Mirabile Dictu! Eurozone to Impose Penalties on Banks That Get Bailouts

Is the bank bailout free lunch coming to an end? While I would not hold my breath, given that financiers have proven quite skilled at watering down proposed reforms to thin gruel, a story from the Financial Times indicates that Eurozone leaders are no longer willing to give banks handouts with no strings attached.

It appears the banks are about to be hoist on their own petard of pushing austerian policies. If the populations of Greece and Ireland are expected to suffer the aftermath of a debt binge, why shouldn’t banks who are revealed to be bust or too undercapitalized to be competitive be subject to similar belt-tightening, downsizing and unpleasant changes in how they operate?

Per the FT:

In draft guidelines, seen by the FT, for the operation of the enhanced European financial stability facility, EU governments say a “planned restructuring/resolution of financial institutions” is “the sine qua non condition” for assistance

The article continues by observing that the banks intend to retaliate by shrinking their balance sheets instead, which is code for cutting lending. They would presumably do that by letting existing loans roll off. This is blackmail, and it would be nice if the media named and shamed the bankers making these threats.

But the conundrum is that the banking sector is too large relative to the real economy, so having it downsize is a desirable outcome. But without some from of government deficit spending to offset the depressing effect of the reduction of credit, the deflationary forces in Europe will only get worse.

Notice too how the banks hold the real economy hostage, and make no mention of cutting their own pay levels as part of the effort to shore up bank balance sheets. I don’t have comparable figures for Europe, but in the US, in the post war period prior to the 1980s, compensation in the financial services industry ranged from 99% to 108% of average worker wages. On the eve of the crisis, it was 181% of average worker wages. Given how well incomes in the banking industry have held up, thanks to the tender ministrations of Hank Paulson, Timothy Geithner, and Ben Bernanke, if anything the divergence has probably widened. I suspect bank employees in Europe are similarly paid better than average workers, although the gap may not be as large.

It is not at all clear how this power struggle will play out. French banks are widely recognized as being among the first candidates for rescues, yet the French government is now taking the line that the banks are earning their way out and will get assistance if it proves necessary. But bank executives have this funny way of denying they need help until it is too late.

Update 3:30 AM: Reader Swedish Lex in comments clarifies a point that was not made explicit in the Financial Times article, that the Eurozone treaty prohibits governments providing permanent subsidies to private companies, and it would be hard to deem a bailout to be “temporary assistance” which is allowed in certain circumstances. This means the toughmindedness is not the result of politicians developing unexpected nerve, but of recognizing there is no way around the existing constraints given how soon weak banks are likely to get in real trouble. Per Swedish Lex:

Under the EU Treaty, EU Governments are not allowed to subsidise companies in ways that distorts competition in the EU. To this main rule, there are numerous specific conditions, exemptions and libraries full of case law.

Governments are allowed to hand out temporary subsidies to companies and industries that are facing acute problems. Temporary subsidies cannot become permanent support, however. A specific scheme for state aid to the banks was developed at the financial crisis.

Governments can thus not subsidise the TBTF on a permanent basis on conditions that are different from what a normal investor would have done. Since no private investor would be prepared to recapitalise the European banks with a few hundred billion, without getting full control and the complete (or almost) potential upside for such risky investments, bank defaults with immediate nationalisation would have to follow. Existing shareholders and management’s options would have to be wiped out, or almost, or be so much under water that bank managers would have to work until 80 to be in the money.

If governments decide to ignore the Treaty, there would be challenges in the courts that could take years and that would create huge amounts of uncertainty as regards the legality of the TBTF’s capital base. Hardly a position that the EU and the governments would like to find themselves in these days.

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55 comments

  1. Typing Monkey

    The article continues by observing that the banks intend to retaliate by shrinking their balance sheets instead, which is code for cutting lending. They would presumably do that by letting existing loans roll off.

    Please correct me if I’m wrong, but I think the banks mean that they will limit lending to sovereigns, not consumers (ie, drive bond yields higher).

    Notice too how the banks […] make no mention of cutting their own pay levels as part of the effort to shore up bank balance sheets.

    I know I’ve said this before, and I know you disagree vehemently with it, but this is something that shareholders should be pissed off over–the government really shouldn’t interfere here. Let them go bankrupt if their salary expense is too high, but there’s no need to regulate this.

    yet the French government is now taking the line that the banks are earning their way out and will get assistance if it proves necessary.

