Thursday, December 8, 2011

@SenatorBurr - Will Republicans cause the next major financial market plunge?

News out near the market close indicates that Euro stress tests require Banks there to raise an additional $150 Billion in capital.  They have until Jan 20 to inform their respective country regulators as to how they will meet the target.   And they'll have until June 30th next year to make it happen.

To meet these requirements,  they could attempt to issue new securities.  But given that their stocks have been trashed,  and their survival is in question,  I doubt that route will be available to many.  More than likely,  they will be forced to sell assets.   That has me scratching my head though in trying to figure out what this means in assets being dumped on the market over the next six months.   It all depends on capital ratio targets,  and which of the assets they'll be selling.  I keep reading that Euro banks are in sorry shape because they are leveraged 40 to 1.  Presumably they are being required to bring that ratio down appreciably to meet new Basel requirements.   But,  to what levels,  and when?   That's what will determine the extent of the asset sales necessary.

Here's my matrix on asset sales needed to achieve given leverage ratios.  And this assumes that the sales are being made to only meet the $150 B stress test requirements.  There may be additional sales needed for Basel requirements,  but likely the stress tests assumed also bringing ratios in line for Basel.  I hope.

I hope this is a situation where we're only going to see somewhere between $1.80 - $3 Trillion in assets hitting the market.  Not sure where the hell we're going to find that kind of capital to soak up the supply.   I can't even begin to imagine the pressure on the markets if significantly more than $3 Trillion must be shed over the next 6 months.

Wish I had a better handle on this issue.  More importantly,  wish I knew what kind of potential pools of capital were out there to absorb this selling.   Must keep in mind too all the sovereign debt hitting the markets in the coming year given the deficit spending that is happening worldwide.

I just don't see how the world financial markets are going to make it through 2012 without getting really clocked.   When supply exceeds demand,  price must come down.

Then again,  US banks are flush with excess deposits,  and don't have enough outlets to put that money to use.  As a result, they have Trillions sitting at the FED,  earning next to nothing.  If Ben were to push that money into the arms of assets being shed off the balance sheets of Euro banks,  at favorable prices ... that could help tremendously,  both Europe,  and US Banks.  AND,  if Ben could also come in with Q3 to put another $500 B to $1 T in capital out there ... the world might slide by this major Euro Bank asset dump.

I can hear the uproar from the idiot Republicans in Congress though.  Those clueless clowns are blind to the risks these assets dumps have to the net worth of American households.  They'll stand in Ben's way,  the world mkts will plummet,  and Americans will see Trillions more of their savings go up in smoke.  Watch it happen.  And remember that I warned you about the idiocy of Republicans challenging the actions of our Federal Reserve Board.

I hope Ben has a plan to cushion the coming Euro Bank asset dump.   And I hope he has the strength to strong-arm Republican opposition.   If not,  get liquid,  get short,  or you're going to kiss your capital good-bye.

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