A Dangerous Moment

This BBC video should explain to any who have doubts just how dangerous this European mess really is:



Here is a Telegraph UK article about this crisis quoting Bank of England's Mervyn King:
http://www.telegraph.co.uk/finance/financialcrisis/8812260/World-facing-worst-financial-crisis-in-history-Bank-of-England-Governor-says.html

Update 6:30pm: Apparently Germany and France can't agree on the EFSF: http://www.zerohedge.com/news/euro-rumormill-disintegration-begins-reality-returns-france-germany-fail-reach-agreement-efsf

Dexia Bites the Dust

The governments of Belgium and France today came out announced that they were going to stand behind Dexia Bank, and there was talk that Dexia would be split into two entities.. the "Good Dexia" Bank and the "Bad Dexia" Bank, where all of the bad debt will be offloaded to. Nobody's sure at this point how much Dexia's losses will cost; the total might not be known for some time as a lot of their loans were to Greece and other insolvent countries. Belgium and France also said they would be covering most of the losses. Over enough time, these losses could be substantial, possibly as high as $100 billion. There was talk that the bondholders and other creditors would have to take at least a 21% haircut.

Problem is, it's a tad more complicated that this, as we ourselves found out when Lehman Brothers collapsed. Many of these bondholders bought insurance on these bonds, called Credit Default Swaps. Companies who wrote these insurance policies will take an ugly torpedo to the stern.. this is how AIG went under-- writing these insurance policies. Worse, the Belgian and French government debts might be downgraded due to the amount of bad debts they just insured. Many of Dexia's debts were outright loans-- and it's an open question if any of these will be paid, thus damaging those who foolishly loaned to this floating hulk of steamy compost.

Equally important, this will damage confidence in other European banks. Remember, Dexia passed the EU's "stress test" with flying colors. Other major banks in Europe, such as France's Societe Generale and Italy's UniCredit, have already had a couple of near death experiences. This will not help.

At the closing bell on Wall Street approached today, the Financial Times newspaper came out with a rumor that a Europe-wide plan was being developed at the European Commission meeting going on in Luxembourg. There were no details; only a vaguely worded statement from the group. It was enough to send stocks soaring at the close. The markets are getting used to such pronouncements-- most of which are little more than hot air-- and with Italy's downgrade in the after hours, I fully expect the markets to head south again at the opening bell. The upcoming Belgian and possibly French downgrades will only make it worse.

Meanwhile here in the US, here's how things are going with Bank of America, where their website has been down all week long, their stock is crashing, and finally this-- not sure if it's true, but this is a video of a SWAT team in front of a BofA branch in St.Louis..  http://www.youtube.com/watch?v=Db_P0wHsSz0&feature=player_embedded

The Final Battle for Europe Approaches

In my humble opinion, the Final Battle for Europe draws near. Simply put, a good many {if not most} of Europe's biggest banks are essentially insolvent. In addition to the banks, many of the governments are hopelessly indebted, led by Greece, Ireland and Portugal.

Over the last 16 months {since the very unreported but serious crisis in May of last year} the European Union, the European Central Bank and governments have tried one bailout plan after another, each having to deal with a more serious crisis because the previous plan was inadequate. Europe's leaders have been one step behind each and every time, including this week when the Bundestag {Germany's Senate} finally passed a small expansion of the EFSF {Europe's bailout fund}which was proposed in July. Since then, Italy's biggest banks and their government bonds have crumbled apart, making the EFSF passed just this week woefully inadequate.

A week ago, US Treasury Secretary Tim Geithner formulated a plan to essentially leverage the existing EFSF by about five times, from about $450 billion to $2 trillion. This expansion will be backstopped by the European Central Bank, which essentially puts the entire Euro currency at risk-- and the governments thereof, since they have agreed to backstop the currency. This plan demands that the EU nations pass this plan by the next G20 Meeting in Canne, France the first week of November. This week, the markets have risen nicely in anticipation of this massive plan to finally deal with the problems.

The problem is, Germany {Europe's biggest, richest nation} seems to be balking. Chancellor Merkel, the nation's President, the head of their central bank, and the top judge of their version of the Supreme Court has all come out and said this is not only not happening, but is very likely unconstitutional. Worse, the German people themselves are, by large margins, dead set against this.

Geithner's Plan is a bold one, a big one. The problem is that, in proposing a plan this big, you also acknowledge the size of the problem. Worse, nobody has asked the question-- what happens if it does not pass in Germany after finally acknowledging how serious the problem really is ? As noted above, there are serious doubts whether the Germans will pass this. Confidence in the markets {European ones especially} will be crushed.

And here we are. As this month of October progresses, Geithner's Plan will be making the rounds in Europe. I believe that this story will be the prime mover of the markets this month; if there is good news, stocks will soar. Similarly, bad news will cause stock markets to sink. At some point, this plan will reach Berlin and the Bundestag. If there are delays in the vote or legal complications, look out. If the G20 Summit arrives and the measure is not passed, the markets will be in some real danger. Delays in the Bundestag vote will {rightly} be seen as a sign that the votes to pass the measure are not there.

If the markets begin a serious skid as the delays mount, we will quite probably have arrived at what I call the Final Battle. In order to stop the market carnage, I forsee multiple central banks co-ordinating action, including The Fed and probably the Peoples Bank of China. The Final Battle will have arrived. Who will win ? I'm not sure-- but I can tell you who will lose.. us serfs. One clue as to how the Europeans ultimately plan to deal {or not} with this might well come very soon-- Belgium's Dexia Bank, a huge bank, looks like it's going to have to be nationalized. The problem is, Dexia is nearly twice the size of the country it's located in, Belgium.  The ECB {well, someone anyways} will have to do something because the Belgian state not only has no government at the moment, but would be completely unable to save Dexia-- it would be rather like a ground squirrel attempting to catch a falling hippo. Keep an eye on this potential mini crisis for clues.