    Well, what do you expect a president who is up for re-election to say? The irony is that this position may well cost Sarkozy his presidency (which is sort of too bad-I really appreciate all the photo ops with his wife…)

    1. LucyLulu

      I know I’ve said this before, and I know you disagree vehemently with it, but this is something that shareholders should be pissed off over–the government really shouldn’t interfere here. Let them go bankrupt if their salary expense is too high, but there’s no need to regulate this.

      Normally I’d agree, if these banks were allowed to go bankrupt, but they aren’t. They get bailouts funded by the citizens, therefore their extravagant compensation is backstopped by the people

      1. Typing Monkey

        Point taken.

        I just assumed that they should go bankrupt…

        As a side note, I don’t think that the EU really “gets it” yet. All the banks with significant derivatives exposure (regardless whether they are American, European, Asian) are going to go under, no matter what the gov’ts try to do to delay it. I don’t think I’ve seen any real thoughts from TPTB as to how the world is going to change as a result. This is sort of strange–if you’re paid to deal with potential problems and reprecussions, you’d think that something like this would top the list.

        JMO…

        1. Mark P.

          ‘I don’t think I’ve seen any real thoughts from TPTB as to how the world is going to change as a result.’

          The TPTB literally cannot imagine what such a changed world would look like. At the very top, we are not talking about Roosevelts, Eisenhowers and Churchills, after all, but Obamas, Sarkozys and Camerons — small people with limited mentalities and no achievements other than having achieved their offices.

          1. Nathanael

            If only we had Al Gore.

            That’s the thing: there are great men and women out there, today, even with platforms to speak from, but *they’re not running the national governments*.

            What does this call for? Change of governments, which is probably going to be by revolution, given the broken party-politics in most of the countries involved. It could be by election in Germany if the election were *several years sooner*, as the state elections in Germany have shown.

        2. HereYeGatherRound

          there is nothing strange about it. have you considered the fact that maybe everything is coming along just as tptb want it to? none of these folks ‘get it’ but they are continually promoted, moved to other agencies, and back and forth from private to ‘public’ service. far too many people don’t ‘get’ this.

          crises and upheaval are ‘opportunities’ for some to ‘reorder’ things more to their liking. iow, they’re not done, yet.

          with the entire world gdp tangled up in derivatives, who- knows-how-many-times over, it surely is a problem and the stuff deflationary depressions are made of. not to mention the banks will surely own whatever is left of the world they do not already possess.

          freezing and unwinding these derivatives that are purely speculative and serve no reasonable financial role must be much nearer the top of the list than they currently are. they are part of the problem. how else could it be?

    2. Yves Smith Post author

      You seem to have missed key facts:

      1. We don’t let banks go bankrupt in advanced economies

      2. Shareholders are disenfranchised and cannot control executive pay. Tell me exactly how shareholders could do that. You’d need to have a majority of shareholders run their own candidates for the board, and it would take three years to replace the board (virtually all boards have staggered terms for directors). The average shareholder holds a stock less than seven months. It is cheaper to sell as stock than do anything about greedy managers.

      3. They plan to shrink their balance sheets to meet certain capital ratios. The sovereign debt is what put them in this bind, but they will cut back whatever debt it is easiest for them to cut back, and that is most likely to be not to renew loans that are maturing. It will most certainly include private loans.

      1. Typing Monkey

        I conceded point 1 already, and you make a valid point (although I suspect bailouts will be much harder to come by in the future).

        As for point 2–you don’t need to replace the entire board. Moreover, if people keep dumping the shares and are no longer owners, then why should they care what the employees of a company they have no stake in make (assuming that bailouts no longer occur)?

        1. JTFaraday

          You keep going in circles. If they are dependent on the state/ the EU nations, then let the state/ the EU nations determine their pay rate– just as US fedgov determines the rate of AFDC checks.

          If they want to quit and get a job, then good. Or, I suppose, they could pretend they actually do something and they could start a public employee union and negotiate with management. As long as we’re clear on who management IS, I guess I can live with that.

          See how easy it is to stop chasing your tail? Meanwhile, I’m sure the Greek and the Irish and the Latvians and the Indignados and OWS will be eager to set the new financial sector pay rates.

