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A rumour concerning €1 trillion in German bad debt

When the Chief Market Analyst of  FX Solutions, Mr Joseph Trevisani, in an interview on CNBC on 23rd Sept 2011,was asked about fluctuating currency values, his reply created a stir. What he said was that you had to look at what was going on in Europe –  everyone then expected him to mention Greece – but instead he said,

“There was a story out in a German newspaper this morning talking about a trillion euros, supposedly, unconfimed. of losses hidden in German Banks.”

He offered nothing further but the implication was that big players believed that the one stable and solvent European nation, the nation that was  supposed to bail out the others was sitting on a time bomb of its own. Which would mean that Germany, the nation that liked to lecture others about lying, was lying. Lying about a potential trillion euro hole in its banks.

The story was around for a while but then faded because no one could add much to it, let alone confirm it. Could it really be that German banks were hiding, and lying about, a trillion in undeclared bad debts? What debts could they be if they weren’t just the exposure to bad debts in Greece and the other southern nations we already knew about? And where could they have been hidden? No answers no story.

First the easy part – what could the debts be? It has been an open secret that the Landesbanks bought up two lots of debt as fast as the ink on the contracts would dry. The first was securities made from sub-prime US mortgages. A trillion Euros of this sort of debt was created and sold in 2004-5 alone. One senior banker at one of the banks which sold this debt told me the Landesbanks would buy these securities from them before the deals were even complete. Much as property speculators further up the same stream would buy the property developements before they were even built. That debt, I have been told more than once, is still there. Sachsen LB collapsed but others are still hoping something miraculous will hatch from their egg of shit if they just sit on it long enough.

This is a pattern of hopeful deceit that is rampant globally. So it really shouldn’t be a surprise that German banks are doing it too.

The other lot of debt is home grown. There is a vast amount of regional european debt which was considered AAA rated when it was securitized and sold on and which is still being held at par because of the now somewhat threadbare but still holding fiction that no nation will ever default or let one of its cities or regions default either. For example Depfa, the German bank,  made very large, long term loans at fixed rates which it then sold on in return for shorter term funding at floating rates. I know of several such deals: to Barcelona (a massive 20 year bond), another to Manchester, another to Luton for its bypass and a large number done with French arrondissments. My guess is that a large number of loans to places in nations not so secure themselves are held at par only because no one has been alowed to look at them very closely.

But that still leaves the ‘where are they hidden’ question. Because no one has actually seen a spread sheet with large negative numbers on it this remains what it has been –  a rumour. And it still is. The only reason I bring it up is that a couple of weeks ago I was told by a European banker  that he had come in to information from an insider in German financial oversight, that the debt was real and was currrently on the books of the 9 regional Landeszentral banks.

The Landeszentralbanks are the remains of the old Pre-Euro system when each of Germany’s powerful regions (remember Germany is a Frederal nation composed of what still are very powerful even if not quite autonomous states) not only had its own bank,  the landesbank of the region, but also had its own central bank. These central banks of the German states were slimmed down from 11 to the current 9 and the heads of these banks form part of the governing board of the Bundesbank.  According to what I was told the official who spoke said the debts were huge, the finances of his region, at least, were a mess and he, for one, expected the situaion to blow up by the end of the year.

As I say I cannot verify the truth of what my source was told and which I have just related. It could be a hoax though it seems an odd hoax for a German official to engage in. Or the official could be horribly wrong.

If we had not already suffered 4 years of blatant lies and manipulation on the part of all our banks and all our governments I might be loathed to believe this story or pass it on. But given what lies we know we have been told over and over by the finanacial sector and our politicians I do not feel that this rumour is impossible to credit.

If the story has any validity at all then it says that Germany and its banks are playing an even more desperate and far higher stakes game of extend, pretend and hope for miraculous growth, than ever Greece was, or Portugal and Italy are.

