Debts, doubts and conflict

For some time now (in May and June)  I have been suggesting that there is a dangerous political divergence opening up between Europe and America.  Although such thoughts are just that, just thoughts, as I, like you, have no access to the thoughts and intentions of our leaders, I continue to see ominous signs.

For what they are worth here are a few more thoughts on this subject.

As things get more difficult domestically governments will be more and more tempted to seek advantage over their erstwhile friends and allies.  Special relationships are never that special are they?

In Europe the political danger is only just starting to take shape.  Most people in Europe are STILL unaware of the true savagery of the cuts they will shortly be facing.  Come November things should start to get clearer and as they do, a lot more confrontational and corrosive.

While in America, the political danger is not austerity, but a growing perception among ordinary Americans that the rule of law in their country is breaking down.

There is a metastasizing cancer of distrust in America.  That cancer is spreading from an ugly growing mass of faked, and fraudulent repossession claims the banks are now trying hard to say were, variously: an innocent mistake, an oversight, the fault of a few overzealous employees, clerical misunderstanding or any of the above.  Two banks have halted all repossession proceedings in an apparent attempt to avoid any more cases going to court.

This began over 18 months ago  in Ohio I think it was when a handful of repossession claims by Deutsche bank were thrown out. The court found the bank could not prove they actually owned the rights to the mortgage.  Silence fell. Mysteriously and completely.  Then a few months ago cases started to come up calling in to question the legality of MERS, the Mortgage Electronic Registration System.  This is the electronic clearing house and transfer system that a vast percentage of US mortgages went though on their way to being securitized and sold on as investments.  If that system were truly called in to question the whole securitized world would unravel.

Now one of the Morgans (JP or Stanley I can’t remember which ) plus ALLY bank which used to be the mortgage part of GMAC have stopped repossession because  questions have been raise about the legality of many of their mortgages and attempts to repossess.

Have the banks been repossessing what they actually had no legal right to claim?  The very question is a cancer.

Then there is the SEC’s ‘report’ on the flash crash and general state of American markets.  The report absolved all HFT traders, made no mention of bid stuffing or the growing number of other flash crashes in stocks.  The report concluded ‘the’ flash crash was a one off and caused by one firm with one rogue trade.  Every trader I read is outraged.  They are openly declaring that the SEC no longer serves anyone’s interest but those rich and powerful enough to have bought it, and they want the whole thing cut out.

Two cancers in one body is not a sign of health.

America and Europe need to find a way out.  The Fed has already tipped its hand and the markets have all but priced in another massive bond buying stimulus.  The market is expecting the Fed to buy at least another $500 billion in bonds.  If the Fed doesn’t, come November, that in itself could be enough to cause a disaster.

The American markets are now littel more than a function of Fed buying and debt monetizing. When the Fed buys the markets move up and the press celebrates the recovery. When theFed  doesn’t, the markets bleed and the press calls for action by the Fed to assure the recovery.  Basically the Fed has little choice any more.  They are on a narrow one way road to currency debasement.  They are gambling that the dollar can never fail and no amount of debt will deter buyers from continuing to see dollar bonds as ‘the safe haven’. But will that continue to hold if, next year, the FED buys up another trillion with newly printed dollars?

I think there are signs China and Europe are beginning to look for a way out of dollar dependence.

This is purely speculative, so take it for what it is worth, which could be nothing.

We all know that all banks in every country are still hiding massive losses on ‘assets’ they continue to mark to model,  at ridiculously high and fictional values.  Mark to model is what is holding off still truly gargantuan, still undisclosed losses on bad loans.

However, some nations are now beginning to get these undisclosed losses quarantined into various government controlled ‘bad banks’.  Ireland is one, Germany is another. The UK has gone for an insurance scheme while the BoE has bought nearly a quater of a trillion in dollar bonds which I think could be used to settle dollar bad-debts.  (That too is just a thought. But an interesting one)

Now this puts Ireland and Germany and by extension the EU+UK in an interesting position.

