[Cid_Yama]

<i>This at Automatic Earth:

Ilargi: As financial troubles in Europe grow, calls for transparency get louder. Since the EU has a common central bank, the ECB, that is not really a lender of last resort, and the national central banks have limited powers, transparency may be the only way to stop the bleeding before the patient succumbs. In the case of Spain, it may already be too late. All the more reason to stop the infection from spreading.

But if Europe chooses to do this, there will be consequences for Wall Street, and the US economy, as well. Much of the US banking system has been propped up by opaqueness: as long as there is no demand for mark-to market-numbers for all sorts of assets, we can all keep pretending they are worth whatever is convenient. That would become impossible, since most securities and derivatives are traded globally.

This could lead to a hostile cross-Atlantic environment.</i>

<b>Banks urged by EU to disclose "toxic products"</b>

Banks should step forward with all their problem investments in order to restore confidence in financial markets, the European Union's top financial regulator said on Friday.

"It would give confidence to the market if everybody was pretty certain that all these institutions had all of their toxic products on the table," EU Internal Market Commissioner, Charlie McCreevy told reporters.

What McCreevy calls toxic products are securitized instruments underpinned by home loans in the United States. As those loans defaulted, the market dried up and their value plunged, forcing many banks to write down billions of dollars in losses.

Banks fear more writedowns are likely and are loath to lend money to each other, thereby prolonging the credit squeeze on the interbank money market.

link

As I have said before, the banks are all in the same boat, but not on the same side. While the European Central Bank wants to Mark-to-Market these assets and get it over with, the Fed and US banks stand in horror, as their strategy has been to do everything possible to avoid these toxic derivitives being priced. As long as they are not traded or priced, the Banks can pretend they are worth whatever they want. The second the EU takes action to price these derivitives, that game is over, and US banks, and the Fed, who has been taking these things as collateral, will take an enormous hit and set the dominoes in motion. Because we created these toxic products, we are the most exposed, and there is no love lost between the US banking system and the rest of the world, who see the the US as the financial criminals who created this mess in the first place.

[RdSnt]

While I fully agree with the need of a new, very strong, mandate of transparency, I just don't see it happening.
The primary problem is that much of the toxic waste, and it involves much more than sub-prime mortgages, is that they have been re-packages more than once, and then have multiple levels of leverage applied to them. If you have heard the term "cheque kiting" well this is "debt kiting" on a massive scale.
Trillions of dollars of the paper has absolutely no value.
If the banks were forced to disclose this stuff fully, fraud charges would be the least of their problems.

[Iaato]

Cid, you bring up a good point that I've been trying to wrap my little pea brain around (haven't succeeded yet). It's clear that the US is going to take the "bailout and print" fork in the road, while Europe would rather take the honest approach, confess to their mistakes, and take their lumps.

I can think of a number of reasons for why the responses of Europe and the US to these bad derivatives are divergent. First, as Cid pointed out, the US is the author of the problem. International legal issues will explode when this stuff finally gets marked to market. Conversely, Europe is at the more innocent, receiving end of this creative fiction that wall street has been spinning. So they will be much happier to expose the US's dirty linens.

The second issue is that the Euro is an amalgam of different countries with varying allegiance to the joint currency. We need some Europeans to speak to this, because I don't know much about the situation other than the idea that German housewives, for instance, would rather go back to the Deutschemark. So I don't know if this economic collapse would be the optimal time to retreat to individual currencies? Given peak oil, I'm thinking that this is the fallback plan.

There are probably more issues here, but I'm getting ready to go skiabout again before I put my skis up for the season. This is an interesting topic.

[Gerben]

In the Netherlands we didn't want this currency. We had one of the strongest currencies in the world. We didn't get to vote about it or we would still have our Guilders. Then the French cheated by artificially strengthening their currency before the exchange rates were fixed. Finally the rules all parties had agreed upon were changed in a majority vote.

We got back on them by rejecting some treaty we all needed.

Atm. ppl. dislike 'Europe' but not the Euro. I do a lot of business internationally and the Euro makes it all a lot easier.

[pedalling_faster]

i feel grateful to the European banks for pushing for full disclosure.

many American companies seem to have a more "sweep it under the rug" approach.

[Tyler_JC]

Here's the problem.

If Italy decides to drop the Euro, go back to the Lira, and then devalue the %&#! out of it...how do they pay their international debt?

Italy's debt is denominated in Euros.

Let's say their current national debt totals 1 trillion Euro. This is roughly 100% of GDP.

Now let's say Italy moves back to the Lira (1:1 with the Euro) and the Lira falls in value against the Euro by 25% (1.25:1 with the Euro).

Now the Debt/GDP ratio has hit 125% of GDP.

Worse yet, they must pay that debt in foreign currency (Euros) and anyone who has lent money to the Italian people expects to be paid in Euros. Businesses might pull investment out of Italy as the value of those investments falls in Euro terms.

The Lira would weaken further as people demand Euros in exchange for their ever weakening Lira...and so on.

The Italian Central Bank would be out of Euros in a hurry leading to a massive collapse in the Italian economy.

