CRASH2: You thought systemic banking risk had gone away? Think again.


The debt assets held by the banks are sub-prime sovereigns and globalist Boards this time. But they’re no more creditworthy than 2008 household debt.

I admire the work of Ian Fraser because he brings both clinical insight and devastating questions to the party when it comes to financialised capitalism. Also he took Fred Goodwin down – easily the most vain and stupid man ever given control of a Bank (RBS) – shortly after Badloss’s unpleasant lawyers threatened me for daring to write ‘the sole reason Mr Goodwin has bought ABNAmro is that he suffers from penile infantilism’.

So I’m very happy to link and thank Ian for providing the starting point for this post.

We’ve all been fed a great deal of guff, since the 2016 2nd & 3rd corrections towards Crash2 got under way, about how another banking meltdown can’t happen because all the netting of daft bets and reductions in high leveraging have been thoroughly achieved. Last November, former Bank of England FOMC member Robert Jenkins had this to say in an address to a Finance Watch conference in Brussels [my emphases]:

‘I will start with capital. We continue to work our way through the greatest credit bubble in history. Now bubbles are not new. They are always the same – and always a little bit different. They always feature heavy doses of greed, stupidity and leverage. What distinguished our recent episode from all past experiences was the degree and magnitude of leverage. Now we will not abolish greed. We cannot outlaw stupidity. But we can and must address excessive leverage. Have we done so? No.

It has not been for lack of trying. The first attempt involved a rewrite of Basel. The new rules tighten up on definitions of banking risk and place an overall cap on leverage. Are the rules tougher than before? Yes. Are they tough? No. Most importantly, are they sufficient to ensure stability? No.

Take an example. Remember CDO² [a derivative product] – that mini-masterpiece of financial engineering that spread panic throughout the market? The instrument still features on Basel’s roster of risk-weighted assets. And the RWA regime determines the amount of capital required in support of such risks. So, how much loss-absorbing capital do you think the “tough” new rules require of a bank to carry an investment in a debt obligation, backed by a debt obligation, backed by a pool of loans made to US subprime residential homeowners? Oh, and assume that the package is once again rated triple-A.

What do you think?

20 per cent of face value? 10 per cent? Five per cent? Well, for your information, the tough new rules require less than 1.4 per cent of equity funding for a security that neither banker, regulator, rating agency nor investor was able to understand.

It’s almost exactly three months since Mr Jenkins made these points (and many more of an equally depressing nature) and trust me, nothing has changed. So you can see that he doesn’t agree with the Dancing Boys of Davos, and he should know. And most important of all, Robert Jenkins has no agenda to flag up: he’s just another sane person like Elizabeth Warren and Bernie Sanders who think bankers are going to screw it all up again.

Pro-Wall Street commentators aka the heads of Wall Street banking firms  have steadfastly insisted since 2009 that the real leveraging problem lies in Europe….and so, they would argue, Jenkins’ remarks don’t apply to them. Also they claim that all their derivative bets are netted – and they have the signed accounts to prove it.

The focus of this post is to demonstrate with brutal clarity that this is tosh: the difference between the US and Europe is grossly exaggerated by the two completely different systems of accounting used on each side of the Pond.

In the US they use the GAAP system (quite an apt name, actually) and in the EU we have IFRS. One crucial difference, for instance, is that IFRS shows derivative assets and liabilities, whereas US banks don’t. ‘Mind the GAAP’ as one might say: the risk appears to be small – in some cases nonexistent – but it isn’t….it’s just somewhere else.

But it’s on the leveraging issue that the US bankers’ “we’ve deleveraged more” defence collapses. Both Credit Suisse and Lazard pointy-heads have modelled to rectify the accounting sleight of hand; this is what it shows:


There are two obvious features here: in the context of a 1.4% fund for surviving disaster, neither set has deleveraged enough; and in real terms, the two systems aren’t that far apart in their level of recklessness. (When Lehman filed for bankruptcy, it’s stated leverage ratio was 12.1)

Lazard Asset Management concludes, ‘the gap between the United States and Europe [bank leverage ratios] is at its lowest point in 20 years‘.

However, it would be a very silly person indeed who let eurobanks off the hook: we are talking levels of banking mendacity here, not real reduction in systemic risk. Very few analysts in the EU banking sector placed much faith in the ‘stress tests’ that were conducted, and such tests anyway don’t factor in the biggest danger Europe faces: banking services – especially in the UK – are on average 50% of gdp….whereas in the US, the figure is half that. One can see just how high British systemic banking risk is by going back to Crash1: during that period, the UK Government spent more on bailing out the banking system that the US Federal Government….but their gdp is seven times bigger than ours.

The bottom line is that European and American banks are equally booby trapped, they just have different ones in different parts of the house.

Yet even that extrapolation is based on the ludicrous assumption that accounting practices in the banking sector are fundamentally honest, and a fair reflection of reality. Returning to the grisly demise of Lehman, under the direction of Chief Financial Officer Erin Callan and the certification of Chief Executive Officer Richard Fuld, Lehman Brothers transferred $100 billion to a behind-the-scenes phantom company called Hudson Castle, which appeared to be an independently run organisation – but was actually controlled by Lehman Brothers executives, thus reducing its leverage ratio.

This is a very specific attempt to wake people up to the bogus nature of the banking balm being spewed out by the lobbyists and pr agencies who work round the clock to ensure Business as Usual for their reptilian clients. It won’t make much of an impact (nothing will until it’s too late) but it’s worthwhile remembering that this Slogpost is very narrow.

QE, political budgetary incontinence and economic slowdown in the EMs have combined to ensure that sovereigns and large global businesses are drowning in debt….and of course, somebody somewhere is holding it. Anyone who thinks that level of debt can be ‘netted’ is off with the fairies. Further, anyone who thinks sovereigns can rescue banks again without evoking rampant hyperinflation alongside sky-rocketing borrowing rates needs to stay under the duvet.

Yesterday at The Slog: The scandal of pensions unfit for donkeys