October 6 2011: Occupy This: Mark the Banks to Market

Detroit Publishing Co. Friendly March April 1905
"The Boardwalk parade, Atlantic City, New Jersey"

Ilargi: The Bank of England announces QE2 (£500 billion?). The ECB will provide unlimited credit to European banks. The IMF will buy EU sovereign debt (so the whole world is forced to finance what the EU itself so far refuses to). All this drives up the markets.

It's high time to realize that what is good for the financial system is not just not also good for you, it's becoming more detrimental by the day. That is your money being given away. That is the money that's being taken from you that feeds investors, speculators and banks. That money will no longer be available to feed your children. If you see those markets go up, you need to realize that it's you who pays to make them do that.

We've recently entered the third year of this giant give-away, this wealth transfer that knows no equal, not even close, in world history. And we still let it happen. We even let ourselves be fooled by politicians and media pundits into believing we're in a recovery. As in: there has been one after the 2008 collapse, and it’s now the recovery that’s threatened. And all we need to do is valiantly, bravely but resolutely restore it.

Perhaps people like Ben Bernanke actually think there is or there has been a recovery. He certainly sounds like he does. Here's what he said in Congress this week: "We need to make sure that the recovery continues and doesn't drop back..." And if you look at a set of numbers that you pre-select carefully enough, you might indeed think they paint the picture of recovery.

But if you look at the budget cuts and deficits in countries everywhere, if you watch for example what's going on with unemployment and home prices in the US, and with austerity measures all over Europe, and then you add to that picture the trillions of dollars of public money either at risk or already lost to bank bail-outs, how can you maintain that spells recovery?

Looks to me like it takes many billions of dollars each and every day just to keep Wile E.'s legs spinning in mid-air a little longer.

It also looks to me like you have a unique opportunity to make yourselves heard, in the Occupy movement, the fast growing mushrooming sprouts of Occupy Wall Street. However, even if fends off police brutality, infiltrators, agitators, misrepresentation and Glenn Beck, I must say that I'm still worried about the level to which the protesters, in what is rapidly threatening to turn into a global movement, understand what's going on, and especially, what's going wrong.

"The 99% vs the 1%". "The greed of the bankers". Yeah. But not quite. The fact that it all started on Wall Street is a bit of a hint. You need to understand that protesting banks, or bankers, is not very useful. What would you want to have them do? Leave? Quit? There’ll be ten others tomorrow morning. Operate differently, be less greedy? Those ten others will operate the same way if they can get away with it.

Bankers, and financial institutions in general, can only go as far as a political system lets them. I’ve noted many times before that we don't have a financial crisis, we have a political crisis. The reason why is so obvious it's hard to see: if you allow money into your political system, it will buy that system, and end up controlling it entirely (or close, allowing for the odd 1 in 1000 honest politician).

A democratic political system needs to be independent of money, or it will not remain democratic. Allow the first bits of money in and at some point it will turn into Mussolini's corporatism, aka fascism. It's like when you can a jar of jelly, and you don't shut it properly, if even for a second. After a certain period of time the entire jar will be filled with something other than jelly. We're well on our way there, very well.

But getting money out of politics is a long-term goal, one that is too far-reaching and too complex to solve in street protests. Still, it’s more realistic than protesting bankers' greed. You might as well protest the fact that the sun goes down. Or that bankers wear suits. Bankers would still be greedy if they all were forced to wear polka-dot dresses. Many people are greedy. They just don't always get the means to satisfy their greed. And perhaps bankers don't even need to be all that greedy and still make obscene amounts of money.

The Occupy movement needs more attainable goals if it is to succeed and survive. The anger is there, as is the energy, but the focus does not seem to be. So I wanted to make a first suggestion; I’ll have more going forward.

It's perfectly defensible for a government to lend money to a bank in trouble that is important to its economy, in order to try and save. However, it borders on criminal negligence, if it isn't outright criminal behavior, to lend that money without being perfectly aware of what assets that bank holds.

A bank could have 100 times more debt than it receives in bail-out money. But we wouldn't know about that today, we're not allowed to know. Both the US (FASB 157) and the European Union (IFRS 9) have accounting (non-)principles in place that say it’s perfectly alright for a financial institution to hold assets in its books at 100 cents on the dollar that have a market value of 70% of that, or 50%, or even 5%. It has therefore no obligation to reveal even to its shareholders what its true financial situation is.

What this means for bonds was explained very nicely a few weeks ago by Peter Tchir of TF Market Advisors:

Marked and Unmarked Bonds

If all Greek bonds were marked at 45 (or even had 55 points of reserves held against them) then there would be a lot of potential solutions.  You would need any of these specialized entities.  Some big total return bond fund, or some large hedge fund could buy the entire universe of Greek bonds. 

Then they could sell them back to Greece for a nice little profit.  Surely the IMF or someone would lend Greece the money to buy the bonds back, or within enough collateral and a high enough coupon, some big total return fund that is underweighted treasuries, could lend Greece all the money they needed to buy back those bonds.

The problem is, not all the bonds can be purchased at that price, not without forcing the banks to recognize the losses. That is why no solution of some new buyer of bonds really fixes anything. They can buy up the existing "marked" bonds, but that will mostly generate profit for the current holders. 

The amount they can accumulate is too small to improve the situation in Greece of the other countries. The percentage of marked bonds is just too low. Too many of the bonds are unmarked or massively under reserved. Banks selling them would monetize the losses, exactly the same as if there had been a default. 

Most of the banks that hold these bonds in non mark to market accounts are exactly the sort of banks that will be desperately seeking capital if they took the write downs.

Until the banks write the positions down enough, the system is operating with too many hidden losses.  New money doesn't help address sovereign issues much because it only addresses the bonds that are already priced reasonably well.  It doesn't encourage banks to take the losses, and doesn't let enough debt be restructured to change the path of insolvency.

Ilargi: That's right. You read that correctly. Banks are sitting on such a large share of Greek debt that the ECB, or any other prospective buyer, is essentially powerless when it comes to solving the Greek crisis through bond purchases (but the ECB still does it). And the banks will keep them on their books, and not sell, as long as they remain allowed to do so.

In other words: a potentially viable solution to the crisis is frustrated by the banks. So far, so good (?!) A bank is after all a private institution and there should be limits to the power a government has over private companies (though measures should be taken to prevent a repeat of this bizarre situation).

But it doesn't stop there, and this is where I suggest the Occupy movement(s) should come in. If a bank wants to sit on its debt, since revealing it would cause it great stress, that's fine, to an extent. Occupy (and us) can make sure FASB 157 and IFRS 9 are thrown out at a later date anyway.

But a bank should never ever be allowed to sit on its debt and mark it to fantasy and then also receive funding from our governments, whether in bail-outs, hand-outs, loans, special facilities' windows at our central banks, or any other sort of funding, nothing of the kind.

We need to tell our politicians that they can no longer give even one single penny of ours to any institution that hasn't marked all of its assets to market. No exceptions.

We must demand this in order to prevent our money from being wasted on those banks that have no chance of recovery with the money we might give them. We can't have any more Dexia's, where a bank that passed a stress test mere months ago with flying colors now threatens to bankrupt an entire nation, simply because a huge part of its assets was kept hidden.

