The Wall of Worry for 2011 is a Big One, as usual

By Richard Smith

These are things I’m keeping an eye on, or trying to find out more about. That isn’t a prediction that any of them will blow up, nor that nothing else will, just a round-up of the bees in my bonnet. If you’ve been following Naked Capitalism you are up to speed on most of this. There are one or two gaps to fill in, though, and I certainly owe readers some more about Unicredit. I touch on one part of that sprawling bank today, and when I have puzzled out a way through its convolutions, I will have a go at more.


Foreclosuregate – LPS and the servicers
RMBSgate – trustees, RMBS, and misrepresentations
Second liens
CMBS – which way will it go?
Unemployment, the foreclosure pipeline, and house prices


Irish politics…and then Lloyds-HBOS and RBS, German banks
Eurozone rollover risk in Spain, Portugal and Italy; Spanish RE loans
UK rollover risk; the beginnings of austerity in the UK; commercial property loans.
The non-Eurozone EU and FX risk (1): Hungary and others, local currency versus EUR and CHF, impact on Unicredit and Austrian banks, with a spillover to Switzerland?
The non-Eurozone EU and FX risk (2): GBP/EUR… then Lloyds-HBOS and RBS and the UK? Or French and German banks?
Unicredit and Italy? Long shot…
Belgian politics


China – Scylla: infrastructure development loans, land loans and RE-secured loans to companies, and Charybdis: popular discontent about thwarted property ownership aspirations; inflation.

Creeping onto the radar

The price of oil.


Anything from Wikileaks

Still, the big financial news, for me anyway, is still old news: massive bank insolvency, nicely recalled to mind in two posts by Ed Harrison. First, this, from a week or two ago, where Mervyn King’s blunt analysis of March 2008 finally surfaces, courtesy of Wikileaks:

Systemic Insolvency Is Now The Problem

2. (C/NF) King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged. He said it is hard to look at the big four UK banks (Royal Bank of Scotland, Barclays, HSBC, and Lloyds TSB) and not think they need more capital. A coordinated effort among central banks and finance ministers may be needed to develop a plan to recapitalize the banking system.

Unblocking Illiquid Mortgage-Backed Securities

3. (C/NF) King said it is also imperative to find a way for banks to sell off unwanted illiquid securities, including mortgage backed securities, without resorting to sales at distressed valuations. He said sales at distressed values only serve to lower the floor to which banks must mark down their assets (mark to market), thereby forcing unwarranted additional write downs.

And secondly, see this, from 2009, where $16.3Trillion of toxic European bank assets (44% of total bank assets!) very surprisingly disappear from a news item, by the mechanism of a quick but incomplete edit, post-publication, and are never heard from again. If only balance sheets were as easy to sort out as news stories and mark-to-market accounting.

There’s a chance that 2011 will be the year when the needed loss recognition starts happening in earnest,  though not necessarily in a controlled manner, unfortunately; hence my list of hot spots.

Lastly, here’s Chris Whalen on the warpath in the US.

*Update* Looking at the Wikileaks thread, you are all on a streak. If you think I have missed something, mention it in the comments!

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  1. russell1200

    Were there short calender Mayans who left out a some leap year days and predicted the end to come in 2011? LOL.

    Seriously, a very nice summation. I will have to ponder if there are anymore worth concluding: you wouldn’t want to get too speculative.

  2. Pat

    What about 1) the $12 trillion or so of debt from various banks (both US and European) quietly “backstopped” by the Fed as part of the general bailout in 2007-2008? Wouldn’t this completely blow out the deficit and the US economy in coming years as everything unravels?
    Or 2) the distinct possibility that the same bad mortgages were sold multiple times in different RMBS tranches? Obviously this would hasten and magnify the upcoming mortgage meltdown.

  3. Maju

    You sum it up pretty well, Richard. I cannot add anything to the Europe picture, except maybe the fact that budget cuts (always directed against social expenditure and not for instance military budget, politicians’ salaries or any other wasteful expenditure of the like) are already causing and will cause more and more social unrest.

