ECB Blows €400bn on “Brexit Black Friday” Bank Bailouts

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Dealing with a Financial Crisis under cover of Brexit Chaos

Remember TARP, the Troubled Asset Relief Program that the US Congress approved to bail out banks and other companies during the Financial Crisis? $700 billion were authorized, later reduced to $475 billion. The Treasury eventually dispersed $432 billion. I bring this up because the ECB bailed out the European banks with more than TARP, in just one day: on Brexit Black Friday.

The ECB saw what was happening to the shares of the largest banks on that propitious day. It saw a blooming financial crisis:

Top UK Banks:

  • HSBC, the apparent winner in this fiasco, perhaps because of its exposure to Asia, -1.4%
  • Barclays: -17.7%
  • Royal Bank of Scotland: -18.0%
  • Lloyds Banking Group: -21.0%

Top German Banks:

  • Deutsche Bank: -15.9% to €13.25, down 59% from April last year, possibly on the way to zero.
  • Commerzbank: -13.6%, to €6.20. The German government still owns nearly 16% of it as a result of the bailout during the Financial Crisis.
  • The third-largest German bank, KfW, is a state-owned institution, so taxpayers are automatically on the hook.

Top French banks:

The fiasco that happened to the Spanish and Italian banks was so enormous that it sent stock markets into their largest one-day plunges on record, of over 12% [ Brexit Blowback Hits Italian and Spanish Banks].

The Stoxx 600 banking index, which covers the largest European banks, plunged 14.5% on Friday. It’s down 29.3% year-to-date, 42% from its 52-week high, and 76% from its all-time high in May 2007 before the Financial Crisis and the euro debt crisis knocked the hot air out of the banks.

But to keep panic at bay, Brexit and the resulting political crisis are used to cover up the blooming financial crisis.

And what a political crisis it is, not just for the UK, but for the EU. No one knows how this will end up. Businesses need certainty. They need to know what money they’re going to use next year, and what the trade and legal frameworks will be. They like to take those things for granted. But now, in the EU, no one can take anything for granted anymore.

Companies with cross-border operations – this includes all major banks and brokerages – have gigantic headaches, and the UK’s 2.2 million financial-sector employees are fidgeting on the edge of their chairs. It might take a couple of years for the UK to actually exit the EU, if it even happens at all, so there’s a little breathing room.

But where there’s apparently no longer any breathing room is with banks, and the ECB went into panic mode.

With bank stocks collapsing on Brexit Black Friday, the frazzled folks at the ECB decided it was high time to start bailing out the banks – and not dabble at the margins, but pull out the whatever-it-takes money-printing machine, and do so under the cover of Brexit chaos when no one was supposed to pay attention.

On Friday, the ECB pulled a huge magic trick, larger than TARP. Under one of its alphabet-soup programs – long-term refinancing operations (LTRO) – it handed teetering banks $399.3 billion, or $444 billion.

€399.3 billion – like a used car is advertised for €19,999.99 – because €400 billion might have been too much of a sticker shock. So let’s round it to €400 billion.

And as central banks do, it didn’t ask legislators for permission. It just did it. Here’s a screenshot of the ECB’s disclosure, with my annotations:


Settlement date is Wednesday. This money is going to go somewhere.

Part of it may be mopped up by the liquidity crisis the ECB sees unfolding at the banks.

And part of it might end up in other assets. This sort of thing is supposed to prop stock markets, particularly bank stocks. But since April last year, European stock markets have swooned, despite all the efforts by the ECB. Its flood of liquidity went into bonds, real estate, and into US assets.

This money might pump up prices, perhaps in the most unexpected places, if only briefly. It might even pump up bank stocks. Short sellers should take note.

And the day before Brexit Black Friday, with impeccable timing, the ECB pulled another big one: it leaked to Reuters that it was addressing the nonperforming-loan epidemic among Eurozone banks by sweeping it further under the rug.

The ECB, which regulates 129 Eurozone banks, has estimated that these banks are bogged down in €900 billion ($1 trillion) of bad loans, or 7.1% of all Eurozone bank loans. At some banks, NPLs have reached catastrophic levels: for example, 15% at Italy’s UniCredit.