Yes, this would send certain banks over the cliff. But if a bank can survive only with repeated infusions of public money, what good does it do to keep it alive?

Greek bonds are now worth maybe 20%-30% of their face value, if that. What are the chances that this value will rise significantly in the near future, to levels where banks would volunteer to reveal their positions? Those chances are either zero or none. Because no-one can buy enough Greek debt to halt the decline in its value. The ECB is already deep underwater on its holdings; it may itself soon need a bail-out.

So how do you get politicians to force mark-to-market on banks that ask for loans and bail-outs? They're not going to do it voluntarily; or perhaps we should put it like this: they sure as hell ain't planning to do it.

That means it will take an "organization" such as Occupy Wall Street, with all its "loose affilates" springing up around the world, to attempt to force them to change their minds and tacks. It's that simple, really.

That means that if the ruling politicians refuse, the bank recapitalizations that are being discussed in Europe, as well as the inevitably forthcoming ones in the US, should be prevented by national parliaments. And if they don't do it either, by courts of law.

Normally, such a process will be dragged out to infinity and beyond. Having enough people in the streets, though, can work miracles to speed things up. It would make your families and friends proud of you to know you stood up for them in the "great revealing". In which you did not rid the world of bankers' greed, but of financially bankrupt institutions and morally bankrupt politicians, and the utterly destructive systems they've come to represent.

In which you put a stop to your children's future being held hostage to hidden losses.

---

---

Support The Automatic Earth
Donate to our Summer Fund Drive

---

---

Britain in grip of worst ever financial crisis, Bank of England governor fears
by Larry Elliott and Katie Allen - Guardian

Sir Mervyn King expressed fears that Britain is in the grip of the world's worst ever financial crisis after the Bank of England announced it was injecting £75bn into the ailing economy. The Bank's governor said the UK was suffering from a 1930s-style shortage of money and needed a second dose of quantitative easing to boost demand and prevent inflation falling too low.

Shares rose strongly in the City, posting a rise of almost 200 points, after Threadneedle Street responded to growing evidence of a looming double-dip recession and the deepening crisis in the eurozone with a four-month programme of electronic money creation. Dismissing concerns that the action risked adding to inflationary pressure, King said Britain was now facing a different problem from the days when too much money flowing round the economy pushed up the annual cost of living. "There is not enough money. That may seem unfamiliar to people." he told Sky News. "But that's because this is the most serious financial crisis at least since the 1930s, if not ever."

George Osborne agreed to King's request to be able to expand the asset purchase scheme under which the Bank buys government bonds from commercial banks. The chancellor said further steps would be taken to boost growth in his autumn statement next month. "Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring further policy options," Osborne said in a letter to the governor. "Such interventions should complement the monetary policy committee's [MPC] asset purchases."

Britain's first dose of quantitative easing, also known as QE1, was in 2009/10, with £200bn being injected into the economy. Labour said the launch of QE2 was an admission that the government's economic policy had failed.

Ed Balls, the shadow chancellor, said: "With our economy stagnated since last autumn David Cameron and George Osborne are now betting on a bailout from the Bank of England. The government's reckless policy of cutting spending and raising taxes too far and too fast is demonstrably not working. But rather than change course the government has spent the last week urging the Bank of England to step in and essentially print more money."

Some in the City were caught unawares by the scale and the timing of the Bank's move. Last month, only one of the nine members of the MPC, Adam Posen, voted for more QE, but the mood has changed in response to poor domestic news and concerns that Europe's sovereign debt crisis risks a repeat of the mayhem three years ago following the bankruptcy of the US investment bank Lehman Brothers.

"The pace of global expansion has slackened, especially in the United Kingdom's main export markets," the MPC said in a statement explaining its decision. "Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery."

The MPC said the slowdown in the UK economy, which saw no growth in the nine months to mid-2011, had in part been caused by temporary factors, but added that there was also evidence that the underlying pace of activity had weakened. It said the squeeze on real incomes caused by inflation running well ahead of wage increases and the impact of Osborne's austerity programme were "likely to continue to weigh on domestic spending".

King admitted that inflation could breach 5% next month but said that would be the peak. Analysts said the Bank was now clearly more concerned about the risks of recession than about the possibility of a rise in inflation. Figures released by the Office for National Statistics this week showed that the downturn of 2008/09 was even deeper than originally believed, with gross domestic product dropping by 7.1% in the biggest recession since the second world war. The flatlining of the economy since last autumn has left activity still 4.4 percentage points below its 2008 peak.

The TUC's general secretary, Brendan Barber, said the decision to expand QE was the right one, but added: "While it is better than not doing anything, quantitative easing is no economic magic wand. "We worry that it does more to help the finance sector than the rest of the economy and could fuel further inflation at a time when living standards are already being squeezed."

Business leaders welcomed the move. Graeme Leach, chief economist at the Institute of Directors, said: "Near-zero GDP and money supply growth made a compelling case and the Bank of England was right to launch QE2. It could be argued that the Bank of England was slow to introduce QE the first time, but thankfully it hasn't made the same mistake twice."

By the end of the four-month programme, the Bank will have bought a total of £275bn in assets from banks, around 20% of GDP. The news prompted alarm in Britain's pension funds, which are concerned that QE pushes down interest rates and reduces the return on their investments, but Threadneedle Street left the door ajar for a further expansion of QE2 should the economy not respond.

Michael Saunders, UK economist at Citi, said the deteriorating outlook for the economy would require the Bank to "do QE on a very big scale". He added: "We expect the cumulative total of QE (now heading to £275bn) will eventually reach £500bn or so. It may go even higher than that."

---

Let the Banks Fail
by Alen Mattich - Wall Street Journal

The question facing Europe’s policymakers is who eats the loss. The French and Belgian governments offer clues with the troubled bank Dexia.

Dexia’s exposure to Greek sovereign debt and residual problems from the financial crisis mean that the Brussels-based giant is in trouble again. Both governments have said they’ll backstop the bank; depositors and creditors will be safeguarded. It’s an open question how equity holders will fare, however, given talk of a break-up and nationalization of parts.

Both governments dismiss the implications to their own credit ratings; Ireland’s example notwithstanding. They may be a bit complacent. Dexia’s assets represent more than one and a half times the Belgian economy’s annual output and more than a third of France’s. And should Dexia’s problems not prove to be unique, the precedent France and Belgium have set means that they’ll be forced to defend the whole of their banking sectors on the same terms. Which is to say a promise to make their bank bondholders whole.

This is an enormous mistake. John Hussman of Hussman Funds has long argued this from the perspective of U.S. banks, but it applies equally to European institutions. In all except the most extreme cases, banks have enough shareholder and bondholder capital to make good on losses derived from the financial crisis and the European sovereign-debt crisis without in the least impinging on depositor funds. But this requires that shareholders and bondholders take losses.

Given that they get paid a risk premium for holding these assets, presumably they know there’s potential downside too. Governments don’t see it that way. By protecting bondholders against any losses they force them on taxpayers instead. It is a prime example of privatized profits and socialized losses and one that will lead increasingly to popular unrest of the sort now sweeping Greece.

