Share on Google Plus Share on Twitter 2 Share on Facebook 4 Share on LinkedIn Share on PInterest Share on Fark! Share on Reddit 1 Share on StumbleUpon 1 Tell A Friend 6 (14 Shares)  

Printer Friendly Page Save As Favorite View Favorites (# of views)   5 comments
Exclusive to OpEdNews:
OpEdNews Op Eds

The coming run on European banks and the resulting crash of the European (and US?) economies

By   Follow Me on Twitter     Message Richard Clark     Permalink
      (Page 1 of 3 pages)
Related Topic(s): ; ; ; ; ; , Add Tags Add to My Group(s)

Must Read 1   News 1   Supported 1  
View Ratings | Rate It Headlined to H3 12/21/11

Author 8235
Become a Fan
  (110 fans)
- Advertisement -

In this very short video clip, Carl Denninger quickly explains this problem on RT TV and RealEcon TV.

In laymen's terms, here's a fleshed-out explanation of what Carl is saying:

- Advertisement -

European banks (and to some extent US banks) have a huge amount of assets, but those assets are mostly state debt (i.e. bonds purchased by the banks from European governments -- in other words loans they have made to those governments.)

However, the banks have no collateral for these loans they've made.   (Example:   when you take out a mortgage on the house you are buying, the bank has your house as collateral;   when you buy a new car, the bank has the legal right to seize "your' car if you should stop making payments on the car.    Its collateral is "your' house and/or "your' car.)

In other words, if something goes wrong and these governments become unable to buy back the bonds (plus interest) that they sold to these big banks, then the customers of the banks are in trouble.   Why?   Because the bank loaned out 40 or 50 dollars to these governments for every dollar of depositor money it had in its possession.   That's called "leverage':   if you're a bank you can, by law, create some specified amount of money, say $50, out of thin air, with which to buy bonds (or whatever), for every dollar your customers have deposited on your bank.   But if the government whose bonds you have purchased cannot redeem those bonds (i.e. pay back the loan), then (at least in Europe) your depositors and stockholders are screwed.

Another way to think of "leverage' is that when a bank has an asset, such as customer deposits, it then loans those assets out more than once, perhaps many times more than once.   Historically, leverage of more than five- or six-times deposits were considered dangerous.   In the late '90s JP Morgan was leveraged 10-12 times its deposits.   Nowadays, leverages of 40-50 times deposits are tolerated by our regulatory agencies.

- Advertisement -

American depositors are protected, up to $250,000 per account, by the FDIC.   If Spain defaults and BofA goes belly-up, the bank's shareholders get screwed, but the bank's customers' deposits are still safe -- as long as the FDIC is solvent!   BofA's remaining assets, including the deposits and loan money owed to it, will get divvied up among its creditors, and life goes on.   (But if the FDIC isn't able to cover the deposits, we've got much, much bigger problems than a failed bank.)

Of particular concern is that a lot of these big banks are invested in each other.   This means that the actual value of CitiCorp stock could take a dive if BofA's stock dives.   Depending on how much flexibility there is within the system, the shock of a couple of mega-banks failing could conceivably be distributed throughout the rest of the financial system.   Otherwise, the entire system could fall apart.   Problem is, no one knows for sure how much flexibility there really is within America's overall financial system.

Bottom line, the problem is that for those who are invested in European banks as stock holders and depositors, if you wait too long, you're not going to get your money back.   Why not?   Because unless the governments step in and begin to step up the tax revenue they collect from their citizen taxpayers, they're never going to have the money with which to pay the banks who bought their bonds, and therefore the banks are not going to have the money with which to pay their investors and depositors.

This problem is compounded by the fact that if you count the value of the bonds they've purchased from these governments, then financially speaking, many of these banks are several times the size of the economies of some of the governments whose bonds they've purchased.   Therefore, the likelihood that all the customers of these banks (i.e. their depositors and investors) are going to get their money back is quite small.   Hence the coming run on European (and America's biggest) banks, and the coming crash of the European economy (and possibly the US economy as well).

The potential negative  consequences   for America's biggest banks and the US stock market

Bank of America's beleaguered bank's shares crashed through the psychologically important $5 mark yesterday, the lowest they've traded since March 2009.   Other bank stocks including Morgan Stanley fell even harder as investors fretted on renewed concerns about bank capital cushions and "a darkening economic outlook in Europe."


- Advertisement -

Back in December of 2009, Bank of America was trading near $15 a share, a far cry from the $5 at which it closed yesterday.   The loss of two-thirds of its value far exceeds the drop in other battered financial institutions like Citigroup, JPMorgan Chase and Wells Fargo over the same period.

"This is like a fire in a 10-story building," said a former Federal Reserve bank examiner who now teaches courses on banking at Boston University.   "It's burning through each floor as investors dump their shares."


Next Page  1  |  2  |  3


- Advertisement -

Must Read 1   News 1   Supported 1  
View Ratings | Rate It

Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon

Go To Commenting
/* The Petition Site */
The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Follow Me on Twitter

Contact AuthorContact Author Contact EditorContact Editor Author PageView Authors' Articles
- Advertisement -

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

Was Pat Tillman Murdered by an American Sharpshooter to Shut Him up?

New JFK assassination bombshells

Two U.S. presidents implicated by ex-CIA black-ops assassin

The cholesterol - heart disease scam: How the medical-industrial complex is raking in billions at our expense

Four Ticking Time Bombs That Will Soon Ignite a Revolution

The Ultimate Goal of the Bankster-led Political-economic Warfare Being Waged Against Us Is . . . ?