Market Upheaval (Updated)

Since this will be trumped by the market opening in the US, I’ll be brief.

So far, this is playing out like I expected. Bad but not horrific. That does not mean we can’t see a moderately bad day in the US slide into nasty end of session erosion and then cascade into Asia overnight. But as much as the markets were psychologically rattled by the wild card of the US downgrade, the bigger deal is whether the ECB will stem the tide of the liquidity crisis underway in Europe. Yes sports fans, we also have a solvency crisis in place like Greece, but the danger of a liquidity crisis that it will lead a big financial domino to fall over and do a Credit Anstalt to the European banking system. Richard Smith’s top contender is Italy’s Unicredit, which had the bad fortune to overpay to get into pretty much every bad housing market in its reach (save the UK and Spain).

A top line overview: S&P future have ranged (at least when I was paying attention) from down 18 to down as much as 32.50, now at about 31.9. European market were down 2% ish on open, some traded up to positive territory or down less than a percent, they’ve now lost faith and are back to meaningfully negatives: FTSE down 1.87%, CAC 40 down 2.48%, Dax down 2.80%.

The dollar was down a mere .3% on the DXY index in Asia, and the euro has weakened meaningfully since then, so I suspect it will be flattish or only slightly negative. Treasuries are moving back from losses overnight that still put them well above the levels of a week or so ago. The ten year yield is up only 10 basis points. Gold is up big, over 3%, and Brent is down 2.87%.

The latest on the Euro interventions, courtesy Bloomberg:

European Central Bank President Jean- Claude Trichet started buying Italian and Spanish assets today in his riskiest attempt yet to tame the sovereign debt crisis.

Italian and Spanish bonds surged as the ECB entered the market, sending 10-year yields down more than 70 basis points. The euro rose to $1.4355 at 10:30 a.m. in Frankfurt from $1.4277 at the close of European trading on Friday.

With governments failing to act swiftly enough to stop contagion from Greece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro. Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty and undermining its credibility. Germany’s Bundesbank opposes the move.

The problem is we have no idea how much the ECB is prepared to commit or what its aims are (as in does it have an interest rate target it is trying to hit). It is worth remembering that the ECB has intervened aggressively and successfully in the past, when the euro fell to about 1.22 to the dollar and bond spreads were blowing out. The question remains whether they are prepared to maintain a large and persistent enough effort this time.

Update 7:30 AM: Reader Tim Coldwell point to this reading from the ever useful Golem XIV. The bottom line is Euribor, the European answer to Libor, is locking up. If the ECB can’t intervene forcefully enough to reverse that, you will start to see banks fall over pronto. From the post:

According to Bloomberg, The Euribor, the European equivalent of the Libor (remember that from 2008?) is locking up as banks decline to lend to each other. Those European banks that do have money are putting it in the ECB overnight in preference to lending it to the European banks that desperately need it – such as Santander in Spain and all the Italian Banks led by UniCredit.

Once the Euroibor starts to freeze that is the signal for non-European banks to stop lending to European banks altogether. Why should they trust European banks if fellow Europeans don’t. Banks have to have overnight funding or they die.

I think we are now closer to the edge of then cliff than we have been at any time since AIG and Lehman’s collapsed. Without short term and overnight funding Europe’s banks will die within the week, so the ECB will now certainly step up its overnight lending to any and all not as a matter of prudent banking but of political panic. That however will be merely the response to the weekend’s Euribor freeze. I say response because it is not a solution. The banks can’t stay addicted to ECB methadone. The amounts would simply run out of control.

This goes back to multiple problems: the refusal to wipe out equity and force bondholders to take losses and partially convert to equity, and the obsession of the ECB (and the influential Bundesbank) with inflation, meaning they do not want the ECB balance sheet to get too large.

Mind you, I am not saying there are pretty ways out of this mess. There are less bad ways, however and I’m not optimistic the ECB will resort to them.

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  1. Jim Haygood

    ‘Italian and Spanish bonds surged as the ECB entered the market, sending 10-year yields down more than 70 basis points.’

    Congratulations, Mr. Trichet. I’m sorely tempted to step out on the patio, pack ice cubes around the base of the thermometer, and gradiosely declare that I’ve single-handedly defeated global warming, at least in my own back yard.

    This eminent Frenchman deserves a Greenspan Prize.

    1. jake chase

      So Wall Street insists the ECB buy Spanish and Italian bonds which are held mostly by European banks. Why do they care? Perhaps our banksters are on the hook to the European Banks on Credit Default Swaps covering these bonds? Perhaps it is the peripheral countries that now have the banksters over a barrel? Are they refusing austerity and using default as a weapon of their own? Is the equity market melting down because the banks are reducing hedge fund lending and forcing liquidation of speculative positions? These are questions which nobody seems to be addressing.

      1. JasonRines

        Yes Jake but it is this way: Central Banks are franchisees of the Rothchild family. So Europe gets saved from U.S. and other CB’s taxpayers to pay for the losses at the global casino. Heads I win, tails you lose for the taxpayers.