Governments are afraid of what damage losses to their financial systems might cause their wider economies, given the importance of credit in how they function. But the iniquity of defending one relatively narrow and typically wealthy set of interests at the cost of social fairness could yet rebound on them. Ultimately, the damage caused by defending their banks could well prove greater than the damage caused by allowing them to fail.

---

European Central Bank offers banks unlimited new emergency loans to ease credit crunch as it hold interest rates
by Telegraph

The European Central Bank has offered longer-term emergency loans to banks in an attempt to ease an escalating credit crunch, but kept interest rates on hold at 1.5pc despite increased fears of recession.

Jean-Claude Trichet, fronting his last interest rate meeting as President of the ECB, said: "The economic outlook remains subject to particularly high uncertainty and intensified downside risks". His view of the eurozone economy was more gloomy than last month when he merely talked of downside risks, encouraging some investors to believe a rate cut is not far away. Mr Trichet said the ECB saw "intensified" threats to the eurozone economy and focused on measures to keep the financial system working properly.

To help banks withstand a further worsening of the European sovereign debt crisis and growing tension in the interbank market, the ECB renewed offers to lend banks one-year funding in two operations, this month and in December. Extra-long 12-month liquidity tenders were first introduced in June 2009 and the first such offer attracted record-breaking use of €442bn.

Mr Trichet also said the bank would buy up to €40bn in covered bonds - bonds backed by assets such as mortgages and public sector loans that are perceived as safe and high-quality assets. The ECB's presence should help free up that credit market and make borrowing easier for banks. It will also keep offering unlimited amounts of credit at its shorter-term lending operations of up to 3 months through the first half of next year.

Many European banks are exposed to losses on Greek debt. That has made borrowing between banks, which is crucial for their daily functioning, increasingly difficult because of fears the money might not be repaid.

However, Mr Trichet continued to draw the line at other crisis-fighting proposals including the idea of turning the European Financial Stability Facility (EFSF) bailout fund into a bank that can tap the ECB for funds. "The Governing Council does not consider it would be appropriate that the central bank would leverage the EFSF," he said.

The ECB has raised rates twice this year and may have been swayed from going into reverse immediately by inflation hitting 3pc last month, well above its target of close to but below 2pc.
"Inflation has remained elevated ... and is likely to stay above 2pc in the months ahead but to decline thereafter," Mr Trichet said.

Holger Schmieding, economist at Berenberg Bank, said: "The ECB is now likely to prepare an interest rate cut within the next four months, by March at the latest."

---

Bank of England's QE2 may reach £500 billion, economists warn
by Philip Aldrick - Telegraph

The Bank of England may have to inject as much as £500bn into the economy to rescue Britain's faltering recovery, economists warned after the central bank shocked markets by restarting its money printing programme.

Sir Mervyn King, Governor of the Bank, unveiled plans to increase quantitative easing (QE) from £200bn to £275bn – a sum equivalent to a fifth of the UK economy, as it held rates at 0.5pc. The Bank was taking the "pre-emptive action to prevent the slowdown becoming too serious", he said.

Markets welcomed the decision, which was roughly £25bn more and came one month earlier than expected. The FTSE 100 climbed 3.7pc, or 189.09, to 5,291.26, outpacing similar rises of more than 3pc in France and Germany. Reflecting the higher risk of inflation, the pound crashed by more than 1.5 cents against the dollar in the aftermath of the announcement, before recovering to close 0.41 cents down at $1.5384.

The move puts the Bank at odds with the European Central Bank (ECB), which kept rates on hold at 1.5pc on Thursday, and the US Federal Reserve, which recently decided against increasing its $2.3 trillion (£1.5 trillion) QE programme and instead switched short-term for long-term government debt in a policy called "operation twist".

Explaining the decision to launch what has become known as "QE2", Sir Mervyn said the world had changed dramatically in the past three months – blaming slow growth in the US, China and Europe. "These tensions in the world economy threaten the UK recovery," he said.

Weaknesses in the UK's major export markets have caused growth to "moderate". In addition, he warned, the eurozone's debt crisis is causing bank funding to dry up, which may trigger a second credit crunch that would hit already stretched households and businesses.

Explaining how the Bank's Monetary Policy Committee (MPC) justified the decision to start QE2 with inflation already more than twice above its 2pc target, he added: "The deterioration in the outlook has made it more likely that inflation will undershoot the target in the medium term." Inflation is 4.5pc and is expected to rise to 5pc next month.

Critics, though, said the Bank may have moved too soon. "The Bank is risking its credibility as defender of stable prices and, even if funding conditions for the UK's banking sector pick up, this will have more to do with developments in Europe than it will from QE," Kathleen Brooks, research director at Forex.com, said.

Others warned that far more QE than first time will be needed, as the policy cannot push the borrowing cost on Government debt much lower than it already is. Although benchmark 10-year gilts fell sharply in early trading, they closed four basis points higher at 2.39pc.

Michael Saunders, UK economist at Citi, said: "With the recent large deterioration in the economic outlook, the MPC will probably have to do QE on a very big scale. We expect the cumulative total will eventually reach £500bn or so. It may go even higher than that."

The Bank is sticking to its existing policy of only buying Government debt to keep risk to a minimum. Once complete, it will own 32pc of the total £860bn UK gilt market. At £500bn, it would hold two-thirds. It expects to complete the asset purchases over the next four months.

---

IMF steps up support for Europe
by Joshua Chaffin - FT

Fund offers to buy region’s sovereign debt

The International Monetary Fund has called for a swift recapitalisation of Europe’s banks to stabilise markets and prevent the economy from sliding into recession.

Antonio Borges, the IMF’s Europe director, estimated the cost of such a move at €100bn to €200bn ($265bn) as he sketched out an increasingly dire economic forecast for the continent.

With their own access to funds in question, European banks were retrenching en masse, according to Mr Borges. The cumulative effect was a sharp slowdown in economic activity since the second quarter. "The situation today is quite difficult," he said, adding: "We have to restore confidence quickly. The best way to do that is to have a capital increase rather quickly."

The IMF’s latest economic outlook for the whole of Europe now estimates that growth will fall from 2.4 per cent in 2010 to 2.3 per cent this year and 1.8 per cent in 2012. A recession, the fund believes, can no longer be ruled out.

European leaders have been debating different plans to recapitalise banks. The primary vehicle to do so could be the European financial stability facility, the eurozone’s €440bn rescue fund. In July eurozone leaders agreed to overhaul the EFSF so it could lend money to governments in order to recapitalise banks. But they are still waiting for national parliaments to ratify those changes, a process that may be concluded next week.

"We would certainly recommend that it should not be country by country, and not limited to one country. All large European banks should have a significant injection of capital under the same conditions for everyone," Mr Borges told Reuters.

In a sign of the IMF’s deepening concern, Mr Borges suggested at one point on Wednesday that the fund could step up its role by joining the EFSF in buying distressed Spanish and Italian government bonds in order to stabilise markets. His comments appeared to contribute to a rally in European markets. But he later backtracked, issuing a statement noting the fund could only lend its resources to other countries – not use them to intervene in bond markets. Mr Borges also said no such plans were being contemplated.

Any IMF move to buy eurozone sovereign debt would be likely to raise tough questions from emerging market shareholders, who are already concerned the fund is over-extending itself on too generous terms to Greece.