          This is going to be fun!

          1. HereYeGatherRound

            20-30, even 50% cuts, are still can kicking.

            let’s not forget from whence we came;

            http://articles.businessinsider.com/2010-02-15/wall_street/30029418_1_goldman-sachs-goldman-first-swaps

            GS, Greece, didn’t disclose swap contracts
            http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asBNXSLtlN9E

            lowering their pay? sure, maybe we should put them on prozac, too.

            i hope it all makes for good reading news, but otherwise this is just not serious stuff, and we desperately need serious solutions. let’s hope there are some in the works.

            i bought several boxes of books at an out-of-town used bookstore this summer and finally got around to reading some of them, lately.

            Gotta love this one;

            “Backstabbing, Lying, Embezzling, Cover-ups. Just another day on Wall Street in history’s biggest corporate swindle,” proclaims the cover. you might think it written today, or 2008, 2009? Serpent on the Rock was published in 1995, just as the nascent tech bubble was beginning its incredible
            run, and record numbers of americans were directly investing in the stock market. we lined up to give them our money to gamble with.

            who coulda knowed?

  2. Swedish Lex

    Under the EU Treaty, EU Governments are not allowed to subsidise companies in ways that distorts competition in the EU. To this main rule, there are numerous specific conditions, exemptions and libraries full of case law.

    Governments are allowed to hand out temporary subsidies to companies and industries that are facing acute problems. Temporary subsidies cannot become permanent support, however. A specific scheme for state aid to the banks was developed at the financial crisis.

    Governments can thus not subsidise the TBTF on a permanent basis on conditions that are different from what a normal investor would have done. Since no private investor would be prepared to recapitalise the European banks with a few hundred billion, without getting full control and the complete (or almost) potential upside for such risky investments, bank defaults with immediate nationalisation would have to follow. Existing shareholders and management’s options would have to be wiped out, or almost, or be so much under water that bank managers would have to work until 80 to be in the money.

    If governments decide to ignore the Treaty, there would be challenges in the courts that could take years and that would create huge amounts of uncertainty as regards the legality of the TBTF’s capital base. Hardly a position that the EU and the governments would like to find themselves in these days.

    The FT article is thus probably stating that the temporary state aid that was allowed post 2008 will have to be faced out and that Governments henceforth will have to recapitalise banks “on market conditions”. The EU State aid rules could thus help accelerate the nationalisation of quite a few EU banks, which will have to happen anyway.

    1. Yves Smith Post author

      The article was not clear on this point, it discussed temporary v. permanent subsidies but didn’t make clear why this distinction was so important, so I skipped over it. Thanks for the clarification.

      Aha, so this isn’t EU toughmindedness, it is having treaties in place that will be impossible to change in the likely trouble timeframe. This is a binding constraint. This will get interesting indeed.

    2. Diego Méndez

      Swedish Lex,

      EU rules forbid subsidies to individual companies, period. All subsidies distort competition (however, the EU does not forbid subsidies to some private activities, like R&D or training, inside private companies).

      The main reason why the EU has done nothing to prevent member states from rescueing all kind of private companies recently (including banks, but also non-financial companies, remember Opel?) is that the EU is weak. Period.

      Subsidies to private companies (including subsidies to banks, on on nationality basis) do distort competition and are illegal under EU law. Member states are breaching EU law with increasing frequence, which points the way to a future of autarky.

        1. Diego Méndez

          Swedish Lex,

          no matter how you construe it, there’s been a long series of illegal subsidies to individual companies, on the basis of nationality discrimination, since the crisis started.

          EU rules explicitly forbid that kind of subsidies.

          EU rules explicitly demand free movement of goods. French labourers have recently stopped some trucks with Spanish agricultural products at the border, and they have proceeded to lynch drivers and throw the Spanish goods to waste. The French police frequently allows this kind of behaviour. EU fines are always very low against this obvious breach of EU rules.

          EU rules demand any EU member state treats agricultural products from another member state as its own. When a potential epidemic broke out in Germany, German politicians were quick to point to Spanish cucumbers, falsely. Spanish products’ sales in Germany fell off a cliff, and many German companies advertised their cucumbers weren’t Spanish.

          The germ apparently was related to German-produced food, but the damage was already done. Where was the EU? The EU did nothing.

