I have a growing feeling that the EU is falling apart

Electrum

The Italian banking crisis is reaching fever pitch.

The eurozone crisis never went away; it was just overlooked in the Brexit upheaval. But you can rely on Italy to trigger thoughts of catastrophe and, sure enough, the arrival of this weekend’s referendum on constitutional reform has spooked markets.

https://www.theguardian.com/business/nils-pratley-on-finance/2016/dec/01/italy-referendum-matteo-renzi-fallout-eurozone-banking-crisis-asos-glencore

So many hard working people who thought money in the bank was safe have lost their life savings.

Greek problems get worse every time they are pushed into the future, Spain, Portugal are even worse in many ways.

Then there is Deustcher Bank derivative time bomb.

Will the EU survive to even bother about all these other countries wanting to follow the UK in leaving?

Electrum

In the Oscar-winning The Big Short, Steve Carell plays the angry Wall Street outsider who predicts (and hugely profits from) the great financial crash of 2007-08. He sees sub-prime mortgages rated triple-A but which, in reality, are junk – and bets billions against the banks holding them. In real life he is Steve Eisman, he is still on Wall Street, and he is still shorting stocks he thinks are going to plummet. And while he’s tight-lipped about which ones (unless you have $1m to spare for him to manage) it is evident he has one major target in mind: continental Europe’s banks – and Italy’s are probably the worst.

Why Italy? Because, he says, the banks there are stuffed with “non-performing loans” (NPLs). That’s jargon for loans handed out to companies and households where the borrower has fallen behind with repayments, or is barely paying at all. But the Italian banks have not written off these loans as duds, he says. Instead, billions upon billions are still on the books, written down as worth about 45% to 50% of their original value.

The big problem, says Eisman, is that they are not worth anywhere near that much. In The Big Short, Eisman’s staff head to Florida to speak to the owners of newly built homes bundled up in “mortgage-backed securities” rated as AAA by the investment banks. What they find are strippers with loans against multiple homes but almost no income, the mortgages arranged by sharp-suited brokers who know they won’t be repaid, and don’t care. Visiting the housing estates that these triple-A mortgages are secured against, they find foreclosures and dereliction.

What is very negative is that in every country in Europe, the largest owner of sovereign bonds are that country’s banks
In a mix of moral outrage at the banks – and investing acumen – Eisman and his colleagues bought as many “swaps” as possible to profit from the inevitable collapse of the mortgage-backed securities, making a $1bn profit along the way.

This time around, Eisman is not padding around the plains of Lombardy because he says the evidence is in plain sight. When financiers look to buy the NPLs off the Italian banks, they value the loans at what they are really worth – in other words, how many of the holders are really able to repay, and how much money will be recovered. What they find is that the NPLs should be valued at just 20% of their original price. Trouble is, if the Italian banks recognise their loans at their true value, it wipes out their capital, and they go bust overnight.

“Europe is screwed. You guys are still screwed,” says Eisman. “In the Italian system, the banks say they are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent.”

Eisman is careful not to name any specific Italian bank. But fears about the solvency of the system – weighed down by an estimated €360bn in bad debts – are not new. In official “stress tests” of 51 major European banks in July by the European Banking Authority, Italy’s third largest bank, Banca Monte dei Paschi di Siena, emerged as the weakest. It triggered a rescue package – and soothing words from Italy’s finance minister, who said there was no generalised crisis in the banking system. But MPPS’s share price remains at just 25 cents, down more than 90% from two years ago.

How worried should British bank account (and shareholders) be? “I’m really worried about England’s banks,” says Eisman. “They are in no better shape than most in Europe.” When it comes to the US, Eisman’s outrage, so central to the plot of The Big Short, has not melted away (just don’t start him on Household Finance Corporation, the HSBC-owned lender at the heart of sub-prime crisis). “I think the regulators did a horrendous, just horrendous job pre-crisis. But under the Fed, the banks have been enormously deleveraged and de-risked. There are no sub-prime mortgages any more... the European regulators have been much more lenient than the US regulators.”

Eisman was of the view that US banks were rather boring as an investment – although Donald Trump’s victory has changed that. “I have a feeling there could be a softening in the Department of Labor rules (an Obama-led crackdown on how banks sell financial products) and the regulatory environment has now changed in favour of the banks.”

The real deal: Steve Eisman
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Steve Eisman: ‘I’m really worried about England’s banks. They are in no better shape than most in Europe.’ Photograph: Bloomberg via Getty Images
Trump’s victory has sent the bond markets into disarray, with the yield on government bonds rising steeply. While this sounds good for savers – interest rates could rise – it is bad news for the holders of government bonds, which fall in value when the yield rises. Eisman sees that as another woe for Europe’s banks, who hold vast amounts of “sovereign bonds”.

“What is very negative is that in every country in Europe, the largest owner of that country’s sovereign bonds are that country’s banks,” he says. As the bonds decline in value, then the capital base of the banks deteriorates.

He doesn’t share the optimism around Deutsche Bank since Trump’s victory. The troubled German bank, facing a $14bn fine in the US for mortgage bond mis-selling, was for a long time one of the biggest lenders to the Trump business empire. In the three days after Trump’s victory, shares in Deutsche Bank, regarded as Europe’s most systemically important bank, jumped by a fifth from €12.90 to €15.30 as traders bet on Trump-inspired leniency over the fine.

But Eisman doesn’t buy it. By his reckoning, Deutsche Bank was less fundamentally profitable than its rivals, and relied more on leverage to boost earnings. His analysis suggests it will struggle to return to its former profitability.