        The real issue is that Bankers run the world and Bankers dont do fiscal policy, they make loans. The problem with their model conquering the globe means now power must be reassigned back to governments or the people if you will to conduct fiscal policy (such as adequate energy supply to for growth). But we see that the Bankers will not relinquish power willingly. Same story over thousands of years of history. The names change but the game of predator and prey is the same. When the prey get tired of being lunch and revolt, the Bankers will tilt us into world war. They go but will take a lot of us with them.

        1. Because

          Nope, nope and more nope. Modern day Central Banks are not franchises of the Rothchilds.

          Can anybody guess what bloodline it is(hint, it isn’t the Duponts or Rockafellers either, though the Rockafellers are historical middle men in this game). What bloodline is it?

          1. Because

            hehehe. If people only knew. The Rothschilds don’t even own a majority share of the USFRS,The British Central Bank or the ECB. They are minority shareholders on everyone of them.

            It is no wonder I see Rothschild handlers funding “Tea Party” Dupontians.

            The Morgan’s are the BRF(Merovingian) handlers like the Koch’s are for Duponts(frankly, considering how old the Koch’s are, I wonder who the Duponts got next lol?). The supporters for the modern “central bank” are the Bundy’s(Bush’s),Astor(Clinton’s, though they are small fries compared to the Bush’s) to name the bigger ones.

            The Kennedy,Disney bloodlines support a fully reserved system to allow government control of the printing presses. Notice how alot “goldbugs” and “doomsday” Gold hoarders never mention that. Mainly because they fear it and instead lie that the current central bank can “print at will”(in truth, they can’t “print” anything the private banks don’t want them to print). They whine about currency stability but never mention the possibilities you yourself have mentioned Frank, because they fear that even more. The need for the international gold standard is chief importance. Anything else is damned.

      2. Cedric Regula

        I’m breathlessly awaiting the Goldman announcement (surely coming any minute) that they are increasing margin on all broker accounts.

        1. Cedric Regula

          I might of said that backwards. I mean reducing the amount of money their clients can borrow to buy stock, or probably anything, resulting in forced liquidations of assets in order to meet margin calls.

          Windy, but more precise.

  2. Jim A

    So, how much exactly DOES S&P charge for a AAA rating? Should I be worried that GS can afford it and the Treasury apparantly can’t?

  3. kezza

    The problem is we have no idea how much the ECB is prepared to commit or what its aims are (as in does it have an interest rate target it is trying to hit). It is worth remembering that the ECB has intervened aggressively and successfully in the past, when the euro fell to about 1.22 to the dollar and bond spreads were blowing out. The question remains whether they are prepared to maintain a large and persistent enough effort this time.

    Earlier it was reported that the ECB stepped in to buy 5-year Italian and Spanish government bonds. I don’t recall seeing any reports that they are buying the 10-year bonds…

    Given the incompetence of bureaucrats in Europe, I don’t think the ECB is going to be persistent enough — this effort is probably only going to last for this week at best, at worst it will end on Wednesday.

  4. Jim Haygood

    From Bloomberg:

    Since starting its bond purchases in May last year, the ECB has bought about 74 billion euros of assets to help stabilize Greek, Irish and Portuguese markets — the three countries of the euro area to have received bailouts from the European Union and International Monetary Fund.

    Oh, and how did that work out? Last I checked, the Greek 10-year bond yielded 15.31%, the Irish 10-year 10.59%, and the Portuguese 2-year 15.21%.

    Wow, this program worked so well that one can certainly see why the ECB is ‘going large’ with it! Double-digit rates for all!

    Centrally-planned Europe has become a Savers Paradise, comrades — real rates out the wazoo. What’s not to like?

    1. aet

      Gee haven’t seen rates like that in the USA since the late 70s, early 80s – looks like they too want to reduce payouts to the “lower classes”, as happened in the US in the 1980s, the “first wave” of “austerity” – rem member the “temporary cutbacks” to wage settlements of the 1980s?
      Those “temporary” cutbacks became permanent , and now their the new baselib ne for the new ‘cutbacks’, in all but defense/police/prison spending. No cutbacks to those.

      How did that last big round of right-wing austerity work out for the rust belt?

    2. aet

      Gee haven’t seen rates like that in the USA since the late 70s, early 80s – looks like they too want to reduce payouts to the “lower classes”, as happened in the US in the 1980s, the “first wave” of “austerity” – rem member the “temporary cutbacks” to wage settlements of the 1980s?
      Those “temporary” cutbacks became permanent , and now their the new baseline for the new ‘cutbacks’, in all but defense/police/prison spending. No cutbacks to those.

      How did that last big round of right-wing austerity work out for the rust belt?

    3. Cedric Regula

      “Centrally-planned Europe has become a Savers Paradise, comrades — real rates out the wazoo. What’s not to like?”


      The Paradox Of Saving – Part Two.

      In the first year, we pay you 20%.

