Asia Getting Hammered, Discouraging Report on ECB Commitment (Updated: Europe Opens Up, US Futures Rise; Second Update: Rally Fizzles)

Wellie, nothing like a lack of leadership to turn an ugly market day into an utter rout. But in another sense, the fake leadership in lieu of real leadership (as in taking a tough stand now and again and bringing the public around) is what set up conditions for a spectacular market unwind in the first place.

It’s one thing to do the equivalent of put the financial system on life support to deal with a crisis, quite another to leave the patient on life support and pretend you’ve returned to status quo ante.

The downdraft continues. The Nikkei is down 4.4%, the Hang Seng is off 5.9% and the Korean stock indexes are all off more than 7%. S&P future are down 25.80. Gold is at $1756 and Brent is just below $100 a barrel . The yield on ten year Treasuries continues to fall and is now at 2.30%. The euro had fallen into 1.41 territory but is now at 1.4219. The Aussie dollar had fallen below parity but is back slightly above it.

The plunge in big bank shares in the US has apparently focused the minds of the officialdom. Bank of America closed down 20.3%, Citigroup was off 16.4%, and JP Morgan, 9.4%. The Financial Stability Oversight Council is meeting tonight. Per the Financial Times:

Regulators convened an emergency conference call of the Financial Stability Oversight Council, which brings together the Federal Reserve, the US Treasury and other agencies. But government officials said there was no evidence of broader systemic instability or institutions’ funding coming under pressure. Banks have been moving to secure longer-term funding in advance of the market turmoil…..

Mike Mayo, analyst at CLSA, told clients that BofA might have to consider selling Merrill Lynch, the broker it acquired during the crisis, and “can no longer rule out a capital raise” because of exposure to mortgage-related losses and litigation.

I think there is a wee bit of denial as to the fix BofA is in. First, I’d like to know who exactly can and would buy Merrill right now, given the upheaval in the markets. Plus there is the not trivial possibility that the bank wrong footed its position going into this meltdown and is sitting on losses (I don’t mean life threatening, I mean enough to impair the price). Second, managements tend not want raise equity when a stock is distressed and often wind up pulling the trigger when it is even more distressed.

Two factors that gave the markets a push to the downside was the halting response of the ECB to the widening Eurocrisis and the astonishing lame Obama speech this afternoon. Europe opened weaker and the ECB was notably absent from the market. When it entered and bought bonds, stock markets recovered to flattish (the Italian index was actually up 4% at one point) but as the ECB went back to the sidelines, the market went down (US stock index futures moved in sympathy). That is not to say the intervention didn’t have an impact: Spanish 10-year yields declined by 105 basis points and Italy’s by 81.

Some commentators have hoped that the ECB would step to the fore and finally act aggressively. A fair point is even if they were to stabilize the markets yet again, the European officialdom seems no closer to a real end game, even in terms of having a viable plan for patient zero, Greece, or the disease carriers, the Eurobanks. So buying more time is a necessary but far from sufficient condition.

A report from a colleague, who knows staffers at the ECB, was very discouraging. The bank has $5 billion in equity. Although a central bank is not constrained by its equity, it is constrained by inflation (as in if it were to incur losses in excess of its equity it can still keep printing. As former central banker Willem Buiter has discussed, the constraint on a central bank is inflation. It won’t need to go hat in hand to a national treasury for more dough to be recapitalized until inflation is imminent.

But the ECB is dominated by Bundesbankian fear of inflation. And the bank is engaging in extend and pretend. My source said the reason the ECB is so opposed to a serious restructuring of Greek debt is that its exposures, including repo, in the €130 to €140 billion range. So Trichet does not want to restructure since it would reveal the size of the losses.

But that’s barmy. The losses exist. Not reporting them is an accounting fiction. But Trichet’s objectives are merely to keep things together until his term is over (which I believe is in November of this year). If he is afraid of exposing losses, that also almost certainly means he will be loath to balloon the bank’s balance sheet unless he is highly confident he is buying assets in distressed markets and is at no risk of loss.