In short, leaving the Euro in order to devalue your currency is a great way to turn your country into Argentina.

[mos6507]

I have a prediction for you. Cid will be posting another prediction of a war of some kind on the horizon every five minutes. And none of his predictions will come true.

[bobcousins]

Also from Automatic Earth:

$this->bbcode_second_pass_quote('', 'I')largi: I called yesterday, March 7, The Day The Wheels Came Off. I was not joking. This first article spells it out loud and clear:


THE GAME IS OVER !!!

[Cid_Yama]

Excuse me, you're an Idiot. The wheels did come off. If not for the frantic scrambling by the Fed over the following weekend(March 15-16) to prevent the bankruptcy of Bear Stearns (and the subsequent pricing of the Alphabet soup they were holding), the financial markets would have collapsed. They barely avoided taking the bullet that weekend. You haven't a clue about what you say. Go back to Oil Drum, Troll.

Can't you see? mos6507 is my assigned troll over here. The job is taken.

[lateStarter]

Cid,

Watch out! 2 out of the 3 Amigos have already checked in against you. (Mos6507 and Tyler_JC). Be prepared for the additional broadside from PlantAgent. He may have already replied while I was typing this. According to the 3 Amigos, you are not allowed to criticize, insinuate, allude to, suggest, portend, or entertain any negative thoughts with regard to the US of A.

[Cid_Yama]

Actually, Tyler_JC grasps what's going on financially, and this goes beyond political partisanship.

[Cid_Yama]

<b>Securitization is officially dead</b>

It appears that the FASB has removed the concept of QSPEs, which is the enabling "piece" to make off-balance-sheet securitizations possible, from the FASB set of regulations, specifically, FAS 140.

As such it appears that all financial institutions will have to reclaim all SIVs back onto their balance sheets no later than the start of 2009.

This is a watershed event.

In short Investment Banks have ~6 months to get their act together and their capital up, and then they are going to have to start integrating these vehicles back onto their consolidated financial statements.

link

[Tyler_JC]

$this->bbcode_second_pass_quote('Cid_Yama', 'A')ctually, Tyler_JC grasps what's going on financially, and this goes beyond political partisanship.

[mos6507]

$this->bbcode_second_pass_quote('lateStarter', '
')Watch out! 2 out of the 3 Amigos have already checked in against you.

[bobcousins]

$this->bbcode_second_pass_quote('Cid_Yama', 'E')xcuse me, you're an Idiot. The wheels did come off. If not for the frantic scrambling by the Fed over the following weekend(March 15-16) to prevent the bankruptcy of Bear Stearns (and the subsequent pricing of the Alphabet soup they were holding), the financial markets would have collapsed. They barely avoided taking the bullet that weekend.

[skeptik]

$this->bbcode_second_pass_quote('bobcousins', '[')
PO.com is for crazy people, and theoildrum is for sane people, is that how it works?

[wisconsin_cur]

There was this radical idea a few centuries ago, that people (at least landed white males) are capable of discerning information and make decisions for themselves. As time went on we decided to extend that, first to white males without land, then black males (with some significant regional discrepencies across time) and then we decided women too we capable of thinking for and making decisions for themselves.

If the cost of this progress is that I have to exercise the effort to decide which posters to listen to and which to ignore then I am willing to undertake the effort. I am lazy, but I am not that lazy.

I have learned a lot from individuals who could not meaningfully contribute "on topic" at the oil drum. We are not just talking about resource depletion but the impact of that on our societies, towns and lives. That is a broad spectrum and needs an open forum. If the cost of that is some trash talk, big deal. Suck it up. Deal with it. Free speech is messy but it is the best problem to have given the alternatives.

I love the oil drum, I learn a lot from it. It does not, however, help me think about how I need to respond to best prepare me and mine for the days to come, at least not in the same way as PO.com

[Twilight]

$this->bbcode_second_pass_quote('Iaato', 'T')he second issue is that the Euro is an amalgam of different countries with varying allegiance to the joint currency. We need some Europeans to speak to this, because I don't know much about the situation other than the idea that German housewives, for instance, would rather go back to the Deutschemark. So I don't know if this economic collapse would be the optimal time to retreat to individual currencies? Given peak oil, I'm thinking that this is the fallback plan.

[MrBill]

$this->bbcode_second_pass_quote('Gerben', 'I')n the Netherlands we didn't want this currency. We had one of the strongest currencies in the world. We didn't get to vote about it or we would still have our Guilders. Then the French cheated by artificially strengthening their currency before the exchange rates were fixed. Finally the rules all parties had agreed upon were changed in a majority vote.

We got back on them by rejecting some treaty we all needed.

Atm. ppl. dislike 'Europe' but not the Euro. I do a lot of business internationally and the Euro makes it all a lot easier.

[Tyler_JC]

By "Italian Central Bank" I was talking about the hypothetical new central bank of Italy that would have to be created if they left the EU and the Euro.

The ECB would then be bailing out another country, not a member state because Italy would be a non-member in this future scenario.

Again, highly unlikely because of the cost of that kind of radical move.