      In the second year, we inform you we keep the other 100%.

  5. mememe

    among the large, liquid sovereigns, the USA is still the prettiest pig in a pen full of aardvarks.

    if anything S&P gave the Euro the kiss of death, if USA = AA+, and USA > France, then there is no way France = AAA.

    Gotta love the transitive property.

    1. no mas

      I don’t remember “safer than” as one of the relations discussed in algebra class. But upon reflection, it seems that it would indeed possess the transitive property.

  6. Roadblock Republicans for America

    “This downgrade is the direct result of Roadblock Republicans.””
    ==> YouTube – Mitch McConnell: Top Priority, Make Obama a One Term President
    Mitch McConnell Vows To Hold Debt Ceiling Hostage In The Future: ‘We’ll Be Doing It All Over’ | ThinkProgress
    MCCONNELL: It set the template for the future. In the future, Neil, no president — in the near future, maybe in the distant future — is going to be able to get the debt ceiling increased without a re-ignition of the same discussion of how do we cut spending and get America headed in the right direction. I expect the next president, whoever that is, is going to be asking us to raise the debt ceiling again in 2013, so we’ll be doing it all over.

    1. aet

      They’ll keep on doing it until pentagon spending is meaningfully reduced, no doubt. Or will only those payments to indigent Americans be reduced?

    2. psychohistorian

      It is way past time to remove the global inherited rich and their bought minions from any sort of public or economic policy role.

      1. steelhead23

        First we’ll need to make them wear armbands with dollar signs on them so we can tell them apart.

        1. psychohistorian

          Please read the comment by “Because” above.

          The list is not that long and the Hauge would easily hold the lot of them and after a fair trial we nationalize all their holdings. This would give the “state(s)” the public money to implement a socially oriented MMT .

  7. ella

    Shocking, one man in one company wreaks havoc on the global economy with one downgrade. How could global governments allow so much concentrated power and why are the governments so cowered by this action. No wonder the Europeans are in the creating their own rating agencies.

    Rating agencies must be accountable for their ratings. Begin with S&P who may have rated $14T of toxic securities for Wall Street between 2003 and 2008. Naturally, the ratings were paid for by Wall Street and fattened the bottom line of S&P.

    1. Yearning to Learn

      Shocking, one man in one company wreaks havoc on the global economy with one downgrade

      I may be wrong, and am happy to be proven wrong, but it seems to me that there were two parallel story lines occuring simultaneously.

      1) the debt drama in America which resulted in S/P downgrade.
      2) the continued pressure on the EU.

      IMO the EU issues are not S/P related. They were building in a parallel time sequence. The spreads on Italian debt and the CDS against Italian banks (e.g. UniCredit) have been exploding over the last few weeks.

      One could argue that it was the fear of the S/P downgrade which pressured US equities/debt which then pressured EU banks… but I find this slightly less likely.

      IMO we’d be here with respect to the EU/EMU regardless of S/P.

      It seems as though we have a reverse pageant between US, EU, China, and Japan to see who is not the worst. At any given time one of the four surges ahead (backwards?) only for the rest to catch up and then another take the lead (or behind).

      perhaps this is more coordinated than we know however… a “race to the bottom” with each country drafting on the others so that no pig looks too bad at one time?

      but the juggling act is clearly getting harder… and Gold surging will be a major problem.

      1. psychohistorian

        Yearning to Learn said:
        “perhaps this is more coordinated than we know however… a “race to the bottom” with each country drafting on the others so that no pig looks too bad at one time?”

        The global inherited rich do not own everything yet but enough to coordinate this sort of race to the bottom as they profit on the movement up or down. It is sad to see the total lack of focus on the folks who put all these corporate and government puppets in place to create the kabuki that their press then turns into useful propaganda……its all the fucking hippies fault or other hate of the day focus.

        1. Yearning to Learn

          The global inherited rich do not own everything yet but enough to coordinate this sort of race to the bottom as they profit on the movement up or down.

          I agree here. They clearly can profit on the way up and down, and have motive and also ability to do so for the most part.

          however, the juggling does get harder the longer this continues, and you do get different factions of the elite who have opposing interests.

          Thus, I’m not sure if this is a coordinated takedown of all major currencies… or emergency slightly-coordinated procedures to keep it all from blowing up right this instant.

          it is highly possible that they set something in motion but are unable to control it. like a 7 year old that goes on a joyride. now they are hanging on for dear life.

          1. ella

            “Unable to control.” Yes, I have been wondering the same. After all the Tea Party was created by a certain group of Ubers and now they have what they bought. Maybe what they will receive will be far less than they thought as global markets are severely damaged. The damage will likely result in demand destruction which will ultimately affect their bottom line. It may well spin out of control.

            Will the S&P downgrade be remembered as 1929 “Black Monday”.

          2. psychohistorian

            How is out of their control? PLEASE!! They have been at this for a long time. Please show me where they are losing control somewhere in the world, really.

