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The market is continuing the rally
from yesterday on enthusiasm for coordinated central bank action next week. The banksters will provide liquidity if elections in Greece create turmoil in
financial markets. What is liquidity? Liquidity means the European Central Bank will make paper euros available if there
are runs on banks from customers withdrawing funds. They will also
provide overnight loans if banks stop making loans to each other out of concern of other banks
Does liquidity make any difference
to the stock market? No. In
the 2008 banking crisis there were unconfirmed horror stories of small businesses not being able to make payroll
because their normal lines of credit might not be available. Never
happened. These falsifications were used as justification to pass the
TARP bill. TARP was originally sold to congress as a vehicle to buy
Mortgage Backed Securities (MBS), we all know what happened.
TARP money never bought MBS to
provide liquidity. TARP bought equity in Chrysler, GM and
AIG. TARP was a sham to socialize the losses in the financial industry
and morphed into bailing out the United Auto Workers. The money that
went to AIG ended up paying off Credit Default Swaps (CDS) owned by Goldman Sachs, J.P. Morgan, UBS, and a whole
host of foreign banks.
The liquidity provided by the
Federal Reserve was evidently not enough for the bankers (because it had to be paid back). TARP was necessary because it put taxpayers on the hook for bank losses rather than
the bank owners and the Federal Reserve.
The market is excited to see central
banks ready to provide liquidity, but remember…liquidity is not equity.
An insolvent bank can be liquid but it is still insolvent. Until the
money flows to banks as equity, or non-recourse loans against dodgy sovereign debt, the banks that are sitting on
huge losses from the Greek debt write down are still insolvent.
We saw bailout money promised to
Spain last week from the EFSF or ESM (to be determined). Spanish
politicians are adamant this money is to shore up their banks. Why are
their banks teetering on insolvency? The number one reason is real
estate loans that have gone bad but also because they are chocked full of Spanish sovereign debt that is not worth
Spain’s credit rating is just one
notch above “junk status” at the present time. If it drops one more
notch the ECB will charge a five percent premium on any Central Bank loans collateralized by Spanish sovereign
According to Reuters, Spanish banks held $185 billion dollars’ worth of Spanish bonds at the end of
April. Italian banks own $370 billion dollars in Italian government
debt. Greek banks lost 75% on the government debt they held when
private bondholders were wiped out in the last bailout.
The situation becomes even more
difficult for banks if they must sell sovereign bonds in the secondary market. A Spanish 10 year bond that pays 4.0% was trading earlier this week to yield
7%. To get to that yield could reduce the value of the bond by up to 40%
depending on length of time left to maturity.
With all the excitement surrounding
the Central Bank’s declaration they will provide liquidity, watch for moves by banks to socialize their
losses. This is the basis behind letting the European Stability
Mechanism (ESM) rescuing banks directly rather than going through the government. Hollande of France is the main proponent of direct bailouts for
This keeps his hands clean and
shifts liabilities to other eurozone countries (Germany). This is why
Angela Merkel and German voters are cautious.
Loved your story about EU members paying to bail out Spain especially the part about Italy having to chip in
20%. It made me think, do you foresee a situation in America's future
where say a state like Kansas or Texas would have to pay into a fund to bail out
Nope. But you can believe California wants to suck at Obama's
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