Posted on 09/05/2011 3:56:36 PM PDT by DeaconBenjamin
Josef Ackermann, chief executive of Deutsche Bank, Germany's biggest bank, has warned that "numerous" European lenders would collapse if they were forced to book their losses on stricken sovereign bonds.
Mr Ackermann said that the value of billions of euros of loans has plunged to a level that could overwhelm smaller banks. "Numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels."
"We should resign ourselves to the fact that the 'new normality' is characterised by volatility and uncertainty," he said. "All this reminds one of the autumn of 2008."
Deutsche Bank shares tumbled 8.9pc as banks led a stock markets lower across Europe. The Stoxx Europe 600 banking index fell to its lowest level for 29 months. The DAX fell to its lowest level in two years.
Mr Ackermann said bank profits will take a long time to recover. "Prospects for the financial sector overall... are rather limited," he said. "The outlook for the future growth of revenues is limited by both the current situation and structurally."
Even so, Mr Ackermann firmly rejected the proposal by Christine Lagarde, the new head of the International Monetary Fund, for another round of recapitalising European banks.
Mr Ackermann claims that the move would be "counterproductive" and argued that "a forced recapitalisation would give the signal that politicians do not themselves believe in the measures" they have implemented to bolster fragile eurozone countries.
Ms Lagarde has said banks need another capital injection to "avert contagion". She told reporters she believed it is "necessary to recapitalise European banks so that they are strong enough to withstand the risks linked to the debt crisis and weak growth".
(Excerpt) Read more at telegraph.co.uk ...
Let them fail.
Nothing new here. The banks in Europe are stuffed with flaky assets in the form of Eurobonds issued by the PIIGS, who are unlikely to pay them.
In the US, the banks (including the FED) are stuffed with mortgages and mortgage backed securities, which are also unlikely to be repaid. Their book value may go up for a while if the Government figures out a way to temporarily goose the price of housing again, but any such price rise isn’t going to hold for the lifetime of the securities. Different type of credit than in Europe, same result.
At some point they’ll have to.
Since it’s past the point of bad, it will be a question of whether it fails at worse or worst or complete financial annihilation.
This the same Deutsche Bank that is the Foreclosure King in the USA . . . ? Take what they say with a pound of salt.
Same as here, but less transparent, if such a thing can be. The humor is the idea that telling the truth about their assets is a valid reason for not telling the truth.
The Fed creates money and then loans that money to US banks at no interest.
US banks deposit that money in European banks,
and gain a small interest payment.
European banks, now liquid with US deposits, loan that money to Greece, Portugal, etc., so that those nations
can then repay the European banks.
Problem solved.
Except that this is all being done with US fiat money (play money, created by the Fed and injected into the system).
It’s OK until the little kid in the corner yells out, “But the emperor has no clothes!”
European banks and American Banks are heavily intertwined.
The one thing that isn’t widely made known is that some of the Euro banks are levered up much higher than American banks.
Last I knew, SocGen was levered up to about 50:1.
I’ve got a question about “mark to market”. I know the idea is to revalue the mortgage at the current market value of the property - but is that actually reasonable? The bank doesn’t own the house - it owns a payment plan from a homeowner. The plan is backed by the house, but the homeowner is NOT the bank.
So, given that, should a mortgage be marked down or adjusted by mark-to-market if the homeowner is up on their payments? It’s a payment plan that’s owned by the bank, not a house.
Let the US banks get the foreclosures done, and sell the real estate at every sale for whatever prices it brings. Otherwise, prepare for the mother of all multifaceted collapses with every most dreaded fear realized (e.g., enormous gangs of thugs from the millions of homeless zombies, invading and occupying all of the greatest refuges among resorts and ranches).
;-)
It isn’t just an issue of re-valuing a single mortgage according to the property, but re-valuing RMBS according to how many of the mortgages are being paid current, and (here’s the important part) what the market thinks the value of those mortgage securities is/are.
So if every owner of a home that is mortgaged within a RMBS is current on their note, the bank should be able to mark that note at full face value, regardless of what the underlying real estate is valued at.
Where the real estate valuation becomes an issue is when the note has gone to default, and now the bank is trying to recover something.
So on the whole, you’re right, you just need to multiply your thinking to “bundles” of mortgages that are sold as securities.
In the case of Euro banks and sovereign debt, it is a little different. If Greece defaults, there won’t be a 100% loss of principal to the holders of Greek debt, but there will be some loss. How much? Well, the bond market is currently pricing in large losses on Greek debt with the sky-high yields - eg, yields above 50% for a two-year note. What does that mean to the Euro banks? If they’re forced to MTM, it means that they can’t price Greek sov debt as being 100% of face value, and it probably means that marking it down to 90% of face value ain’t gonna cut it either.
Bankers around the world need to be held to some better standards of truth-in-accounting. They’re almost all liars right now, and that’s part of what is paralyzing the world economy as nation-states are pouring money into the banks to capitalize them and prevent failure. The bankers don’t want to admit how bad the situation is, so we keep seeing this “bailout upon bailout” situation. We’d be better off if more nations did as Iceland did and stiffed the bankers outright, forcing a re-valuation of bank assets very quickly and brutal honesty enforced on the bankers.
If he cannot take the entrepreneurial risk anymore, perhaps he should ask to be nationalized.
OK, thanks - that makes more sense. If the mortgage is up-to-date it really shouldn’t get recalculated in terms of value, since the cash flow/payment plan is still solid. If it’s delinquent or in foreclosure, then I agree - reset the value of the note to the market rate of the home.
It should be a bit more accurate representation of the actual book value of what the banks have. They’ll definitely take a hit, but not as bad as if they had to revalue ALL mortgages they hold (for example, my own house - slightly underwater, but I don’t care because I’m not planning on this as an investment but a place to live, and a place where I’ve put down roots - and I’m current on my mortgage).
Thanks again!
This article is speaking of marking sovereign debt to the market value. Marking mortgages to market is a separate topic.
There is a good case to be made that banks holding securities that they intend to hold to maturity should not have to mark to market. That said, if it becomes apparent that the securites will not reasonably perform as per their initial agreement, then they should be marked down.
Agreed. When they begin to fail due to bank runs in Europe, we have two weeks to prepare for the same here.
While I’ll echo what NVDave said, in the thought example we’re having, one should consider further that an estimated 25% of US housing is underwater. Since about 1/4 of US homes have no mortgage, are owned outright, the number of homes in payment arrears is larger than the figures suggest at first blush. I don’t know what pctage of actual mortgage payments are delinquent, but I suspect it is close to 10%.
All of these statistics have historical “outcome” scenarios. By that I mean, lenders know very well that a home delinquent by three payments has a scant chance of being cured, whereas when you get up to 6+ payments, it’s generaly considered a lost cause. Of course, at one time, lenders understood that a 28% front-end and 36% back-end ratio was as much as anyone should expect a homeowner to bear. But of course, that produced only a measly .7% default rate and who could make any money on that?
What we have with the housing market is a spiraling type of effect, where the number of homes being offered well below market (which generate “comps”) themselves depress the market going forward. Theoretically, even if every mortgage borrower pays their payment faithfully on time, the decline in value of the underlying collateral should depress the value of the RMBS. “Underwaterness” does, in and of itself, produce walkaways...it doesn’t necessarily require a lost job or medical problem.
The RMBS holders don’t care about any of this. After all, they purchased CDS instruments from insolvent companies and are all done up proper, huh?
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