            I have not heard a peep in all this turmoil about taking control from the global inherited rich, nationalizing banks, changing the rules about private ownership of everything. Hell, I am almost the only one really pushing the cry to end the control of the global inherited rich on NC…..this is not to say that others are not attacking the beast from other directions but where is the focus on the folks behind the curtain instead of the kabuki of their minions in governments and multi-national industry?

          3. Yearning to Learn

            How is out of their control? PLEASE!! They have been at this for a long time. Please show me where they are losing control somewhere in the world, really.

            Psychohistorian, sorry couldn’t reply to you under your name.

            I’m not sure if they are in control or not. it just seems a very dangerous game they are playing here… and one tiny miscalculation can cause an out of control spiral.

            Many of us have predicted that we’d see a summer swoon in order to clear the way for QE3. many of us predicted that we’d continue seeing a “race to the bottom”. however, I am not sure that any human or group can closely control all the moving pieces of our interlocking system.

            For instance, I do think that Paulson and Goldman torpedoing Lehman (and yes, that is what that was) was planned, but a massive flight from Money Market Mutual funds was not.

            I doubt that they foresaw that the average investor would not return to the market, and that instead the Stock market would just become algos trading with algos.

            I think that they did want the ridiculous Kabuki of Tea Party vs Obama in a debt stalemate, but I think they likely foresaw a rebound rally when the deal was made and not a major selloff.

            I think they really thought they could “contain” the EU mess to the periphery. But I doubt they foresaw all dominoes including France falling.

            one could argue that they are setting us up for a world currency or something… but this is a huge gamble… no knowing what would happen if most/all fiat collapsed together.

            trade wars and nationalism are enemies to globalism, and globalism furthers the interests of the elite too much.

            thus: although I can see them pressuring and manipulating here and there, and taking advantage of Disaster Capitalism, I’m not sure that they understood/understand the full ramifications of their acts.

          4. jonboinAR

            @Psychohistorian: Many blog-commenters at least agree with you. The problem is, we are not organized. I occasionally post a call to organize. The problem when I do that seems to be that no one takes me seriously. As much as I read here I still don’t seem to be well enough informed. For example, I’m well familiar with the general argument in this sub-thread, but can’t relate specifics. Me and Carla, who frequents Baseline Scenario a lot, we started the blog my name links too. It doesn’t seem to attract attention. Others have blogs too. We never meet. I have been too busy for about a month to post to it.

            How do we get our you-know-what together? Leaders such as Ms Smith have done the first step. How do we do the next? Organization is the key I think (spoken by one without organization experience who hasn’t a clue of how to begin).

        2. steelhead23

          While I agree with your sentiment, I have little hope of effectuating an outcome. That is, the puppet-masters are generally not in my acquaintance. I know a few names – that’s all. Truly – all we can hope to do is to cut the strings. Even if we could eliminate all the puppets, the puppet-masters would merely hire new ones. To cut the strings by the way, means to get the influence of money out of politics. There has been substantial effort at this, but little success. The second thing is to see finance for what it is – a utility function in the economy – a utility that would function best if devoid of the profit motive. Hence, of course the banks should be nationalized. To do so would be quite simple – offer FDIC deposit insurance only to institutions organized on a not-for-profit basis. Investment banks could continue – completely uninsured, but regulated like a wayward child. Psycho – you are NOT alone.

      2. ella

        Concur, major global problems but would we have the current chaos absent S&P downgrade? Perhaps the global debt problems would have unwound less dramatically and more slowly.

        S&P has too much power and is now downgrading:
        ” * Options Clearing Cut to AA+ From AAA by S&P, Outlook Negative – there goes no counterparty risk,
        * Natl Securities Clearing Cut to AA+ from AAA by S&P, Outlook Neg – there goes no clearing risk
        * DTCC Cut to AA+ from AAA by S&P, Outlook Neg – there go all your stock certificates” per ZeroHedge

        What next?

        1. Cedric Regula

          We’ll probably find out that hummingbirds did a speculative attack on HFT Robos. It had to happen sooner or later, no matter what S&P thinks about hummingbirds and HFT robos.

    2. Huh?

      Is the fundamental problem of the economy not financialization? When we talk about the “economy” now we aren’t talking about the real economy of production, we are talking about an economy based on debt and finance. Is that not the problem, the growth of finance relative to the real economy?

      Marx talked about there being four types of transactions. C-C’ (commodity for commodity, or barter), C-M-C’ (commodity sold for money which is used to buy another commodity), M-C-M'(which is the dominant transaction in capitalism. If M’>M then you see a profit) and finally M-M’. Money for money, with no connection to the productive economy. That seems to be where we are at, an economy increasingly reliant on M-M’ transactions.

      Financial profits used to be around 10% of overall profits in the US, they are now over 40%. What is the product of finance? Debt. How can an economy, the real economy based on production, survive with that being the case?

      Here’s a chart showing the growth in the size of financial profits since the late 1940’s.

      Either we shrink finance and get back to an economy based on production or we crumble back into something like feudalism, only (given the ecological crisis) much worse.

