5 thoughts on “Twenty-Five Trillion?!”

  1. Who is saying that there’s $25 trillion in “toxic” assets? The reference story did not mention a particular amount and a naive google search didn’t come up with an answer.

  2. I haven’t seen -any- sources quoting a figure that large. I’ve seen numbers between $2 and $3 Trillion for the USA, so I can’t imagine the EU’s situation is almost 10x worse.

    What I do know though is that however bad the problem is, the EU is in a worse economic position to handle it than the USA. We’ve got O/P/R now (sadly), but at least we had Reagan for eight years. Only Britain had Thatcher; the rest are pretty screwed.

  3. The Euro banks are substantially more heavily leveraged than the US are (like 60:1 versus 28:1 or so; Canada, by the way, is only 18:1) so the toxic assets bite even worse. There were huge housing bubbles in the Mediterranean countries; they are collapsing rapidly. I find $25 trillion to be not too incredible.

    The Euro ain’t gonna replace the dollar (for all its problems) as the world’s reserve currency any time soon. Something else might someday but there’s nothing else appropriate in sight.

  4. The little most read widget thingee on the right side of the story page at the Telegraph quotes 16.3 trillion quid, which at the exchange rate of $1.43 per pound works out to be close to $23.3Tn. At about 90 pence per Euro that’s about 18.1Tn Euros, which at $1.29 per Euro works out to be about $23.4Tn. Hmm, looks like there’s an arbitrage opportunity here…

    It’s probably a combination of factors, but my guess is that the most significant portion of that amount is not to write down (i.e. mark-to-market) the bonds on their books, but rather to ensure liquidity in the event of a major CDS event.

    Let’s look at how this might work out using a recent bankruptcy as an example. Muzak filed for bankruptcy this week. Muzak was bought out by a private equity firm in 2004 according to the last available Muzak LLC 10-Q as of 09/30/2004. Looking at the assets they had then, they had about $100Mn in hard assets and $250Mn in fluff. Fluff being goodwill and intangibles. This was supported by $425Mn in LTD. LTD being long-term debt.

    Bloomberg notes that in the BK filing that the company had $465.3Mn in liabilities, of which $361Mn was outstanding when they went private and stopped reporting to the SEC, and $375.0Mn of which is unsecured. Let’s say you’re USA Bank, one of the large holders of the debt which you’ve got on your books. You’ve decided to hedge your risk with a Credit Default Swap (CDS), and so take out a $300Mn swap with your counterparty who’s willing to insure you against the loss of your principal. BK would be a triggering event under the terms of the CDS, and so a $300Mn cash flow would be triggered.

    But let’s say that other people want to insure against Muzak default risk as well? Well thanks to the the wonders of derivatives, and the by-and-large unregulation thereof, you can! There might be ten counterparties who want to insure that risk, and so they do. Sometimes more than once. Let’s say that you end up with 14 contracts. That original $300Mn cash flow (CDS to holder of the bonds) becomes a $4.5Bn cash flow. Believe it or not, it’s not easy to come up with that kind of cash on the spur of the moment. You’ve usually got to sell a lot of stuff. And if one of the counterparties can’t come up with the cash on short notice, then they default on the payment, which cross-defaults all of the other CDS contracts that they are a party to (just like your credit cards), so that the $4.5Bn cash flow becomes a $45Bn cash flow as the contracts are closed out. (and hopefully no one else defaults)

    Now let’s say that instead of one bankrupt leveraged bought-out company you have 10 bankrupt leveraged bought-out companies. Do you see where this is going? This is why the 16.9 trillion quid liquidity facility doesn’t surprise me that much. I also regard it as a crying shame that it doesn’t surprise me. At least someone got $40Mn out of the deal.

    That being said, a lot of it is going to be bonds that need to be written down to what they are really worth, which directly hits the financial institutions’ capital. IIRC, under the Basel II bank capital needs to be around 8%, and of course a lot of folks have been playing fast and loose with that for a while. It doesn’t take much in write-downs to wipe that capital out, as we’ve already seen.

    The problem here is that the issue is a contract performance one, not a political one. Judges aren’t (generally) buyable, but politicians clearly are readily buyable. This is why the problem is being worked out in the Treasury and Congress instead of in Courts of Law where it belongs. That and the fact that the courts would be swamped with stuff they’d be under-qualified and under-resourced to handle.

    Hopefully Europe will be able to work it out. I’m pretty confident they will. I doubt it will be pretty, though.

  5. The Europeans are the masters of projection. They criticize us for “cowboy” capitalism, yet their banks are even more leveraged in speculative financial securities and their real estate bubble was even more out of control than ours was.

    They will not allow people to import our beef and pork, claiming that we use too much hormones and antibiotics. Yet, our hormone and antibiotic exports to the EU make it obvious that they use just as much of this stuff on their cattle as we do on ours.

    Europeans berate us over “green” issues. Yet, their industry is more polluting than ours. They switched to un-leaded gasoline only in the late 90’s. Also, you cannot individually import a European car to the U.S. because it will not meet our anti-pollution (real pollutants like carbon monoxide and nitrides, not this “green house” horse-shit) and safety standards.

    They also claim that their economic system is better than ours. Yet, I met many Europeans when I lived in Asia who told me about how it was impossible to start any kind of business or do any kind of economic activity on your own. I met one guy from France who left it because once you go into a job or career field, you become pigeon-holed for life. You can never change to a different field if you decide you do not like the field that you have gone into (this would really, really suck). I cannot imagine why anyone would value this kind of system.

    Also, Europeans are way more racist than any American. Ask any Chinese or Japanese who has been to Europe and the U.S. and they will tell you this.

    It such that if a European politician criticizes the U.S. for something, you can bet that they do it in spades.

    I have met many fine European people when living in Asia, but I think that their system and political classes are parasites.

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