So instead of forcing the banks to finally take the losses, raise a lot of new capital or topple, the ECB will merely give them “non-binding guidance” by the end of 2016 or early 2017, and some of this “guidance” won’t even be in writing, sources told Reuters with perfect timing the day before Brexit sank these banks.

The ECB doesn’t want to hurt fake earnings. And this leak to Reuters was supposed to have soothed the markets and helped prop up bank stocks.

The thing is, banks that need to raise equity capital must have inflated stock prices or else existing investors get crushed. If Deutsche Bank has to raise €30 billion in capital by issuing shares at €3 a share, existing shareholder will essentially be wiped out, and raising equity capital may no longer be possible. So the name of the game is to manipulate up bank stocks before issuing new shares. But it may be too late.

And this is what happened to Italian and Spanish stock markets, as banks were massacred. Read…  Brexit Blowback Hits Italian and Spanish Banks

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  42 comments for “ECB Blows €400bn on “Brexit Black Friday” Bank Bailouts

  1. Petunia
    June 26, 2016 at 5:01 pm

    I was watching the market open on Friday and the minute it went over a 500 pt loss, the plunge protection team kicked in and drove it back a few hundred points. I turned it off at that point because you could see the fed was going to protect the market. Turned it back on to watch the last 15 minutes and it had already closed (due to stop, but they didn’t report it that way). Morgan Stanley shut down their dark pool for the day, so much for providing liquidity. These are not real markets anymore.

    Can’t wait for Monday, they will probably have to shut the whole thing down when they run out of places for the digits on the screens.

  2. Wilgob
    June 26, 2016 at 5:58 pm

    The ” whatever it takes” promise of the ECB and the zero interest rate on the Euro 399 bln LTRO facility from the ECB to banks in Europe rally shows that even the ECB has lost the key to the way out.

  3. J P Frogbottom
    June 26, 2016 at 6:23 pm

    Yes, was wondering who “bet wrong” on the BREXIT vote. Oh, did I say that in an insensitive way? Derivative bets, anyone?

    Monday isn’t here yet, could grow, no? Is the FED saying “not this time” when solicited.

  4. Dave
    June 26, 2016 at 9:07 pm

    I wonder if any bankers are going to jumping from tall buildings in the next week or two? All this concern about market crashes and banks going under reminds me of year 2000 scare that turned out to be “much ado about nothing”. Our whole monetary system is built on fraud. It will fall apart at some point BUT know one knows when. Not even then Xperts or $mart Money (if there is such a thing).

  5. Copernicus
    June 26, 2016 at 9:47 pm

    This (Brexit) is a divorce.
    Buy the spoilt children (italian banks) and family lawyers and sell the spouses.

  6. Jungle Jim
    June 26, 2016 at 11:01 pm

    There is an interesting angle to the demographics of the voters. The young were heavily in favor of remaining in the EU because they felt that they would have better employment prospects by moving from country to country under the EU. The older folks were in favor of leaving the EU. No one has said this so far, but I have a feeling that their reason is that they have been the principal victims of the Central Banks interest rate gambits. As savers, they have been stolen just about blind and they are fed up. They want out before things get any worse.

    • Gil Obrero
      June 27, 2016 at 3:12 am

      I think you will find that propaganda in the schools is far more potent.

      I have talked to friends who say that the pushing of this Euro garbage at their kids is unrelenting, false and purely political, and is pushed as part of all the PC crap.

      They have a hard time reeducating their kids to reality, just like deprogramming cult converts.

      Frankly if I had kids at school age now, I wouldn’t let them near a school, especially one with a high muslim intake.

      I cannot help but think that there is a huge potential here for home tutors with the “right” credentials who are really educated and will teach kids math finance, tech and real history, and not the garbage blown about by the marxist pc brigade

      • this guy must be an alien
        June 27, 2016 at 8:02 pm

        What has a school with Muslim students got to do with EU propaganda…

        Or did you just show your real fascist xenophobic colors.

        OAP’s voted out, they crushed their own pension funds, because they are poorly educated self serving twats. Greed runs deep with the baby boomer generation, they invented nothing but took everything, so much so the only thing left to invent was the imaginary internet.

      • Kaj
        June 29, 2016 at 2:49 pm

        Very true!