    I would be concerned about that. Europe is not the USA and people have already demonstrated they can go out to the streets and fight. 2011 should be very hot in this aspect.

    But in the US case, I think you are being much unspecific. No mention of the Bank of America and all the other banks that are up to their eyebrows in toxic assets. No mention also of the likely California bankruptcy, as well as the increased insolvency risk in so many other states, and no mention of the dramatic effects of the Gulf of Mexico oil disaster, whose consequences we are just beginning to grasp (besides the health emergency and ecological disaster, who’s going to buy a home in Florida after this, foreclosed or not?)

    The EU problems (very real indeed, though easy to solve by means of careful state intervention after due company bankruptcy) are grabbing the headlines but the US problems are anything but smaller, as you know very well.

  4. Brick

    I can think of a few more.
    Municipal debt restructuring and/or austerity at a municipal level.
    Irregularities are revealed in the FED’s accounting leading to resignations.
    Commercial Real estate takes a dive south putting a major bank into difficulty.
    A major bank is revealed performing a politically undesirable act like lending to terrorists.
    GM gets into difficulty again.
    Company profits drop due to a margin squeeze sending equities southwards.
    Oil is no longer valued in dollars but RMB.
    Government loses control over the media as news goes viral.
    Governement backtracks on austerity and the bond vigilantes have their day.
    Ireland decides to default and UK banks need a bail out again.
    Some smaller italian banks get into trouble.
    Problems in Holland appear on the radar as Belgium gets deeper into diffculty.
    French strikes make a big dent in the french economy.
    Unemployement rises or GDP drops in Germany.
    Growth slows significantly and becomes the new normal for China.
    Currency volatility wrecks the economy to the extent that the bond vigilantes pay a visit.

    Creeping onto the radar
    Opec cuts production.
    Problems with food scarcity.
    Australian currency volatility.
    Canadian housing bust.
    A major terorist act against a financial institution.

  5. Cedric Regula

    I’ll second that the state/local budget crisis is likely to come to a head in 2011 in the US along with the associated problems in muni/general obligation bond markets.

    Also we may need to watch the treasury market for more signs that there may in fact be bond vigilantes, or at least bond wallflowers. Same goes for MBS.

    Maybe some chance something happens with USD/RMB exchange rate, tho it’s difficult to tell who would initiate the action. China is now trying price controls on food so they can have it their way – keep the masses from rioting but maintain an inflationary exchange rate.

    Then, sometime around March, Congress must vote up the debt ceiling from $14T or be forced to close the federal government. (Hint-they will vote up the debt ceiling, but how many tax cuts it takes to marshall the vote is the big wildcard.)

    Also, how can things stay quite so long in Iran and/or Israel? Almost spooky. What if Iran eradicates the computer virus that stalled it’s nuclear program?

    And my favorite one… what if oil inflation, food inflation, import inflation, rising market interest rates on treasuries, MBS, CMBS, ARMs actually do succeed in moving the needle in our inflation numbers, indicating the Fed was successful in their master plan, and next the Fed may have to do something again?

  6. Jesse Frederik

    What amazes me is that people are actually underestimating the European mess. So take the country that isn’t talked about much and in which I have a personal interest (since I live there), the Netherlands. The Netherlands still has a long way to go, we still have a huge housing bubble which has yet to deflate substantially (we’ve only seen 10% price declines). The same goes for Belgium where we actually saw an increase in housing prices, despite the crisis. 2011 is going to be horrible in my opinion.

    1. emca

      Funny, I never knew the Netherlands or Belgium even had a housing bubble, but I think the underestimating is a shared experience; and I can’t help feeling what happens in Europe has as great effect on the U.S. as vis versa.

      Watch which way Bernanke’s head turns in the turbulence.

