Street.

Bank capital has more incentive to think long term, rather than engage in speculative investing.  Maybe there should be a small securities transaction tax to slow down volume on mercantile exchanges and create an incentive for long(er) term investing.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sun Sep 21st, 2008 at 04:39:16 PM EST
[ Parent ]
But Bank-based finance is subject to Basel II which is a bloody mess.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Sep 21st, 2008 at 05:20:13 PM EST
[ Parent ]
Migeru:
We declare that our bank-based (as opposed to market-based) financial system works well and we press on with deregulation and market liberalisation.

Hedge funds plan to sue FSA over short-selling ban - Telegraph

¨The FSA's remit is to maintain orderly markets - the markets were working fine, only the banks were going bust.¨
by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Sep 21st, 2008 at 05:28:02 PM EST
[ Parent ]
They have a point, you know? Short-selling is being blamed for insolvency which makes no sense. And, as I pointed out before, short-selling can be simulated with futures and options so the ban is just for show.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Sep 21st, 2008 at 05:38:35 PM EST
[ Parent ]
Yes, just how bloody will my asshole be?

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sun Sep 21st, 2008 at 03:44:39 PM EST
[ Parent ]
What am I being WARNED for?  Foul language?

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sun Sep 21st, 2008 at 04:46:49 PM EST
[ Parent ]
Mother of all bailouts and what it means for Europe

But the AIG case shows the importance of another link across financial markets, namely massive circumvention of regulatory requirements.  The K-10 annex of AIG's last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is:

".... for the purpose of providing them {European Banks} with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee".

[...]

The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain's GDP. Fortis bank, which has been in the news recently, has a leverage ratio of "only" 33, but its liabilities are several times larger than the GDP of its home country (Belgium).

[...]

No idea whether this stuff is valid or not, just putting it out there.

by MarekNYC on Sun Sep 21st, 2008 at 03:58:38 PM EST
[ Parent ]
Well, another question is, if it really matters. UBS has written down more than 10% of Swiss GDP. Switzerland is still well.
If Deutsche Bank goes bankrupt, the German gov't certainly is able to finance the debt of German corporations, who depend on funding by Deutsche Bank. If every foreign creditor of the bank gets bailed out, is not an issue for Germany. The loss in jobs and tax collection by losing much of the German financial sector is as well not too big.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Sun Sep 21st, 2008 at 04:06:40 PM EST
[ Parent ]
Doesn't matter what UBS has written down. What would matter if the Swiss government needed to bailout UBS. On DB - it may well be, but the German government doesn't have the of bureaucratic expertise to do that. Plus a collapse of DB would create an ungodly mess in the entire German financial system which would likely shut down other banks. Credit, both consumer and business, would simply freeze up while the details of what to do were being worked out.
by MarekNYC on Sun Sep 21st, 2008 at 10:52:04 PM EST
[ Parent ]
Why do you think the Landesbanken, the KfW, and the Sparkassen don't have the expertise to give credit to corporations? State owned banks count for ~1/3 of all banking activity in Germany. These banks can simply get new equity by the gov't to expand there operations.
And on some political items, e.g. EADS stocks, the gov't has the expertise it needs.
On other, very big items, probably foreign banks have the expertise. Sound credits may simply be sold to other banks.

I don't say there wouldn't be temporary problems, but I'm pretty convinced, that one can let DB fail, without getting too much sustained trouble - although probably if DB is just some dozen billion short of money, one would first try to rescue them.
I would definitivly disagree with any plan to back the DB debt fully by the gov't.


Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Mon Sep 22nd, 2008 at 11:24:03 AM EST
[ Parent ]
KfW has just last week been dubbed "the dumbest bank in Germany"...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Sep 23rd, 2008 at 05:55:00 AM EST
[ Parent ]
Yes, and they are. In the meantime it has become clear, that they transfered 350 million Euro to Lehman, because they were not willing to finish a discussion on friday afternoon about the credit worthyness of Lehman, because nobody wants to be late at home on weekend.

But an insolvency administrator for a bank is potentially easier than investmentbanker in a bank. They just have to look on the conditions, DB has given an enterprise and take the credit line over.

Most credits in Germany are credits to enterprises. If those credits would be similar distressed as the housing credits in the US, we wouldn't simply have a financial crisis, the whole economy would just have been gone bust. If Deutsche Bank would get bankrupt, it would be due to adventurism on foreign markets, not because of the debt lying on the German economy.