        Young people in the Netherlands are also indoctrinated with a lot of Euro-propaganda in their scholls/colleges/universities. The higher the level of education, the more Pro Europe propaganda they receive. Hence there is a fierce belief in the advantages of Europe amongst university graduates: They talk like robots when it comes to Europe….

        • d
          June 29, 2016 at 3:46 pm

          The disadvantages of the EU are mostly due to the abuses of the unelected Eurocrat’s. And are outweighed by the long term disadvantages of a return to European nation state Nationalism.

          The unelected Eurocrat Dictators can be made Accountable to the Electorate which would resolve many of the Mainland Europe Eurosceptic issues.

          Mainland Europe federates or dies as an economic force..

          The UK remains part of the EU with restriction’s on Immigration Labour movement and Social benefit’s for Non British citizens or both, suffer for decades as a result of the divorce.

          Junker and the Eurocrat dictators are still trying to use Britain to unload their unemployment and social problem’s on. This has to stop. Junker and the european Commision ahve to be made directly accountablke to the electorate.

          It is an insanity that the “Catherine Ashton” was the Eu Foreign minister, completely unaccountable to the electorate.

          Europe Also needs a recall Mechanism so that individual Eurocrat’s can be replaced when they Offend the electorate. The very existence of such a mechanism would end much of their bad behavior as they want to keep their HUGE salary’s and HUGE fringe benefit’s.

    • Peter Forsyth
      June 27, 2016 at 5:22 am

      Right on JJ. The voter had one chance in 35 years to make a difference and they took it. Robbed of 50% of their savings in 8 years and still some voted to remain in their straightjackets.

      • education is the future
        June 27, 2016 at 8:04 pm

        They voted to reduce their own savings by 10 to 20%

        Very clever move.

    • d'Cynic
      June 27, 2016 at 12:14 pm

      It must have to do with Erasmus, a yet another wasteful program to socially engineer a new EU elite by subsidizing their university education in another EU country. One Brit who took part actually blogged about what a ridiculous waste it was, but he was at least smart enough to figure out that he would have to pay for it, in the end. The rest probably find a job with the EU.
      Secondly, the globalist, indoctrinated youth thinks the old generation is like some sort of dinosaurs that will eventually die out. They are too young and stupid to figure out that you cannot run out of old people: they are being made every day, every year.
      You just increase in age, indoctrination wear out, work problems of ageism crop up, you grow your own brain, and then you become “old”.
      Should teach it in school.

      • d'Cynic
        June 27, 2016 at 1:57 pm

        Just to add; recently, it was reported (probably by the EU propaganda squad) that the one millionth Erasmus baby was born. How did they figure that one out? So, academically speaking, the program is worth every penny.

  7. OutLookingIn
    June 26, 2016 at 11:04 pm

    A depression is where systemic deleveraging must occur.

    Assets are sold, often for pennies on the dollar. (to meet margin calls) The result being that asset prices collapse. (markets crash) Equity levels drastically decline.
    This triggers more selling of assets. Credit levels shrink as the value of underlying collateral vanishes. Cash flow dries up and debt service stops, generating more asset sales and bankruptcies become common.
    This now becomes a self-reinforcing cycle of economic negativity.
    Welcome to the vicious cycle.
    Tomorrow should be approached with trepidation and extreme caution.

  8. Jeff
    June 26, 2016 at 11:04 pm

    Wolf, could you please provide a link to the ECB’s webpage you took the screenshot from? Very, very interesting to say the least. Even more interesting is there has not been so much as a peep in the MSM about this!!

    • June 27, 2016 at 12:01 am

      Sorry, I somehow forgot to link it in the text. It is now linked. Look for “disclosure” right above the chart. Thanks for pointing it out.

      • d
        June 27, 2016 at 8:29 am


        That the Smelly little Mafiosi pulled that off, does not surprise me in the least.

        The annoying thing is, the Mafia owned POS, will get away with it.

        Soon the ECB is going to have a bigger NPL’S problem, than all the Euro bank’s combined.

        At some point, this has to start reflecting in the value of the now Seriously Overpriced EUR.

  9. Thomas Malthus
    June 26, 2016 at 11:43 pm

    The Frankenstein Economy.

  10. ML
    June 26, 2016 at 11:50 pm

    It really isn’t the end of the world! All that has happened is that the balance has tipped so far that it had flipped over.