Post script – What isn’t a rumour is that there are real and large problems above and beyond the insolvency of Greece and soon Portugal as well, lurking in the Euro system and in Germany in particular.  One such problem, different from what I have written about, can be seen in this article from Der Spiegel. This article looks at the way the European banks are shackled together by the outstanding claims they have on each other. Which means the money they owe each other which would NOT be paid by any country that fell out of the Euro system. It just adds to the impression that the Euro has sown its member together in such a way that to part ,will rip the skin off them.

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34 Responses to A rumour concerning €1 trillion in German bad debt

  1. Hubert March 20, 2012 at 5:28 pm #

    I would say there is something to this rumour.
    German banks had somewhat above 800 bn € critical debts in 2009.
    From the beginning press coverage was indirectly proportional to the amount and importance of the money involved. It was talked about bad banks, guarantees – and then the whole discussion died down and apparently nobody really was interested in asking.
    I would have guessed that this amount has decreased since then as new money has allowed old money to be paid down. Only HRE was rumoured having doubled down in 2009 with its rescue money.
    If I remember correctly it was 250 billion exposure in US real estate, the rest 560 billion not clearly defined (but most probably PIIGS exposure). A big part was Landesbanks SPEs though the biggest hole was found in HRE/ DEPFA which explains the financial flows between Germany and Ireland.
    As they admitted 800 bn, it may as well be 1 trillion as your source conveys.
    But even assuming “only” 600 billion still outstanding with 40% recovery would create a hole of 360 bn Euros – enough to end any perceptions that there is something like a solid “Core” in Europe.

    • Golem XIV March 20, 2012 at 5:35 pm #

      Hubert,

      Thank you very much for the extra, much needed, detail.

    • Joe R March 21, 2012 at 9:05 pm #

      Hubert,

      I’m not sure your comment about the Irish bit is correct there.

      The DEPFA thing didn’t land at Ireland door. Ireland have not paid a penny for this nor will they be. Irish banks themselves though do have huge borrowings from Germany.

      Plus I see a lot of confusion between total external debt, government and private debt in numbers that are in circulation.

      A breakdown I saw of total debt owed by the PIIGS to Germany from about 18 months ago in billions of Euro is as follows;

      Portugal € 34
      Italy € 143
      Ireland € 140
      Greece € 36
      Spain € 180

      Thats about € 533-odd?

      Ireland and Portugal look to be the bombs most likely to go off next.
      Ireland’s share of the debt (pop. 4.5 million) is about the same as Italy’s (pop.60 million ) and was racked up almost exclusively between 2003-2008.

  2. sean March 20, 2012 at 6:07 pm #

    It was interesting that thee Germans reactivated soFFin last nov. Was it not?
    A bad bank for the bad debts?

    • Golem XIV March 20, 2012 at 6:42 pm #

      I think the SoFFIn enlargement is tell-tale. How much is it now, 600 and odd billions?

      • Sean March 20, 2012 at 7:24 pm #

        You dont open a shop unless you are expecting customers.

  3. simoncz March 20, 2012 at 6:32 pm #

    Folks do say the devil is in the detail, and this article could be one more detail. There’s many more to come. Eventually these details will be piled so high the stink will reach everywhere.

  4. Charles Wheeler March 20, 2012 at 9:37 pm #

    The fact that no one knows where the debts are hidden is at the heart of the problem. Markets depend on transparency – instead we have opacity and labyrinthine obfuscation.

  5. ch-ch-changes March 20, 2012 at 10:27 pm #

    The way Germany plays her hand remains a key element in how the Ponzi unravels.
    The Euro is unsavable without huge debt write offs, mass bank nationalisation and escaping the clutches of Wall Street and the City.
    The AngloUS model can’t survive that scale of de-leveraging – so its only short term hope is picking profits from EZ countries hung out to dry by the rest.
    They seem like polar opposites to me.
    Germany decides – the Spiegel link is interesting – it suggests the Bundesbank might have a real problem if it considers going it alone, especially once you factor in that Germany’s banks are as bust as all the others in the West!
    As ever, fascinating insights Golem.