          There is no symmetry in EU rules. Germany and France can consistently breach them with no significant consequences. They did with the Stability Pact. They did with discriminatory subsidies based on companies’ nationality. And they are increasingly doing it on other areas, as well.

          1. Swedish Lex

            Diego,

            I agree that the enforcement of EU rules and regulations by the EU Institutions and by national authorities is far from perfect. But it is not correct to say that there is “no” symmetry in EU rules as you say. Of course there is.

            Your latest comment could be read as a call for the strengthening of the EU Institutions and their powers to reinforce the four freedoms, to go after also the large Member States when they decide to ignore the rules. I would agree with that

          2. Diego Méndez

            Swedish Lex,

            I am totally for European unity and I feel totally European. But you have to be blind not to see things are not working and the EU will not last in its present form.

            Things will probably go worse on a GDP basis if the EU breaks up. But we are obviously going down that route. There is no one at the top of the EU enforcing the spirit of the EU.

            It doesn’t matter EU rules are symmetric if, every time a crisis breaks out, EU rules are re-written or a EU exception for that crisis is created. The end results aren’t symmetric.

            Merkel is ruling the EU and even my own country’s finances, but Spaniards didn’t have a choice to vote her. That’s all you should know about EU symmetry. If putting an end to that means poverty, so be it.

          3. Swedish Lex

            Diego,
            My latest, and last, contribution to our little exchange was posted at the bottom of comments.
            Not sure why

          4. Michael Cain

            “…and they have proceeded to lynch drivers…”

            Surely this is an exaggeration? At least in American English, “lynch” has a very specific meaning and involves a mob killing the victim. French laborers killing Spanish truck drivers, and the authorities not taking a very active interest, would surely be headline news around the world.

          5. Diego Méndez

            Sorry, there were no killings. I mistranslated the Spanish verb “linchar”. But truck drivers are not the kind of people who let anyone throw away their cargo.

    3. vp

      Those rules were waived for the financial sector back in 2008. Governments can legally bailout banks for stability’s sake.

    4. vp

      Those rules were waived for the financial sector back in 2008. Government can legally bailout banks for stability’s sake.

    5. shtove

      One thing puzzling me about the legalities of the EU set up: Art 123 of the Lisbon Treaty prohibits the ECB from purchasing sovereign bonds, and yet the ECB has been purchasing since May.

      The ECB’s purchases are open to judicial review by the European Court of Justice. Why no review?

      1. shtove

        Sarkozy appeared isolated after an acrimonious meeting in Frankfurt on Wednesday, when he pushed the idea of turning the EFSF, a 440-billion-euro ($600 billion) fund, into a bank.

        Germany, the ECB and the European Commission all argued that the move would violate an EU treaty prohibition on monetary financing of governments.

        “The path is closed for using the ECB to ease liquidity problems,” Merkel told conservative lawmakers in Berlin, according to participants at the private meeting.

        http://www.reuters.com/article/2011/10/21/us-eurozone-idUSTRE79I0IC20111021

    6. mmckinl

      “Under the EU Treaty, EU Governments are not allowed to subsidise …”

      We have already seen the EU Treaty breached … The German Constitution as well …

      1. shtove

        But the German chief justice has made it clear a constitutional referendum is needed.

        There will have to be a vote, but I wonder if this contraption can be kept on the road until then.

  3. LucyLulu

    I have an idea, but I don’t know how realistic it is, re: the private loans. If the banks refuse to lend, would private investors want to pick up the slack? In the current environment where earning decent returns on one’s money is nigh impossible, perhaps this would be a way to fill the gap? I’d be willing to consider making a loan. Essentially it’s like buying a corporate bond, with the exception of having to do one’s own credit rating and earning a higher return. Groups of people could even pool their money and thus diversify their risk. Or maybe people already do this (but if so, it would become more popular)?

    Maybe this is just a fantasy such that banks will find their threats put themselves right out of business as people find them no longer necessary.

    1. ambrit

      Dear LucyLulu;
      What you’re suggesting is the creation of new banks, or more precisely, credit unions, a not unknown occurrence. Buffets Bank anyone?

    2. Mark P.

      The creation of new lending institutions and their capitalization by the government, alongside the moving of the TBTF banks into receivership, was what economist Paul Romer recommended in 2008. (Romer is the co-author of the classic 1990s paper on ‘Looting: the Economic Underworld of Bankruptcy for Profit,’ among other things.)

