Tom Ferguson: “This is really a backdoor bank bailout”
Tom Ferguson gives a comprehensive view of the politics of the European sovereign debt crisis. He explains its all about the banks and their unwillingness to take a haircut.
On Friday, we will see who fails the stress tests. One failure is certain, Helaba, a German bank which doesn’t want to reveal the extent of its undercapitalisation. Expect almost 20 more to fail.
The clip runs nine minutes.
You cannot fault the analysis. I have been saying pretty much the same for around a year. What really surprises me is that the ECB who with their immense access have not worked this out well before this. The big question is will bond holders get bailed out by CDS writers, effectively destroying the banks or will the banks be allowed to walk away from those liabilities meaning that bond holders with insurance find that the insurance is not honoured? This will either mean the end of the big banks, as they pay out or another multi trillion dollar bank bailout of the banks. This will trigger riots.
To the extent that I have read about psychology and economics, it is apparently well agreed that selling a stock at a loss is a very difficult thing to do. Before politicians or regulators are politicians or regulators, they are people. I see no evidence that they are any more capable than the average person of accepting losses. they will “invest” in banks until it is impossible to do so.
That psychology applies when selling homes. People have a price in mind and will not accept a lower offer. Eventually after some time they come to realise that they will never sell at even the last price and are forced to take an even lower price. It is the stickiness problem.
With banks though they are trading in bonds that are clearly marked lower in the market. So they can see their losses minute by minute. The problem was created recently when accounting standards abandoned mark to market as it would show these banks to be insolvent. If they sell they crystallise a loss. If they can persuade some idiot at a central bank to take them at face value they show a profit and have socialised the losses.