    A simple solution for getting people to spend would be to increase interest rates. The wealthy would have to transfer from their savings to pay more interest on their loans, the poor are broke anyway. A year or two of coming to grips and everything would sort itself out again.

    • Markar
      June 27, 2016 at 8:45 am

      Raising interest rates in a world awash in debt that cannot be serviced with real economic growth is no simple solution. Debt will have to be written off, failures allowed to fail, and a return to sound money is the only solution to this mess.

      • economicminor
        June 27, 2016 at 12:08 pm

        I agree BUT the pain would be severe! When everything is leveraged to the max and so much is privatized the disruptions could be way more than our system could handle. Our necessary infrastructure, energy, communications, food, etc. is all tied up in this huge pyramid of debt and the disruptions could be devastating. I mean, really devastating! Even many water delivery systems have been privatized and under huge piles of debt.

        Over the years the underlying support system as in courts and anyone who actually knows how to deal with real big bankruptcies and break ups has been minimized. A big up tick in this kind of chaos could mean long delays in settlement and re-organization I would think. Plus the Federal Government is totally dysfunctional and divided and would be worse in this kind of catastrophe. Especially as this would be round 2 or 3 or 4 if you start with the Asian Debt Crisis.

        I just hope that this melts down really slow and allows the system to adjust.

    • Robert
      June 27, 2016 at 10:57 am

      One of the reasons for ZIRP was that, with no return on savings, and some inflation always present, people would be strongly encouraged to spend now. While it is stated in Economics (Samuelson edition) that “savings is the engine of investment,” it does not look much that TPTB bankers are interested in raising rates much if they can help it. It looks more like the banks that own the Fed (and every central bank), and which are getting money virtually interest free from them (as Wolf just pointed out) are planning to pick the bones of distressed resource producers, IMHO.

  11. nick kelly
    June 27, 2016 at 1:33 am

    I think it’s time to look at a new element (or an under noticed one)

    Virtually all of the commentary sees these financial events as a struggle between antagonists, or antagonistic forces.
    Marxism sees the fundamental struggle as labor versus capital. But the key point I’m making here is that it sees it is a struggle between humans.

    You would have to be willfully blind not to notice that many posts and the majority of comments see these events as a struggle between human adversaries, and for many of those commenting it is an almost biblical struggle between good and evil. Ordinary folk being good while finance is evil.
    These people, the commenters, would probably describe themselves as cynical or skeptical.
    But if the enemy is human there is hope because we the people could always execute those adversaries and launch a New Age. The has been tried before but maybe 5 th time lucky.

    But what if the ‘enemy’ isn’t human.
    What I’m suggesting is that we are entering the realm of chaos, and that branch of mathematics known as chaos math now applies.

    The book the Black Swan by Taleb introduced this idea and Taleb mocks
    the quants, including of course the Noble prize winners who almost crashed the world in 1998 when their equations failed.
    One of Taleb’s observations: the 30’s Depression was so far from the mean, statistically it shouldn’t happen more than once in a million years.
    But it did happen- a Black Swan- something unpredictable ( many people in 29 predicted a correction, but not one that saw several thousand banks fail and US steel sink to 12 % of capacity)

    To return to chaos math, the system is entering turbulence.
    Re: Brexit the latest event. Maybe it would have been better if the UK had never joined the EU. But having joined, the sudden change increases turbulence.

    No living person who has never left the US has experienced real chaos.

    Why, after the French Revolution did the French embrace the military dictatorship of Napoleon- because he ended (internal) chaos
    Decent Germans accepted Hitler for the same reason.
    (If either had been content with internal success..but Russia tempted both, and Hitler had forewarning, his hero’s failure.)

    Once you’ve experienced chaos, you don’t want to go back. Its fundamental lesson is that far from you being entitled to something by reason of being human- there is no logical necessity for the human project to exist at all. Unless you are religious, the message from the Universe is.. static.
    This by default, leaves the tribe, us, civilization.

    This is one reason the Brits, (and the other five countries who routinely
    win the UN’s best quality of life) are fond of the monarchy. It’s something that doesn’t change. They know that major decisions will be decided by elections etc. but they don’t want the head of state to be elected- it leads to turbulence, and with more than one civil war they don’t want more.