I was also told the meeting of the ECB board have become heated, with members resorting to nationalistic sniping (“What do Italians know about austerity?”). Needless to say this does not sound promising either.

I’ve long been using the metaphor that the markets for the last year or so reminded me of a man trying to keep spinning plates balanced on poles. If you’ve seen that trick, the performer has to keep manipulating the poles to keep the plates aloft. I’ve felt so many of the plates looked wobbly that if one fell, others would come down in quick succession. But even a gloomster like me never thought more than one would come down separately but on the same timetable.

Update 3:45 AM: Someone must have put out the QE3 memo in the last two hours. S&P futures have gone from nearly minus 30 points to up 31.50 points as of now. The FTSE is up .33%, the CAC is up 1.88% and the DAX is higher by .55%. Ten year Treasury yields have increased 10 basis points to 2.40% and gold has fallen back to $1744.

Update 4:30 AM Bloody hell, that didn’t last long. I’m turning in. Blink and the rally is over. FTSE down 3.5%, CAC down 2.33%, DAX down 3.33%. Ten year Treasuries at 2.38%. S&P up only 4.2 points.

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  1. readerOfTeaLeaves

    So much for mathematicized economics.
    Looks like the system may be undergoing a phase change.

  2. Alan

    “I don’t mean life threatening, I mean enough to impair the price”

    What happened to your “death watch”?

    1. tawal

      I believe she was talking about the ML book not Bac as a whole. JPM would buy ML for 4 bil, 8 tops.

    2. Yves Smith Post author

      Yes, correct. What is killing BofA is its Countrywide liability and its yet to be taken second mortgage writedowns. Merrill as a business is probably OK, but who would buy it right now? All the big banks have impaired capital bases and/or have been whacked by the market downdraft.

      1. Hugh

        I remember thinking at the time that BoA must be crazy to buy Countrywide. But then I heard that most of the mortgages BoA dealt with were originated or funneled through Countrywide before coming to BoA. So I thought the purchase must have been a way for BoA to hide the toxic nature of these mortgages. Hiding is not the same as eliminating liability and this is what we are now seeing, at least that’s my theory.

        1. Susan the other

          It looks like that is also what happened with Bear and JPM. In the early years JPM became the trustee of lots of Bear MBS products. So all the hype about JPM refusing to take on the toxic Bear mortgages unless the Fed bailed them out with a 30 billion guarantee against loss seems like a cover story.

        2. Yves Smith Post author

          No, it’s more complicated.

          BofA was a second tier mortgage market participant despite the size of the bank Very little overlap between its business and Countrywide’s.

          BofA very much wanted to be able to scale up in mortgages. Believe it or not, Countrywide was perceived to be the best private label mortgage originator: best systems, best run call centers, best servicing, etc (remember servicing performing portfolios is not the same as servicing ones with lots of delinquencies).

          And if you look at deals through 20004, losses on Countrywide RMBS are lower than other private label players.

          They turned a good machine and went pedal to the metal for volume starting in 2005. And as we saw with Goldman, if you turn a good machine to bad ends, you can do a lot of damage.

          Why BoA didn’t see the change in their practices is beyond me. I was just a dumb blogger and it was bloomin’ obvious from the media.

  3. MyLessThanPrimeBeef

    That does sound too helpful – What do Italians know about austerity?

    By the way, are those in London rioters, protesters, rebel fighters or just thugs? What is happening over there?

      1. Mikhail Kropotkin

        Tottenham started off as a polite protest of the relatives and friends of a small time criminal being executed by the police while sitting in a cab. It was execution because it was planned, staffed by their heavy gun crew and they shot him in the head at point blank range – twice.

        Police refused to talk to the protesters. It got heated and then violent. Youths from the area got involved, the police stood back a lot, stuff got burned (police cars, a bus, shops). Police moved in heavily and broke it up. They have arrested over 55 people already.

        Follow up stuff since then has been a combination of frustrated and angry youth, political activists and opportunistic looting by locals and blow-ins.

