I was driving out to Burlington this morning to get a new crown installed on an implant I had put in this past Spring. You may ask, "Why the heck do you drive to Burlington for dental work?" Because, like managing money, the relationship between a dentist and a patient should be based on trust and I happen to trust that my friend Dr. Bruce Gardner will do the right thing. My dentist of 30yrs, one block from my office, did not do the right thing a year ago (he is no longer my dentist).
So as I drive, I constantly flip through the pre-programmed satellite radio stations in my car: Fox, CNN, Bloomberg, CNBC and POTUS. I have to mention that all of those stations all air commercials at the exact same time. Brutal. And we thought satellite radio was commercial-free. Not if you want news it ain't (and that is all I listen to really...ask my wife and my three sons).
This morning, there was a talking head on one of the stations (can't remember which one because I constantly channel surf) who I think was some sort of retired Deputy US Treasury Secretary. The guy was waxing on about how great shape European banks were in...more regulated, no proprietary risk, etc etc.
If that is so, maybe he could explain the following three charts:
1) Credit Suisse 16yr stock chart (worse than 2008)
2) Credit Suisse 5yr Credit Default Swaps (CDS) YTD (worse than Feb/16 wides)
3) Deutsche Bank 5yr Credit Default Swaps (CDS) 15yrs (way worse than 2008 and bordering on 2011 wides)
Perhaps someone should explain a few things to this talking head:
1) The market is always right, at least eventually, and right now the market seems to be telling us that there are problems with European banks and, arguably, they are as bad or worse than 2008. Maybe the market is worried about cross-default risk (a chain reaction or contagion risk)? Maybe negative rates?
2) The talking head says nothing of the risk of "bail-in" and contingent capital securities cascading into common stock. (European banks have a hard trigger on whether they are forced by the regulator to effect a "bail-in". Canada has a soft trigger determined by our regulator). Maybe that will happen, maybe it won't, but as we have also said numerous times, the new "bail-in" regime and various country forms of non-viability contingent capital have created a much more volatile environment for bank securities, especially common stock. IE, if there is an event that brings any one bank close to default (a triggering event) then it is not tax payers who will bail out the bank(s), it is the common equity holder as most of the bank's debt will convert automatically to equity...read, Massive Dilution for the common equity holder. No one thought this would happen, at least so soon, but the market feels like there is a risk it might happen. Perception is reality, or at least can become so.
Can it happen in North America? I honestly hope not but who knows what kind of risk any of these large global banks have taken? Recall we wrote recently about the fact that they are most certainly a helluva lot bigger today than they were in 2007. Do you think with no proprietary revenue left, very low rates, a flat yield curve, more regulation, etc, that banks around the world haven't done other stupid things to drive revenue to replace all of those traditional sources that have evaporated?-- I worked at Merrill Lynch where the CEO had the treadmill moving at 15mph in the never-ending pursuit of revenue...nothing bad happened with that strategy though!? And do you think the regulators understand exactly what risk the banks have on their page?
I hope so.