The Endgame Of TBTF Banks And Rising Rates

Global markets are stabilizing a bit after authorities worldwide are pulling out all the stops to stem the bloody tide.  Greece and South Korea have followed Italy’s recent lead and even banned the short-selling of equities.  Brazilian Finance Minister Mantega said the G-20 was prepared to take action to calm the global crisis.  The concerns over the debt levels of Italy, a country which is Too-Big-To-Bailout, are quickly spreading to the US as Citigroup and Bank of America both fell over 15% yesterday.  Personally, I don’t think it’s necessary to bifurcate these two problems much, both the Italian crisis and the TBTF bank sell offs in the US represent the same thing, potential threats to the banks that make up the $700tr derivative market.  The $60tr global economy can take a haircut on billions of dollars in Greek debt, but it simply cannot take a haircut on $700tr in global derivatives sitting on the balance sheet of every major government, hedge fund, financial services company, TBTF bank, insurance company and major corporation that engages in any hedging activity.  Greece, Italy, Spain, Portugal and Ireland could all simply restructure their debt and life would go on were it not for the leverage of the banks that hold them.  In the US, real estate could be allowed to fall to its market clearing price or be written off by the lender were it not for the leverage of the banks that own it.  No matter which way you turn, all roads lead to the TBTF banks, their leverage and the $700tr derivatives market.  Until these issues are resolved, we will continue to go through bouts of panic, instability and market routs.  The entire global economic system is threatened by the continued status quo regarding our TBTF banks and the global derivatives market.  Everything else is just noise.  Governments can be upgraded or downgraded, currencies can rise and fall and equity markets can rally or sell-off.  But if one of the TBTF banks collapses, the game will change immediately to one of fear and collapse as the size of the potential asset write-downs that will follow is simply overwhelming.

What about QE3?

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