EUCOM Economic Analysis - Part I

[Surferbeetle]

Firn,

Labels of left and right are too confining for 'free market thinkers'...

Fiscal imbalances, financial transaction taxes, general mismanagement, and proposed recovery tactics, techniques, and procedures are all topics of interest/still very much under consideration:

Investing in Change (The reform of Europe's financial markets) edited by Andrew Gowers

The American Phoenix (and why China and Europe will struggle after the coming slump) by Charles Dumas and Diana Choyleva

Vorbeben (das Buch zum Crash) von Wolfgang Munchau

Judging from the recent YPF and Bankia experiences (among many others to include IndyMac, Hokkaido Tokushokku bank, Long Term Credit Bank, Nippon Credit Bank, Long- Term Credit Bank, RBS, HBOS, UBS, Credit Lyonnais and Sparkassen) partial and full nationalization always remains in the governmental quiver

Along those lines this paper on nationalization as a strategy makes for an interesting read:

A Proven Framework to End the US Banking Crisis Including Some Temporary Nationalizations, Adam S. Posen, Peterson Institute for International Economics
Testimony before the Joint Economic Committee of the US Congress hearing, “Restoring the Economy: Strategies for Short-term and Long-term Change”
February 26, 2009

That self-preservation, not profit-maximization, strategy by the banks usually entails calling in or selling off good loans, so as to get cash for what is liquid, while rolling over loans to bad risks or holding on to impaired assets, so as to avoid taking obvious losses, and gambling that they will return to value. The result of this dynamic is to create the credit crunch of the sort we are seeing today, and this only adds to the eventual losses of the banks when these losses are finally recognized.2 The economy as a whole, and nonfinancial small businesses in particular, suffer in order to spare the positions of current bank shareholders and top management (and, on the firing line, bank supervisors).

A hedge fund, sovereign wealth fund, or private equity firm with cash is not staying out of these markets for distressed assets at present just because the prices have not yet “fallen enough”; such investors are staying out because the assets are indeed toxic with indeterminate prices.

I would suggest that much of the American political spectrum (not to mention the Western political spectrum as a whole) still (!) fail to recognize that irrespective of whether they hold 1st class, 2nd class, or 3rd class tickets ticket on the Titanic, the end result of a collective political navigation failure is still the same.

Fortunately Democracy is a wonderful thing, there is no Arab Spring for us, instead we can just vote the bums out.

[Watcher In The Middle]

"Judging from the recent YPF and Bankia experiences (among many others to include IndyMac, Hokkaido Tokushokku bank, Long Term Credit Bank, Nippon Credit Bank, Long- Term Credit Bank, RBS, HBOS, UBS, Credit Lyonnais and Sparkassen) partial and full nationalization always remains in the governmental quiver"

Good timing (or maybe, poor), depending upon one's outlook.

Mortgage Crisis in France - Bank Bailout required?

To quote from the article:

A direct nationalisation would likely mean some form of capital injection - an unpalatable outcome given the new government rhetoric and the fact that the existing owners' stake would have to be wiped out. CIF is 100% owned by 56 regional cooperative entities.

Just imagine - a newly elected President who wants to take on the banks, may have to as one of his first acts in office, bailout a bank.

Why do I hear echos of 2008 in my head (see Bear, Stearns and both the Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund - Re: Subprime mortgages).

President Hollande - Welcome, now you get to find out that governing ain't easy.

[Fuchs]

It's probably cheapest to just let them all crash, then nationalise the remains (banks are little more than balance sheets and employees - the balance sheets are crap, and many of the employees are working in socially useless if not harmful jobs) and destroy the investment banking and risk management departments. Rebuild the risk management departments as really, really tiny staffs and enforce rules that make risk management efforts largely unnecessary.


It's too bad that European governments lack competence in regard to financial markets so badly. Just look at the nonsensical parts of the Basel agreements, such as the empowerment of the rating agencies. The governments were regulating the banks as if the banks were doing simple late 19th century banking only.


Well, we have highly developed and organised societies and that enables us to use electricity by simply plugging a device in, it enables us to have a shower, to use on a road where almost everyone drives orderly, to work in multi-thousand people companies and to have a kind of magic chat over any distance.
The other side of the coin is that certain institutions are not only highly developed, but also quite rotten and we seem to be complacent enough to just tolerate that.
Germany for example could vote Merkel out of office, but the replacement is guaranteed to be 95% incompetent on economics, just as most of our ministers of the economy have been for four decades.

[Surferbeetle]

Good timing (or maybe, poor), depending upon one's outlook.

Hey Watcher,

I would go with most likely poor for the investors/traders caught in this event, but positive for the rest of the financial system.

Why?

IMHO our/the western political class has cravenly passed on exercising their duties to ensure that the market is able to kill unsustainable enterprises before they became to big to fail, and now the only way left is via nationalization. Voters are also part of this in that we have not exercised appropriate supervision and due diligence of those we have elected. Perhaps Monsieur Hollande will take the opportunity given and do the right thing?

Hopefully his econ team can ensure that the nationalization, breakup, and sale of the remaining assets is a case study in how to repay taxpayer funds plus interest.

Hollande Names Pierre Moscovici As French Finance Minister, By Helene Fouquet and Mark Deen - May 16, 2012 12:33 PM MT Bloomberg News

The young Moscovici started in politics as a supporter of the Communist Revolutionary League and left it in his late twenties for the Socialist Party, where he steadily rose to become one of its leaders and a specialist of European affairs.