      Romer was and is right. Increasingly, it looks like a tragedy that we didn’t follow his prescription in 2008.

      1. Nathanael

        For reference, this is *exactly* what FDR did in the New Deal. He created over a dozen new government-capitalized, government-operated banks to replace the vanished function of the private banks.

  4. Linus Huber

    It is interesting that everyone in charge is toeing around the real subject, namely, LOOTING. As long as these bankers are not made accountable on a personal level and cannot get away with the loot, they will continue, no matter how much the rest of us will suffer; they do simply do not care about the economy or any country but look only after their own personal interest.

    The EU should introduce an emergency bill, to make all bankers accountable on a personal level (with the inclusion of their personal wealth) for all those who earned more than 0,5 mio over a period of 2 years or more during the past 15 years. Only such or similar action will stop the banks to ignore the wellbeing of the economy and will make them responsible.

    1. LucyLulu

      Linus,
      Here in the US, and surely in the EU as well, we already have the means to hold the bankers accountable. We can prosecute them for fraud, we can prosecute them on Sarbanes-Oxley, we can send these bankers to jail. The problem isn’t lack of means, the problem is lack of will.

      1. Nathanael

        This raises a major point. *WE* cannot prosecute them; in the broken US system, only Attorney Generals (or district attorneys at lower levels) and grand juries can prosecute them. The Attorney Generals and district attorneys are largely bought off, with a few honorable exceptions like Schneiderman.

        Any grand jury members who are listening, you have the power to bring indictments against anyone who committed a crime in your jurisdiction, and the legal duty to. However, the prosecutors and judges will lie to you about this and try to prevent you from prosecuting people they don’t want prosecuted.

        This system where Attorney Generals can give criminals a get-out-of-jail-free card is really sick and needs to be changed.

        In the UK and elsewhere, private citizens can bring private prosecutions, and frankly I’m surprised there haven’t been any yet. This apparently acts to keep the public prosecutors honest….

        1. Externality

          “Six states have laws allowing citizens to impanel grand juries through the process of collecting signatures on petitions: Kansas, New Mexico, North Dakota, Nebraska, Nevada and Oklahoma.”
          http://ballotpedia.org/wiki/index.php/Petitions_to_impanel_grand_juries

          Once impaneled, the grand jury is obligated to investigate the issue(s) raised in the petition. In Nebraska, for example, the petition is submitted to the local county clerk’s or election commissioner’s office for verification. Once the signatures are verified, the local presiding judge is obligated to convene a grand jury on their own authority. If the presiding judge refuses, the petitioners can get the state supreme court to count the signatures and order the a grand jury impaneled.
          http://law.justia.com/codes/nebraska/2009/Chapter29/29-1401_02.html

          Would any progressive group in these states be willing to collect enough signatures to force the impanelment of a grand jury to investigate the banksters’ crimes?

    2. MattJ

      That’s one thing we are tiptoeing around; the other one is bondholder losses. Even Swedish Lex referred only to shareholders and management options being wiped out, not bondholders. If bank debt can’t take losses in this situation, then why should they be able to pretend that such bonds are risk capital at all? There is no justification for a bond from a bank receiving a government bailout having a higher return than the debt of that government.

  5. Swedish Lex

    Diego,

    I am too old to be naive but not old enough to be blind. My view since the launch of the euro has been that it is a great project but with important flaws in the design. The euro sceptics early on pointed this out. My view was, and still is, that the euro would have to survive its first major crisis in order to “exist” in real terms. That is where we are now. It could still go either way.

    But it is important to recognise that the EU will continue to exist even after a potential euro implosion. The EU is so much more than the euro. I entirely disagree with those who say that the EU would disappear if the euro crashes. The EU would obviously be weakened in the short term by a euro crash but quite a few people think that the EU without the euro would e a good thing since it would allow for varying degrees of integration depending on economic sector while not creating a tsunami of hidden obligations and unintended consequences, with not easy way out, which is what many feel about the euro these days.

    1. Diego Méndez

      Swedish Lex,

      my hearts wants you to be right, my brain thinks otherwise.