In spite of his deep worry at the outlook, Mr Borges was sanguine on the state of negotiations with Athens over an €8bn loan payment the country had previously said was vital to pay salaries and other basic obligations this month.

In return for the aid, the IMF and the other lenders overseeing Greece’s €110bn bail-out package – the European Commission and the European Central Bank – are insisting that Athens fires thousands of public workers and make other cuts necessary to meet tough fiscal targets. "There is no urgency," Mr Borges said, noting that Greece did not have any bond payments coming due until December.

---

Bank Deposits at ECB Reach 2011 High
by Margit Feher - Wall Street Journal

Euro-zone banks' overnight deposits with the European Central Bank on Tuesday hit a fresh peak for this year as lending conditions among banks remained strained amid Europe's debt crisis.
In times of stress, banks prefer to place their money with the safe haven of the ECB, instead of lending it to one another, fearing fellow banks' exposure to weak credit—in this case, from debt of certain euro-zone countries.

Banks deposited €213.206 billion ($284.69 billion) with the ECB, the central bank said Wednesday, up from a previous high this year of €209.275 billion reached Monday. That is the highest level since July last year, when the figure was distorted by the run-off of a large 12-month refinancing operation by the central bank. The increase in the deposits is partly due to the approach of the Oct. 11 end of the current reserve period. The ECB requires banks to maintain a certain amount of liquidity throughout each reserve period, which typically run for about 30 days. However, the increasing level of overnight deposits since July has shown that funding stress in the euro-zone bank sector has intensified.

"Even though deposit facility usage is cyclical, depending on the stage of the maintenance period, the data still reflect a dysfunctional money market," said fixed-income strategist Orlando Green of Crédit Agricole CIB.

Berenberg senior economist Christian Schulz said, "Although amounts deposited are lower than in previous periods of uncertainty since the Lehman crisis [in 2008], the lack of trust among European banks results in banks' preferring to incur a loss on the differential between the main refinancing rate [of 1.5%] and the deposit rate [of 0.75%] rather than incurring counterparty credit risk."

Funding stresses have been apparent in ECB tenders lately. Banks' demand for funds in the ECB's main refinancing operation—the unlimited seven-day liquidity facility—remained heavy on Tuesday, though it was down from a seven-month high at the previous offer a week earlier.

In fact, it was higher than a week ago, Société Générale economist Klaus Baader said. Société Générale watches the difference between the ECB's estimate of liquidity that banks need to conduct routine operations and the actual amount bid at the seven-day main refinancing operation. This measure of excess liquidity jumped Tuesday to €275 billion from €146 billion a week earlier, to the largest amount since June 2010, Société Générale noted.

"This should intensify downward pressures on Eonia rates, even if most of the excess liquidity is then deposited with the ECB [overnight facility]," Mr. Baader said. Eonia is the euro overnight index average rate—the rate at which banks can borrow from one another. The ECB's Governing Council is expected to discuss the funding situation at its next rate meeting Thursday. Banks borrowed, meanwhile, a relatively small €1.361 billion from the ECB Tuesday, little changed from €1.318 billion Monday.

---

Behind Europe's Debt Crisis Lurks Another Giant Bailout of Wall Street
by Robert Reich

Yesterday Ben Bernanke added his voice to those who are worried about Europe’s debt crisis.

But why exactly should America be so concerned? Yes, we export to Europe – but those exports aren’t going to dry up. And in any event, they’re tiny compared to the size of the U.S. economy. If you want the real reason, follow the money. A Greek (or Irish or Spanish or Italian or Portuguese) default would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008.

Financial chaos.

Investors are already getting the scent. Stocks slumped to 13-month low on Monday as investors dumped Wall Street bank shares. The Street has lent only about $7 billion to Greece, as of the end of last year, according to the Bank for International Settlements. That’s no big deal.

But a default by Greece or any other of Europe’s debt-burdened nations could easily pummel German and French banks, which have lent Greece (and the other wobbly European countries) far more.
That’s where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle. The Street’s total exposure to the euro zone totals about $2.7 trillion. Its exposure to to France and Germany accounts for nearly half the total.

And it’s not just Wall Street’s loans to German and French banks that are worrisome. Wall Street has also insured or bet on all sorts of derivatives emanating from Europe – on energy, currency, interest rates, and foreign exchange swaps. If a German or French bank goes down, the ripple effects are incalculable.

Get it? Follow the money: If Greece goes down, investors start fleeing Ireland, Spain, Italy, and Portugal as well. All of this sends big French and German banks reeling. If one of these banks collapses, or show signs of major strain, Wall Street is in big trouble. Possibly even bigger trouble than it was in after Lehman Brothers went down.

That’s why shares of the biggest U.S. banks have been falling for the past month. Morgan Stanley closed Monday at its lowest since December 2008 – and the cost of insuring Morgan’s debt has jumped to levels not seen since November 2008.

It’s rumored that Morgan could lose as much as $30 billion if some French and German banks fail. (That’s from Federal Financial Institutions Examination Council, which tracks all cross-border exposure of major banks.) $30 billion is roughly $2 billion more than the assets Morgan owns (in terms of current market capitalization.)

But Morgan says its exposure to French banks is zero. Why the discrepancy? Morgan has probably taken out insurance against its loans to European banks, as well as collateral from them. So Morgan at least feels safe. Should it? Does anyone remember something spelled AIG? That was the giant insurance firm that went bust when Wall Street began going under. Wall Street thought it had insured its bets with AIG. Turned out, AIG couldn’t pay up.

Haven’t we been here before? Republicans and Wall Street executives who continue to yell about Dodd-Frank overkill are dead wrong. The fact no one seems to know Morgan’s exposure to European banks or derivatives – or that of most other giant Wall Street banks – shows Dodd-Frank didn’t go nearly far enough.

Regulators still don’t know what’s happening on the Street. They don’t know whether Morgan is telling the truth. They have no clear picture of the derivatives exposure of giant U.S. financial institutions. Which is why Washington officials are terrified – and why Treasury Secretary Tim Geithner keeps begging European officials to bail out Greece and the other deeply-indebted European nations.

Several months ago, when the European debt crisis became apparent, Wall Street banks said not to worry. They had little or no exposure to Europe’s problems. The Federal Reserve said the same. In July, Ben Bernanke reassured Congress the exposure of U.S. banks to European nations in trouble was "quite small." Now we’re hearing a different tune.

Make no mistake. Lurking here is another giant bailout of the Street. The United States wants Europe to bail out its deeply indebted nations so European banks don’t implode. And they don’t want European banks to implode because they don’t want the Street to crash again like it did three years ago. One of the many ironies here is some European nations went deeply into debt bailing out their banks from the last crisis.

Full circle.

In other words, Greece isn’t the real problem. Nor is Ireland, Italy, Portugal, or Spain. The real problem is the financial system — centered on Wall Street.

---

Banks in Europe Face Huge Losses From Greece
by Landon Thomas Jr. - New York Times

Europe’s biggest banks may finally be forced to own up to their losses.

While bank executives and government leaders have been reluctant to acknowledge that the hundreds of billions of euros of Greek debt held by financial institutions is worth far less than its face value, they are slowly accepting the grim reality, as investors, clients and lenders grow increasingly wary.