    To end this, beware of rejoicing at the downfall of a system ( unless it really is evil) because as one system after another fails, the System may fail. The EU has all kinds of warts but the core of the project was to bury the hatchet between France and Germany, by overcoming nationalism and eventually making them one country.

    The US has had two huge bonanzas, won two giant lotteries: World War One and World War Two.
    WWI bankrupted everyone else.
    In WWII, at little cost to itself (total US deaths in WWII were exceeded in a week by Russia in several battles) the US in 1945 was the only commercial power left standing.
    If the system reaches maximum turbulence it won’t be so lucky again.

    • Nicko
      June 27, 2016 at 3:42 am

      The game is still in play. Watch Scotland and Ireland make a bid for independence (and continued EU membership); perhaps the UK ends with a whimper instead of a bang – a fitting end for the once mighty British Empire. The 21st century is looking more interesting all the time.

      Being half English myself, I look forward to visiting London soon, it’ll be cheaper than ever.

      • Agnes
        June 27, 2016 at 4:25 am

        Ireland is a founding EU member. Lots of Great Britain citizens with at least one Irish grandparent applied for Irish Passports on Friday(some postoffices ran out of forms). There were signs of shorting the Irish bonds on Friday(gotta use that LTRO money for shorting something besides gold :P)

        • d
          June 27, 2016 at 8:22 am

          This thing hasent even started yet Cameron has stated noting happens regarding article 50 till Im gone Octo0ber teh earliest.
          England could be on the way to anea election by then.

          If You could Easily get an EU Irish (Or any other EU nation) Passport. It would be a Wise thing to do. In these uncertain times.

          I suppose I could always get a German one, if Brexit actually Occurs.

          Passports, just like Borders, are all about. TAX.

          I haven’t decide weather I should put 10, 100, or a 1000, on Brexit not actual occurring in this cycle. YET. 1000 might be a bit ambitious.

      • VK
        June 27, 2016 at 4:28 am

        Scotland won’t be leaving the UK anytime soon. Their budget deficit is 8-10% of GDP, which is funded by the English. EU rules state that any new member must have a budget deficit of only 3% upon entry. For the SNP to leave is idiotic, they’d have to shrink their own economy by 5-7% just to enter the EU – a major recession and a huge political hit. Then they’d have to adopt the euro guillotine as well, when they wanted to be under the British pound last time around. It’s a lot of yak and no substance. Then there’s the question of whether the EU will even accept the Scots? Spain and Italy are battling their own secessionist movements and wouldn’t accept Scotland as a break away country entering the EU.

      • Your own History
        June 27, 2016 at 8:13 pm

        As you are half English maybe you will be interested to learn, Ireland is not part of the UK.

        And Scotland made the alliance with England to create the UK, not the other way around.

        Scotland will vote to leave the UK and rejoin the EU. Breaking up the UK. The outlying territories of the UK will be traded off as part of the free trade agreements. Spain wants Gibraltar back.

        NORTHER IRELAND is full of English Fascists, the very people who voted on the basis of an ideological fantasy. They will not leave the UK and Ireland doesn’t want them to join them either.

        And it wont be cheaper because you will find that the UK will undergo a horrible period of inflation, starting any time about… now.

        • d
          June 27, 2016 at 9:39 pm

          “NORTHER IRELAND is full of English Fascists, the very people who voted on the basis of an ideological fantasy.’


          Northern Ireland is full of Scottish Religious Maniac Puritan Fascist, put there by Cromwell.

          The same Religious Fascist Maniac’s. Who were the American Glorious “Pilgrim’s ” on the Mayflower. They were all Puritan Fascist, mostly from Scotland, no longer welcome in an England returned to Royalist sanity.

          Many were regicides fleeing for their lives or Strong Cromweellian’s no longer welcome in England Scotland or Ireland.

          Scotland BEGGED to join England AS IT WAS BANKRUPT AND IN DEFAULT.

          The PC History you are presenting is in fact a FAIRYTALE.

          The Irish troubles began when Henry the eight Turned England Protestant . Thenhe Pope started using the Irish as cannon fodder in his war’s against England.