      If the PIIGS are forced out of the euro, good luck trying to re-establish the lost confidence in the European project. Good luck selling EU integration to the generations who lost their lifetime savings, or to the Germans whose unemployment rate will shot up to a permanent 20% level when it happens.

      But the deeper problem is financial. You cannot have globalization, or a single market in Europe, if there is no stable exchange-rate mechanism. Every globalization wave had its own fixed exchange rates: the gold standard, Bretton Woods, the ESM, the euro and the dollar-yuan peg.

      There won’t be significant international financial and trade flows if there is no stable exchange-rate system. This applies to Europe and to the world as a whole.

      That’s why my pessimistic brain thinks globalization as we know it will soon be over. We are going straight to the 19th century, or maybe to the 1930s.

  6. Ginger Yellow

    The article continues by observing that the banks intend to retaliate by shrinking their balance sheets instead

    This doesn’t make much sense. A lot of the strings the EU has attached to the bailouts have been to do with forcing banks to shrink their balance sheets. It’s not retaliation, it’s mandatory.

    Other common conditions have included a ban on calling (or paying interest on, where it’s voluntary) subordinated debt until the permanent restructuring is implemented.

    1. Yves Smith Post author

      No, as observed earlier, the banks could take the bailout dough (which will bolster capital ratios) and put up with the tough hand of the state, or earn out faster by cutting pay. The latter is what the old Wall Street partnerships did routinely, but no one on the public dime bothers.

      If you read the FT and other coverage on this issue, the banks are positioning the cut balance sheet size option as a threat.

  7. Jim Haygood

    Latest in the Euro-Bizarro saga, courtesy of Bloomberg:

    European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, seeking to break a deadlock between Germany and France that is forcing leaders to hold two summits within four days.

    The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece that will run for up to 30 years. Instead of replacing it with the European Stability Mechanism, which will hold 500 billion euros, in mid-2013, a consensus is emerging on merging the two funds, the people said.

    The ESM will operate with paid-in capital as opposed to the EFSF, which sells bonds guaranteed by governments.

    http://www.bloomberg.com/news/2011-10-20/eu-said-to-mull-wielding-1-3-trillion-as-franco-german-discord-mars-talks.html

    Let’s look at Bloomberg’s astonishing claim that ‘the ESM will operate with paid-in capital.’ The reality is a bit different:

    The Euro area member states have decided: 1) an initial paid in capital of around 2% of the total amount rising up to more than 10% of the total to Euro 80 billion in five years from 2013 onwards 2) the balance in the form of callable capital and 3) a reserve fund that will accumulate fines and profits.

    http://www.re-define.org/blog/2011/07/11/commentary-newly-signed-european-stability-mechanism

    In other words, the ESM is VAPORWARE! I’ll bet even the cheesy 2% initial ante isn’t funded yet. And we can be damned sure that a 500 billion euro capital call would send sovereign ratings plummeting across the continent.

    What possible benefit can come from merging these funds, other than producing a more impressive-sounding total? Je n’ai pas une seule idée.

    But I do understand that two summits in four days signifies GOVERNMENT PANIC. Eurocrats are psycho scared, and liable to do anything as they scurry furiously on their gerbil wheels.

  8. Jim Haygood

    Some piquant quotes from la presse brittanique:

    Lionel Barber in his Global Insight column in the Financial Times comments:

    As the European debt crisis has deepened, so France has found it more difficult to maintain the illusion that it is Germany’s equal and that any solution will be designed as much by Paris as by Berlin.

    While Geoffrey Dicks from Novus Capital said the current crisis was all too reminiscent of Britain’s ordeals in the Exchange Rate Mechanism in the early 1990s.

    As we [Britain] found, when you get into bed with Germany you play by German rules.

    Bruno Waterfield, our man in Brussels, tweeted this – it was last night but sums up the feeling in Europe.

    #eurozone: I’ve reported 9 years here in Brussels and never known such a palpable sense of despair, even doom, signing off …

    Juergen Stark remains exercised about increasing the size of rescue funds and packages. He told the Warsaw conference:

    The financing that is provided is just to buy time, but to buy time to what end? (With) ever larger packages, there is a risk that water damage is much larger than damage done by the fire.

    http://www.telegraph.co.uk/finance/financialcrisis/8782663/Debt-crisis-live.html

  9. Jim Haygood

    The Guardian sums up Europe’s exquisite dilemma:

    The new financial bailout plan is expected to cover debt reduction for Greece, new capital for ailing banks that might take losses from Greek bonds, and enhanced financial firepower for the bailout fund to stabilise markets.

