Tuesday, October 07, 2008

Flaming Twisted Wreckage

Europe and the EU, those glorious amalgams of good intentions which were supposed to prove through a million gestures, ceremonies, and reams of paper, were supposed to be the mutual social scheme society to end all social protection schemes, has left each of it’s member-states to fend to itself.

The European banks have always been overleveraged compared to their deposits, nearly twice as much as their US counterparts. Having stopped to catch their breath while lecturing the rest of humanity, they now notice that they’re toast.

The dozen largest European banks have now on average an overall leverage ratio (shareholder equity to total assets) of 35, compared to less than 20 for the largest US banks. But at the same time most large European banks also report regulatory leverage ratios of close to 10. Part of the difference is explained by the fact that the massive in-house investment banking operations of European banks are not subject to any regulatory capital requirement. Another part of the explanation must the regulatory arbitrage, for example though the credit insurance offered for example by AIG.
Not only that, the Euro which was long known to need a soft landing has bonked. Now they have to renegotiate loans in other currencies with those less-valued, formerly magical €s and borrow again.

Good luck with all that. We will remember the past months’ of sniping and “rubbing America’s nose in it” warmly.

No comments: