CRASH2: After six years of roulette and brag, the banks begin a game of dominoes

bankdominoesIn Germany, Spain, the UK, Italy, Greece and the US, anywhere between 15 and 20 banks have something to hide and remain oblivious to risk. The Slog looks at why the failure to reform the sector will be a key factor in Crash2.

The aptly named Düsselhyp bank told us all in its last annual report that it was holding around €360m of Hypo Alpe Adria debt. Last week, Fitch ratings described it as “in urgent need of capital”. What, with all those assets just waiting to be repaid? Surely not. And having passed Mario’s stress test? Surely not. And with nearly E11bn in assets. Er….

It is worrying, I think, that a bank blows over for less than half a billion euros – Hypo Alpe’s HETA went up the pictures last week for €7.6bn – and The Slog wonders how many more bits of banking balsa wood are hiding from the wind in Germany….and elsewehere.

Either way, the Düsseldorf bank has gone bust and been bailed out by Berlin’s Care Machine. This emerged from Germany as the bank having “run into problems, and so the deposit protection fund will take over with a view to continuing its operations at a later date”, but it’s just spin: a complete takeover is envisaged, period. Doubtless, a new bad bank will appear at some point in time.

But now and then, bad banks get let out for good behaviour. Perhaps this might explain why Spain’s ambitious bank Sabadell (led by the low-profile Josep Oliu) has moved in with what looks, to be honest, like a rather generous bid for TSB. You will recall that TSB became a sort of bad bank to Lloyds a few years back; being a bad bank of Lloyds must be rather like hydrogen escaping from the Hindenburg, but it’s clear that the directors of The Bank that Liked to Say Yes far too often are hot to trot. I understand, however, that the UK’s regulator – the Prudential Regulation Authority (PRA) – might be under pressure to block the deal.

The pressure (as yet still a rumour) is from the Coalition: with an election looming – and Ed Miliband promising to set up Peoples’ Banks – the Labour Opposition could make hay from the Government allowing a Spanish bank to take over what used to be a Peoples’ Bank. I’m not so sure myself (I doubt if many voters would even notice these days) but I would support the PRA if it did block the deal.

If the lessons of Lehman and Austria have still not been learned, perhaps someone should tell Chancellor Osborne to spend less time with his nose, and more time keeping an eye on what is now gradually becoming The Big One for Crash2: bank-failure fuelled contagion. Senor Oliu is a smart operator, but his bank has ballooned in size through takeover rather than gradual organic growth.

Sabadell itself is allegedly well-run, but it operates in a socio-economic and political environment that is – to put it mildly – unstable. There are enough wobbly Britbanks as it is; the last thing they need is a largely untested eurozone owner. The Spanish bank has already admitted that the purchase of TSB would mean a deterioration on its capital ratio, and eurozone stress tests have historically been the creator of more bad jokes than bad banks. Oliu is looking overseas because his home market is dead: in and of itself, that should give us cause for concern.

Banking stress tests are (in my view) a bit of a waste of time anyway: with liquidity ratios being suggested at anything between 8-12% under the new Basel rules, we shouldn’t forget that Lehman had a 13% ratio, but still went down with all hands. Further, the future has a tendency to come out of left-field. And finally, once they know the test criteria, banks adjust their way of expressing the accountancy situation accordingly.

As to those last two points, the US Fed is at least working harder under Yellen to be creative about the future, and in turn being much less revelatory about the criteria. Not surprisingly, during the newly completed American tests, the banks squealed like piglets being taken off a tit about it….which tends to suggest that Yellen made a good call.

Ultimately, however, the problem that continues to get in the way of many investment banks is Zirp. I was against low interest rates from Day One (they reduced demand from Silvers, the biggest single and most undebted social group), and by definition reduce the margins banks earn on lending: as banks are by nature selfish, they’d rather do something else with the money – where there is less risk and better margins.

But perhaps way, way above any other factor are the two biggest elephants in the vaults: banks lie to protect themselves, and remain largely unreformed. The bonus pools are bigger than ever, and almost every week the likes of Goldman Sachs come up with yet another Day One idea that is tomorrow’s problem waiting to happen.

For example, the banks that did least well on the latest Fed tests were, surprise surprise, Bank of America, Deutsche Bank….and my old favourite for disaster, Santander.

BoA (and I have no fear of writs on this one) continues to be followed by clouds: about its business model, accounting methods, and management. Accusations and Class Action suits against them include frauds involving email use, foreclosure, unsecured loans, plastic cards, commodity market manipulation, cheating Fannie Mae and Freddie Mac, misreporting capital ratios, and money laundering. As a result BoA has been forced to pay – literally – billions of Dollars in regulatory fines.

Deutsche is at or near the top of most people’s calamity lists, if for no other reason than its gigantic derivative exposures. But the severity of the Fed’s statements about both DB and Santander should give cause for concern: they were “found to have serious deficiencies in capital planning and risk management”. And bear in mind, these are shifty bankers we’re dealing with here.