On Tuesday, Deutsche Bank said it would not meet its profit goals for the year, citing investor uncertainty and losses on Greek bond holdings. Government officials are debating dismantling Dexia, the large French-Belgian bank, and warehousing its troubled assets in a bad bank.

The latest woes prompted a broad market sell-off in Europe, hitting banks in France and Germany particularly hard. Wall Street, dragged down early by the problems on the Continent, lifted at the close, after reports that European financial officials were considering ways to shore up the industry.

As Europe’s debt crisis continues to fester, financial firms exposed to troubled sovereign debt face a brutal fallout. Weaker banks are moving closer to the embrace of their governments. Shares of Dexia — which held more than 21 billion euros of Greek, Italian, Spanish and Portuguese bonds at the end of last year — collapsed in recent days. The situation led the Belgian and French governments, three years after originally bailing out Dexia, to guarantee the bank’s future financing needs.

For stronger banks like Deutsche Bank, the biggest in Germany, the pressure is building to cut costs and raise capital. On Tuesday, Deutsche said that it could no longer meet its 2011 profit target of 10 billion euros, or $13.3 billion. The bank said it would take a loss of 250 million euros on its Greek debt and cut 500 investment banking jobs, most of them outside Germany.

By the numbers, a write-down on Greek debt should be affordable. Some banks have already marked down their holdings to market prices. But several of the biggest holders, including Dexia, Société Générale, BNP Paribas and two German-owned state banks, have resisted admitting that their Greek bonds are worth, at best, 50 percent of their face value. Dexia has 3.4 billion euros on its books while Deutsche Bank holds 1.1 billion euros.

European policy makers are fearful of pushing Greece into default. Regulators want to wait until they can erect a firewall around Italian and Spanish debt and protect the European banks holding the bonds on their balance sheets at near or face value.

"Once you take a write-down on Greek debt for Dexia, this has systemic implications for the French and German banks," said Karel Lannoo, the chief executive of the Center for European Policy Studies in Brussels. Dexia may be one of the worst-off banks, he said, but "the issue is the same for all banks — it will be the taxpayer that pays for this."

European policy makers remain deeply divided on how to deal with the shaky banks. The French government supports an exchange between Greece and bankers, which was negotiated in July as part of a second bailout for Athens.

But Germany has increasingly pushed for the banks to contribute a larger share of Greece’s growing bailout bill. Officials at the German finance ministry argue that the most efficient way to do this is for banks to take a 50 percent loss on their Greek bonds.

Since the private sector deal was forged in July, the prices of Greek bonds in secondary markets have plunged to about 36 percent of face value, from 75 percent. That has put additional pressure on European policy makers to change the terms of the deal. On Monday, Jean-Claude Juncker, the prime minister of Luxembourg, who leads a permanent working group of euro zone finance ministers, cited the changing market conditions and added that Europe was discussing "technical revisions" to the exchange.

Analysts point out that the cost of this private sector initiative has increased significantly. As originally planned, Greece was supposed to borrow 35 billion euros to buy the AAA bonds needed to back the new securities created for the debt swap.

But the global rally in high-quality debt has made the bonds pricier. People involved in the deal now say that Greece may need to borrow an extra 12 billion euros.
While the question remains whether taxpayers or financial firms will make up the difference, European authorities may be moving closer to a coordinated effort on the banks.

Olli Rehn, the European commissioner for economic affairs, told The Financial Times on Tuesday that banks’ capital positions "must be reinforced to provide additional safety margins and thus reduce uncertainty." He said there was "a sense of urgency," acknowledging that officials were discussing measures to bolster the banks.

Mr. Rehn’s reported comments appear to be at odds with those of his colleague, Michel Barnier, the European commissioner responsible for financial services. On Tuesday, after a meeting of European Union finance ministers in Luxembourg, Mr. Barnier said that although bank recapitalization was proceeding, there was no need for new measures.

A growing number of economists, and some voices within the International Monetary Fund, argue that banks need to formally acknowledge their losses to restore their credibility.

"It is difficult to see how Greece gets out of this without a write-down of its debt," said a senior I.M.F. official who refused to be identified because he was not authorized to speak publicly on the sensitive issue.

---

Moody's downgrades Italy for first time in two decades
by Bloomberg

Italy’s credit rating was cut by Moody’s for the first time in almost two decades on concern the government will struggle to reduce the region’s second-largest debt amid chronically weak growth.

Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook, the New York-based company said in a statement. The action comes after Standard & Poor’s downgraded Italy on September 20 for the first time in five years. Italy was last cut by Moody’s in May 1993.

Italy gave final approval this month to a €54bn austerity plan aimed at balancing the budget in 2013 that convinced the European Central Bank (ECB) to buy the nation’s bonds. While the purchases initially brought down bond yields by about 100 basis points, Italy’s borrowing costs remain near record highs because of euro-area debt crisis contagion.

"The fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy," Moody’s said in the statement. "Although future policy actions within the euro area could reduce investors’ concerns and stabilize funding markets, the opposite is also increasingly possible."

The yield on Italy’s 10-year notes was at 5.49pc on Tuesday, pushing the difference investors to hold Italian bonds instead of benchmark German bunds to 376 basis points. The cost of insuring Italian debt against default is more than double the level at the start of the year.

Italy joined Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries whose credit rating has been cut this year. Unlike Ireland and Portugal, which followed Greece in seeking bailouts from the European Union and the International Monetary Fund, Italy had until this summer managed to skirt the worst of the fallout from the debt crisis.

The downgrade by Moody’s may aggravate a volatile political situation. Prime Minister Silvio Berlusconi, battling to keep his ruling coalition together, faces four trials and calls from Italian employers, his long-time backers, to step down after a decade of virtually no economic growth undermined debt reduction. Italy’s debt of about 120pc of gross domestic product is second in the region only to Greece.

S&P in May and Moody’s in June warned that they may downgrade Italy, saying the government may miss fiscal targets. Moody’s extended its review of Italy for one month on September 16, four days before S&P cited growth concerns and Berlusconi’s "fragile" government as reasons for its downgrade.

Italy’s economy expanded an average 0.2pc annually from 2001 to 2010, compared with 1.1pc in the euro area. Gross domestic product grew 0.3pc in the second quarter from the three months through March, when it grew 0.1pc, national statistics institute Istat said on September 9.

On September 20, the International Monetary Fund (IMF) cut its growth forecast for Italy, saying it will miss its goal of erasing the deficit. Two days later, the government cut its own forecast, while keeping its commitment for a balanced budget in 2013.

The Finance Ministry said the euro-region’s third-biggest economy will grow 0.7pc in 2011 instead of the 1.1pc forecast in April and 0.6pc in 2012 rather than 1.3pc. That compares with the growth forecasts by the IMF of 0.6pc this year and 0.3pc next. The ministry also forecast a budget deficit of 3.9pc of GDP this year, 1.6pc next year and 0.1pc in 2013. The IMF projected the deficit to fall to 4pc of GDP in 2011, 2.4pc in 2012 and 1.1pc in 2013.