  6. The Dork of Cork March 21, 2012 at 2:30 am #

    The Fois Gras European Industrial policey post 1987 & its single european act is at the very heart of this crisis.
    Spain & Ireland are the Ducks while Germany is the farmer – what happens when he runs out of ducks.
    The Bank takes the farm.
    Steve from Virgina and indeed myself have been banging on how Germanys coal reserves are depleting yet it continues on with its mad policey of exporting high quality Grot to the periphery and now to China.
    All the time its wealth ‘/ capital base is declining but it must also burn rather then firewall the peripheral countries to keep the cost of capital down while it continues this madness.

    Very little French style Dirigsme has been seen in Europe since the monetarists took over the entire show in the late 70s early 80s.
    The European continent is now heading for a massive energy crisis as a result of the export of its capital stock to build 6 coal fired power stations a month in China & elsewhere rather then 1 nuclear plant at home as the banks tried to make their grubby money on Labour arbrtriage / slavery.

  7. Patrick Donnelly March 21, 2012 at 6:36 am #

    So? The best solution is to shut down the old banks and start new ones, fewer and state owned. Since it is clear that all profits of banks go to shareholders and bond holders, but losses belong to the shmucks who failed to discern that there were in fact no such profits?

    But banks have records…… as an ex-investigator for the Revenue, I can tell you some of these records are incredibly ropey! By spreading out large deposits, the banks did not need to report on branch interest payments over a certain amount. But they clearly only pretended to spread them out. In addition, they launder money for all sorts of criminal activity, drugs, arms and bribery in particular. So we can never examine the egg of shit!

    The effects should be deflationary, but we have massive payments of fiats, to create inflation! The easiest crime to investigate is always the cover up~!

    Prlonging the agony for the unemployed will not be rewarded!!!!!!!

  8. patma2003 March 21, 2012 at 9:08 am #

    Wow… what a shower of shit it’d be if this comes to any sort of bright light – and if it does any time soon, you can only think that a broad monetary reform is coming sooner than expected. This sick mess will fold in on itself at some stage, and how much more can The Fed strong arm itself about the place on both sides of the atlantic?

    And, yeah Patrick, mirroring the BRIC economies, I predict a return of the state bank/s. To what extent they return, we’ll have to wait and see how scorched the battlefield gets. The bloodier the better.

  9. simoncz March 21, 2012 at 11:48 am #

    Interesting documentary on land tax here.

    http://michael-hudson.com/2012/03/film-real-estate-4-ransom/

  10. Phil March 21, 2012 at 2:46 pm #

    Ex-fraud officer Rowan Bosworth-Davies on the social class leading and regulating our banks:

    ”Many years ago, as part of my M.A. degree in financial criminology at the University of Exeter, I did a thesis on how compliance officers in the financial sector regard the offence of insider dealing. The vast majority didn’t see it as a bad thing and admitted they would do it themselves if they thought they could get away with it. The lesson I took from the exercise was that if you entrust City professionals to ‘police’ themselves and the broader financial sector, they’ll bring a certain amount of baggage to the role.

    Finance industry insiders just don’t ‘see’ or ‘look’ for the indicators that a professional law enforcer sees or looks for.

    Thus it has been with FSA chief executive Hector Sants, who resigned last Thursday night. Sants is a professional banker and has the mindset of such a person. He didn’t see or appreciate what was going wrong inside the banking sector in the build up to the crash, because culturally he was predisposed to ‘not seeing’. You might argue that he was ‘wilfully blind’. I suspect that it wasn’t necessarily wilful. It may just have been ignorant.

    Sants is exactly what’s wrong with the City of London and its style of regulation. The British have always believed that the ‘great and the good’, operating on the cult of the enthusiastic amateur, can police wrong-doing in the City, and this it is perfectly acceptable to have ‘revolving door’ between the regulator and the regulated. But they can’t, and it isn’t. What’s needed is regulators who are familiar with the ways of criminals. After all, banks today fit every known definition of organised criminal enterprises.