  8. craazyman

    is it too late for skf? damnation. loved the quote from Doly’s Mom about the indignants “you can’t put doors on an open field” i kept thiking about that and rolling the words in my mind like water running down a river. it’s a beautiful and moving image, great rhythms in the words too. just don’t want to get the skf door slammed on my little piggy bank. is euroland an open field of trick thy neighbor and be thee as a briar unto him? could be, there on the high hills in the etruscan walled towns with jewels behind locked doors. can’t put a door on that. skf could go to 100. if youze can help me get rich quick, youze get an honorary GED in Ecnomic Lit from University of Magonia.

    1. Cedric Regula

      Gee, craazyman, I dunno. Double shorting banks sounds kinda risky seeing as how they can just create money out of thin air and all. You’d think they could grow earnings in any environment that way? Besides, somethimes they ban short selling when they get pickish about price discovery. I mean, mark-to-model is mark-to-model right?

      I wanted to post sooner so we could have a timely chat about this, but the NC server has been crashing. The whole world must be hitting the thing to read Auerbach’s piece and find out how money works and how the debt-money morons at S&P just don’t get what Sovereign means. Better late than never I always say. I don’t know why the government doesn’t just nationalize S&P and be done with it.

      But getting back to SKF and Auerbach’s revelation about the Chinese. I guess if I were the Chinese with a checking account at the Fed full of dollars (Auerback clarifies that it is really called a Federal Reserve Account – but it works just like a checking account like you or I have..or maybe more like MyLessThanPrimeBeef has), I might buy SKF because I wouldn’t really be sure if I was risking our money or not, and that would go a long way in reducing my fear factor, I would think…somewhat irrationally, of course. Especially if I were a committee.

      Don’t know if that helps or not – just thought I’d share.

      1. propertius

        I don’t know why the government doesn’t just nationalize S&P and be done with it.

        You misspelled “arrest”.



      2. craazyman

        thanks Cedric I appreciate your ideas. I’m crying right now. I was long SKF big time (for me anyway) at 64 and I panicked and stopped myself out at 63 last week. Now it’s 92. One week! I knew I’d be right, but I just didn’t know when. I’m not George Soros. I can’t afford to carry a position like he can. How can I get rich quick if I can’t use other people’s money? It’s complicated. :)

        1. Cedric Regula

          I hear ya. I bet George Soros told the PBoC last week they should put their money in a London account then buy $2 trillion in SKF just as fast as they can without causing suspicion. They could short the US all the way back to the stone age.

          Course George would have his position already, ya know, being a savvy hedge fund guy!

    2. hermanas

      Craazyman, wanted to get back earlier.
      Your comment of passing on pints and laughing with the doob made me think of the Bee Gee’s,”I laugh in your face”.
      Will make it hard for hatred to prevail.

  9. Dan Duncan

    This “market analysis” is knee-jerk.

    Time and again, Yves has referenced Richard Bookstaber in making the point that the global markets are tightly coupled. And it’s really is an astute observation…that a failure at one point, too often in modern markets, tends to propagate through the entire system.

    And now, for some reason, you’ve forgotten that the markets are tightly coupled and this downgrade is–and I quote–“much adieu about nothing.”.

    I’m not saying that the S&P downgrade is an Armageddon Event. Far from it.


    1. As you are already highlighting, Bank of America is under real stress right now. And as ZH is highlighting…Bank of America CDS is growing dangerously wide. BAC CDS are affected by this development.

    2. The S&P downgrade puts the spotlight on France. Whether you agree or not is irrelevant…the fact of the matter is, the probability of a France downgrade just increased after the US downgrade. It matters.

    3. Who knows how many other funky derivative bets have been affected by this development. A single hedge-fund margin call would cascade through the system.

    4. Maybe the downgrade will provide cover for the Fed to go with QE3 quicker than it would have otherwise.

    There’s no telling what the impact will be…and 6 hours of trading in Asia and Europe doesn’t mean a whole helluva a lot.

    1. craazyman

      Geez Dan, make yourself useful already. These are the times fortunes are made. What’s your call? What’s your best 10-bagger? We all know the variables. We need some conviction! An Honorary GED in Ecomonic Lit awaits if you nail it. LOL. I’ll do it up on my computer and print it out on my Epson Printer. I can even draw if I have to. I’m thinking a little Alien wtih those big insect eyes superimposed on clouds for the logo.

  10. Francois T

    This goes back to multiple problems: the refusal to wipe out equity and force bondholders to take losses and partially convert to equity, and the obsession of the ECB (and the influential Bundesbank) with inflation, meaning they do not want the ECB balance sheet to get too large.

    Well…isn’t it past due time for the adults in the room to tell politicians and banksters that this is game over for them? That others, more prudent and sensible, shall replace them? That the banking system will be saved but they are not part of this rescue plan. And Oh! BTW, expect a 30-50% haircut in your portfolio soon…REMF!