    A huge debt forgiveness plan for Greece is already in place with a 21% cut on offer from most of the country’s private creditors. This is now deemed inadequate by the Germans, who argue it must increase to 40% or even 50%. The loss to private investors would, says Brussels, amount to a manageable loss of €100bn for euro banks. But that would mean nationalising several banks, with French ones possibly included. The Sarkozy government objects. The International Monetary Fund has also expressed reservations.

    A 30% debt write-off for Greece may limit the number of banks that need to recapitalise, and the wider wrath of international investors with loans to Greece, but will likely prevent Greece from recovering within a next few years.

    http://www.guardian.co.uk/business/2011/oct/20/euro-bailout-plan-delayed-by-french-german-row

    Imagining that a 30% haircut will put Greece on a sustainable footing is delusional. The French are mired in un monde fantastique.

    Greece WILL default big and French banks WILL be recapitalised and/or nationalised … end of story.

  10. Richard

    Yves,

    A couple of quick question: is a bank with negative equity bankrupt and who puts a bankrupt bank out of business?

    Unfortunately, I am old enough to remember the US Savings and Loans. Many of them operated with negative equity for years in the mid 1980s after having exhausted their one time funny accounting equity replacement from the Office of Thrift Supervision (OTS essentially created an offset in their equity accounts for all their losses).

    1. Nathanael

      In the US, the FDIC is supposed to put a bankrupt bank out of business. (NCUA is supposed to do it for credit unions.) I believe the OCC is also empowered to put bankrupt banks out of business, but it never does.

      In the UK, I believe the FSA is supposed to put bankrupt banks out of business, but I could be wrong. I have no idea about other European countries.

  11. Jim Haygood

    The comedy just doesn’t stop — Berlusconi has broken a deal with Sarkozy. Sarkozy agreed to support Mario Draghi for ECB governor if Berlusconi would remove Bini Smaghi from the ECB board (perhaps by appointing him to Bank of Italy), so as to clear the way for a new French ECB board member.

    http://www.bloomberg.com/news/2011-10-21/berlusconi-s-bank-choice-risks-france-tensions.html

    Leadership transition, internecine warfare, compromised political support — have you ever seen a better recipe for chaos and panic?

    L’Europe est hors de contrôle, mes amis.

  12. fightthefuture

    Again, bizarre assumptions, mischaracterization of facts and overheated rhetoric,

    1) Restructuring is hardly a “penalty” and there s little new about. Do you not remember the Saving and Loan debacle of 20+ years ago?

    2) The banks have not “gotten away” with bailouts in this latest round of them either. There were substantial string attached to TARP, and there is the terrible legislation we call “Dodd-Franks”. Your assumption here, if you actually believe it, is truly bizarre and absurd on the face of it.

    3) Again, there is this childish faith in government. You imagine that the real monopoly of government will somehow less corrupt and more “democratic” than free markets capitalism and a smaller, non-activist State.. The TBTF should have bee allowed to fail. “Restructuring” is just kicking the can down the road. What has to stop is governments financing their huge socialist expansions through debt creation via derivatives backed by the taxpayer. More broadly, the real and actually history of activist, collectivist Government says otherwise. In fact, the whole history of the world says otherwise. You appear to ot know the political-economic history of the country and how it came to be; either that, or you childishly and arrogantly dismiss all.

    But let us be clear: Socialism (International or National) and Communism do not work. Moreover, all powerful government is the most corrupt and dangerous thing on this Earth. Collectivist an populist governments killed near a billion people in the last century, and deeply blighted the lives of billions more. We are still recovering from them.

    4) Lastly, you seem to think that “the banksters” have “captured government” when in fact it is the other way around and has been so since the start of the New Deal. In fact, “The Government and “the banksters” are the same people: The (again, almost wholly Democrat) Nomenklatura of the modern welfare, soft-socialist state. One need not look farther that Rubin’s career in DC and at Citi ad Goldman to see this (and, never forget, it was really Rubin who was the driving force behind the glass-steegall repeal and not Graham–that is just the unusual Democrat blame shifting). If you need more persuasion, just look at how Obama is pressing Wall St. on campaign donations with mobs in the street (and that is what they are. The “99%”? more like 5%: The usual corrupt Union and hard left rent-a-mob all manipulated by direct actin political fronts connected to the Democrat Party.)