The problem in the US currently is as well not, that there is one big bank, that is bankrupt, but that all banks are under pressure.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Tue Sep 23rd, 2008 at 11:59:39 AM EST
[ Parent ]
The problem in the US currently is as well not, that there is one big bank, that is bankrupt, but that all banks are under pressure.

The LB's are already suffering losses  courtesy of the financial crisis in the US due to their buying of toxic paper and exposure to US banks. If DB were to fail, so would they due to exposure to DB.

by MarekNYC on Tue Sep 23rd, 2008 at 12:43:19 PM EST
[ Parent ]
The LB's are already suffering losses  courtesy of the financial crisis in the US

Negligible for the scenario. Their losses are big, compared with their earnings(in the hundreds of millions range), the numbers are very small compared with the German GDP. I argue, that the state in case of a banking crisis could recapitalise the LBs massivly, let's say with overall 300 bn Euro. A couple of billions lost by the LBs on the toxic waste is really peanuts compared with that.
As the LBs are state owned, there is no stock holder moral hazard. The biggest problem wouldn't be the underlying economic facts, but the EU commision. In case of a severe crisis, I doubt, that the EU commision would stop a rescue of the banking system, even if it requires measures, which are competition distorting.

Even without knowing details of micro economy, it is difficult for me to believe, that a nation, in which banking is not a major branch, which has a savings rate above 10% and low private debt to income levels, should get into severe trouble, because of a single bank failure, while the US with its consumers in debt above their head should be able to manage a bankrupcy of a thousand of their banks(which would happen without any help plans), just because every single of these banks has a balance sheet smaller wrt the GDP than DB to the German GDP.

The fears for DB were because of the 60 times leverage. So a break down of DB wouldn't mean they have losses of 2 trillion, but maybe 40 bn (as USB so far). That's peanuts for rescuing the banking system anyhow. If taking over the 2 trillion balance sheet would count as 2 trillion bail out, then taking over F&F in the US was a more than 5 trillion bail out, but it is counted as 200 bn bail out so far, as this are the funds, which are likely needed to keep the GSEs up.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Tue Sep 23rd, 2008 at 01:37:31 PM EST
[ Parent ]
I, honestly, don't think Paulson's going to get this.  The battle lines are being drawn, and the more I read, the less convinced I am that he's even going to be able to rally the Republicans behind it.  The noises coming from people like Shelby have to be disturbing to the Bushies.

I don't see the Bushies getting a lot of help from the financial "experts".  The econ blogs, many of which have inroads with the traditional finance press, have all universally denounced this.  The economists on the left and center have all, or will all, denounce it and do the talk shows (Krugman, Ritholtz, etc).

I think you're going to see consensus around a couple of the points in Obama's proposal (equity share, home-loan modifications, etc), along with a few other things tossed in (perhaps Pelosi's stimulus package, etc).

Compensation reform is probably not going anywhere for now, but I wouldn't rule it out, and if nothing else it serves as a weapon for our side in order to get more of other things.

Hopefully McCain will do us all a favor and come out supporting Paulson.  The Obama campaign also needs to hit hard on Gramm, UBS and McCain when Paulson's official plan is finally released.  That should be easy enough to see coming.

For now, I'm cautiously optimistic and basically satisfied with the response.  But, again (as always), we'll see what happens if the Blue Dogs try to kneecap us.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Sep 21st, 2008 at 04:19:05 PM EST
[ Parent ]
Ok so the markets rallied on the back of rumours that this was going to happen. if various politicians decide this just isn't going to happen will we see further failure on Monday?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sun Sep 21st, 2008 at 04:50:46 PM EST
[ Parent ]
Depends.  What I outlined above on what I think is likely to happen, give or take a bit here and there, will probably leave the markets a disappointed, since they'd love for us to give away the store, but it shouldn't have any giant negative effect.

If, however, nothing happens, then we're back to where we were on Tuesday, and I think the downward trend will continue.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Sep 21st, 2008 at 05:03:17 PM EST
[ Parent ]
Maybe not on monday, but the longer the legislation is delayed the more likely a crash is.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Sep 21st, 2008 at 05:19:12 PM EST
[ Parent ]
Unless a fairly serious taxation and re-regulation is imposed anything that is done will only stave off, and probably acerbate, the problems.

Right now, I don't see any Serious People© gunning for either.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Sep 21st, 2008 at 04:58:46 PM EST
[ Parent ]
Compensation reform should be an excuse to introduce high marginal rates of income and wealth taxes - they work better than a cap on compensation.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Sep 21st, 2008 at 05:17:33 PM EST
[ Parent ]

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