Gillian Tett at FT:

“As more toxic assets keep emerging, public confidence in the financial system keeps crumbling afresh. Little wonder. After all, the only thing more scary than the current scale of today’s banking woes is that, a full two years after subprime defaults got under way, policymakers and bankers alike remain confused about just how big the toxic rot really is, let alone when it might end.

That is no accident. One dirty secret that hangs over Thursday’s meeting is that there is still precious little global consensus about how to tackle the toxic woes. Some countries (such as the US) are trying to persuade banks to sell their bad assets; others (such as the UK) are trying to “insure” the banks against losses instead.

Meanwhile, several governments in continental Europe seem to be just holding their breath – and praying that the problem will magically disappear.”

The IMF currently estimates world banking losses at $2.2 Trillion.  Rumors are now circulating that number will soon be revised.  As the world economy get worse, more assets begin to fall into the “toxic” category.

Phillip Moore’s article in Euromoney describes many investors and much money (from both UK and US investors) allocated to snapping up distressed commercial real estate debt.  What’s interesting to us is the indications in the article that it’s the banks that are unwilling to sell – that is preventing the investments – NOT a need for federal financing…

“There are three principal reasons explaining why, to date, so much of the cash that was earmarked for investment in commercial real estate debt remains “hors de combat”. The first is that in spite of the precipitous falls in values in the commercial property market over the past year, the general consensus appears to be that values still have further to drop.

Another reason explaining why there appears to be a disequilibrium between supply and demand in the commercial real estate debt market is that in spite of the bleak outlook for values, there is still a reluctance among European banks to offload their holdings, or even to acknowledge how distressed their exposure has become.

“There has been a widespread misconception that as commercial and investment banks looked to restructure their balance sheets they would start by marking their real estate books to a more realistic valuation and then look to sell significant volumes of those assets at those prices,” says Cairn Capital’s Henriques. “We have seen very little of that happening, largely because the markdowns the banks are being quoted on their debt valuations are such that they regard the benefits of selling them as somewhat ambiguous. The capital write-downs they would have to take from such a strategy are such that they would erode most if not all of the capital relief they would generate by selling. So while we are confident that there will be opportunities to acquire bank debt, it won’t be the avalanche that some people were expecting at the tail end of last year.”

We think the debt will not be available for the investors to “snap up” until the banks are willing to take what is offered. Granted, the Geithner plan makes overbidding easier, but to bridge the yawning gap that exists now, is going to make the plan very difficult to implement.

As if he writes in response to the issue we and others have repeatedly raised, Tim Bond at FT answers why he thinks bank bond holders should NOT be forced to take a haircut.  We don’t agree with his analysis, but if one does, then an argument can be made, like Tim’s, that the equity bear market is over, so read the entire thing…

The main objective of government assistance is to prevent a generalised bank run, thereby giving banks sufficient stability to earn their way through the bad debt cycle. This objective is achieved by maintaining confidence that banks can pay their debts.

Any action that hurts the interests of senior bank bond holders would be opposed to this objective. Senior bonds are a necessary source of funding for banks. Crucially, they supply longer term liquidity and thus play a valuable role in reducing the vulnerability of banks to the maturity mismatch between long term loans and short term funding, the Achilles heel that has recently caused the downfall of several institutions.

In most European jurisdictions, senior bank debt explicitly ranks pari passu with deposits. So any government action that might hurt senior bank debt holders would also hurt depositors, achieving the precise opposite to the presumed intention. In the US, although senior bank bonds rank below deposits, exactly the same arguments apply. Any default to senior note holders is tantamount to allowing the bank to fail, an eventuality that can have, as we saw in the case of Lehman and during the Great Depression, cataclysmic economic effects. As such, the risk that governments might opt for such a policy is virtually zero.

From CNBC.com :

“I find it impossible to understand why we as taxpayers are bailing out foreign banks,” said Thomas H. Patrick, a founder of new Vernon Capital and a former top executive at Merrill Lynch. “If the shoe was on the other foot and major U.S. institutions were exposed to those banks, would the U.K. or the E.U. tax their citizens to pay off JPMorgan? There has to be some explanation of why we decided to do that.”

An article in the Telegraph says,

“House prices may fall by a further 55 percent and there is a “very real probability” that Britain will be bankrupted, a leading investment bank has warned in a private note to clients.”  Regarding home prices in the UK, the refers to a Numis Securities report: “Our core headline forecast is that UK property prices remain between 17% and 39% overvalued based on fair valuation. Moreover, history has shown us that when property…which has experienced a price bubble corrects, the price tends to fall below fair value for a period of time, as confidence in that market remains low. Prices could fall a further 40-55% if the over-correction was as bad as the early 1990s in our view.”

The Numis report goes on to argue the UK government’s policy of encouraging lending at 2007 levels is “crazy” and that bankruptcy could result:

“…bankruptcy of the UK is a very real probability as the UK Government is trying to stimulate a greater debt burden in a grossly indebted economy. We believe the scale of the macro imbalances in the UK means there is no prospect of a recovery in 2009 and we expect the UK to be mired in a deep recession through all of 2010.”

Hmmm,  how exactly does a Government go bankrupt anyway?  However it is, if its possible for the UK, it’s possible for…

from the New York Times:

HORSHAM, England-”…top finance officials meeting here Saturday committed to take “whatever action is necessary” to revive consumer demand and regulate global markets.”

The problem is that none of them can agree on which specific action might be included in “whatever action is necessary”, so the bottome line is the G20 will do nothing except wait and hope.  It seems that we’ve heard somwhere that “hope is not a strategy”…but it also seems that’s all we get these days.

For more on this subject see Simon Johnson article:  G20′s real agenda should be saving Europe from itself

From RGE Monitor:

The Swiss National Bank announced it would begin quantitative easing by intervening in the currency and corporate debt markets to “increase liquidity substantially”. The fear of deflation is growing in Europe.  The Swiss cut their economic growth forecast from about -.75% annual to between about -2.75%,  acknowledging the collapse in global demand for manufacturing.  The European banks are even more leveraged than US banks. Could Europe be ground zero for the next leg of the financial crisis?