Sept. 10 (Bloomberg) --
DeutscheDouche' Bank AG is considering a stock sale of as much as 9 billion euros ($11.4 billion) to boost its stake in DeutscheDouche' Postbank AG and meet stricter capital rules, said three people with knowledge of the talks.
Yeah, the clown-car brigade continues.
The Basel III requirements, of course, are what's on the table here. Or are they?
Simply put, they're a joke, just as are our "capital rules." The real bottom line number is the total leverage permitted in the any given institution including both on and off-balance sheet exposures, plus all non-nightly-margined, non-exchange-cleared derivatives.
Because off-balance-sheet exposures are real and so are derivatives if they're not margined each night with cash at the maximum reasonable expected change in value for tomorrow.
That's the only way you can reasonably know that the position you hold is in fact "money good" - that is, the other party on the other side will be able to pay. Even this, of course, isn't completely safe, in that you might be wrong about that maximum possible change, but it sure beats what we have now, which is a pure joke in that no cash margin is posted at all and everyone claims to be "hedged" with someone else.
This produces the sort of dislocation we had in the fall of 2008 when someone like AIG gets in trouble, exposing the fact that these claims of "hedging" are fallacious.
If it conducted a 9 billion-euro capital increase, Deutsche Bank would have an estimated core Tier 1 capital ratio, which excludes hybrid instruments, of 9.2 percent, declining to about 7.5 percent after so-called Basel III rules are introduced, Bank of America Merrill Lynch analyst Derek De Vries wrote in a note to investors today.
Yeah, right. You're going to tell me that Douche Bank's actual leverage ratio is about 11:1 after this? Pure nonsense.
Incidentally, what is Douche Bank's actual current leverage ratio? Count all off-sheet activities, count all contingent liabilities that they're on the hook for, and count all derivatives that are not known-good via posted margin. Good luck figuring it out - I've been unable to do so.
Incidentally, if you remember Bear Stearns blew up with a roughly 33:1 leverage ratio, as did Lehman. Also incidentally, both firms were considered "well capitalized" at or immediately before they detonated, which means they had a formal Tier 1 ratio of 6% or better.
If this doesn't put the "liar" light on in your head you're pretty dense; a 6% Tier 1 ratio makes the absolute maximum leverage that is possible, assuming nobody is lying, at just under 17:1.
So where did the other half of the leverage come from?
Un-margined positions - that is, off-balance sheet crap and derivatives - that were not counted, but are nonetheless real exposures and real risks.
Then we have this nice piece on the wire this morning about courts becoming increasingly closed to litigants claiming corporate wrong-doing:
Twombly-Iqbal now moves it to the motion to dismiss based on a single document, the complaint, with no opportunity for discovery, said Miller, who is also special counsel to New York-based law firm Milberg LLP, which represents plaintiffs in securities litigation. Its becoming a big battle.
The Chamber of Commerce says suits deserve more scrutiny in part because of the expense incurred by defendants in discovery. A report the group co-sponsored this year found that the discovery cost in 20 cases involving major companies averaged $621,880 in 2008, up from $488,847 for 15 cases in 2004.
Why would discovery be so expensive? Oh, mostly because corporations want to hide evidence and thus spend huge amounts of money litigating subpoenas, trying to quash them. Actual production of documents is chargeable to the subpoenaing party at a reasonable cost, so there's no issue there of materiality.
No, the real issue is that corporations, when sued, will fight tooth and nail to prevent the information being sought to prove the case up - one way or the other - from being disclosed at all.
Don't take this to indicate that I support the sort of ambulance-chasing BS that many attorneys engage in. I don't. There's a lot of abuse in the legal system, and plenty of frivolous suits are filed. But in Federal Court these are at least somewhat dangerous, as judges can and do sanction frivolous filers (this is far, far less likely in State Courts, unfortunately.) But the solution to legal abuse is not to bar the door for filing in the first place by forcing a plaintiff to plead facts that he can't obtain until after discovery takes place! Indeed, that makes a mockery of the legal system - the entire purpose of discovery is to turn allegations, which one files in an original pleading, into supportable conclusions using the information gained from the discovery process.
Finally, let's deal with the tax crap that is flying around. The silly season (that's called "campaigning") kicked off officially yesterday, the day after Labor Day. The claim being made is that we "must" provide even more tax cuts to "spur economic activity."