While those undisclosed losses were still sitting in Ireland’s banks, those banks and their wealthy bond holders were in mortal danger.  If any real valuation of their losses was made public Ireland’s banks and the holders of their debt, would have died instantaneously. The ‘uncontrolled’ death of the banks and sudden impoverishment of the financial class of Ireland and the wider society of wealthy bond holders would have made things difficult for Ireand as a nation to ‘manage’. Nothing like pissing off the wealthy to kep the phones ringing and the papers doing their best to bring the government down.

But now a great many of the losses are on the tax payers tab.  The wealthy are feeling protected. Of course, given the size of the losses the people of Ireland are now in mortal danger.  But the banks, their owners and the present system they depend on – well that is perhaps a little less danger than when those same losses were in the banks. Ireland, with EU help could perhaps contain the explosion inside the bad bank.

The only good thing from the transfer of private losses into public debt has been that in transferring the bad loans to Ireland’s ‘bad bank’, a first large step has been taken in writing the loans and assets down to a more realistic level.

What has not been made public is what exactly those assets and loans are.  That is still under wraps.  And I bet there are many non-Irish banks that are very grateful. Because they are probably holding very similar ‘assets’ and still marking them to an inflated and unreaslitic value.

So imagine if, in a fit of financial openness, Ireland opening the books.  Imagine all the other banks, suddenly having to mark down by 60% overnight, assets still held on the banks own books and doing so without government backing already being in place.  Never happen right?  Ireland doesn’t have political strength or independence.  Ireland can’t come clean because it is one of the hidey holes for London, European and even American banks. That is the tragedy for the Irish people.

But now look across at Germany. Germany’s Landesbanks were the major global ‘buyers of risk’. Meaning they were the final destination for hundreds of billions of dollars worth of the high yield, less-than-AAA, wrapped in worthless insurance, securitized American securities.  LB and Beyern are two major sink holes.  Hypo is, of course, the other.

Ever wondered how so much bad paper ended up in so few institutions?  I mean were they staffed by the stupidest people Germany could find?  Part of Hypo is the Dublin based lender Depfa. A German bank which moved to Dublin in the 90’s.  So Ireland and Germany getting together for a cretin-fest.

Then there’s the weirdness of how much bad German debt, which was bought by Unicredit of Italy, ended up back on the German tax payer’s tab.  Its a complicated story I won’t go into. But its strange how bad debts ended back in strong Germany and not in weak Italy.

191 billion euros worth of bad debt from Hypo alone.  Stripped out of the bank into a state backed ‘bad bank’.

So Europe is stuffed with bad dollar denominated debts on top of their own home grown, euro denominated  rubbish.  BUT, but, look at how much of the debt is now out of the banks and in sovereign backed bad banks.

What if,  someone decided to use mark to market as a weapon?  What if you thought that you had now quarantined enough of your own bank’s bad debts, where the government or the ECB could contain and back them, such that you could reveal what the losses were, and on which assets? AND what if you ALSO thought that because you had already begun, through austerity measures, to pay down your national debts and reign in debt levels, while your competitors were still massively increasing their debt levels, that there was an advantage in doing so?

If you came to believe that you were in a better position to be able to contain the fall-out, then you could think to yourself, we could begin to come clean about the real losses, and do so on a schedule of our choosing.  Germany, for instance could start to reveal the actual losses on US securitized mortgages.  If Germany did so, whoever else was holding the same asset classes would have to mark theirs down as well.  When it suited Germany.  Marking to market wouldn’t have to be a coordinated and friendly exercise.

Now I’m not saying Germany, or Europe, is even near to doing such a thing. BUT, if they were in a position to do so, it becomes a rather powerful weapon.  Especially, IF, at the same time, Europe were to also persuade China to make statements about how China liked European debt and was going to be buying the stuff.  A currency and debt rapprochement. And especially if one or both began to feel uneasy about American dollar debasement and debt levels.

These are just the idle thoughts of an outsider.