Berlusconi has pushed through two packages of deficit cuts since mid-July totaling about €100bn euros. Measures included raising the value-added tax by one percentage point to 21pc and a levy on incomes of more than €300,000 to balance the budget by 2013. The second, announced on August 5, was a condition of ECB support.

The negative outlook on Italy announced this week by S&P means there’s a one-in-three chance that the company will lower the nation’s rating again within the next 12 to 18 months, Moritz Kraemer, S&P’s managing director of European sovereign ratings, said on September 20.

Italy will have to find additional savings between €9bn and €10bn "to increase the chances of reaching a budget that is close to balanced by 2013", Fabio Fois, European economist at Barclays Capital in London, wrote in a note before the new forecasts were unveiled. "We think that further fiscal measures are likely to be announced over the next couple of weeks."

---

French mayors rap Dexia "trickery" as rescue brews
by Lionel Laurent - Reuters

Dexia "tricked" French towns into taking out complex loans that saddled them with crippling interest payments, mayors told a parliamentary hearing on Wednesday, ahead of an expected break-up of the crisis-stricken bank.

With a restructuring plan for the lender expected as early as Thursday, following a pledge from Belgium and France to guarantee its financing in the face of a dramatic share-price slide, some local authorities said now was the time to bring the business of local-government lending under tight control. Specifically, they advocate putting the state back in the driving seat and banning risky, variable-rate products.

Several mayors have sued Dexia over these so-called "toxic" loans, which they say were presented as "fixed" interest-rate products pegged to exchange rates such as the euro-Swiss franc. When the new rates kicked in, the local authorities saw their 4-percent borrowing rates shoot up in some cases to 15, even 24 percent, the mayors told the hearing at France's National Assembly.

"Fixed rate, fixed rate, fixed rate -- every time the same words," said Xavier Martin-Le Chevalier, mayor of the northwestern town of Tregastel, holding up Dexia's marketing documents. "There was indeed serious trickery."

Dexia contests the size of the claims and maintains the local authorities were aware of the risks. However, some mayors counter that they did not have the manpower or the sophistication to understand the risks.

Christophe Faverjon, mayor of the central French town of Unieux, said the state should seize the opportunity to take back control of the situation. "We have to ban these types of speculative loans to local authorities," he told the hearing, after explaining that exchange-rate movements had saddled his town with extra interest payments equivalent to an across-the-board tax hike of 30 percent. "We need to create a state-backed financing arm."

This is broadly what France is now pushing to do. Dexia's local government lending arm was, prior to the 1990s, under the control of state bank Caisse des Depots. Now the French government is in talks to essentially put it back there, with an additional backer expected in the form of the banking arm of France's state-owned postal service.

But the uncertainty surrounding this plan, which may be unveiled as early as Thursday, has put the plight of the French mayors under the spotlight. Claude Bartolone, a lawmaker for the Seine Saint-Denis department north of Paris, said details were urgently needed. "It would be unacceptable to contaminate the Banque Postale and especially the Caisse des Depots, given the trust that exists between it and local governments," he said.

He added the rescue of Dexia had come at a very difficult time for local authority funding, with tougher capital rules and market volatility tightening the screws for banks.

---

Dexia Set for Restructuring
by William Horobin, Inti Landauro And Laurence Norman - Wall Street Journal

France's central bank governor and finance minister Wednesday said Franco-Belgian lender Dexia SA will be restructured in the coming days, but the fallout on public finances and the banking sector will be limited.

"I think there should be a solution tomorrow. It is undeniable that Dexia cannot remain in its current state. It's been hit by very bad management and a business model" with high liquidity needs, French Finance Minister François Baroin told RTL radio. Speaking a few minutes later on Europe 1 radio, Bank of France Governor Christian Noyer added that "we are on the cusp of a restructuring of Dexia."

Dexia is headed for a breakup, which seems likely to include setting up a so-called bad bank. According to people familiar with the matter, at least €125 billion ($166.9 billion) of assets could be shifted into the bad bank, which would benefit from Belgian and French government guarantees.

Dexia's public-finance arm will most likely be taken over by French savings banks Caisse des Dépôts & Consignations, or CDC, and La Banque Postale, according to one scenario being discussed. Mr. Noyer said this was the plan of the finance ministry, while Mr. Baroin said it is the most serious option.

Late Wednesday, the board of France's state-owned post office, La Poste, was gathered for an extraordinary meeting to discuss a possible tie-up with Dexia, a person familiar with the matter said. La Poste's banking arm, La Banque Postale, and CDS are considering buying a large part or all of Dexia's Paris-based municipal lending business, people familiar with the matter said. CDC's supervisory board was also meeting Wednesday evening to discuss the proposed tie-up, these people said.

"It's in no way a failure," Mr. Noyer said. "The different parts of Dexia will probably live their lives separately. The French local authority financing part will be repatriated in France."

Meanwhile, Belgian Finance Minister Didier Reynders said Wednesday that the government is ready to invest in the bank. "We're certainly ready to invest, but in what form, and who our partners should be is the subject of discussion in coming days," Mr. Reynders told Bel RTL radio.

Dexia's management has been in touch with a lot of players, Mr. Reynders said, without elaborating. He reiterated that Belgium doesn't plan to sell its stake in any of the banks it has supported in the financial crisis until share prices are healthier.

Both Messrs. Baroin and Noyer stressed that the impact on public finances will be limited. Indeed, Mr. Baroin noted that guarantees pledged to banking institutions don't increase debt levels as measured by official European statistics agencies. Meanwhile, Mr. Noyer dismissed the idea that the guarantees will harm France's top notch triple-A sovereign-debt rating.

"I'm not at all worried," he said. "The states won't have to guarantee any more than what they guaranteed a few years ago...The French and Belgian states will put much less money into this operation than the English put into Royal Bank of Scotland Group or Barclays."

Both French policy makers described Dexia as a "particular case" and played down the possibility that aid to the bank could be a precedent for assistance to other European banks. "For French banks, they are very solid. Frankly, I'm much less worried about French banks than American banks," Mr. Noyer said. "We don't have more problems than others. Our banks are in very good health."

In a research note Wednesday, ING analysts Albert Ploegh and Maarten Altena said they didn't believe that guarantees on long-term funding or a recapitalization will be sufficient to prevent the bank's breakup. "We are not sure whether a nationalization of Dexia Belgium...might be an alternative, but we see similarities with 2008 and" the splitting up and nationalizations of Fortis/ABN. "The difference now is that we believe governments are not keen on nationalization, as this will contaminate sovereign ratings, and lead to several negative knock-on effects for other financials."

---

To Cure the Economy
by Joseph E. Stiglitz - Project Syndicate

As the economic slump that began in 2007 persists, the question on everyone’s minds is obvious: Why? Unless we have a better understanding of the causes of the crisis, we can’t implement an effective recovery strategy. And, so far, we have neither.

We were told that this was a financial crisis, so governments on both sides of the Atlantic focused on the banks. Stimulus programs were sold as being a temporary palliative, needed to bridge the gap until the financial sector recovered and private lending resumed. But, while bank profitability and bonuses have returned, lending has not recovered, despite record-low long- and short-term interest rates.

