Modern Banks Runs and What to Expect from Bernanke

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Reggie Middleton of BoomBustBlog.com has been someone whom I have paid a bit of attention to over the past year.  Judging by this great Zerohedge post today, I should be paying more attention.  The subject is the number of bank runs occurring in response to the Euro Zone.  While these transactions have been reported, Middleton does a great job putting them together:

Roughly two quarters ago, I warned subscribers that markets were overlooking a distinct concentration of risk in France. Interestingly enough, many believed France to be a stalwart, alongside fellow ECB boss Germany, as one half of the strongest economic duo in the EU. Our take was that France's exposure to Italy (and the other PIIGS states) through its highly leveraged and funding mismatched banking system was a house of cards waiting to happen. I also asserted that Italy was nowhere near as strong a credit as the media and the sell side has made it out to be.

So, what does this have to do with French banks?

Well, if you subscribed, you'd already know, but I'll spill the beans anyway. On Wednesday, 03 August 2011 I digitally penned "France, As Most Susceptble To Contagion, Will See Its Banks Suffer". Long story, short - France and French banks are uniquely and solely situated to suffer from excessive leveraged exposure to both Greece AND Italy. What an enviable position. Italy CDS seemed to be underpriced for quite some time, but not anymore. The cat is apparently out of the bag. Interested parties should have acted back when the origianal BoomBustBlog Italian Finances report was released: March 2010 (exactly 1 1/2 years ago): Italy public finances projection. According to ZH, Italy 5 Year hit 520 earlier, a new all time record.

So what has the exposure French banks have to Italy caused, see the Financial Times:

Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

Middleton explains the lack of confidence:

I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence. The risk of a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable. A more important concern appears to be the threat of short-term liquidity and funding difficulties for European banks stemming from said haircuts. This is the one thing that holds the entire European banking sector hostage, yet it is also the one thing that the Europeans refuse to stress test for (twice), thus removing any remaining shred of credibility from European bank stress tests. As I have stated many time before, Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run!

See more evidence, via The Telegraph:

Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system.

Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.

Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal.

And Reuters:

Bank of China (601988.SS), a big market-maker in China's onshore foreign exchange market, has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, three sources with direct knowledge of the matter told Reuters on Tuesday.

So there you have it, the slowly unfolding detachment from Euro zone risk by global banks, financial institutions, central banks, and companies.  Middleton's conclusion that modern day bank runs are now caused by institutions and not grandma rushing to get the last bit of her retirement out before it all goes bust looks spot on.  Congrats on the great call Reggie.  And these are some nicely done graphs on the absurdity of IMF and government economic projections of Greece and the U.K.:

So as Bernanke and his cohorts are meeting today and tomorrow, the rumor mill is filled with assumptions that operation twist (buying at the far end of the yield curve to drive long term rates down) is coming.  A few days ago, I remarked on some of David Rosenberg's predictions from this FOMC meeting.  Today, Mish weighs in on Rosenberg's predictions:

Mish Analysis of 6 Alternatives

1. Buy the long end of the curve: What would it do? 10-Year yields are near all-time below 2%. Would another .5% lower to 1.5% accomplish anything? About the only thing I can think it might do is increase the Fed's exit problem down the road.
2. Eliminate Interest on Excess Reserves: I think the Fed should eliminate interest on reserves because printing money then handing interest straight over to banks on that money is outrageous. However, banks are capital impaired. Paying interest on excess reserves is one way of slowly recapitalizing banks over time. It would be a huge policy error for the Fed (from their point of view, not mine), to eliminate interest on excess reserves.
3. Announce an explicit ceiling on the 10-year note yield (say 1.5%): Rosenberg calls this the preferred scenario. It has three problems: It will not accomplish much, if anything, for the real economy. It would increase the exit problem of the Fed down the road. And worst of all it would increase the exit problem by an unknown amount. Defending an interest rate target, as Switzerland just did, means buying unlimited quantities of treasuries from any sellers.
4. Buy foreign securities: This one is interesting, and little discussed. Moreover, the market is clearly focused on problems in Europe. Were the Fed to announce backstopping debt of Italy, it could easily start a huge market reaction (if a market reaction is the goal). However, there are obvious political problems of this policy and if the ECB will not do buy sovereign debt, why should the Fed? Note that once the EFSF is in place the ECB stops buying debt.
5. Announce an explicit higher inflation target or perhaps a lower unemployment rate target: The goal of driving rates lower while announcing a higher interest rate target sure seems counterproductive, especially at the long-end of the yield curve. Should the Fed announce a lower unemployment target, members of Congress would pressure the Fed until that goal was reached. The Fed most assuredly will not want that pressure.
6. Fixed-term loans to banks at low or zero interest: Banks will not lend for 10 years or even 2 years (remember they are capital impaired and have few good credit risks willing to borrow) if the Fed will only backstop the loan for 90 or 180 days. I am not sure the Fed would try this anyway, but if they did I fail to see how it would spur much lending. It does nothing to solve capital impairment.

Mish has some nice thoughts, and yes, operation twist probably won't accomplish much.  That means Bernanke will attempt it.  It would be pretty interesting if Bernanke tried bailing out Europe (more directly than he is now anyway) and see the political consequences of such.  It would definitely make Geithner jump for joy.  It would be my great hope that the public would catch on to the "good ole boys" shenanigans going on if it should happen.  Lending directly to the private sector would be a radical move and I am not sure if Mish is right on with his analysis.  If Bernanke really wanted to get banks to lend, he will find some way to do it, even if it means picking up the phone and screaming "lend lend lend!! I will give you all the liquidity you want!"  This would have grave consequences of course so it depends on what kind of reputation Bernanke wants to leave with.

PIMCO has an interesting report out today on the potential central banking endgame scenario that could play out very soon, via Zerohedge:

In an environment where large fiscal adjustments are required, central banks rely on mechanisms that are effective. Indirectly through asset purchases or liquidity injections, central banks could competitively devalue their currencies. As competition intensifies, cooperation and coordination among global central banks could diminish and engender a timing dilemma for policy reversal. At the same time, decisions may become asymmetrical as central bank actions are not synchronized but rather self-centered. Both cases of Switzerland and Japan showed by targeting the currency in reaction to flight to safety and negative real interest rates, each central bank acted on its own in a non-cooperative manner, contrary to what the coordinated dollar liquidity action suggests.

Quite the prisoner's dilemma going on here.  If one central bank goes rogue from the coordinated devaluation effort, it could cause an incredible flight to safety for whoever wants to be a rebel.

I will end with a recent interview of Tom Woods by Press TV:

Woods is fantastic as always.

Update- Forgot to mention, had a post on the American Thinker today entitled "Mark Zandi: Never Right, Yet Still Trusted."  An excerpt:

It's premature to say the economy is reviving in a consistent way, but I think it is fair to say the economy isn't going to weaken any further."

So predicted Moody's chief economist Mark Zandi on July 6, 2007, right in the midst of a deflating housing bubble.  As the rest of the world knows, the U.S. economy didn't bottom out till well over a year later.  Chalk up another failed prediction for Mr. Zandi who holds a worse record than Charlie Sheen in rehab.  Even more ironic is the fact that he works for one of the three stooges of rating agencies that were blind to the toxicity of subprime mortgage paper.

Like Alan Greenspan, whose over-hyped reputation as a central planner provided cover for easy credit policies which inflated the housing bubble, Mark Zandi still has the nerve to pop up on national media outlets and share his infinite wisdom.