        This could go either way, depending on what level of community organisation exists or develops quickly. The reality for the communities that are reacting is enormous unemployment, racist oppression by the police and disdain through to racism from the anglo community around them. In that respect they can all be seen as protesting and acting as rebel fighters, just not organised, so they can easily be painted as only thugs by the compliant MSM. I hope they get it organised and start aiming their anger in the correct direction, not at each other.

        1. solo

          You well describe the fruits of a generation of bipartisan Thatcherism; sow glitzy austerity, reap helpless bitterness. I do not know enough of the public mind in UK, but if they are like their American cousins, your hope for organization will either be dashed outright or else unhappily satisfied by fascist organization (to be more accurate, “herding”). Fascism is again in the European mainstream, and it feeds on hatred. –Not good for the market indices, by the way, at least in the gestation stages.

        2. vlade

          Please do not spreads rumors. As confirmed by the family, the man was shot ONCE, in the chest. Does that sound like an execution to you? Spreading “execution” rumours is just what was (partially) fuelling stuff like this.

        3. cheale

          This bears no resemblance to any of the reports. I don’t know where you are from but friends of mine live in London and may be affected by this. Can you ban this guy Yves. Thanks

    1. readerOfTeaLeaves

      Yes, what is happening, exactly?
      Markets move constantly, but not generally against the backdrop of burning cities. Very unusual.

    2. notabanker

      It’s mostly teenage thugs, and it went out of control last night. Ealing, Clapham, Croyden, Hackney and Woolwich saw massive looting and fires. Some fires burnt out of control for hours as police could not guarantee fire fighters safety.

      It has now spread to Birmingham, Leeds and Liverpool.

      It is very ugly.

      1. Mikhail Kropotkin

        So would you rename them to protesters or rebel fighters if they decided to us an organisational name, say, Youth For a Socially Fair Society?

        Communal anger does not necessarily come with a bankster compliant political party attached on day one. That takes a little time, and some elders who are willing to sell out.

      2. Hugh

        Letting fires burn can be both a way to punish communities in which riots occur and a means to discredit the rioters and any legitimate grievances they may have. In assessing a situation like this, the credibility of the police is key. The English police have taken a hit in that area with the affaire Murdoch. The initial impetus for the rioting also raises the issue of what exactly is the relationship of the English police with the communities in which these riots are occurring. Offhand it looks pretty poisonous.

        1. Typing Monkey

          It can also go some way to convincing the government not to cut your police staff, as you previously announced.

        2. Susan the other

          But what better way to clear off the area slated for the coming Olympic venue. Let the fires make the buildings uninhabitable; raze them all and build the Olympic stuff. let all the dispossessed people sleep in a tent city or on the street until it is time for the Olympics. Then put them all on a ferry and send them to France for a month.

      3. psychohistorian

        I read this at Crook & Liars

        One London blogger notes:

        In one NBC report, a young man in Tottenham was asked if rioting really achieved anything:

        “Yes,” said the young man. “You wouldn’t be talking to me now if we didn’t riot, would you?”

        “Two months ago we marched to Scotland Yard, more than 2,000 of us, all blacks, and it was peaceful and calm and you know what? Not a word in the press. Last night a bit of rioting and looting and look around you.”

        Eavesdropping from among the onlookers, I looked around. A dozen TV crews and newspaper reporters interviewing the young men everywhere.’’

    3. attempter

      This is a revolt within capitalism which is turning its own values against it. I’d call it an excellent of example of a Work to Rule demonstration.

      Lost in the condemnation of gangs, animals and thugs by the middle and upper class media is the fact that many rioters have actually internalized capitalist values. Like the great oligarchs, they don’t hesitate to use violence to achieve their ends, and, also like the oligarchs, they expropriate the property of others.

      As long as they attack the institutions of the enemy rather than trash their own neighborhoods, they’re acting rationally and justly. It does seem that there may be some indiscriminate and self-destructive rioting going on. There’s no organization to it, but for the most part the poor are spontaneously counterattacking those who so viciously attack them on a daily basis.

      The looting of corporate retailers is, of course, simply mirroring the corporations’ own actions which stocked those stores in the first place.

