Dealing with a Financial Crisis under cover of Brexit Chaos
Remember TARP, the Troubled Asset Relief Program that the US Congress approved to bail out banks and other companies during the Financial Crisis? $700 billion were authorized, later reduced to $475 billion. The Treasury eventually dispersed $432 billion. I bring this up because the ECB bailed out the European banks with more than TARP, in just one day: on Brexit Black Friday.
The ECB saw what was happening to the shares of the largest banks on that propitious day. It saw a blooming financial crisis:
Top UK Banks:
- HSBC, the apparent winner in this fiasco, perhaps because of its exposure to Asia, -1.4%
- Barclays: -17.7%
- Royal Bank of Scotland: -18.0%
- Lloyds Banking Group: -21.0%
Top German Banks:
- Deutsche Bank: -15.9% to €13.25, down 59% from April last year, possibly on the way to zero.
- Commerzbank: -13.6%, to €6.20. The German government still owns nearly 16% of it as a result of the bailout during the Financial Crisis.
- The third-largest German bank, KfW, is a state-owned institution, so taxpayers are automatically on the hook.
Top French banks:
The fiasco that happened to the Spanish and Italian banks was so enormous that it sent stock markets into their largest one-day plunges on record, of over 12% [ Brexit Blowback Hits Italian and Spanish Banks].
The Stoxx 600 banking index, which covers the largest European banks, plunged 14.5% on Friday. It’s down 29.3% year-to-date, 42% from its 52-week high, and 76% from its all-time high in May 2007 before the Financial Crisis and the euro debt crisis knocked the hot air out of the banks.
But to keep panic at bay, Brexit and the resulting political crisis are used to cover up the blooming financial crisis.
And what a political crisis it is, not just for the UK, but for the EU. No one knows how this will end up. Businesses need certainty. They need to know what money they’re going to use next year, and what the trade and legal frameworks will be. They like to take those things for granted. But now, in the EU, no one can take anything for granted anymore.
Companies with cross-border operations – this includes all major banks and brokerages – have gigantic headaches, and the UK’s 2.2 million financial-sector employees are fidgeting on the edge of their chairs. It might take a couple of years for the UK to actually exit the EU, if it even happens at all, so there’s a little breathing room.
But where there’s apparently no longer any breathing room is with banks, and the ECB went into panic mode.
With bank stocks collapsing on Brexit Black Friday, the frazzled folks at the ECB decided it was high time to start bailing out the banks – and not dabble at the margins, but pull out the whatever-it-takes money-printing machine, and do so under the cover of Brexit chaos when no one was supposed to pay attention.
On Friday, the ECB pulled a huge magic trick, larger than TARP. Under one of its alphabet-soup programs – long-term refinancing operations (LTRO) – it handed teetering banks $399.3 billion, or $444 billion.
€399.3 billion – like a used car is advertised for €19,999.99 – because €400 billion might have been too much of a sticker shock. So let’s round it to €400 billion.
And as central banks do, it didn’t ask legislators for permission. It just did it. Here’s a screenshot of the ECB’s disclosure, with my annotations:
Settlement date is Wednesday. This money is going to go somewhere.
Part of it may be mopped up by the liquidity crisis the ECB sees unfolding at the banks.
And part of it might end up in other assets. This sort of thing is supposed to prop stock markets, particularly bank stocks. But since April last year, European stock markets have swooned, despite all the efforts by the ECB. Its flood of liquidity went into bonds, real estate, and into US assets.
This money might pump up prices, perhaps in the most unexpected places, if only briefly. It might even pump up bank stocks. Short sellers should take note.
And the day before Brexit Black Friday, with impeccable timing, the ECB pulled another big one: it leaked to Reuters that it was addressing the nonperforming-loan epidemic among Eurozone banks by sweeping it further under the rug.
The ECB, which regulates 129 Eurozone banks, has estimated that these banks are bogged down in €900 billion ($1 trillion) of bad loans, or 7.1% of all Eurozone bank loans. At some banks, NPLs have reached catastrophic levels: for example, 15% at Italy’s UniCredit.
So instead of forcing the banks to finally take the losses, raise a lot of new capital or topple, the ECB will merely give them “non-binding guidance” by the end of 2016 or early 2017, and some of this “guidance” won’t even be in writing, sources told Reuters with perfect timing the day before Brexit sank these banks.
The ECB doesn’t want to hurt fake earnings. And this leak to Reuters was supposed to have soothed the markets and helped prop up bank stocks.