Moscovici, like Hollande, studied at France’s elite Institute for Political Sciences and Ecole Nationale d’Administration in Paris. After working for the Socialist Party for several years, he ran for deputy in 1997 in the eastern Doubs region.

Hollande also named Michel Sapin Labor Minister, Laurent Fabius Foreign Minister and Manuel Valls Interior Minister. Jerome Cahuzac will run the budget ministry. For the first time, the French government will have an equal number of men and women in its cabinet, Ayrault said.

You might also remember the recent case of Dexia...France has a significant piece of the the liability associated with that failure as well.

Dexia, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Dexia

Dexia N.V./S.A., also referred to as the Dexia Group, is a Belgian-French financial institution active in public finance, providing retail and commercial banking services to individuals and SMEs, asset management, and insurance. The company has about 35,200 members of staff and core shareholders' equity of €19.2 billion as at 31 December 2010, and provides governments and local public finance operators with banking and other financial services. Asset Management and Services provides asset management, investor and insurance services, in particular to clients of the two other business lines. In 2008, the bank received bailouts for €6 billion, and it has become the first casualty of the 2011 European sovereign debt crisis. Negotiations are taking place for its breakup.[2] Its headquarters are in Saint-Josse-ten-Noode, Brussels.[3]

Fortis is a 2008 casualty worth looking at.

Fortis (finance), from Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Fortis_(finance)

Fortis N.V./S.A. was a company active in insurance, banking and investment management. In 2007 it was the 20th largest business in the world by revenue[1] but after encountering severe problems in the financial crisis of 2008, most of the company was sold in parts, with only insurance activities remaining.

The Benelux countries were Fortis's home base and its strength. Fortis's banking operations included network (retail), commercial, and merchant banking; its insurance products included life, health, and property/casualty lines. Products were sold through independent agents, brokers and financial planners, and through branches of Fortis Bank. It was listed on the Euronext Brussels, Euronext Amsterdam, and Luxembourg stock exchanges.

The company was broken up after having critical difficulty financing its part of a joint acquisition of ABN AMRO (as a member of a consortium which also included Royal Bank of Scotland Group and Banco Santander). After receiving a bailout from the Benelux governments, its Belgian banking operations were sold to BNP Paribas, while its insurance and banking subsidiaries in the Netherlands were nationalised by the Dutch government and renamed ABN AMRO. The Dutch insurance arm of Fortis was split off as ASR Nederland.[2]

Fortis retained the rest of its insurance operations (remaining the largest provider in Belgium),[3] and changed its name to Ageas in April 2010, with ownership of the Fortis brand having passed to BNP Paribas.[3]

@ Fuchs,

The Great Depression was an example of relatively quickly clearing the market of malinvestments while Japan's 'Lost Decade' is an example of a more controlled clearing process.

Tough choices either way...

[Watcher In The Middle]

"Hopefully his econ team can ensure that the nationalization, breakup, and sale of the remaining assets is a case study in how to repay taxpayer funds plus interest."

Actually, I agree fully with this approach. It's what we should have done here in the US (except not to nationalize, but make them file Chapter 11/Chapter 7 in federal bankruptcy court). And then we should have kicked out all the upper level management in disgrace (& board of directors), and then assigned a task force of special prosecutors to look into each occurrence.

But we didn't do that, and we've been paying for it ever since (undoubtedly, with more to come).

France in particular needs to get to the bottom of this entire real estate mortgage crisis really fast and decisively, because otherwise, you just might see France turn into "Spain, Part II". Don't do like the US is doing -trying to 'push it all down the road'.

[M-A Lagrange]

France in particular needs to get to the bottom of this entire real estate mortgage crisis really fast and decisively, because otherwise, you just might see France turn into "Spain, Part II". Don't do like the US is doing -trying to 'push it all down the road'.

Makes too long I'm not living in France so I don't really see where you are coming from. If it's true that real estate market in France is getting a little crazy, I do not believe you can compare the situation to Spain. If real estate is too expensive in Paris, it remains accessible in "province". Also, it's a hell to get a credit from the banks. The problem is more that banks do not play their role anymore by refusing to allow grants to small enterprises. This basically kills a lot of business, even if they are health but need cash to fund their growth.

but i might be wrong.

[Firn]

Well almost all banks are indeed greedy when others are greedy and fearful when others are fearful. It is just all too human and at the same time a strange case of Dr Jekyll and Mr Hyde. Only that both extremes will make the economy suffer be it a couple of years down the road or now.

@Surferbeetle: Banks are unique institutions as when many a banca becomes rotta the economy suffers greatly. As we have seen in dire times it is the citizien who covers the downs of those big banks while he has little from the ups. I believe we really should give a nod to the law of medieval Genua and literally break the big banks, but in away that the pieces can stand on their own feet.

[Fuchs]

@Surferbeetle: Banks are unique institutions as when many a banca becomes rotta the economy suffers greatly.

It depends. The real economy had been complacent about the leeches in the financial industry and the big consulting firms, but since the crisis began they broke largely free from the banks.

Large corporations not only have a lot of liquidity - they also have their own means to emit bonds and such for foreign capital.

Small businesses have always been better off by dealing with regional savings & loan institutions instead of with the big banks.

Medium-sized companies are in between.


The real economy did its job of mitigating the risks of association with the big banks to the point that German big banks are now desperately in search for large loan customers. These well-done homeworks may be part of the reason why the German economy can now grow faster than long term average (which would be in real terms: working age population growth about -0.5% + annual technological progress rate about +1.5% = 1% p.a. total at most since the capital stock doesn't change much).