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EU Update (And FI Reality)

posted by Stephen Lubben

If you've been tuning out the Euro situation, despite Gelpern's periodic updates, today's Times magazine has a since summary of where things stand.

I also think the end of this bit nicely captures the extant cynicism regarding financial institutions.

4. Is Europe a Lehman in waiting? About 20 percent of U.S. foreign trade is with the E.U. That’s significant, but if the European economy collapses, it’s quite likely that China, India, Brazil and several gulf states will pick up much of the slack. And a truly collapsed euro would mean discounts on everything from French wine to Italian shoes to Greek yogurt. More worrying is if a) the euro zone faces an abrupt financial panic, and b) it turns out that many American banks are overly invested in those suddenly defunct European banks. There is a general assumption that U.S. banks are prepared for the worst. But many in the financial world thought they were prepared for the collapse of Lehman Brothers too.

Importantly, my sense from talking with people who work at FIs is that they don't understand this is how they are perceived by the vast bulk of people.

Comments

Yes, interesting article, but what does it mean?

1 and 6. Yes, Greece and Germany will play chicken for awhile and ultimately enter into an agreement full of sound and fury, signifying nothing but a victory for each government's immediate goals. Greece will gain a new round of financing, fudge the austerity measures when it comes time to implement them (Good, austerity is a crock.), and delay once again the day when it defaults on this whole mess. For Merkel, the delay improves her odds of foisting off on someone else the consequences of serial defaults on the EU perimeter and the shocks they will send through Germany.

2 and 4. Given facts such as set out in #2, why is #4 even being raised? The euro zone may break up, the EU may break up, but neither of those would be a collapse of the European economy. At the very least, Germany, France, the UK, and Scandinavia would keep on chugging along.

3. I can't even get past the first sentence. "Since most countries left the gold standard over the last century, a currency’s value is based entirely on collective faith." I don't know if that came from Planet Goldbug, Planet Neolib, or some unholy spawn of the two, but it didn't come from Planet Reality.

5. "This would be good news for U.S. consumers, if not for U.S. producers." A minor detail the Gray Lady just doesn't want to deal with. A break-up would mean more cheap stuff for the 1% while costing the other 99% more jobs. As for the rest of this paragraph concerning account transfers to Germany, has anyone at the NYT been paying attention to what has been happening in Greece, and Italy, and Spain?

7. But they end on a strong point. Obvious, but strong. A sovereign currency without a sovereign is, shall we say, problematic, and you need either deeper integration or dissolution. I'm not holding my breath for the former. I expect to see Athens, Rome, and Madrid start taking orders from Brussels bureaucrats when they see Berlin and Paris doing so. Not going to happen.

I don't know what is more interesting, the actual article or the last comment.

Honestly, in the long run, i don't think an EU break up or collapse of the Euro will lead to a global meltdown. Yes, there will be immediate consequences in US markets, but it just means that European goods will be cheap and European countries will go back to their own currencies.

The real threat to the US and global economy is the coming collapse China. Yep, they have been lying about their growth for years and they are within years if not months of catastrophe. The own trillions of dollars our debt and when they start selling it on the open market, look out.

What is the backup for the claim that "most people thought they were prepared for the collapse of Lehman Brothers too"?

1) I don't know anybody who made that claim save possibly, by extrapolation from references to "fortress balance sheet", Jamie Dimon. And perhaps JPM was. And maybe some of the short sellers were, by dint of being short. But I don't recall anybody else saying they were prepared for it and I certainly worked on a number of closely related matters, and read most of the books written about these events. I think it is much more accurate to say that (1) hardly anyone knew what was going to happen but (2) they figured that the authorities in charge would take steps to mitigate the damage, as they had in the ases of Bear, Drexel, Fannie and Freddie etc - and as they later did with AIG, Wachovia, etc - instead of exacerbating it by telling to to freefall into chapter with less than 24 hours warning without any preparation for a transition at all.

2) It is also entirely possible that people were prepared "for the collapse of Lehman Brothers" in and of itself, but not for the simultaneous collapse of Fannie, Freddie, ML, AIG, Wachovia, Citi, etc. and the frighteningly bizarre on the fly government response to them all.

I also need to remind readers that when F & F were placed in conservatorship, which happened before the AIG / Lehman weekend, Paulson et all said their preferred stock was worthless and would not be protected. That preferred had been given Tier I capital treatment on bank balance sheets, meaning that it could support as much as 30X its size in assets and 29X its size in debt. Once it had to be written down - immediately - to zero per Paulson's decision, that blew a big hole in some balance sheets and caused a cascade of demands that drained credit from the financial system. I don't know of anyone who said after the F&F takeover that they felt good about how things would unfold if another SIFI failed.

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