    Short these drastic measures against the elites, stick around and witness Nottingham exponent 100 all over Europe pretty soon.

    1. Dikaios Logos

      I found myself agreeing with most of what you wrote, so I’d like to know what a Nottingham exponent is?

      1. Jim Haygood

        Prolly he meant ‘Tottenham^100’ (cities on flame with rock ‘n roll, so to speak). :-O

        1. aet

          Wasn’t Nottingham Robin Hood’s old neighborhood?

          IIRC Robin Hood was popular during the 1930s, specifically 1937.

  11. Francois T


    Chris Whalen asked a rather provocative question here:

    Are U.S. regulators worsening E.U. credit squeeze?

    I’m not qualified to assess this content. Yves, anyone?

    The head of the credit risk book at one of the largest French banks told me yesterday that his institution has seen a one-third reduction in the volume of credit available from U.S. counterparties. He directly attributes this change to advice to U.S. banks from American regulators. The market veteran notes that long-term credit is unavailable for most E.U. banks, increasing pressure on short-term funding pressures in the dollar/euro market.

    American officials apparently want to avoid another “AIG situation,” in the words of one well placed banker, thus reducing credit lines to E.U. banks is seen as a way to reduce systemic risk. But in fact just the opposite may be the case. The regulators may be fomenting a systemic risk event by going against the advice of Chairman Martin and most of his contemporaries.

    Another market observer points to U.S. derivatives dealer banks reducing exposure to E.U. banks because of continued worries about the PIIGS implosion. But one wonders how much these particular data points weigh on the credit markets compared with the impact of low or no interest rates on risk taking. When Bank of New York announces that it will charge large customers for deposits, it begs the question about current Fed rate policy.

    I believe that the Fed needs to let the cost of funds rise to restore yield and risk taking to dollar assets, but at the same time make clear to the markets that the volume of credit available to solvent borrowers is unaffected or even increased. The contraction of money and credit on both side of the Atlantic is the key issue that should have the attention of policy makers. As Carl Weinberg of High Frequency Economics said on Bloomberg Radio this morning, nothing good comes from contracting credit and money markets. But low interest rates is driving deflation, in my view.

    To the extent that regulators at the Fed, OCC and FDIC are encouraging U.S. banks to arbitrarily reduce credit lines to their E.U. counterparts, that behavior needs to end now. The chief threat to the global markets remains deflation as debt levels are reduced to practical levels. Next week, Fed Chairman Ben Bernanke and his colleagues at other agencies needs to make clear in a very public way that the U.S. central bank is not taking steps to make things in the money markets a lot worse than they need to be.

    1. Cedric Regula

      Whalen seems to be saying that our government made risk-reward suck…so everyone is saying FU to that. When we did that in 2008, we named it “wholesale bank run”. Nothing new here.

      Not a big problem tho, really. This is when Ben does does dollar for euro swaps with the ECB, then the ECB loans out the dollars to EU banks, provided they have any unpledged collateral left.

  12. appointmetotheboard

    Watching the BBC market ticker with a kind of sick fascination.

    New Capitalism readers will doubtless be gratified to know BoA have been the consistent big losers all day (so far), with 9-10% off the share price…

  13. rps

    Bloomberg:Europe’s Crisis May Stuff U.S. Banks With Undeployable ‘Hot Potato’ Cash

    The European debt crisis is poised to flood U.S. banks with something they don’t want and can’t use: more money.
    ….Since late 2008, the Fed has been paying interest on deposits placed with the central bank, known as interest on excess reserves, or IOER. That rate is currently set at 25 basis points, or 0.25 percent.

    ‘Hot Potato’
    At that rate, banks may struggle to profit from even non- interest-paying deposits, because the companies must pay premiums to the Federal Deposit Insurance Corp. when they route the money to the Fed. On April 1, the FDIC changed its methodology for assessing premiums, resulting in an increased cost for most large banks. Because a deposit at the Fed is technically an asset, taking the money may stretch banks’ capital-to-asset ratios…..

    Slowing economic growth has capped demand for new loans, the biggest category of investments for most banks. Deposits held at U.S. domestically chartered commercial banks climbed 16 percent in the past 31 months to $7.38 trillion, while loans fell 6.4 percent, according to the Federal Reserve……”

    “Continue to contaminate your own bed, and you will one night suffocate in your own waste.” Chief Seattle

  14. barrisj

    Much of the recent financial Doomsday news stories always begin with, “…political ‘leaders’said…”, or “…’leading’ governmental officials said…”, etc., etc. The sad truth of the matter is that there AREN’T any “leaders” or “leadership” anywhere within institutions expected to take the initiative and do what is right. We are witnessing simple reactivity to events, rather than getting ahead of the curve on extraordinarily pressing and critical issues threatening to engulf major economies across the planet. Obama is scheduled to deliver yet another announcement today on the “debt crisis” and S&P downgrade, with more tedious andodyne boilerplate as a substitute for real action. Absolutely woeful and pathetic, all of this. The Serious People wring their hands, whilst all around them there is chaos.

