Perhaps you've heard... Europe's in trouble. The problems stem from trillions of dollars in European sovereign bonds plaguing the banks' balance sheets. When the euro was formed in January 1999, regulators wanted to develop the sovereign debt markets and promote tighter economic integration across Europe. To encourage banks to buy sovereign debt, they adjusted the reserve requirements for holding these bonds... Banks didn't have to set aside any capital to protect against potential losses in sovereign debt. In other words, the banks could lever up.
Last month, Porter obtained a copy of Goldman Sachs' "State of the Markets" report, which it sends to its hedge-fund clients. It contained a detailed study on the state of European banks. Porter discussed the report in the October issue of Stansberry's Investment Advisory…
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From January 1, 1999 – when the euro was launched – until the peak of the 2000s credit bubble, total European sovereign debt on the balance sheets of Europe's banks rose from around 2 trillion euros to more than 3.3 trillion euros – an increase of over 50% in about seven years. Europe's banks also heavily invested in other highly rated securities – like the triple-A-rated mortgage securities from American investment banks that contained highly dubious collateral, like subprime mortgages. |
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Again, European banking rules allow much higher amounts of leverage to be used when investing in these supposedly "safe" triple-A-rated assets. The combination of regulations favoring sovereign debt and triple-A-rated assets was a disaster. Regulators completely ignored the huge increase in leverage that resulted from the risk-based capital rules. |
The front page of today's Wall Street Journal featured a story discussing the other bad debt on European banks' balance sheets. According to a recent study by Credit Suisse, 16 top European banks hold a total of about $532 billion of questionable U.S. commercial real estate loans and subprime mortgages... That total exceeds the combined value of the Greek, Irish, Italian, Portuguese, and Spanish debt held by the same banks at the end of last year. And unlike the U.S. banks, which have reduced these assets by about 80%, European banks have only halved their holdings.
How big a problem is this for the banks? To find an answer, let's look at Deutsche Bank, Germany's largest bank. Deutsche holds 2.9 billion euros of U.S. residential mortgage assets. And it has 20.2 billion euros of commercial mortgages and whole loans. That's approximately 150% of Deutsche's tangible equity. Remember, this does not include its European sovereign debt holdings.
But Deutsche Bank says it won't be an issue, as it plans to hold these assets to maturity. We've heard that one before...
We know global central banks will work together to paper over Europe's problems. But what about liquidating real assets, perhaps some gold, to help fund the bailout?
"German gold reserves must remain untouchable," Germany's Economy Minister Philipp Roesler said today. Roesler – the head of the Free Democrats, a partner of Chancellor Angela Merkel's coalition – squashed calls from France, the U.K., and the U.S. for Germany to use gold reserves as collateral for the bailout. He also negated calls from the G20 – the gathering of finance ministers from 20 of the world's leading economies – for Germany to post its gold as collateral.
"Germany's gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes," he said.
One of the world's economic powers is willing to print euros to save its continent, completely debasing its currency, but unwilling to sacrifice an ounce of gold. The irony is not lost on us.
Here's an interesting fact from the Washington Post... Wall Street banks earned more in the first 2.5 years of the Obama administration than they did during all eight years of the George W. Bush administration.
Ken Langone, one of the founders of Home Depot, appeared on CNBC this morning to discuss the economy. Langone said he's bullish on America and our best days are ahead of us. However, he also said he could not start another Home Depot in today's environment. Not because of the economy, but because of "accounting rules and regulations." When Langone and his partners started Home Depot, they made every employee an owner of the company. Granting that same equity today would mean a hit against earnings. And without positive earnings, a company can't go public, Langone said.
The jewel of Langone's interview was his take on Occupy Wall Street... "These kids downtown, I define them as babies in adult bodies," he said. "I don't think they know what they want to be when they grow up."
Langone – a billionaire who came from modest beginnings – gave some advice to the legions of unwashed occupying parks around the world... "Stop bitching about where you are... Do something about it." You can watch the full interview here.
Another blue-chip executive, McDonald's CEO Jim Skinner, recently spoke out against government policy. "The question is, how can we get the ox out of the ditch?" Skinner said in an interview with British newspaper, The Telegraph. "In order to create jobs in America, you're going to have to cut taxes... particularly in the business community."
Skinner, whose company employs 500,000 people, complained that U.S. corporations pay some of the highest corporate taxes in the world. And he said the government must clarify core issues, like health care, for employees. "Until all of that is all defined and certain... we're going to continue to have a fragile environment for consumer confidence."
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New 52-week highs (as of 11/4/11): McDonald's (MCD).
Is Porter stupid? According to the mailbag, yes. Read below for more. And send your feedback to feedback@stansberryresearch.com.
"I admit that I will soon be a criminal in your way of thinking. I am not as well off as you, and cannot afford not to take SS checks every month just to survive. I would rather be a criminal and be part of the Ponzi game than live in a cardboard box under a bridge. After all I did support others in the past, so it will soon be my turn.
"I do have a solution for you to consider. To keep us from all being criminals we could decline the SS checks every month if you sent us a matching gift to take its place. That way we would not be part of the Ponzi game, and you would feel better having saved us." – Paid-up subscriber Larry
"Thank you Mr. Porter Stansberry for not backing down even an inch from people who want to use weasel words to blind themselves from the truth of SS. My brother and I have joked for years about the pussification of America, as politically correct language became more widely used. After reading your research for years and watching your truthful blunt analysis of financial situations, I've concluded the reason our country is so far off the rails is because blunt truthful analysis is rare to find and seldom accepted. Every aspect of our lives as Americans from our financial system, education system, health care system, etc... has been corrupted to obscure simple truths from being recognized by the majority of people. I am not optimistic enough people will recognize, accept and act on truthful information to prevent our nation from experiencing some very difficult times ahead. However, I am becoming more confident in my family's ability to prosper during the challenges ahead. A large part of that comes directly from what I learn through your publications. Thank you and keep up the great work." – Paid-up subscriber Tom Schwegler
"Your Quote 'Our subscribers want something for nothing.'
"This is a stupid statement on your part Porter! It is incorrect, provocative, and only irritates people (in this case your paid up customers) and for no good reason other than to increase your cancellation requests. Maybe your ego cannot stand it when your customers take issues with your occasional rants. Just as you have a point, so do your customers! Seems you cannot admit that. Says something about you.
"I have made money with your services and have lost money as well. No, I do not wish to cancel." – Paid-up subscriber Al Nielsen
Porter comment: No... no... I meant, of course, only the subscribers who would defend their Social Security benefits without recognizing from where they come.
Regards,
Sean Goldsmith
New York, New York
November 7, 2011
The next problem for Europe's banks... Germany won't sell gold... Wall Street is doing better under Obama... Home Depot founder slams Occupy Wall Street... McDonald's CEO on government regulation... The Project to Restore America conference... Is Porter stupid?...