The banks claim that lending remains constrained by a shortage of creditworthy borrowers, owing to the sick economy. And key data indicate that they are at least partly right. After all, large enterprises are sitting on a few trillion dollars in cash, so money is not what is holding them back from investing and hiring. Some, perhaps many, small businesses are, however, in a very different position; strapped for funds, they can’t grow, and many are being forced to contract.

Still, overall, business investment – excluding construction – has returned to 10% of GDP (from 10.6% before the crisis). With so much excess capacity in real estate, confidence will not recover to its pre-crisis level anytime soon, regardless of what is done to the banking sector. The financial sector’s inexcusable recklessness, given free rein by mindless deregulation, was the obvious precipitating factor of the crisis. The legacy of excess real-estate capacity and over-leveraged households makes recovery all the more difficult.

But the economy was very sick before the crisis; the housing bubble merely papered over its weaknesses. Without bubble-supported consumption, there would have been a massive shortfall in aggregate demand. Instead, the personal saving rate plunged to 1%, and the bottom 80% of Americans were spending, every year, roughly 110% of their income. Even if the financial sector were fully repaired, and even if these profligate Americans hadn’t learned a lesson about the importance of saving, their consumption would be limited to 100% of their income. So anyone who talks about the consumer "coming back" – even after deleveraging – is living in a fantasy world.

Fixing the financial sector was necessary for economic recovery, but far from sufficient. To understand what needs to be done, we have to understand the economy’s problems before the crisis hit.
First, America and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labor had to shift to services.

The problem is analogous to that which arose at the beginning of the twentieth century, when rapid productivity growth in agriculture forced labor to move from rural areas to urban manufacturing centers. With a decline in farm income in excess of 50% from 1929 to 1932, one might have anticipated massive migration. But workers were "trapped" in the rural sector: they didn’t have the resources to move, and their declining incomes so weakened aggregate demand that urban/manufacturing unemployment soared.

For America and Europe, the need for labor to move out of manufacturing is compounded by shifting comparative advantage: not only is the total number of manufacturing jobs limited globally, but a smaller share of those jobs will be local.

Globalization has been one, but only one, of the factors contributing to the second key problem – growing inequality. Shifting income from those who would spend it to those who won’t lowers aggregate demand. By the same token, soaring energy prices shifted purchasing power from the United States and Europe to oil exporters, who, recognizing the volatility of energy prices, rightly saved much of this income.

The final problem contributing to weakness in global aggregate demand was emerging markets’ massive buildup of foreign-exchange reserves – partly motivated by the mismanagement of the 1997-98 East Asia crisis by the International Monetary Fund and the US Treasury. Countries recognized that without reserves, they risked losing their economic sovereignty. Many said, "Never again." But, while the buildup of reserves – currently around $7.6 trillion in emerging and developing economies – protected them, money going into reserves was money not spent.

Where are we today in addressing these underlying problems? To take the last one first, those countries that built up large reserves were able to weather the economic crisis better, so the incentive to accumulate reserves is even stronger.

Similarly, while bankers have regained their bonuses, workers are seeing their wages eroded and their hours diminished, further widening the income gap. Moreover, the US has not shaken off its dependence on oil. With oil prices back above $100 a barrel this summer – and still high – money is once again being transferred to the oil-exporting countries. And the structural transformation of the advanced economies, implied by the need to move labor out of traditional manufacturing branches, is occurring very slowly.

Government plays a central role in financing the services that people want, like education and health care. And government-financed education and training, in particular, will be critical in restoring competitiveness in Europe and the US. But both have chosen fiscal austerity, all but ensuring that their economies’ transitions will be slow.

The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves.

Eventually, the world’s leaders – and the voters who elect them – will come to recognize this. As growth prospects continue to weaken, they will have no choice. But how much pain will we have to bear in the meantime?

---

Bernanke says US economy is 'close to faltering'
by Dominic Rushe - Guardian

Fed chairman blames euro crisis, uncertainty over jobs market and political battles in Washington for gloomy economic outlook

Federal reserve chairman Ben Bernanke has warned that US economic recovery is "close to faltering", and that a "disorderly" default in the Greek debt would have a serious impact. In testimony to Congress, Bernanke was repeatedly quizzed about the impact of the European crisis on America. He said the US was an "innocent bystander" in the eurozone debt standoff and that US banks were not heavily exposed to Europe's most troubled economies.

But he warned that Europe's economic woes were already having a negative impact on US stock markets. "Unless the European situation is brought under control, it could be a much more serious situation for the US economy," he said. Bernanke also warned that political warfare in Washington was a threat to the US economy. He told the Joint Economic committee that the recent row over raising the debt ceiling had been very unhelpful at a time of increasing economic uncertainty. "It's no way to run a railroad," he said.

In written testimony and during a question-and-answer session, Bernanke told Congress that the Federal reserve had acted forcefully to support growth and was prepared to take further action if necessary. His comments, alongside news that European finance ministers were working on plans to support the region's banks, cheered US investors. After Europe's stock markets closed down US stock markets rallied in late trading. The Dow Jones Industrial Average closed up 153 points at 10808 having fallen 253 points earlier in the day.

But Bernanke warned that political infighting was a risk to the fragile US economic recovery. "Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the US economy," he said. "Fostering healthy growth and job creation is a shared responsibility of all economic policymakers."

Bernanke was asked about the Occupy Wall Street protests, now in their third week in New York and spreading across the US. "I would just say that very generally people are quite unhappy about the state of the economy," said Bernanke, and with "some justification". "At some level I can't blame them. Nine percent unemployment and slow growth is not a good situation," he said.

Senator Bernie Sanders of Vermont asked Bernanke: "In light of the protests, did Wall Street's greed and recklessness lead to the crisis?" Bernanke said: "Excessive risk-taking had a lot to do with it." So did the failures of regulators, he said.

Bernanke said the US economy had grown more slowly than expected, in part because of unexpected setbacks like the Japanese earthquake and Europe's debt crisis – but also because of the US's own problems, especially in the jobs market. "The recovery from the crisis has been much less robust than we hoped." "Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market," Bernanke said.

"Private payrolls rose by only about 100,000 jobs per month on average over the summer — half of the rate posted earlier in the year – and state and local governments have continued to shed jobs," he said. Moreover, recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead, he said. "We need to make sure that the recovery continues and doesn't drop back," Bernanke added.

---

European Banks Show Signs of Ill Health
by Spiegel

Germany's Deutsche Bank issued a profit warning on Tuesday and a Franco-Belgian bank wobbled signficantly as Greek debt begins to drag significantly on Europe's financial industry. The European Central Bank is expected to make emergency credit available this week for the first time since the Lehman collapse.

For months, financial experts have been warning that Europe needs to act quickly to shore up banks on the Continent due to their heavy exposure to Greek debt. This week, there are increasing signs that their dire prognostications may be correct.

Deutsche Bank on Tuesday said in a statement that the company's earnings targets for 2011 were no longer realistic and that third quarter results were well behind expectations. CEO Josef Ackermann, who is set to vacate his current post next May, had hoped to earn a record pre-tax profit of €10 billion ($13.27 billion) this year. But the bank was forced to write down €250 million in Greek debt in the third quarter after similar write downs of €155 million in the second.