    • Robert
      June 27, 2016 at 11:06 am

      “One of Taleb’s observations: the 30’s Depression was so far from the mean, statistically it shouldn’t happen more than once in a million years.”
      A very fascinating contemporary account, Louis Sullivan’s 1933 Prelude to Panic, stated that the trigger for the Depression in the U.S. was Britain’s going off the gold standard in 1931. Up to that point, they had been able to issue 100-year bonds (consols) at 1%, due to their gold backing, and this vaporized. Enough Americns saw the writing on the wall and began demanding gold for their gold certificates, i.e. dollars, and as the banks had just 40% in gold backing their loans, they were forced to call in loans, despite which they started failing one by one.
      The villain in this story is fractional reserve banking, the original sin of the goldsmiths, and today magnified 100-fold in a 100% fiat environment. There is nothing unforeseeable, of a one-in-a-million-year nature about it.

    • d'Cynic
      June 27, 2016 at 12:47 pm

      You write far and wide as if trying to paste multiple essays into one, but you mentioned an old, tired canard that EU is necessary to prevent war among the old enemies.
      When these countries went to war the last time they were empires straddling the globe. They dominated militarily, scientifically and technologically. Today they are also runners in all these fields.
      They also dominated the world by population, with the exception of China and India. Today, the general joy of making babies in the third world that noone know how to support, have made them a population dwarf.
      Going to war? Only if someone can make an iPhone game in French and German for keyboard warriors.

    • economicminor
      June 27, 2016 at 1:03 pm


      I see this playing out human against human because the population of the earth has grown beyond its carrying capacity. We did this with cheap energy. Cheap energy produced food supplies to feed an ever growing population.

      That era is over and energy is no longer cheap, yet the world’s population grew as did enterprises to entertain them. We are now entering the era where there are more humans than there are jobs and the cost of feeding, housing and entertaining all these humans is growing. Thus meaning less for most. Add in robots and automation and there are even fewer jobs. So we have conflicts between those who still have and those who have little or nothing and I can not see how this dynamic will change for the better unless fusion or some other cheap or free energy source is found.

      Yes we could be doing a lot better with what we have BUT that is not human’s nature either. We are only a century away from the horse and buggy and hunger and starvation for many. Hording and selfishness is human and then we have our religious institutions who all want to dominate the world with their *beliefs*! All still promoting more and more births to accomplish their personal goals.

  12. Aneesh
    June 27, 2016 at 5:44 am

    superb reporting Wolf. your blog is one of the few intelligent financial blogs I follow on a daily basis. keep up the excellent work

  13. Ptb
    June 27, 2016 at 8:37 am

    Like when the rich divorce. Lots of attorneys and years of litigation.

    • d
      June 27, 2016 at 9:12 am

      And as they investigate they frequently discover separate bedroom’s and separate lives would be cheaper and easier than divorce.

      The clinton’s being an excellent example of this.

      She know’s he still play’s around. Just a she always has. They dont do that anymore and she has decided it is not worth fighting about.

      What may come out of this is a refocus on how the EU deals with certain matters and possibly bring the members of the Eu commission and parliment to direct electorate control. The main issue being the Electorate has currently no control over what Brussels does.

      The Electorate didnt want Junker (And has no control over him) the Eurocrats did, so hes there. Enjoying every second of pushing the English into Brexit with uncontrollable immigration.

  14. MC
    June 27, 2016 at 9:05 am

    €400 billion is roughly equivalent to the estimated 2016 GDP of Chile, the world’s 44th economy. In short it’s some very very serious money.
    Yet what good did it accomplish? As I am typing this European banking stocks are still crashing, erasing an earlier “dead cat bounce” and adding more red ink.
    In short those €400 billion failed to achieve their main and probably only scope: calm financial markets and kick off a panic buying spread like it happened with Deutsche Bank on the eve of “Brexit”.

    What the ECB may have achieved is the exact opposite of what it set out to do: it’s destroying whatever faith was left in the European banking system by confirming every investor’s worst fear, starting from that pyramid of NPL’s which grows by the day as those responsible “discover” a few billions tucked here and there in every fold of the banking system.
    The ECB may “do whatever it takes” to keep these banks fictionally afloat but these days it’s not enough. Traders demand profits, possibly lots of them. Buying bonds issued by putrescent Italian and Austrian banks is fine, but it hardly impresses markets these days: Haruchiko Kuroda has been doing far more impressive financial gymnastics and traders have quickly grown tired of them.
    In short at very most the ECB may be able to keep the European banking system from collapsing like the poorly engineered house of card it is, but that’s it… and it will become progressively more expensive, especially on the political front.

