CRASH2: You thought systemic banking risk had gone away? Think again.


The debt assets held by the banks are sub-prime sovereigns and globalist Boards this time. But they’re no more creditworthy than 2008 household debt.

I admire the work of Ian Fraser because he brings both clinical insight and devastating questions to the party when it comes to financialised capitalism. Also he took Fred Goodwin down – easily the most vain and stupid man ever given control of a Bank (RBS) – shortly after Badloss’s unpleasant lawyers threatened me for daring to write ‘the sole reason Mr Goodwin has bought ABNAmro is that he suffers from penile infantilism’.

So I’m very happy to link and thank Ian for providing the starting point for this post.

We’ve all been fed a great deal of guff, since the 2016 2nd & 3rd corrections towards Crash2 got under way, about how another banking meltdown can’t happen because all the netting of daft bets and reductions in high leveraging have been thoroughly achieved. Last November, former Bank of England FOMC member Robert Jenkins had this to say in an address to a Finance Watch conference in Brussels [my emphases]:

‘I will start with capital. We continue to work our way through the greatest credit bubble in history. Now bubbles are not new. They are always the same – and always a little bit different. They always feature heavy doses of greed, stupidity and leverage. What distinguished our recent episode from all past experiences was the degree and magnitude of leverage. Now we will not abolish greed. We cannot outlaw stupidity. But we can and must address excessive leverage. Have we done so? No.

It has not been for lack of trying. The first attempt involved a rewrite of Basel. The new rules tighten up on definitions of banking risk and place an overall cap on leverage. Are the rules tougher than before? Yes. Are they tough? No. Most importantly, are they sufficient to ensure stability? No.

Take an example. Remember CDO² [a derivative product] – that mini-masterpiece of financial engineering that spread panic throughout the market? The instrument still features on Basel’s roster of risk-weighted assets. And the RWA regime determines the amount of capital required in support of such risks. So, how much loss-absorbing capital do you think the “tough” new rules require of a bank to carry an investment in a debt obligation, backed by a debt obligation, backed by a pool of loans made to US subprime residential homeowners? Oh, and assume that the package is once again rated triple-A.

What do you think?

20 per cent of face value? 10 per cent? Five per cent? Well, for your information, the tough new rules require less than 1.4 per cent of equity funding for a security that neither banker, regulator, rating agency nor investor was able to understand.

It’s almost exactly three months since Mr Jenkins made these points (and many more of an equally depressing nature) and trust me, nothing has changed. So you can see that he doesn’t agree with the Dancing Boys of Davos, and he should know. And most important of all, Robert Jenkins has no agenda to flag up: he’s just another sane person like Elizabeth Warren and Bernie Sanders who think bankers are going to screw it all up again.

Pro-Wall Street commentators aka the heads of Wall Street banking firms  have steadfastly insisted since 2009 that the real leveraging problem lies in Europe….and so, they would argue, Jenkins’ remarks don’t apply to them. Also they claim that all their derivative bets are netted – and they have the signed accounts to prove it.

The focus of this post is to demonstrate with brutal clarity that this is tosh: the difference between the US and Europe is grossly exaggerated by the two completely different systems of accounting used on each side of the Pond.

In the US they use the GAAP system (quite an apt name, actually) and in the EU we have IFRS. One crucial difference, for instance, is that IFRS shows derivative assets and liabilities, whereas US banks don’t. ‘Mind the GAAP’ as one might say: the risk appears to be small – in some cases nonexistent – but it isn’t….it’s just somewhere else.

But it’s on the leveraging issue that the US bankers’ “we’ve deleveraged more” defence collapses. Both Credit Suisse and Lazard pointy-heads have modelled to rectify the accounting sleight of hand; this is what it shows:


There are two obvious features here: in the context of a 1.4% fund for surviving disaster, neither set has deleveraged enough; and in real terms, the two systems aren’t that far apart in their level of recklessness. (When Lehman filed for bankruptcy, it’s stated leverage ratio was 12.1)

Lazard Asset Management concludes, ‘the gap between the United States and Europe [bank leverage ratios] is at its lowest point in 20 years‘.

However, it would be a very silly person indeed who let eurobanks off the hook: we are talking levels of banking mendacity here, not real reduction in systemic risk. Very few analysts in the EU banking sector placed much faith in the ‘stress tests’ that were conducted, and such tests anyway don’t factor in the biggest danger Europe faces: banking services – especially in the UK – are on average 50% of gdp….whereas in the US, the figure is half that. One can see just how high British systemic banking risk is by going back to Crash1: during that period, the UK Government spent more on bailing out the banking system that the US Federal Government….but their gdp is seven times bigger than ours.

The bottom line is that European and American banks are equally booby trapped, they just have different ones in different parts of the house.

Yet even that extrapolation is based on the ludicrous assumption that accounting practices in the banking sector are fundamentally honest, and a fair reflection of reality. Returning to the grisly demise of Lehman, under the direction of Chief Financial Officer Erin Callan and the certification of Chief Executive Officer Richard Fuld, Lehman Brothers transferred $100 billion to a behind-the-scenes phantom company called Hudson Castle, which appeared to be an independently run organisation – but was actually controlled by Lehman Brothers executives, thus reducing its leverage ratio.

This is a very specific attempt to wake people up to the bogus nature of the banking balm being spewed out by the lobbyists and pr agencies who work round the clock to ensure Business as Usual for their reptilian clients. It won’t make much of an impact (nothing will until it’s too late) but it’s worthwhile remembering that this Slogpost is very narrow.

QE, political budgetary incontinence and economic slowdown in the EMs have combined to ensure that sovereigns and large global businesses are drowning in debt….and of course, somebody somewhere is holding it. Anyone who thinks that level of debt can be ‘netted’ is off with the fairies. Further, anyone who thinks sovereigns can rescue banks again without evoking rampant hyperinflation alongside sky-rocketing borrowing rates needs to stay under the duvet.

Yesterday at The Slog: The scandal of pensions unfit for donkeys

26 thoughts on “CRASH2: You thought systemic banking risk had gone away? Think again.

  1. And whose to blame? Of course it’s our rulers and masters, but there again the banks own them all so, nothing will be done because there is nothing they can do, it’s political suicide to attempt to reign in the banks.
    Banksters rule ok?
    Move along, nothing to see here…

    Liked by 1 person

  2. KFC “it’s political suicide to attempt to reign in the banks” – indeed so, but only if a country has persistently failed to regulate them when they had the chance.

    Remember that TTIP is all about undermining the anti-corporate regulations that exist in Central/North Europe, which effectively hobble banks and force them into impoverishment by lending against houses and businesses.


  3. The truth is the system in completely bust and there will be no real recovery, ever!

    The ponzi scheme will be kept alive for as long as possible, with the introduction of NIRP and a ban on all but the smallest denominations of cash, because the elite do not give a damn, as they will soon be looking to run and hide in those nice underground bunkers paid for with citizens taxes, after we enter a full economic collapse and the commencement of WW3, plus they will make sure that there are enough Jihadi’s in the West to start a race war.

    That should be enough to cover up the failed fiat ponzi scheme and take care of the ‘excessive’ population!

    Yet another example of why we in the West are heading into the abyss……


  4. Hi Gemma,

    It is me again.

    Could you please give a reference to your assertion that TTIP is to prevent the impoverishment of banks caused by anti-corporate regulations. Or even name a single bank whose impoverishment was forced by legislation that forced it into lending against housing and businesses.


  5. Stevo

    Or is it Lord Buckfast?

    The first time you posted this comment on here it was shite and it hasn’t improved in any way shape or form with each subsequent cut and paste event.

    You can do what you like on zero hedge where you appear to cut and paste this from.

    Liked by 1 person

  6. Stevie, think about it for a few minutes. If the media and official – read academic – papers are controlled by the very people who want to see TTIP introduced, how are you going to find papers that speak against it?

    As to impoverished banks, look at Deutsche! They can’t foist their hard earned derivatives onto the DAX, can they? Yet RBS can… because it ain’t illegal in the UK. (Mind you, Deutsche UK can… which does help puff up their, umm, well, er, it lessens their losses, right?)


  7. Stevie – was that your troll? No wonder he – no, it – was asking daft questions, if he’s playing the same game as Central Bankers!