Critics will point out that shorting the likes of Banca Monte dei Paschi di Siena or Deutsche Bank sounds fine – except that the share price of both have already fallen so dramatically the bad news is already in the price. But we don’t know for sure if they are Eisman’s precise targets – because he’s not willing to say unless you give him at least $1m to manage in one of his “personal accounts”.

Eisman now effectively runs his own “boutique” operation within a bigger Wall Street firm, Neuberger Berman. His “Eisman Long/Short SMA” account has opened to wealthy investors, and in January he will be in London drumming up interest among investors.

But not everything Eisman touches turns to gold. He declines to say how much he made during the financial crash, when he was manager of funds at FrontPoint Financial Services, though it was reportedly as much as $1bn. But in 2010 FrontPoint ran into trouble after one of its manager pleaded guilty to insider trading and was given a five-year prison sentence.

Eisman later set up a hedge fund, Emrys Partners, gathering nearly $200m from investors, but its returns were relatively humdrum compared to the drama of the great crash, making 3.6% in 2012 and 10.8% in 2013, according to the Wall Street Journal.

Did he think the film accurately portrayed what went on? He visited the set, and gave Carell and the other actors (Brad Pitt and Christian Bale also starred) advice and notes.

“When I saw the film, I thought it was great and that Steve Carell was wonderful. But I thought, hey, I wasn’t that angry. After the crash I was interviewed by the Federal Crisis Inquiry Commission, and I saw a transcription later on. After reading it, I realised that ‘yes’, I really was that angry... but the Fed has done a very good job since.”

https://www.theguardian.com/money/2016/nov/19/big-short-financial-crash-steve-eisman-italy-banks-risk

cogito

Of course, the big problem for Italy is that if the banks need a bail out, the people who have to suffer from the bail in are ordinary Italian people who own most of the bonds. This is unlike other countries where bondholders are mostly professional investors who should have a better understanding of the risks. This is political dynamite for the Italian government as under EU rules, bondholders have to be bailed in and the government cannot bail out the banks.

The EU also have a dilemma. Can they impose the Greek solution on the EU's third largest economy?

Thrugelmir

Electrum wrote: »

T
Then there is Deustcher Bank derivative time bomb.

I thought that myth had been detonated. :doh:

Wouldn't get over excited about everyone elses problems when the UK has enough of it's own.

Carl31

what does this matter? as long as the UK can get cheaper pasta from the single market, then that's all we care about isn't it?

steampowered

I think you are wrong to suggest that a banking crisis would lead to further break-up of the EU.

In fact I think it is the opposite. A crisis would increase support for further integration. Greece has done by the far the worst and yet the figures I could find seem to say that a staggering 75% of Greeks support remaining in the EU.

Also, in the UK the Royal Bank of Scotland just failed a stress test? These problems are in no way just linked to the EU.

Luke273

Austria is also re-holding its elections on Sunday, with the euroskeptic leader Hofer losing out by 30,000 votes in May, the election is expected to be just as tight.

He has been wishy-washy on calling for a EU referendum, in any case another Euroskeptic in the fold will no doubt hurt the EU's cause.

Ronaldo_Mconaldo

I don't know what the big deal was with The Big Short. The subject matter was interesting but it might as well have been a documentary with real life people in it rather than actors because all that seemed to happen was that the protagonists in the movie would go cross country interviewing people who represented real life people. So what was the point? At the end of every little interview a character would ask "don't they understand that they're creating?" as if to patronise the viewer "hey, stupid viewer, this is what you should be getting from that little montage!"

The movie wasn't anything like as great as people make out.

cogito

steampowered wrote: »

I think you are wrong to suggest that a banking crisis would lead to further break-up of the EU.

In fact I think it is the opposite. A crisis would increase support for further integration. Greece has done by the far the worst and yet the figures I could find seem to say that a staggering 75% of Greeks support remaining in the EU.

Also, in the UK the Royal Bank of Scotland just failed a stress test? These problems are in no way just linked to the EU.

71% of Greeks view the EU unfavourably.

http://www.politico.eu/article/poll-the-eu-is-bad-news-but-britain-shouldnt-leave-it/

That's not the same as saying that they support leaving the EU of course.

Italy's problems are very deep seated and if they still had the lire, they would need to devalue it by 20-30% against the deutschmark. That's an impossibility ar present and could only come about if they left the euro. I wouldn't completely rule that out.

kabayiri

Ronaldo_Mconaldo wrote: »

I don't know what the big deal was with The Big Short. The subject matter was interesting but it might as well have been a documentary with real life people in it rather than actors because all that seemed to happen was that the protagonists in the movie would go cross country interviewing people who represented real life people. So what was the point? At the end of every little interview a character would ask "don't they understand that they're creating?" as if to patronise the viewer "hey, stupid viewer, this is what you should be getting from that little montage!"

The movie wasn't anything like as great as people make out.

I enjoyed The Big Short. I guess it just shows how tastes differ.

Have you seen Margin Call ? It's a lot tighter, dealing with a very short time frame. It's a different perspective on the same subject.

It might appeal more.

Thrugelmir

Ronaldo_Mconaldo wrote: »

The movie wasn't anything like as great as people make out.

To explain the complexity of the story in one word syllables was quite an achievement. The book goes far more in depth.

I'd love to see a film made of weekend in October 2008 when the UK banking system was saved. Must have been a fraught tense 48 hours.