    1. aet

      A “leader”?

      From the tone of your comment, I think you really want a “führer”, don’t you?

      1. barrisj

        Hardly…I didn’t write “The Leader”, now, did I? Here is Obama, still the most singularly powerful individual in the world today, and what is he offering up? SFA, as far as I can determine – just hopelessly inadequate bromides and patriotic platitudes, just rubbish, the lot of it. Berlusconi, who operates as a cut-price version of Mussolini, is helpless in the face of Italy’s debt problems; Merkel, Sarko, Cameron, what a rum lot, honestly. They all of them know what the basic problem is: insolvent banks and states going broke in their defense of the banksters. But they all panic and call for what surely must be the most radically counterfactual “solution”: Restructuring and austerity, across the board. “Leadership”?? Um, I really don’t think so.

        1. MyLessThanPrimeBeef

          Barrisj, it’s pretty hard to miss that you were talking about leaders and not the Leader.

          Not sure how anyone would jump to that conclusion.

          In any case, we have to go beyond looking for leaders. We are the leaders. We must take responsibility ourselves.

    1. gs_runsthiscountry

      TARP II huh? I will say this right now, the American public does not have any stomach for that idea, even the ones with their heads buried in the sand at the moment. What happens to pension funds, i don’t have an answer to that.

      However, if Governmental officials float TARP II or further BHC/FHC bailouts (i.e. hold the public hostage with a “bazooka” again), you are guaranteeing civil unrest… seriously.

      I think we have reached the point where Moral Hazard hits a brick wall haircuts, write downs and restructuring are the name of the game going forward IMHO.

  15. rps

    From Daily Beast: The Meltdown’s True Villain

    “The Boston Globe ran a chart last Sunday that I’d buy billboard space to reproduce in every decent-size city in America, if I were running the Democratic National Committee. The premise of it was very simple: It showed how many trillions each president since Ronald Reagan has added to the nation’s debt. The debt was about $1 trillion when Reagan took office, and then: Reagan, $1.9 trillion; George H.W. Bush, $1.5 trillion (in just four years); Bill Clinton, $1.4 trillion; Obama, $2.4 trillion.

    Oh, wait. I skipped someone. George W. Bush ran up $6.4 trillion. That’s nearly half—44.7 percent—of the $14.3 trillion total.”

    Boston Globe chart:

  16. Eric

    Yves sez: “It isn’t yet clear what the impact of the S&P downgrade of the US to AA+ will have. There are good reasons to believe, despite the media hyperventilating, that it won’t add up to much.”

    Yves sez: “Bad but not horrific.”


    1. Jim Haygood

      Bank of America and Citibank are off more than 20% at mid-afternoon. Yet TLT — which could be taken as a proxy for long Treasury portfolios — is UP 3 percent on the day (no rating downgrade pressure there).

      What does this skewed picture tell us?

      Trichet’s epic folly of buying Spanish and Italian debt is a de facto admission that several large European banks are insolvent, with the ECB itself soon to follow.

      So the weak-sister US banks are getting hammered, too. Europe’s spectacularly failed policies are at the root of this panic, I would say, with the rising likelihood of US recession as a secondary factor.

    2. Yves Smith Post author


      I have said consistently that Treasuries would at most fall on a short term basis and would rise because deflation was in, and that stocks would fall. That is EXACTLY what happened.

      And since you are apparently so rattled by the market that you didn’t read closely, the comment you singled out was a recap of what happened overnight. I clearly highlighted that the US market could open down and decay big time at the close. That is ALSO what happened.

      The market was down 3% which I consider bad but not horrific and in case you missed it, Obama’s speech is what tanked it. And I also indicted CLEARLY that what the ECB did was also key, a point you ignored. Dealers reported that the ECB had started buying the debt as soon as European bond markets opened. They reports are that they bought bonds and stopped, that’s why the markets fell apart later:

      A senior Italian official said his impression was that the ECB was buying.

      Yields on 10-year Italian bonds, which move inversely to prices, fell 60 basis points to 5.49 per cent, taking them well below the 6 per cent level above which they had been trading for much of last week.

      Spanish borrowing costs also dropped, the 10-year bond yield falling 79 basis points to 5.25 per cent. The euro rose against the dollar.

      However, early gains on Spanish and Italian stock markets receded in early afternoon trading on Monday after making strong gains earlier in the session. Spain’s Ibex 35 index was up just 0.3 per cent having jumped 3.3 per cent in early trading and Italy’s FTSE MIB slipped into negative territory having been up more than 4 per cent earlier.

      1. grandiosity

        Yves – with all due respect, I think you are calling this wrong. US Treasuries are soaring after the downgrade. Stocks are falling.

        This isn’t about the downgrade. This is about the debt deal. Stocks began falling after the deal, and after the revision of the GDP numbers. Investors are realizing that there is no good news and no prospect of a stimulus package until after 2012 election.

    1. Because

      LOL. I think the big thing this time is, though, that the global economy is about ready to crash.

