Posted By: Matthias Paul Kuhlmey
Markets have “shrugged-off the Italian scare,” and were off to yet another promised land of stellar returns in global equities. To keep our minds flexible, let us not forget to look beneath the surface. A common “confidence vote,” as it relates to the credibility of a sovereign nation, is the outcome of regular bond auctions held (a standard refinancing mechanism). And, there, was a nice surprise that helped market participants to initiate the recent turn-around: Italy was able to comfortably place a maximum targeted 6.5 billion Euro of long term-debt obligations. Relieved?!
Bond auctions held in most European nations, especially in Italy and Spain, are heavily supported by their respective domestic banks. According to data released by the European Central Bank (ECB), Italian banks purchased a record amount of government debt in January 2013, about 18.5 billion Euro(!), and (if this data point was not disconcerting enough) Monday’s auction was mostly absorbed by two Italian banks. Same deal, a little to the West, in Spain. Let’s not forget that these are the same (Spanish) banks, which require a minimum of 60 billion Euro in new capital and keep posting major losses. For some perspective, Spanish banking giant, Bankia, just reported the worst results ever recorded by a Spanish corporation, a screaming 19 billion Euro loss. Bankia was “bailed-out” by the European Commission in December of 2012 and continues to be nationalized ever since.
To round things up, there is another big player in the mix: the U.S. Federal Reserve Bank. The FED reports that most cash reserves held in the US banking system are “under the roof” of foreign banks operating in the U.S. In the month of January 2013, the FED injected a record of $237 billion into foreign banks, a number greater than the liquidity influx seen after the Lehman collapse in September 2008. Something going on here? Let’s broaden the picture:
The top five banks in the U.S. receive about $64 billion in government subsidies, an amount roughly equal to their annual profits. Stated differently, our banking system, at the top of the global “financial food chain,” with nearly $9 trillion in combined assets, would just about break even in the absence of “welfare considerations.” The profits those banks are reporting are essentially transfers from taxpayers to their shareholders. None other than FED Chairman Bernanke, in his testimony to the Senate Banking Committee earlier this week, stated that American banks receive implicit subsidies because the market believes they are too big to fail. OK, case closed!
The above is exactly the reason why we prefer to talk “crazy” at times. “Drop It Low” was just the perfect outlet …