Mauldin: US Banks Have Plenty of Euro Exposure

Remember all that stuff about getting our deposit banking institutions out of the opaque derivatives trading business and back to, oh I don’t know, banking?  Well the President decided to come into office in the midst of the worst economic crisis in 70 years and use up all his political capital to tackle healthcare instead.

So now, US banks are facing a not-insignificant amount of exposure to Europe via the kind of unquantified counterparty risk that should have been left behind in the last decade.

John Mauldin‘s latest, Kicking the Can Down the Road, opens with some detail about this exposure…

***

How often did we as young kids go down the street kicking a can? “Kicking the can down the road” is a universally understood metaphor that has come to mean not dealing with the problem but putting a band-aid on it, knowing we will have to deal with something maybe even worse in the future.

While the US Congress is certainly an adept player at that game, I think the world champions at the present time have to be the political and economic leaders of Europe. Today we look at the extent of the problem and how it could affect every corner of the world, if not played to perfection. Everything must go mostly right or the recent credit crisis will look like a walk in the Jardin des Tuileries in Paris in April compared to what could ensue.

From the point of view of not wanting to so soon endure another banking and credit crisis, we must applaud the leaders of Europe. The PIIGS collectively owe over $2 trillion to European and US banks. German, French, British, Dutch, and Spanish banks are owed some $1.5 trillion of that by Portugal, Ireland, Spain, and Greece by the end of June, 2010. That figure is down some $400 billion so far this year, which means that the ECB is taking on that debt, helping banks push it off their balance sheets. For what it’s worth, the US holds, according to the Bank for International Settlements, about $353 billion, or 17%, of that debt, which is not an inconsequential number.

Robert Lenzner notes something very interesting about the latest BIS report, out this week:

“What’s curious, though, is that for the first time the BIS has broken out a new debt category termed ‘other exposures, which it defines as ‘other exposures consist of the positive market value of derivative contracts, guarantees extended and credit commitments.’ These ‘other exposures’ – quite clearly meant to be abstruse – amount to $668 billion of the $2 trillion in loans to the PIIGS.

“So, bank analysts everywhere; you now have to cope with evaluating derivative contracts that could expose lenders to losses on sovereign debt. Be on notice!”

What did I write just last week? That it is derivative exposure to European banks that is a very major concern for the world and the US in particular. It is not just a European problem. I predicted in 2006 that the subprime problem would show up in Europe and Asia. This time around, European banks present a similar if not greater risk to the US.

A collapse of a major European bank could trigger all sorts of counterparty mayhem in the US banking system, at least among our major investment banks. And then people would want to know which bank was next. This is yet another reason why the recent financial-system reform was not real reform. We still have investment banks committing bank capital to derivatives trading overseen by regulators who don’t really understand the risk. Who knew that AIG was a counterparty risk until it was? Lehman was solid only a month before until it evaporated. On paper, I am sure that every one of our banks is solid – good as gold – because they have their risks balanced with counterparties all over the globe and they have their models to show why you should go back to sleep.

Read More:

Kicking the Can Down the Road (Investors Insight)

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. 토토 commented on Sep 25

    … [Trackback]

    […] Here you can find 53068 more Information to that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  2. piante rampicanti commented on Nov 09

    … [Trackback]

    […] Find More on that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  3. td canada trust easyweb commented on Nov 10

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  4. What is Functional Testing commented on Nov 26

    … [Trackback]

    […] Info on that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  5. Harold Jahn Prosperity Investments commented on Nov 27

    … [Trackback]

    […] Find More Info here to that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  6. automated regression testing commented on Dec 01

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  7. bmo mastercard online login commented on Jan 13

    … [Trackback]

    […] There you can find 62635 more Information to that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  8. DevOps Automation commented on Jan 15

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  9. State EPX 80 DHPT manuals commented on Jan 20

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  10. wigs commented on Jan 23

    … [Trackback]

    […] There you will find 87895 more Info on that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]

  11. online banking commented on Jan 28

    … [Trackback]

    […] Read More here to that Topic: thereformedbroker.com/2010/12/19/mauldin-us-banks-have-plenty-of-euro-exposure/ […]