      1. Cedric Regula

        So… you’re saying their thieves. Not gangs, animals, thugs, rioters, protesters, or rebel fighters.

        That’s so Old English. It all makes sense now.

        1. Mikhail Kropotkin

          No, he is saying they are capitalists, using a very low capital business model. Rocks are cheap, stores are expensive.

          Asymmetric capitalism anyone?

          1. Cedric Regula

            Yes, I did get it. Capitalists are thieves. Not gangs, animals, thugs, rioters, protesters, or rebel fighters.


            Thieves are thieves.


            It’s all thieves within thieves within thieves.

            From thieves who can to thieves that can’t…so well.

            We can see some progress as we go here?

            I’m new at this socio-politico stuff…but I do try and pay attention.

          2. Mikhail Kropotkin

            Sorry Cedric, forgot the /humour tag!

            My dry humour too often reads like bitterness. But I also hate the infantile emoticons that are supposed to make up for the uncertainty in prose. I pays me money and I takes me chances…

          3. Cedric Regula

            It’s getting late and I’ve been staring at this computer screen too long and my humor detector is on standby power.

            Plus it can be hard to tell sometimes when people are being serious around here.

            Gonna sign off and hit the sack.

            Hope Sony doesn’t come by and steal my screen.

          4. psychohistorian

            Sorry about Cedric, it looks like I am not sensitive when he is…maybe its our balance Cedric

            Anyway, back to that asymmetric capitalism. It does have a nice ring to it the way you couched it. My point here is that we are going to see more, not less of this expression of frustration at “the system”.

            Come on now folks, we are the elite and have studied and read our asses off to try and understand the world we live in…ands some of us, like our host, have extraordinary powers of communication. These youth and others that will express frustration at the rents in our social fabric are less skilled at the cognitive dissonance they face and so some of their actions are hurtful and misdirected in my/our opinion.

            That is going to be the interesting aspect of this going forward. American imperialism has been and continues to be very effective in eliminating emerging opposition…..don’t want to stop the Syria thing too soon…..maybe still some emergent power that needs to be eliminated…. What is going to happen to that strategy when it comes to you and I here in the good old US of A? The media and big money are stacked against us but I am ready to put what remains of my life on the line. What does that mean, the life on the line going forward? Don’t know but am open to being true to my ideals about what the REAL evolution of the American dream should be by now.

            I going to be slightly critical of our host here and encourage her to think a bit more outside the bounds of her current gloomster box and consider conspiracy a bit more. The really are and have been at this concerted effort to get and keep nations fighting with each other for table scraps for ever. I look at all these market gyrations and think…hmm, if the rich own 60-90% of all this then it is all just more kabuki to take money from those stupid enough to think they can beat the house at their game.

            Now, was I on track 2 or was it 4……..? Sigh…

          5. Cedric Regula

            Maybe if we wear “I’m Sympathetic” t-shirts we can all keep things straight out there on the streets.

            I do recall driving down the freeway one day in LA on the way to a biz meeting (contract negotiation – our capitalists were attempting to steal from their capitalists and visa versa – it’s a way of life for us) and belatedly heard on the radio that we were having the Rodney King Riots. I watched all this black smoke rising to the sky obliterating the sun. Then I learned the riot was set off by my people (LA Cops).

            It gives you a different perspective on asymmetric capitalism when you get to see it up close rather than on the TV/monitor from 1/3 to 1/2 a world away.

            Then again, if we wanted to do something about it, we could always vote against “our people” when given the chance on election day?

            Then maybe we could wear “Don’t Hit Me In The Head With A Brick” t-shirts with the picture of our favorite candidate.

        2. attempter

          Self-restitution from those who stole from you isn’t thievery. All I’d want is that they don’t trash their own neighborhoods, but take the fight to the enemy’s commercial and residential neighborhoods.

          1. attempter

            Yes, god forbid the criminals would ever be disturbed in their peaceful enjoyment of the fruits of mass murder and world-historical robbery.

          2. Anonymous Jones

            This reminds me of some cliche repeated by a couple of good-for-nothings last century about everyone ending up “blind,” but for the life of me, I cannot figure out why.

