Tuesday, July 13, 2010

Troubled European Banks Get Reprieves Instead Of Reprobation

Europe's banks are becoming just as proficient as their American cousins when it comes to hiding bad fixed-income assets with phony accounting and central bank recapitalizations:

The EU banking system is in big trouble. Many of the Union's largest banks are sitting on hundreds of billions of dodgy sovereign bonds and non performing real estate loans. But writing down their losses will deplete their capital and force them to restructure their debt. So the banks are concealing their losses through accounting sleight-of-hand and by borrowing money from the European Central Bank. This has helped to hide the rot at the heart of the system.

Not to worry.  Insolvency no longer means failure.  We can count on cooperative regulatory bodies to rescue banks on either side of the Atlantic.  European regulators are about to hand down plenty of gifts:

European banks, rattled by investor uncertainty about their ability to withstand a sovereign-debt crisis, are poised to win a reprieve in Basel, Switzerland, this week as regulators from 27 countries shape new capital rules.

A push to water down stringent standards proposed last year by the Basel Committee on Banking Supervision, and to allow more time to implement them, is led by France and Germany, according to bankers, regulators and lobbyists involved in the talks.

I've been saddened lately to hear know-nothing investors brag about their genius at having bought banking stocks.  I've even heard a tale from an aspiring finance professional about how i-bankers were regaling him with rationales for aggressively buying U.S. bank stocks.  I tried to talk this guy out of listening to those fools.  Banks that hold garbage assets and report them as healthy deserve rejection and reproach, not recommendations. 

I just shrug my shoulders now.  I take small comfort in the existence of others who are dumb enough to take the other side of any smart trade I can make.  Our world is upside-down. 

Full disclosure:  No positions in European bank stocks.