    You people have really gone over the edge in your Marxist. Should you get the world you desire, you will nott like it much. Try marching in the streets then.

    1. Out of the Frying Pan

      What a crock.

      Yeah, I should put my faith in Hanky Panky Paulson and the Goldman Sachs Blankfiend and the always fair and efficient “free market”.

      Sure there were strings strings attached to TARP, but not enough. The real garbage of securitized loans that should have never been made got dumped back on us, hidden for the time being but a load of crap with a day of reckoning coming nonetheless.

      Who gets to borrow money at near 0% and lend several points higher? Why is this? Just because it’s been that way for a hundred years?

      I’m moving my main accounts from a large bank – which I only use due to the convenience of widespread ATMs – to my credit union by Nov. 5, and advocating for a state bank, and an alternative system to replace the Fed (after we get a full and transparent audit – whatever happened to that?).

      Why should these 1% banksters have such complete control over OUR money?

    2. Yves Smith Post author

      Restructuring IS as penalty if you are a bank executive or board member. You get fired and your lovely employment contract gets torn up. You go in line with all the other creditors. And 1000 S&L executives were prosecuted successfully, or did you forget that part? Oh, and shareholders get wiped out and bondholders often take a hit.

      If you think there were “substantial strings” attached to TARP, I have a bridge I’d like to sell you. The ONLY strings were very minimal restrictions on executive comp. And the TARP warrants were massively underpriced, we’ve quoted derivative experts on that. TARP was a great gimmie.

      I’ve discussed the intellectually incoherent, internally contradictory “free market” construct in ECONNED at length. I suggest you read that so we can have an intelligent discussion.

    3. Steve

      Please, don’t ignore this rant. This is EXACTLY the kind of talk most politically active (i.e. concerned!) Americans are listening to. This garbled garbage is exactly what spews from Limbaugh, Hannity, Levin, Beck, Fox News, CNN and the entire MSM (except some MSNBC). Actually, after spending some time reading the independent media (of the NC kind) even NPR is spewing this same incoherent crap. I actually get MORE angry listening to NPR now than AM Radio or Fox News. NPR is the same extreme subversion as Obama, a liberal veneer over an extreme right wing operative.

      TPTB are pushing back through their MSM with EXTREME force. By now, the people following the MSM are MUCH MORE dangerous than their puppet masters the criminal bankers and politicians.

      Don’t believe it? Listen to Rush in your car. It’s way past frightening at this point. He is demanding that all worthless poor people (i.e. literally most people) and their government cohorts be taken out. People who can’t take care of themselves and their liberal progressive government (evil do-gooders all) have destroyed the country and they need to be put in their place (locked up? corralled into ghettos? disappeared?). I’m not exaggerating… listen to Rush.

      Independent media (of the NC kind) and the OWS movement appears to be the only force pushing back. Unfortunately, I suspect that it’s a small rock in front of a gigantic steamroller. The situation is VERY bad. Do not dismiss this commenter as lunatic… he/she IS mainstream. Fighting these nuts will be much more difficult than their masters the criminals.

      Please OWSers… listen to Rush Limbaugh every day to 1) get to know your enemy (very, very important) and 2) to motivate and organize yourself to, not just fight back but, fight back HARD, with EXTREME force.

  13. Schofield

    It really is a nonsense to pretend that when it comes to human flourishing control over critical resources like money creation should be left to markets and not subject to genuine democratic political will. This is the task ahead of human society. How to create a money creation and control organization that is safeguarded as far as humanly possible from the effects of Agency or Public Choice theory. This is the serious issue Naked Capitalism contributors should be considering.

  14. TC

    The euro is finished. What must Germany do to assure the world it will not voluntarily participate in a replay of the 1923 Wiemar experience? Bomb Paris?

    From what we have seen this week from the press, it’s plain the only useful information to be ascertained is how bankrupt financiers run a psychological operation in a desperate bid to buy time, if only days and hours. The closer you get to the core of the bankruptcy (US/UK), the more laughable is the reporting. The post-Bretton Woods era of Ponzi finance is finished.

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