Sep 07, 2011

http://www.businessinsider.com/josef-ackermann-euro-banks-speech-frankfurt-2011-9

Josef Ackermann just gave a terrifying speech about the fragility of the Euro banking sector right now.

"At a conference in Frankfurt he said, "It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels."

In other words, bank assets (bonds) are valued according to what they used to be worth, not according to their present value. The banks do not want to state the true value of their assets on their books, otherwise they would have to admit that they are insolvent. So it is better to fib than to tell the truth and go bankrupt. The banks hope that they can hold out long enough for the financial markets to get better.

They should turn around and read the handwriting on the wall (Dan. 5:5). It is their personal revelation from God.

What about getting another bailout to recapitalize the banks, like we did in September of 2008? The article goes on. . . .

However recapitalization is not the answer. Ackermann duly shot down the measure suggested by IMF head Christine Lagarde at Jackson Hole.

He said recapitalizing the banks urgently, as Lagarde suggested, would be "counterproductive."

"A forced recapitalization would give the signal that politicians do not themselves believe in the measures" they are negotiating.

As a result, it could exacerbate the debt situation in individual countries. Also, faced with a threat of dilution (a result of recapitalization), private investments in banks would be even less likely.

Another measure that he does not think will help, he says, is dissolving the Eurozone. "The costs of supporting weak member states, particularly from the German perspective, are less than the costs of disintegration.... It is a dangerous illusion to believe that a country could do better should it reclaim the sovereignty it has delegated to the EU."

Sounds like Ackermann just sounded the alarm. There is now a full-on Euro banking crisis.

So it looks like we are about to see the European version of our own banking crisis three years ago in September 2008. The only difference is that the US crisis was caused largely by banks holding worthless mortgages, which the banks were reluctant to revalue lower to reflect their real market value. Right now, the European banks are holding "sovereign debt" (bonds from Greece) that are probably worthless. Those same bonds are trading at much lower prices on the open market right now, but the banks don't want to write that low value on their books, because that would make them insolvent.