The Right's claim is that lower taxes "always" lead to more economic activity, while the Left's claim is that "we can't afford" to extend the Bush Tax Cuts.
Both claims are half-truths at best.
First, let's dispense with the Right. It is obvious that if you were to cut taxes to zero receipts would also go to zero. Therefore, the premise that "tax cuts always increase revenue" is a lie. The question is in point of fact what is the tax rate that produces the maximum economic efficiency - that is, at what point does increased taxation result in the modification of behavior such that the total amount of economic activity subject to that tax, and thus the revenue collected, decline?
Nobody has that answer available when asked and the idiots on the TV don't ask the question at all. But what we do know is that the Bush Tax Cuts resulted in roughly half ($300 billion) of the Bush-era deficits and that placing the government into deficit was an intentional act, as Greenspan was worried about surpluses!
That is, he was worried about not being able to play Wizard of Oz behind the curtain, manipulating government borrowing rates and thus influencing them across the economy. Without the need for the Treasury to continually sell bonds into the market, The Fed has nothing to tamper with.
Thus the dirty secret: The Fed wants chronic deficits at the Federal level, because without them there is no bond market activity they can manipulate in order to effect their "monetary policy", and they are forced to instead actually regulate the banks under their supervision.
Of course some people would argue that if a little of something is good a lot is better. Drunks and other drug addicts make this argument all the time, and most of them eventually die from it. Governments do it too, and wind up with their central bank effectively operating both monetary and political policy!
This cycle fails when confidence is lost - that is, when the world in the general sense is no longer willing to believe that the man behind the curtain is a mighty wizard, but rather come to understand that he's a little mouse of a midget with an even smaller set of balls.
That's when the walls (and markets) come tumbling down.
The Left, for its part, seems to think that we can increase taxes without economic impact. Of course that's false too. A dollar that the government taxes is a dollar that the private economy cannot allocate - oh it gets spent all right, but the government choose where, how and usually by who.
The problem with the Left's position is that the underlying falsehood isn't that we "can't afford" the existing tax structure - it is that there is no tax structure that will produce enough revenue to close the deficit gap at the current level of spending! That is, in order to actually meet the spending numbers ($4 trillion more or less, or about 30% of GDP) taxes would have to rise well beyond the point where economic activity would be deterred, and that deterrence would cause the budget as a percentage of GDP to rise. This enters and in fact reinforces a vicious spiral that leads to national insolvency.
At a macro level we need to dramatically reduce federal spending to that level which can be sustained by taxation less about 3-5%. This will slowly pay down the deficit over the space of years. The Fed needs to be told to***** off on their concept of manipulating the bond market via Treasury sales. If we are going to have such manipulation it has to be done BY TREASURY under Congressional oversight. That is, either The Fed has to cut this crap out, or it has to be de-certified as an "independent" Central Bank and brought under Treasury as an arm thereof, where Congress and the CBO will have full access, and the people will have full transparency, into all of it's operations.
But this mathematically-provable correct set of actions is political anathema to both sides. The Left will not stop with the handouts and the Right will not stop trying to buy votes with "tax cuts." Both therefore, despite claiming that "deficits are bad", in point of fact are the creators of those same deficits. In other words both the Left and Right are lying through their teeth.
As a result we're going to play the drunk on the road.
The drunk starts out driving straight, but soon hits a small imperfection in the pavement. This sets up an oscillation in the vehicle, and he over-corrects (since he's drunk) which moves the vehicle too far in the other direction. That in turn causes another overcorrection and this cycle continues until the drunk either reaches the limit of the vehicle's stability (and rolls it) or goes wildly off the road and strikes a tree.
Since we keep drinking more as an economy (debt and deficits) the violence and incidence of these "undesirable outcomes" is going to continue to increase. We had one nasty in 2000, and then again in 2007. From the so-called "recovery" (2003) to the onset of the last mess was about four years. We're now about two years in from the so-called "bottom" of this latest train wreck (Lehman), and if we keep on-path, and we are as the below chart shows, our fuse should go inside the box for this next mess somewhere between now and the end of 2011.
I hope you're ready, because this next one, coming with no real recovery having taken place in employment or private economic activity, may be the one that takes us well beyond the misery we suffered in the 1930s.
And if it does, it will be our - that's right - our - fault, since we simply will not accept that there is no such thing as a free lunch.
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