    • Tim
      June 27, 2016 at 10:47 am

      This €400 billion is listed as ‘reverse transaction’. So what exactly is the ECB getting for this money? Is it draining more sovereign debt from the banks? This kind of transaction doesn’t improve the capital structure, does it? As you say, putrescent banks, are just as putrid by such a transaction. And so as you say, about not calming markets, it would seem impossible until the capital structure of the banks is improved. Which doesn’t seem likely, in the near future. So crash on. Maybe the ECB will have to actually buy ‘rusty old bicycles’, as someone joked. If the ECB bought the NPLs, that would be rocket fuel for the banks. Maybe the banks should package their NPLs, get a captive ratings agency to rank the junk as high grade, and then they could sell them to the ECB as AAA MBS. Then it wouldn’t matter about the NPLs rusting away on the ECB balance sheet.

      • MC
        June 27, 2016 at 12:45 pm

        What do they get? Under LTRO terms, the collateral posted can probably include almost anything: “alternative forms of rating are acceptable for bank loans which are not rated by the major agencies”.
        This is probably one of the most opaque phrases I’ve read in my life, and my reading list includes a whole big heap of Medieval Muslim literature.

        The massive problem with NPL’s, as revealed by the continously unfolding Italian fiasco, is they are kept on the books as productive assets as long as possible, invariably years after repayments have stopped coming. Just don’t try this at home: in our case this may be considered accounting fraud or worse.
        This makes finding exactly how many NPL’s are in the European banking system exceedingly difficult and hence finding a solution even harder than it would be were the NPL pile a mere €900 billion tall.

        • Tim
          June 27, 2016 at 7:08 pm

          Thanks, MC! Great info. This could be ‘the big one’.

  15. Julian the Apostate
    June 28, 2016 at 6:38 am

    I agree with the argument that we are entering the Chaos range of the pendulum swing, I don’t think you can remove human antagonism from the equation. It isn’t an either /or dialectic. And while Americans who haven’t traveled abroad haven’t experienced full blown Chaos to date, they are certainly getting a taste of it. I first got a taste of it when I was 4 years old and Charlie Starkweather was on his murderous rampage. Suddenly doors that had never been locked were being locked and my Dad was loading the shotguns with deer slugs. Unnerving to say the least. I remember making a delivery of bread to Long Island a week after 911, and the incredible relief of the receiver who had run completely out just that morning. I couldn’t call in to the company til I was well away from there because the phones were out. My reading of history couldn’t be more than a guide because it doesn’t convey the fist that twists the gut in the moment. I felt the twist in my gut again when I went to Cabelas in PA after Obama’s threat to seize our guns and the whole black powder section of the store was cleaned out. Chaos and Order are part of the warp and woof of our Universe and we are a product of that same Universe, people who are no one in an Ordered time will arise in Chaos and be comfortable there. There will be much suffering, but the pendulum will swing back.

    • economicminor
      June 28, 2016 at 10:03 am

      Well, if the pendulum is indeed swinging, which I suspect it is or will soon start, then it has just begun. As CH Smith in his newest piece about the shrinking pie shows that this current swing has been going on for around 45 years. What most people are fear is the suffering.

      Not only the pie shrunk but at the same time the workers were manipulated. The opportunity for them to keep up the lifestyles they had been sold on TV commercials was mostly possible thru debt which also transferred the wealth upward to the financial class and thus accelerating their declining prosperity.

      The widening divide and the shrinking pie will surely cause chaos. Especially in the western civilizations were people actually believed in exponential growth. Where their future and their children’s futures was an endless expansion new things, new opportunities and endless recreation. Yet the math was always fictional and magical. Believe in the myth or the math.. People chose the myth. Now comes the consequences of that mystical/magical thinking.

      Yes, the pendulum will swing but now because of cheap energy and massive population growth, we have a lot of people who will be severely harmed. This transition will be a very unpleasant time for many humans. Maybe most.

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