  8. Stevie

    As it happens, Stevo talks a lot of sense, and in moderation.
    You, on the other hand ,and one otheruseless item, prattle endless nonsense, which some of us put up with, until your assertive ignorant manner needs commenting on.


  9. John
    This morning I Watched a spokes person from the United Institute for defence giving, her take? on the the situation in Syria ….Woz it Russia whodunit …the bombing of hospitals?
    To my mind she was far from happy with the words coming out of her own mouth.
    Big brother at work I’m thinking.


  10. Kentucky & Gems
    Later in his speech, Jenkins said it would be political suicide NOT to rein in the banks. If we reigned in the banks btw, they’d have to live in Buck Palace.
    I confess to not really knowing WTF TTFN is about, and I doubt if anyone else does really. Perhaps it’s designed to play war games using splash paint and quad games.


  11. Stevie4real
    It’s Mr Metwatwe again, returned after a mercifully long absence.

    He is a man with a criminal past, but no hohoho criminal future. No doubt Gems will be a little more sprightly now too.


  12. Um, Gemma
    Home ownership – as you would know better than most – ist im diesen Täge fast homoäopatickische in Deutschland, nicht?
    So why aren’t German banks the richest in the world? In the US, mortgage lending by banks is also relatively rare. They’re in bad shape too.
    Bist du sicher diese Theorie wird Wasser halten, my little Schnitzel?


  13. It is pleasing that at such a speech is made (& probably very brave) and hopefully a sign of change!all be it rather late!


  14. Herr Slogmeister,

    don’t you remember what the American banks did? After all, they caused Crash 1, didn’t they? I’m sure you remember that the US banks could give out mortgages hand over fist, take a pigsty in Louisiana and lend out several thousand on it… because Clinton had slackened the regulations on lending…

    … something that didn’t happen in Germany, by the way. Mind you, you only saw the DDR, didn’t you? Perhaps you didn’t get a feel for the force of their regulations?

    After all, a British bank can knock on Osborne’s door, walk in and say “luvvie, you just can’t do this to our banks because, well, we’re in charge, right?” And the banks could feel pleased that they could belittle some jumped up intellectual. My point is that German banks can’t do this kind of thing… after all, it wasn’t the German banks that caused Crash 1, was it? Although they did get hit by it.

    Had the US banks stood by the terms of the securities they sold – the so-called ‘toxic assets’ – there’d have been no problem in Europe, would there? Because there’d not have been Crash 1. There’d not have been the housing slump that followed hard on the heels of a sudden contraction in the economy. That was a problem for German banks: the houses that had been worth €100,000 in Leipzig were only worth €75,000… hence there was a big hole in the German banks. Which became the bad banks…

    And just to save the skin of a few US banks that should have gone to the wall because of their deliberate fraud.

    I will repeat myself: had the US banks abided by the terms of the contracts they issued, there’d not have been a crash. The US government might have had a few problems with their gangsters, though, and they tell people what to do, just as they tell Osborne. Quite what the ramifications of a US banking failure would have been is something we can’t ever know because it didn’t happen, did it?

    Did you ever pay income tax during your stay in Germany, in the DDR, John? Because if you did, you might have gotten a flavour of how tight the regulations are there. Germany is not a country with an Anglo-Saxon laissez-fair mindset.

    When carpenters in the UK have three national insurance numbers… you can see how easy fraud is in the UK, what with its rather slack regulations.

    Liked by 1 person

  15. The sheer elasticity of current stock market fluctuations serves to underline the fact that the investment value equates fairly accurately to a large consignment of old knickers – this is confirmed, despite almost continuous laundering over many years, by the presence of some very large and unsightly skid marks. When the elastic eventually fails, as it always does, the knickers will head south and the once attractive illusion of a bourse set in a corset will be replaced by the vision of a bunch of fur coated nickers with no knickers. Those with a weak constitution will doubtless want to avert their gaze..

    Liked by 2 people

  16. @ghost

    “Notably, it encourages predation, monopolisation, hoarding and in some cases, even contraction as opposed to growth.”

    …. which, evidently, some people think is a good idea!


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