Geithner says it's 'fair' to take your money...

 "Fair" is one of the most dangerous words in a politician's arsenal. Around the office, we joke that you should "grab your wallet" when a government official starts talking about what's "fair." After all, this is a person whose job is to think of ways to spend your money. But still, they try... And today, Treasury Secretary Tim Geithner, in an interview with CNBC, said it was "fair" to raise taxes on the wealthy. Here we go...

 What would a Digest be these days without another few paragraphs about the deteriorating situation in Europe? Today, Moody's downgraded its credit ratings of French banks Credit Agricole and Societe Generale. It kept France's biggest bank, BNP Paribas, on review for a downgrade. Remember… France is one of the "well-capitalized" European nations. The decision was based on the banks' exposure to Greek debt.

 In reaction to the downgrade, Christian Noyer, governor of France's central bank, said his nation's banks had enough capital to withstand losses from a Greek default and that the downgrades were "relatively good news."

"French banks have an excellent rating, the same level as other major European banks, HSBC, Barclays, Deutsche Bank, Credit Suisse," Noyer said on RTL radio. "There's no really bad news on the way, and Moody's says the level of capital of French banks allows them to absorb any potential losses on sovereign debt… It's a very small downgrade, and Moody's had a higher rating than the other agencies, so it's just put them on the same level or slightly better than the others."

 We expect politicians to lie, but this is ridiculous. In no way is a credit rating downgrade "relatively good news." Any time mainstream ratings agencies – the same agencies that completely missed the blowup in mortgages – downgrade you, it's bad news. It means your capital shortfalls are obvious to the point where these companies can no longer ignore them without looking stupid.

And Noyer's "strength in numbers" rebuttal that French banks are rated the same as other major European banks is infantile. All these banks are junk... junk loaded with debt from a nation on the brink of default (Greece)... Not to mention sovereigns from other struggling euro nations like Italy and Spain.

 To be specific, BNP Paribas – which is on review for a downgrade – wrote down its Greek debt holdings by 21%. The credit default swap market estimates owners of Greek debt will take a 60% haircut on their holdings. On a side note, Greek one-year paper is now yielding more than 130%. The country is toast.

 The same credit default swap markets estimate holders of Italian and Spanish debt will only take 7%-10% haircuts – an absurd assumption. When European banks are forced to realize full losses on their holdings, they will fail. No, we're not being sensational. Even Deutsche Bank CEO Josef Ackermann agrees. As we covered in the September 6, 2011 Digest, Ackermann recently told a conference, "It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels..."

 And how will this situation resolve itself? As we've been predicting since the first signs of a European banking crisis, the European Central Bank (ECB) will "print, print, print." We're not the only ones who think so. This morning on CNBC, hedge-fund manager and short-selling whiz Jim Chanos said, the "ECB will pull out all the stops." Chanos also agrees that loss estimates are too optimistic, saying "recoveries [for euro banks] are still assumed to be way too high."

 Markets also expect China to buy loads of European bonds, as Europe is China's largest trading partner. But today, Chinese Premier Wen Jiabao made it clear his country will not blindly funnel cash to troubled economies...

"Countries must first put their own houses in order," Wen said today at the World Economic Forum in the Chinese city of Dalian. "Developed countries must take responsible fiscal and monetary policies. What is most important now is to prevent the further spread of the sovereign debt crisis in Europe."

 China will eventually backstop Europe (and is likely doing so right now despite its stern warning). But according to a European Union document dated September 13 that was leaked to the news service Reuters, fear of "further spread" of the sovereign crisis is too late. The document, which European Union officials wrote for a September 16-17 meeting, says, "While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic."

 Again, this negative news is no surprise to you, as we've been warning of a systemic crisis from Day 1. In his latest issue, Porter again sums up our views of the euro crisis...

For Porter's latest update on the European crisis – and how he recommends protecting your portfolio from the downfall – read his latest issue of Stansberry's Investment Advisory. You can access it here...

 New 52-week highs (as of 9/13/11): Westport Innovations (WPRT), Royal Gold (RGLD), EV Energy Partners (EVEP).

 Don't miss today's mailbag, where a GE insider exposes his former employer's follies. Do you have any inside stories about the companies we cover? We'd love to hear them... feedback@stansberryresearch.com.

 "I read your note today on GE and completely agree with your comments. I worked for GE Capital during the credit turmoil. Your reference to the bailout of GE is correct. Like you, I also believe GE would have collapsed had they not received the bailout you mentioned (FDIC insuring the debt issued by GE).

"However, I wanted to remind you that they also received a bailout in the form of the Federal Reserve purchasing their Commercial Paper. At the time, GE typically had roughly $100B of CP outstanding at any given moment. Fed was likely the only buyer of GE's CP. Like Goldman Sachs, GE also received a large capital infusion from Buffet, which they are just now indicating they will repay.

"Thought I would add some color to your comments. What's interesting is that GE did not initially qualify for the debt guaranty program because it was intended for banking firms. GE is not a bank and GE Capital is (was) a non-regulated financial institution. However, GE successfully sent a group of lobbyists to Washington to argue that GE should have access to the loan guaranty program because they owned a Utah Industrial Bank and therefore should qualify for the program. Eventually, the bailout artisans in Washington agreed and GE was allowed to participate in the program. According to a Washington Post article GE participated in the program to the tune of $340B at the time of the article (and this is an old article). Not sure what the final number ended up hitting.

"Seems like an outsized level of participation given their Utah Industrial Bank is mentioned (in other sources) as a $10B bank and probably contributed only nominal sums to GE's overall revenues and/or profits.

"It is my understanding that GE was one of the largest users of the FDIC Debt Guaranty program and the Fed's Commercial Paper facility program relative to the other companies that had access to those same bailout programs. It seemed to me that when you have outstanding Debts of $500B-plus and $100B of CP (neither of which were working during the credit turmoil) that $50B of Cash wasn't going to last long enough... without a bailout.

"I enjoy the S&A commentary each day. Thanks." – Anonymous

Regards,

Sean Goldsmith

Baltimore, Maryland

September 14, 2011

Geithner says it's 'fair' to take your money... French banks downgraded... Noyer is clueless... Greek yields hit 130%... China warns the world... European problem is now 'systemic'... Confessions from a GE insider...