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Thursday, 27 October 2011

The first domino has fallen - systemic collapse to follow?

A giant bank has just gone under. It’s the biggest bank failure since the debt crisis of 2008-2009. It’s so big, in fact, that its assets are actually LARGER than the total GDP of the country where it’s domiciled.
Dexia sank like a lead balloon once banks stopped lending to them
The bank that failed is Dexia, and the country is Belgium. But if you don’t live in Belgium ... and you think that fact makes this failure less relevant to your banks or to your investments, consider these shocking facts:

Shocking fact #1. Dexia was the world’s largest lender to municipal governments in the U.S. and overseas. So as the bank’s various pieces are chopped up and sold off to other institutions, it’s naturally going to be a lot tougher for municipalities to get financing.

Result: More belt tightening and job cuts at local governments everywhere.

Shocking fact #2. Dexia was one of many large banks that actually PASSED Europe’s official “stress tests” just three months ago.

And yet it’s the first to go down!? What does that tell us about the OTHER, even larger banks that supposedly passed the tests?

We're talking about giant banks loaded with bad loans like ...
  • Italy’s UniCredit, which is 1.8 times larger than Dexia in terms of assets ...
  • France’s Société Générale, which is more than double the size of Dexia ...
  • France’s Credit Agricole, which is almost three times larger than Dexia ...
  • And France’s BNP Paribas, nearly FOUR times larger than Dexia.
The big disconnect: The official stress tests let these banks lie through their teeth about their huge loans to Greece, Ireland, Portugal, Italy and Spain.

Those loans are worth as little as 40 cents on the dollar on the market. And yet, in the recent stress tests, the banks were allowed to value them at 100 cents on the dollar!

Result: They also lied about their capital and their solvency!

This absurd — and deliberate — oversight by the banking regulators is widely known; and they’ve already been raked over the coals for it.
What’s not widely known is ...

Shocking fact #3. It wasn’t recognition of the bad PIIIGS loans that sunk Dexia. Even now, as Dexia is being split up and sold off, it’s STILL carrying those loans at full value on its books!

So what did sink Dexia?

It was a bank run — the sudden and mass withdrawal of its funding.

Moreover, the run on Dexia’s funds was not by consumers lining up on the street to pull out their deposits. Rather, it was by so-called “wholesale funding” sources — other big banks and institutional investors who can pull out hundreds of millions of euros and dollars with a simple click of the mouse.

What makes this truly shocking is that nearly ALL large banks in Europe — including many that supposedly passed the stress tests with flying colors — also depend very heavily on these same funding sources:  

On average, they get nearly HALF of their money from these here-today-gone-tomorrow funding sources. That’s far MORE than they get from ordinary deposits.

Even Moody’s admits: “Until this problem is corrected, ‘fixing’ European banking is merely applying band-aids.”

And guess what! The promises made last night by France and Germany — to “recapitalize the banks” — do NOT fix this problem!

If anything, if France and Germany throw more good money after bad into saving these banks, it will merely sink their own finances, invite more ratings downgrades, cause bigger losses in sovereign bonds, and dig a deeper hole in the banks’ capital.

Shocking fact #4. Some of the largest U.S. banks, including Bank of America and JP Morgan Chase, are equally vulnerable, according to analysis.

They’re loaded with toxic assets of their own. And to make matters worse, they have placed big bets with European banks.

Just bear in mind that the crisis is hitting right now. So time for protective action is running out.