    The FSA is staffed by a lot of people with fancy job titles who like to meet and greet with other regulators around the globe, but none of whom have ever investigated a shop-lifter. How can they be expected to bring any real sense of criminogenic insights to their role when they themselves come out of the same class and background as those they purport to supervise?”

    http://www.ianfraser.org/rowan-bosworth-davies-hector-sants-is-exactly-whats-wrong-with-the-city-and-its-style-of-regulation/

    • Phil March 21, 2012 at 2:48 pm #

      He continues on this theme:

      ”The real problem behind all this is a question of class! Edwin Sutherland enunciated this conundrum back in the 1930’s when he wrote ‘White Collar Crime’. He observed that Judges and Politicians have great difficulty in perceiving bankers and financiers as criminals because they do not manifest the same stereotypical attributes as other, more usual criminogenic offenders.

      Ironically, we have had a brief era in our more recent history when the SFO prosecuted a mainstream Bank, County Nat West, which was prosecuted and the main players were convicted for criminal offences involving the take-over of a company.The scandal became known as the ‘Blue Arrow’ case. The jury found no difficulty in convicting all the leading defendants, some of the greatest and the best of the City, but for reasons entirely beyind my comprehension, the Court of Appeal did an amazing thing. Normally, the Court of Appeal is very loathe to overturn a conviction arrived at by a Jury. They will consider an appeal against sentence, and they will consider an appeal if it can be shown that the judge erred in law, but to overturn a sensibly arrived at Jury conviciton is very very rare, on the basis it would be bad for public policy. Those who remember the Guildford 4 case will recall how long it took to get their convictions challenged.

      In the Blue Arrow case, the Court of Appeal sat within a couple of months of the convictions and came to the conclusion that because the case had taken so long to prosecute, that no reasonable jury could have come to any sensible verdict and the convictions were quashed. This was the most appalling example of people from the upper socio-economic group being given a leg-up I have ever encountered although I have witnessed other equally appalling efforts to help the blue-bloods. After the Bue Arrow case, a friend of mine in the SFO told me that the message had come down from on high that there would never again be any similar kind of prosecution of any City Insitution. Blue Arrow terrified the shit out of the toffs because it proved that ordinary juries could understand the ramifications of complex fraud cases, and they could convict. The lawyers had spent so long trying to cloud the issue and to obfuscate, but the jury saw through them and potted all the defendants that mattered. I doubt we shall ever see its like again however.”

      • simoncz March 21, 2012 at 3:29 pm #

        Don’t I remember from years ago moves to get “complex financial trials” away from juries on the grounds that juries couldn’t understand?
        The spin was that they were likely to get more convictions but I don’t think I believe that one.
        Sounds more like a move to get them into a more controlled environment, juries being too unpredictable for the powers that be.

      • Roger March 21, 2012 at 4:45 pm #

        Thanks to Phil for the insights into the investigation ( Or Lack of ) of this lot and to Hawkeye for making me laugh. One gets the feeling that pacing ourselves is a good plan this extend and pretend stuff and continued spinning is obviously a way of hoping that memories will be short and business can resume as usual when the coast is clear again. Time to dig in for a long campaign i think!

      • Jason March 21, 2012 at 5:02 pm #

        Maybe so but don’t you think it could go the other way (jurors automatically defaulting to ‘City boy’ must be up to no good and judge them guilty, everyone has their prejudices that’s why we have the appeals process).

      • Jonathan Sugarman March 21, 2012 at 5:10 pm #

        Phil,

        May I ask you for the link to the 2nd. quote above? I would like to use it, so need a ref for it. Could not find this text in the link you posted for the first quote.

        Thank you,
        JS

        • Hawkeye March 21, 2012 at 5:51 pm #

          JS

          I did a bit of digging around on the “Blue Arrow” case:

          “in 1992 Clifford Chance litigation partner George Staple became head of the SFO. (The Lawyer commented: “It must yet be one of the legal world’s little enigmas that he was plucked from the ranks to be head of the SFO.”)