      2. nonclassical

        In the U.S. fascists would take control under the guise of
        “order”…take a long look at “Patriot Act”, because it was never meant to use against foreign “terrorists”-

        (“The Power of Nightmares”-Adam Curtis)video-neocons invented al-Qaeda, for exactly the purpose of control of populace…

  4. Susan

    “First, I’d like to know who exactly can and would buy Merrill right now, given the upheaval in the markets.”

    It depends on who the US government gives a huge chunk of the US taxpayers money to….. the recipient will buy Merrill.

    1. Typing Monkey

      I would get rid of the idea that the Feds are stupid enough to give any bank money to take over another one at this point. It simply won’t fly in the current political environment, and I’m sure the politicians know this–no amount of spin is going to change the public opinion, and no politician is even going to try at the moment (esp. after talking about the importance of deficits, etc). In terms of bureaucratic priorities, ass-kissing is out, ass covering is in…

      Even Helicopter Ben is probably weary of announcing QE3 until he can cover his ass at the moment.

      1. K Ackermann

        Oh yeah? The Fed would shoot children from rooftops if it prevented a systemmic problem.

        Don’t forget who created the Fed, who controls it now, and its prime directive.

        1. Typing Monkey

          I think the government has finally realized that we are going to get a systemic problem regardless. That’s why it’s time for ass covering. Incidentally, the Fed has done a lot of things that are **really** questionable legally. Bernanke is not going to push his luck without a lot of Congressional approval (and in any case, he can’t directly bail out the banks). And neither Congress nor the President have the backbone to explain why the banksters deserve more money–especially with the repugnant way the bankers have acted since they got their last money. It’s simply political suicide, and it’s just not going to happen.

          I do think that this plunge is overdone, btw–there should be a sharp (if temporary) bounce up soon.

  5. Mikhail Kropotkin

    Well, most of Asia came off again in the 1.5% – 2.5% range, except for Australia that bounced off mid-morning lows to finish just shy of 100 points north of the 4000 resistance. Looking at the segments in Sydney, it was mostly bargain hunting in the blue chips and banks.

    Bombay is slightly up. Maybe there are some happy shoppers out there thinking they can get a good deal. Best of luck with that!

  6. Maju

    I must be blind because I really fail to see any connection between the unusually appropriate act by the ECB and the collapse of stock markets, specially in Asia. The reaction to Trichet’s declarations was good in Europe and held the markets initially yesterday, so markets are reacting to other stuff, like the downgrading of the US debt, the “hidden” radioactive collapse of Japan or the London riots…

    … or more likely there’s just an unjustified bubble that has finally burst. You tell me. I’m not directly concerned, specially after I realized that the worst stock crash ever (1987) had no relevant effects in the mid run. I am more concerned about jobs and about the overall slow paced (with outbursts) collapse of the Capitalist system without any alternative on sight nor any sort of meaningful political leadership.

    1. Cedric Regula

      My theory is that “cognitive dissonance” just keeps building and building until enough bad voodoo vibes makes cognitive dissonance contract again.

      But it’s not a very good theory for trade timing.

    2. Yves Smith Post author

      The ECB was late in coming out with its statement over the weekend, which signaled internal dissent, and it hasn’t given any parameters for its action. That means investors have to watch and see what it does. My Euromarket watchers say its actions in the market, albeit helpful, were not convincing, and its body language before the announcement was that it intended to nibble and hope that reassured investors enough.

  7. psychohistorian

    Certainly were some wide swings in the market today.

    Has “faith” been restored?

  8. 60sradical

    Thanks for your hard, relentless work Yves. You are a model for my daughter–a woman warrior.
    I think we should all pull back for 15 minutes from the Niagra Falls of financial information, go placidly to utube, watch the 7 second collpase of Bldg. 7, WTC, 9-11(47 stories and never hit by anything)sraight into its own footprint, nine hrs. after the trade towers came down and ask ourselves how could this happen?
    One’s crusty cognitive dissonance may snap and the edges of an insidious scheme by dark foces may appear.

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