    2. Maju

      I have the feeling that the only countries that do not have a housing bubble are those providing state-subsidized housing to their less well-off citizens (in sufficient amounts), such as Germany, Switzerland or Denmark, what clearly keeps speculation at bay (and lowers significantly the cost of living and hence makes salaries less rigid). I thought that the Netherlands also fell in that category but it seems it is not the case for what you say.

    3. Cedric Regula

      Some people think we will begin talking about PFIIGS rather than lumping Germany and France together as the “good” countries.

      I think it’s likely someone comes up with a 27 letter acronym for EU troubled countries sometime in 2011. Arranged in some more or less pronounceable way, like one of those long German words.

  7. emca

    I will add to the general doom-n-gloom as 2010 closes out another problem facing the U.S. From Salon this morning,

    Where are the jobs? Overseas, of course.

    You don’t need to be a weatherman to see which way the wind blows and it ain’t blowing toward the U.S.

    This is evolving as big a disaster as any of the above. It is why unemployment will be very difficult if not impossible to stymie. It is why any attempt at nurturing or infusion of investment monies will end up in China or one of the other ‘hot’ nations on the ground floor shifting up to a consumer economy. It is why today it is the lowly answering centers personnel, tomorrow it is the engineers and other high-salaried occupations supposed immune to the contagion.

    U.S. corporations (and other wealth holders) are going where the money is, whether to be close to their future consumer base, or to meet entry requirements set by a government (read China). Any innovation or creativity is still needed will be outsourced back to the U.S.

    The U.S. economy whose existence is structured on personal consumption, is screwed – big time.

    Any one for a little trickled down to China, folks?

  8. Hugh

    I agree state budget shortfalls, also a crazier, more corporatist Congress, austerity measures and attacks on Social Security. All the major economic centers, China, the US, and Europe have major and unsustainable extend and pretend campaigns going on. It’s mostly a question of which one will go first and drag the others down.

    If oil stays above $90 the US will go back into recession.

    1. Roz

      What you wrote makes no sense, was asinine, reeks of paranoia and provided no intelligent input of a very serious situation.

  9. Psychoanalystus

    Good list, but I would add (1) possible dollar crash, (2) repeal of health care reform, (3) rapid destruction of Medicaid/Medicare, leading to “death panels” and skyrocketing homelessness and starvation among members of The Greatest Generation, and last but not least, (4) Obama dissolves Congress, replaces the US Constitution with Sharia Law and appoints himself as America’s first Shah, leading to all Americans converting to Islam and instantly attacking of conservative Christian Europe…


    1. Maju

      LOL, that must be a joke or is people in th USA so throughly brainwashed by Teabagger nonsense propaganda? While I do not discard such a coup eventually (without the Sharia part), I’m more inclined to see it happen after Republicans take over again in 2012-13.

      But currently the elites are in no hurry for such a coup because the streets of North America are still not burning from angry unemployed and impoverished citizens. It will happen at some point, I believe, but not yet. By the moment they control every single power resort: White House, Congress, judiciary and the Pentagon, so only a real revolutionary threat would push them to such kind of unwise measure.

      Why unwise? Because a pretense of democracy and free speech is better to keep the masses content than an outright dictatorship without any costume.

  10. deeringothamnus

    Let me get this straight. Ultimately, the world financial economy is like a bunch of small children pretending that they give each other a zillion dollars. Accordingly, we have a small number of individuals who hold nothing other than the promise to cross pay each other some huge sum, and, based upon these promises, these individuals go get loans to buy actual assets ,for the cash flow with which to leverage more debt, thereby causing the capital and human resources to run down to the point that producing assets become as fundamentally worthless of the original cross promise.

  11. 60sradical

    Good list, Richard.
    I guess I worry about what will not happen–and by not happening, lead us closer to doom and gloom. 1. The war in Afghanistan wll not stop–nor will its complexities and human loss be understood by Americans. And the American ignorance of the horror in which we left Iraq will continue. 2. There will be little prosecution of the hundreds–even thousands of securitization fraudsters. 3. The mass media will continue to push “infotainment” and the sheeple will not see the depht of their sleep. Enough for now.

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