In addition, share prices for stock in the Franco-Belgian bank Dexia plunged on Tuesday, the most recent symptom of its significant holdings of Greek debt. The stock dropped by as much as 38 percent on Tuesday as officials in Belgium and France struggled to come up with a plan to prevent it from collapsing altogether. The news also led to a general fall in European bank share prices which dragged down European and global markets on Tuesday.

The problems at Dexia, and the profit warning from Deutsche Bank, come as a result of a private sector agreement to contribute to efforts to bail out Greece. As part of the new, €109 billion Greek bailout fund tentatively agreed to in July, private sector creditors agreed to a 21 percent debt discount. Dexia this year has already written down €338 million to cover that pledge.

Warnings from Ackermann
With the Greek economy stuck in recession, however, and the country's budget deficit not falling as rapidly as hoped, there are concerns that Athens will need much more than €109 billion. Consequently, European officials have floated the idea of revisiting the 21 percent private sector contribution -- with some having proposed raising it to as high as 50 percent. Dexia, which holds some €3.8 billion worth of Greek sovereign bonds, would almost certainly be unable to survive such a writedown. Investors have fled the bank as a result.

Ackermann has been vociferous in warning against revisiting the 21 percent agreement, a position he reiterated again on Tuesday. "I personally am very convinced that any short-term restructuring of Greek debt could provoke a contagion which would need much higher ring-fencing ammunition for other countries," he said at a London conference. He added that he thought Europe would ultimately be successful in overcoming the crisis, but that "it will take much longer than some people think, and that will have an impact on the real economy but also an impact on the financial markets."

In response to the increased pressure on European banks, the European Central Bank is expected on Thursday to boost the amount of emergency credit available to banks in need of financing. The last time the ECB made such a move was in 2008 in the immediate aftermath of the collapse of Lehman Brothers. Banks have become reluctant to lend to one another due to exposure to Greek debt. Should Greece become insolvent, banks fear they would never be repaid for loans to other banks.

The Search for a Solution
The European Financial Stability Facility, the expansion of which is currently being approved by euro-zone member-state parliaments, will be responsible for indirectly recapitalizing European banks once it becomes operational. There are grave doubts, however, as to whether the €440 billion the newly expanded fund will have at its disposal will be enough.

Indeed, European officials are already discussing ways to either boost the fund yet again or to leverage it, using the fund's assets as collateral to borrow up to €2 trillion. On Tuesday, Belgian Finance Minister, at a euro-zone meeting of finance ministers in Luxembourg to discuss the crisis, said that the euro-zone is likely to pursue ways to boost the fund.

That, though, is not a foregone conclusion. Germans in particular have been extremely wary of throwing additional billions at the debt crisis and a parliamentary vote last week to expand the EFSF to its current level already cost Chancellor Angela Merkel significant political capital. Several politicians from within her ruling coalition have said that further expansions are out of the question.

Her junior coalition partner, the business-friendly Free Democratic Party (FDP), has also swung toward skepticism in recent weeks. On Tuesday, the party decided to hold a poll among its 67,000 members on further measures to prop up the common currency. Should a majority reject further EFSF expansion, that will become the party's official position. And that in turn would significantly reduce Merkel's wiggle room in the search for a solution.

---

Wall Street protest movement spreads to cities across US, Canada and Europe
by Karen McVeigh - Guardian

Occupy Wall Street protests reach Boston, LA, St Louis and Kansas City, and are planned in cities across US and abroad

It began as the brainchild of activists across the border in Canada when an anti-consumerism magazine put out a call in July for supporters to occupy Wall Street. Now, three weeks after a few hundred people heeded that initial call and rolled out their sleeping bags in a park in New York's financial district, they are being joined by supporters in cities across the US and beyond.

Armed with Twitter, Facebook and shared Googledocs, protesters against corporate greed, unemployment and the political corruption that they say Wall Street represents have taken to the streets in Boston, Los Angeles, St Louis and Kansas City.

The core group, Occupy Wall Street (OWS), claims people will take part in demonstrations in as many as 147 US cities this month, while the website occupytogether.org lists 47 US states as being involved. Around the world, protests in Canada, the UK, Germany and Sweden are also planned, they say.

The speed of the leaderless movement's growth has taken many by surprise. Occupytogether.org, one of several sites associated with the protest, has had to be rebuilt to accommodate the traffic. OWS media spokesman Patrick Bruner said: "We have on our board right now 147 US cities. I don't know whether they are occupied or they are planning on being occupied. My guess would be over 30 cities are occupied."

The original call by the Canadian magazine Adbusters to occupy Wall Street drew hundreds of protesters on 17 September and 2,000 attended a march the following Saturday. But the movement, which organisers say has its roots in the Arab spring and in Madrid's Puerta del Sol protests, has been galvanised by recent media attention.

Last week, the Guardian reported that a NYPD police officer had been filmed spraying four women protesters with pepper spray. On Saturday, a peaceful march on Brooklyn bridge intended as a call to the other four boroughs of New York to join in resulted in 700 arrests. Some protesters claim the police trapped them. There are now two investigations, including an internal police inquiry, into the pepper spraying incident.

Bruner said the protest had snowballed in the last few days: "The American people have realised that the American dream has been assassinated and the murderer is still on the loose."

A message on the occupytogether site apologises for the site rebuild and directs readers to update links. It reads: "Wow, the groups organising and occupations popping up across the country is growing exponentially by the day. So much so that, in order to have proper navigation and organisation on the site, we had to begin categorising these pages by state. Because of this, every occupation's permalink has been changed."

Thornin Caristo, of OWS, said the movement had taken hold because it had tapped into anger at inequality, unemployment and corporate greed. He predicted it would continue to grow.
Caristo said: "It was always going to be a hit or miss situation but it's a hit and I don't think it will be reversing. So much of the population has no hope and those people are desperate."

Other websites publicising the protests have also become hugely popular. One, named wearethe99percent, in reference to the statistic that 1% of the US population owns a third of the wealth, posts pictures of people holding handwritten messages daily.

One said: "Last year, my 60-year-old mother was evicted. This year I graduated with my master's. I am unemployed with over $120,000 in student loans. I no longer believe the American Dream is for me because … We are the 99 per cent."

Another person holds up a sign which reads: "When you're young, you're told you can be anything, I'm sick of being fed lies. I graduated with a BA in 2009 and I've been searching for a job ever since. My generation is lost, depressed, in debt, struggling. We are taking unpaid internships and temporary contracts with no health insurance in desperation. We will forever be living at our parent's house."

Unions have have also expressed solidarity with the protests. On Monday, the Transit Workers Union said it had applied for an injunction to stop the NYPD from forcing bus drivers to carry arrested OWS demonstrators. On Tuesday the 700,000-strong Communication Workers of America endorsed OWS, describing it as an "appropriate expression of anger for all Americans, but especially for those who have been left behind by Wall Street".

In a statement, the group said: "We support the activists' non-violent efforts to seek a more equitable and democratic society based on citizenship, not corporate greed. "The Occupy Wall Street demonstrations are spreading throughout the country. We will support them and encourage all CWA Locals to participate in the growth of this protest movement." Today, the protesters will join a number of unions and community organisations, including the CWA, the TWU and the United Federation of Teachers in a march on City Hall.

---