          “At the beginning of his term heading the SFO, Staple gave a speech at the London School of Economics calling for the introduction of plea-bargaining, greater pre-trial disclosure for the defence and management training for specialist fraud judges.”

          http://www.thelawyer.com/span-id=red20-years-of-the-lawyer/span-1992/130260.article

          And there we have the genesis of the “don’t look too hard” approach to White Collar Crime and the “if we really have to be seen to do something then just dish out a slap on the wrist” (i.e. financial penalities a fraction of the ill gotten gain, and no admission of liability clauses).

          If only I earned 1p for every time a letter / email started with the phrase “Without Prejudice” !!

          • Jonathan Sugarman March 21, 2012 at 6:44 pm #

            Many thanks Hawkeye!

            It it the source for the following quote that Phil used that I am looking for:

            “The real problem behind all this is a question of class! Edwin Sutherland enunciated this conundrum back in the 1930′s when he wrote ‘White Collar Crime’. He observed that Judges and Politicians have great difficulty in perceiving bankers and financiers as criminals because they do not manifest the same stereotypical attributes as other, more usual criminogenic offenders.”

            This rings particularly true in the case of Ireland’s inability to hold anyone accountable for the collapse of its banking system. “It just happened” is the generally accepted notion. The Honohan, Regling and Nyberg reports all found that the problem was the malaise of the system. No one is at fault.

            It was a person who is now a minister in the current Irish government who had said to me that as a foreigner in Ireland, I obviously failed to realise that “There is no white collar crime in Ireland. We only send people to jail for shop-lifting and for not paying a TV license”.

            Recently, someone was sent to jail for 6 years for smuggling garlic into the country. His real crime – not being well connected! Otherwise, he would be playing golf with all of the bankers & regulators who presided over Ireland’s financial melt-down.

            “Ireland garlic scam: Paul Begley jailed for six years” – BBC, 9 March 2012:
            http://www.bbc.co.uk/news/world-europe-17320460

        • Jim M. March 21, 2012 at 9:10 pm #

          Hi Jonathan,

          It took me a moment to recognise you! Nice to see you posting under your own name.

          In case Phil doesn’t pick this up I suggest a look at the following:

          http://www.linkedin.com/pub/rowan-bosworth-davies/2/428/bb5

          http://rowans-blog.blogspot.co.uk/

          Hope that helps.

          • Jonathan Sugarman March 22, 2012 at 9:14 pm #

            Thank you Jim 🙂

    • Hawkeye March 21, 2012 at 3:06 pm #

      Phil

      I know for a fact that the FSA undertakes an annual survey of its “customers”, i.e. banks and financial institutions, to give their feedback to the FSA on its regulatory performance !

      Imagine if the police surveyed suspects, asking them how good a job they thought the police were doing !!

      Makes you wonder who is running the show, eh?

  11. Roger March 21, 2012 at 10:45 pm #

    Excellent film on the I Player I watched this evening about Elliot Spitzer ex Attourney General and then Govenor of New York. Very relevant to the discussion here.

    http://www.bbc.co.uk/i/b0179wbx/

  12. sheepshagger March 22, 2012 at 1:24 am #

    Who has got wealthy from all this financial jiggery-pokery
    There has to be a fat cat somewhere licking the cream from his lips.

  13. BHomes March 22, 2012 at 12:15 pm #

    Deutsche Bank can’t afford $20 Billion extra capital for its USA investment bank division

    http://www.zerohedge.com/news/deutsche-outmaneuvers-dodd-how-germanys-biggest-bank-took-fed-ride

  14. mikems March 23, 2012 at 11:46 am #

    This isn’t surprising in the least.

    It is obvious that all banks are sitting on massively over-valued assets and are hiding their real values by refusing to operate the markets these assets trade in.

    Let’s have some mark to market in the downturn, and see how much traders would be willing to offer for these assets.

    If it’s good enough to transfer profits immediately from mtm, why not losses?

  15. Charles Wheeler March 25, 2012 at 2:32 pm #

    This article gives an insight into the erroneous – not to say unhistorical – mindset that feeds the complacency of the neoliberal world view and its reliance on voluntary arrangements.

    It serves the interests of the looters and pillagers.

    http://goo.gl/S9V2x

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