The European Bank Run

(aka the Handiwork of the Anglo-American Wolfpack)

There is a bank run now ongoing in Europe. Here’s how Felix Zulauf put it in May when he anticipated a bank run:

Felix Zulauf: Debt problems are never solved by more debt. In Greece, an epic drama is playing out. The Greeks are broke. The Irish are too. And the Portuguese are close.

Who’s next?

Spain is still doing well, but the things will proceed as in Ireland. The Spanish bonds are priced incorrectly. The European Central Bank is manipulating the price.

Is that the full count of crisis countries?

No, it is missing Italy. Deposits are falling at their banks. We are experiencing a bank run in slow motion. Banks in Italy and in Spain are being refinanced with ever more short-term financing. Soon the biggest buyer of government bonds will be missing. This means that yields have to rise. And the bomb will explode in Italy this year already.

–Felix Zulauf turns bearish, expects major correction and QE3

The bank run soon was a reality in wholesale markets as US money market funds with significant exposure to commercial paper of European banks with significant exposure to the eurozone periphery pulled in their horns. See “Fitch: US Money Fund Exposure to European Banks Remains Significant” and “FT: Flight from money market funds exposed to EU banks” from late June for example.

Thus, the conspiracy theory has been that money market funds as a channel of contagion in the European sovereign debt crisis was driven by speculation and US and British hedge fund manipulation. This is the reason for the short selling bans in Europe. It’s “The Big Bad Wolfpack and the Four Little Pigs” all over again.

But, that’s not all there is to the story. Remember Washington Mutual? WaMu claims it was solvent and was seized improperly by the US bank regulator. This is in dispute. But what is clear is that WaMu was under assault by its uninsured wholesale depositors (those with accounts over the FDIC insurable limit of $250,000) before it was seized.

On September 11, Moody’s issued its rating: It downgraded WaMu’s debt to junk status, rated the company’s financial strength at D+ and issued a negative outlook on the company, citing its asset quality and the potential for future losses. Freilinger, WaMu’s assistant treasurer, fielded the call from Emrick, and had the thankless task of checking the accuracy of Moody’s forthcoming press release. Freilinger’s heart sank. “No bank of our size anywhere in the world survives without an investment grade rating,” he recently said.

The downgrade roared across the country. WaMu customers, reminded once again that their money might not be safe, pulled $600 million out of WaMu that day. “That’s when we thought, ‘Oh, crap, here we go again,’” said one WaMu manager who monitored deposits.

Soon, other rating agencies followed suit, sparking another massive bank run that would ultimately become the reason FDIC officials gave for closing WaMu.

Fast forward to Europe and we see exactly the same thing occurring now (hat tip Scott):

Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

In total, Siemens has parked between €4bn ($5.4bn) and €6bn at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.

Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

The bottom line: this is a classic liquidity crisis now not just for the sovereigns but the banks in Euroland as well. I would consider this a bank run via the wholesale funding market – and it’s not just the Anglo-American wolfpack manipulating markets but genuine concern of creditors about the solvency of their financial institutions. The right thing to do is to accept the bitter pill and make substantially all of the credit writedowns at financial institutions quickly and recapitalize and/or nationalize the weakest banks. But remember, bank seizure can make the situation worse.

WaMu’s failure created panic among the unsecured creditors of other struggling banks, particularly Wachovia. But Bair stood behind the decision not to invoke the “systemic risk exception,” according to the report, as did the Federal Reserve. “I absolutely do think that was the right decision,” she said, according to the report. “WaMu was not a well-run institution.” She also said she thought the resolution of the thrift was “successful.”

But Treasury officials felt differently when interviewed by the FCIC, according to the report.

“We were saying that’s great, we can all be tough, and we can be so tough that we plunge the financial system into the Great Depression,” Treasury’s Neel Kashkari told the FCIC. “And so, I think, in my judgment that was a mistake. . . . [A]t that time, the economy was in such a perilous state, it was like playing with fire.”

What will the Europeans do here then? I am anticipating bailouts, liquidity injections and capital injections. But this is looking pretty dismal now so it is not clear if that will be enough.

P.S. – Maybe the Calafia Beach Pundit was right in relation to the recent surge in the US money supply, which he suggests might be a reflection of a scramble for USD assets. That’s how its looking right now.