RBS Warns: Sell Everything

[original mungerville]

I'm surprised that nobody's discussing the virtues of European banks here.

 

I've been accumulating SAN/BSBR the whole way down through additional purchases and reinvested dividends.

 

I'm short SAN, DB and CS and think Europe is on the verge of a banking crisis.

 

Why a banking crisis in Europe? Spreads are blowing out on subdebt...something looks potentially very wrong; bank stocks are tanking. Why a crisis?

[james22]

Jurgis, how concentrated are you nowadays and what's your cash balance?

 

Click on the link next to my picture. Will update for January over the weekend, but hasn't changed much.

 

Really like the portfolio overviews.

 

I've relied on reviewing my thinking by reviewing my posts (on another forum), but you've convinced me to begin more formally doing something similar.

 

Thanks.

[original mungerville]

Ni-co, I want to discuss. Something feels weird but Why a banking crisis?

[JBTC]

Belatedly those "best" stocks are heeding the call.

 

SBUX -7%, NKE -5%, FB -6%, HD -4%

 

Is this capitulation or the start of a more serious leg down?

 

 

[ni-co]

Ni-co, I want to discuss. Something feels weird but Why a banking crisis?

 

Big picture, I think, is negative rates causing banks with thin Tier 1 capital layer to lose money, thereby triggering further regulatory capital requirements.

 

At the same time, from 2014 onwards, they almost all have begun financing their T1 capital requirements with CoCo bond issues. Those bonds are a fucking nightmare. They are accepted as T1 capital because when there is too little T1 capital ("trigger event") the bonds are either written off completely or automatically converted into common shares (this depends on the features of the single issue; most are converted).

 

Thing is, the ones that will be converted give bond holders a huge incentive to short the stock. This is a known problem called "the death spiral" (see reverse convertibles in the 1990s). But even the CoCos that are not converted are in danger of being written-off completely when it becomes more clear that the trigger event will actually happen.

 

This is all happening now. Yields on CoCos just exploded. Consequently, for the next few years there is no chance in hell that banks will be able to sell additional CoCos to prop-up their Tier 1 capital. The only option remaining is therefore the issuance of new equity. Well, good luck with that!

 

It wouldn't be that bad were it not for the fact that capital markets are closing for those banks exactly at the moment when they need them most (which was completely foreseeable at the point when the CoCos where "invented", s. this FT article from 2009 (!) where one guy calls them "equity time bombs": https://next.ft.com/content/833b6f8e-ca34-11de-a3a3-00144feabdc0).

 

Add to this that market participants know that tangible book values of the European banks are phony. They are loaded with bad assets that have never been written off. Nearly all the Europen banks need to be recapitalized and you can kick the can down the road only for so long. Then, have a look at DBs derivative book (mostly obscure OTC derivatives) which is the largest or second largest in the world with a nominal amount close to world GDP. They say it's mostly "netted-off" but this is only true as long as no counterparty's failing.

 

Take all this together and you may see why I don't want to own any of the European banks.

 

[Edit: Almost forgot: I'm worried that in the event of a systemic crisis European banks are too big to be rescued by their own countries since their books are several times GDP in a lot of cases. This is completely different from the US financial crisis and I think it's the reason why they haven't been recapitalized so far – it is very comparable to Japan from the 1990s onwards.]

[John Hjorth]

ni-co,

 

Thank you for a very good post here. Actually, I think investing in European banks nowadays could deserve it's own separate topic in the General Discussion forum, so I suggest that you repost your last post above as a starting post in a separate topic.

[ni-co]

ni-co,

 

Thank you for a very good post here. Actually, I think investing in European banks nowadays could deserve it's own separate topic in the General Discussion forum, so I suggest that you repost your last post above as a starting post in a separate topic.

 

Thank you. Done. See this thread.

[John Hjorth]

ni-co,

 

Thank you for a very good post here. Actually, I think investing in European banks nowadays could deserve it's own separate topic in the General Discussion forum, so I suggest that you repost your last post above as a starting post in a separate topic.

 

Thank you. Done. See this thread.

 

Thank you for the topic split, ni-co. I think it's important [- at least for me].