I’m forced back into wondering yet again whether the ECB boss Mario Draghi would ever really countenance loads of Greek banks folding as part of the argey-bargey going on beween Syriza and Troika 2. I doubted it on Perfidious Friday, and I doubt it even more today. But what’s clear already is that the banking sector’s tooth and nail lobbying against reform is going to cost us all dear. And this time, I suspect, things will sooner or later turn violent.

Yesterday at The Slog: Am I the only one losing faith in Yanis Varoufakis?

20 thoughts on “CRASH2: After six years of roulette and brag, the banks begin a game of dominoes

    Rik , I’ m shocked — shocked I tell you ! — to find that illegal financial hanky panky has been going on in your back room and as a consequence Hype It Up Bank has gone under owing 8 billion . I ‘ m shutting you down

    SALOON BAR FLUNKEY : Excuse me Directrice but this email has just come in co signed by Mr Draghi i and Ms Lagarde saying they have signed off the 8 billion you requested taking it from the European Taxpayers Contingency Fund .

    RENAULT ; Oh … I see … thank you very much . Now get out – all of you !!!


  2. Why would a bank be wanting to buy the British TSB? Isn’t it obvious? They want a casino.

    That is, after all, why Deutsche has all those derivatives on its American arm. A private institution like a bank can make a lot of money where the government has been clubbed into submission and the government then pruned regulations to an irrelevance. For the private banks in Germany, where banking is shackled to lending money to businesses – which as you know is certain death for healthy – sorry! – fat profits.

    And one thought about translations; “hypo” in British banking means splashing it out on the thrills and spills of stockmarket gambling and a gay time is had by all concerned. In Germany (where regulations are strict) “hypo” means a bank is reduced in its circumstances and the only profits it can glean are found by eking out a living by lending to home owners and people who pay money in dribs and drabs. It is a pitiful existence, being a bank in Germany – especially when their British friends are having such a good time.

    It’s just not fair for a private bank to be treated in this way! Let them free, I say, let them gamble until dawn.


  3. Turn violent? I think you could be right. If people are swindled by the banks and politicians and loose faith in the system they will want redress. You could have martial law impossed very quickly.


  4. John, thanks for your previous reply: “…whether it will be fiscal, financial, economic, military – or several of them – is impossible to say at the moment.”. So let’s deconstruct that a bit – if you are able – and let’s take the first one in your list of alternatives. What does a fiscal ‘Crash 2′ look like? Can you describe the characteristics and features of this scenario? (Given your background in marketing/advertising this should be fairly straightforward I hope!) Thanks, D


  5. I think you’re confusing hyper (=over, from which comes “hype”) and hypo (=under). In any case, a Hypothekenbank is a German equivalent of a traditional British building society. The English term hypothecation explains its debt-financing function.


  6. Jimarchy, I doubt the British governments ability to enforce UK wide martial law given the state of our armed forces and police forces, especially in non Metropolitan areas. Nothing worse than declaring martial law you can’t enforce.


  7. Yes, actually, I did. And I replied because you brought up the question of translations but confused “hypo” with “hyper” when they are opposites. I included the full name Hypothekenbank so that anyone interested can see where Hyp or Hypo in a eurobank comes from.


  8. 1. There are several books about the very nasty past of Deutsche Bank. Long ago the notorious Herman Abs concealed certain accounts for many years after WWII for reasons still not clear.

    As DB has this asset-burying history, perhaps it has more money than at first appears?

    2. Not quite off topic. Peston did a recent one-hour programme about France and its economic and political woes. NOT ONE SYLLABLE about the welfare of French banks.

    3. (definitely off topic) Grant Shapps as forecast in more hot water this morning. All over press and broadcasters.


  9. So as usual, it is an argument about terminology – rather than the real problem. It’s how the banks like people to discuss their problems ;-)

    By the way, do you speak German?


  10. Jim. why else would Boris have been buying water cannon? Chaos is the objective…just look at the success of foreign policy in the Middle East for the script.


  11. @ Gemma
    Yes I speak German if that helps – mostly I find it doesn’t.
    By the way are you still doing the Lingerie business in Cologne? I’m looking for something for my new friend.
    Where were you when I phoned from the train station in February 2013?


  12. Tony Farrell was chief intelligence analyst for South Yorkshire Police.
    He came to the conclusion that both 9/11 & 7/7 were false flag events.
    He was fired after he refused to go along to get along & play foot soldier of the Queen.
    15.20 mins. 1/3.
    Or, put in search box: Tony Farrell: British Whistle Blower Fired for Exposing 7/7, 9/11 as “State Sponsored Terror”


  13. The core lesson from the 2008 crash is that the banks failed, were deemed too big to fail, & their debts were lumped onto the backs of the small taxpayers.
    The banks screwed up & the politicians screwed us.


  14. I do not know why they bother with this investigation crap! Its a bloody cover up as usual. Voting is an endorsement for more of this kind of corruption nationwide, to protect the criminal ruling class at all costs!


  15. Pingback: 50 days to the Grand Coalition | Gabriel Vents

  16. Pingback: John Ward – Crash2: After Six Years Of Roulette And Brag, The Banks Begin A Game Of Dominoes – 17 March 2015 | Lucas 2012 Infos

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