      The 2007-8 episode was American/Britsh. This one is Europe,Asia and South America. The “real” big one. Global prices will crash and so will economies that rely on commodities(Canada,Australia,Great Plains) will crash. I think China may contract and soon.

      QE3 would be irrevelant fast. The FED could target nominal GDP and try to force the banks to print money out to lend, but if the banks don’t want to, they won’t(which QE 2 proved). It is possible the banking system is so dead, the banks CANNOT print money which is why the FED has been so passive lately. They can’t do a damn thing. Ditto for the ECB and British central bank. The only way out is to turn back full money printing powers to the sovereign countries, but if they do that, they may never again get back money creation powers, so they may be willing to take down the rig rather than save it.

      I am not sure how far down the US will go, while the economy will contract. The crashed commodities could boost economies outside the Great Plains. I suspect the contraction will be greater elsewhere.

  17. Doug Terpstra

    “So far, this is . . . Bad but not horrific.” Yikes, what’s horrific? It’s about time gravity reasserted itself.

    Sheesh, after all those trillions printed into the market, don’t you all feel the wealth effects? C’mon, step up and put in your yacht orders!

    Maybe now, can we please get rid of the authors of disaster capitalism, preferrable in a common cell? BTW, Bennie sure is keeping his beanie down these days. I wonder if he slunk off in the night to an island without an extradition treaty.

    1. Yves Smith Post author


      Did you miss the posting time, which was 7 AM? I indicated that this would be trumped by the US opening. And 2-3% down, which is where futures were trading before the market, is what I considered to be bad but not horrific. Where we wound up is horrific. But Obama’s speech and the ECB punking out on buying bonds (a risk I highlighted in the post) appear to be the culprits.

      1. Doug Terpstra

        Yes, I caught the time, but I’m gald you noted it again for the record. I certainly didn’t intend to impugn your forecasting, just highlighting the strangeness of it all.

        It was striking how the market had begun a rally of sorts and then began dropping like an ACME anvil as the teleprompter began its vacuous wrap-up with the usual rally-round-the-war pap.

        At the risk of exposing my considerable monetary ignorance, I don’t quite understand such freefalls as this, unless of course it’s all part of the Shock Doctrine setup to shred the safety net. (that wouldn’t surprise me in the least). Why don’t Bennie and Timmie simply start buying more stocks, equities, whatever, at least indirectly through their cronies and henchmen (GS, JPM, etc.)? Isn’t that what they’ve been doing all this time? I suppose the fraud tarp is just too tattered and lumpy with toxic waste at this point.


      Doug, I also noticed you did’t hear a peep from the Bernank with all the kabuki going on. Where’s Ben?

      1. Doug Terpstra

        Exactly. Maestro Greenspan would have been exuberantly pontificating and obfuscating all over this issue, especially on the inevitablility of SS for non-Randian “parasites” going broke in twenty years. Just watching his oral gymnastics alone would have been entertaining, if not pretty. How does he move those lips, anyway?

        But Bennie is now too conspicuous in his absence. In fact he must be doing last minute maintenance on the fiat chopper. We wouldn’t want an aviation mishap just now, right before he has a chance to spend more quality time with the family.

  18. Hugh

    As near as I can see, the trading day went something like this:

    The Dow closed at 10,809.36 down 634.76 or 5.55%.
    The Nasdaq closed at 2,357.69 down 174.72 or 6.90%.
    S&P closed at 1,119.46 down 79.92 or 6.66% for you mark of the beast fans.
    The NYMEX near oil future fell $6.32 to $80.56, a drop of 7.27%.

    Bank of America lost 20.32% of its value. Its market cap dropped to $65.97 billion, a loss of nearly $16 billion in a single day.
    Citigroup lost 16.42% of its value today, also a $16 billion loss. Its market cap is down to $81.63 billion.
    AIG lost 10.04%, a $4.5 billion loss. Its market cap sits at $40.57 billion.
    Even the vampire squid lost (6.01%) nearly $4 billion off its market cap.

    These are losses on top of losses from last week.

    In a flight to safety, the yield on 10 year Treasury notes dropped 0.214% to 2.344%.

    There are both real and manufactured reasons for all this. Among real causes, economic data for the US economy hasn’t been good. The bad fundamentals are beginning to shine through all the happy talk. Europe’s euro crisis has been heating up. And China’s bubbles are still out there. Among the manufactured causes, there was the debt ceiling debate, the downgrade, and the use of both to set up the looting of entitlement programs.

    1. Jim Haygood

      In the only western hemisphere BRIC — Brazil — stocks are off about 30% from their highs.

      Brazil is taxing inbound capital to resist the appreciation pressure on its currency. Suddenly — so it seems — the hot money is leaving with a gigantic whoosh.

      China can be thought of as Brazil, but with six times the population.

    2. MyLessThanPrimeBeef

      Most European bourses closed down 2-3% as did Asian markets.

      I think they have some catch up to do.

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