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Wednesday, March 21, 2012

A rumor concerning German banks holding 1 trillion euros of bad debt

A post on Golem XIV discusses a rumor that German banks are holding 1 trillion euros of bad debt (h/t Yves Smith).

By choosing to implement the Japanese model for handling a bank solvency led financial crisis, policymakers and financial regulators guarantee that the information necessary to prove or disprove the rumor is unavailable.

This is a direct result of the requirement under the Japanese model that in preserving the myth banks have positive book capital policymakers and financial regulators 'bless' the banks hiding losses on and off their balance sheets.

Regular readers know that under the Swedish model for handling a bank solvency led financial crisis, banks are required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

Were this information available, market participants could easily determine if German banks were holding 1 trillion euros of bad debt.

When the Chief Market Analyst of  FX Solutions, Mr Joseph Trevisani, in an interview on CNBC on 23rd Sept 2011,was asked about fluctuating currency values, his reply created a stir....
“There was a story out in a German newspaper this morning talking about a trillion euros, supposedly, unconfimed. of losses hidden in German Banks.” 
He offered nothing further but the implication was that big players believed that the one stable and solvent European nation, the nation that was  supposed to bail out the others was sitting on a time bomb of its own. 
Which would mean that Germany, the nation that liked to lecture others about lying, was lying. Lying about a potential trillion euro hole in its banks. 
The story was around for a while but then faded because no one could add much to it, let alone confirm it.... 
First the easy part – what could the debts be? It has been an open secret that the Landesbanks bought up two lots of debt as fast as the ink on the contracts would dry. The first was securities made from sub-prime US mortgages. A trillion Euros of this sort of debt was created and sold in 2004-5 alone.... That debt, I have been told more than once, is still there.... 
This is a pattern of hopeful deceit that is rampant globally. So it really shouldn’t be a surprise that German banks are doing it too. 
The other lot of debt is home grown. There is a vast amount of regional european debt which was considered AAA rated when it was securitized and sold on and which is still being held at par because of the now somewhat threadbare but still holding fiction that no nation will ever default or let one of its cities or regions default either. 
For example Depfa, the German bank,  made very large, long term loans at fixed rates which it then sold on in return for shorter term funding at floating rates. I know of several such deals: to Barcelona (a massive 20 year bond), another to Manchester, another to Luton for its bypass and a large number done with French arrondissments. 
My guess is that a large number of loans to places in nations not so secure themselves are held at par only because no one has been alowed to look at them very closely.
But that still leaves the ‘where are they hidden’ question. 
Because no one has actually seen a spread sheet with large negative numbers on it this remains what it has been –  a rumour. And it still is. 
The only reason I bring it up is that a couple of weeks ago I was told by a European banker  that he had come in to information from an insider in German financial oversight, that the debt was real and was currrently on the books of the 9 regional Landeszentral banks.... 
If we had not already suffered 4 years of blatant lies and manipulation on the part of all our banks and all our governments I might be loathed to believe this story or pass it on. But given what lies we know we have been told over and over by the finanacial sector and our politicians I do not feel that this rumour is impossible to credit. 
If the story has any validity at all then it says that Germany and its banks are playing an even more desperate and far higher stakes game of extend, pretend and hope for miraculous growth, than ever Greece was, or Portugal and Italy are. 
Post script – What isn’t a rumour is that there are real and large problems above and beyond the insolvency of Greece and soon Portugal as well, lurking in the Euro system and in Germany in particular.   
One such problem, different from what I have written about, can be seen in this article from Der Spiegel. This article looks at the way the European banks are shackled together by the outstanding claims they have on each other. Which means the money they owe each other which would NOT be paid by any country that fell out of the Euro system.

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