The thing is, banks that need to raise equity capital must have inflated stock prices or else existing investors get crushed. If Deutsche Bank has to raise €30 billion in capital by issuing shares at €3 a share, existing shareholder will essentially be wiped out, and raising equity capital may no longer be possible. So the name of the game is to manipulate up bank stocks before issuing new shares. But it may be too late.
And this is what happened to Italian and Spanish stock markets, as banks were massacred. Read… Brexit Blowback Hits Italian and Spanish Banks
by Wolf Richter | WolfStreet
European Banks Get Crushed, Worst 2-Day Plunge Ever, Italian Banks to Get Taxpayer Bailout, Contagion Hits US Banks
European bank stocks just experienced their worst two-day plunge ever in the post-Brexit fallout that rained down on the already blooming European banking crisis.
Healthy big banks would get over Brexit and the political turmoil it is spawning, particularly non-UK banks. But there are no healthy big banks in Europe. And non-UK banks are crashing just as hard, and some harder. This is about a banking crisis morphing into a financial crisis, that has gotten so bad that on Friday, the ECB tried to bail out the banks in its bailiwick with €400 billion – more than the entirety of TARP – in just one day.
These bank stocks got crushed on Friday. And they got crushed again today. Italian banks have been reduced to penny stocks. Spanish banks are getting closer. Commerzbank, Germany’s second largest bank, and still partially owned by the German government as a consequence of the last bailout, is well on the way.
The two-day losses are just breathtaking. This table shows the largest banks by country with their percentage losses for today and for the two-day period:
Note that the European Stoxx 600 banking index fell 7.6% today for a 21.1% two-day plunge! It isn’t just a few banks whose stocks are collapsing!
Deutsche Bank’s infamous CoCo bonds deserve a special word. These hybrid bonds that are just above equity on the capital totem pole had spiraled down, with the 6% CoCos hitting 70 cents on the euro in February. At that point, they and all other Deutsche Bank bonds were propped up by government verbiage and bank money. The bank ingeniously announced it would buy back its own bonds! Like all these transparent market manipulations, the market ate it up, and even the CoCo bonds jumped to 87 cents on the euro. But that didn’t last long. They have since lost 11.5%, including today’s 3.7% plunge to 77 cents on the euro.
In Italy, the banking crisis that has been growing for years has reduced all major Italian banks to penny stocks. It has triggered bailouts of some banks, including the third largest publicly traded bank, Banca Monte dei Paschi di Siena. Now the taxpayer is going to get shanghaied into bailing them out to put a floor under the collapsing share prices and prevent them from going to zero.
Italian banks are bogged down in a sea of bad debt whose true dimensions are still unknown publicly, and that the ECB publicly estimates to be €360 billion, but every time someone looks at it, it gets larger.
According to “a banking source familiar with the government’s thinking,” as Reuters put it, the Italian government is now fretting about a hedge fund attack on these zombies, following the Brexit turmoil! To counter this attack, the government is trying to figure out how to “protect its banks from a destabilizing sell-off of their shares” that “could tip them into full-blown crisis.”
(I have some news for the Italian government: Your banks have been in full-blown crisis for years!)
The government is thinking about using some kind of taxpayer guarantee and taking a stake in these banks, funded by about €40 billion in new government debt, issued by the second-most indebted government in the Eurozone, after Greece.
According to media reports in Italy, cited by Reuters, the government is already in talks with the European Commission about this sort of bailout. European rules are supposed to end state aid to tottering companies, and collapsing banks are supposed to be wound down involving losses for stock holders and junior bondholders (the bail-ins).
But the government is invoking the exemption in these rules in case of “exceptional events,” which would be the crash of bank stocks, as a consequence of investors figuring out that these Italian banks are toast.
That doesn’t mean that bottom fishers and falling-knife catchers aren’t jostling for position to pick up “bargains” among these European banks, as they have done so many times before, only to see banks stocks, after a brief rally, fall once again to new lows.
Contagion is infecting US banking stocks. As I’m writing this, Goldman Sachs is down -1.1%, Wells Fargo -1.3%, JPMorgan -3.1%, Morgan Stanley -3.1%, Citibank -3.5%, and Bank of American -5.3%.
These wounds among US banks are just cosmetic compared to the bank massacre happening in Europe, where the ECB is now fully engaged in trying to deal with a Financial Crisis under the cover of Brexit Chaos.
by Wolf Richter | WolfStreet