Monoline Tsunami Aimed at European Banks

If you skim over headlines in your RSS reader, it's easy to miss this one: "Ackermann warns of monoline 'tsunami'". Ackman is bearish on monolines? Wake me up when you have something new to - oh. It's not Bill Ackman but rather Josef Ackermann, the CEO of Deutsche Bank (DB)? OK, that's news.

Yves Smith explains that the huge complicating factor here is Basel II, which is heavily reliant on credit ratings.

Banks (which bought primarily AAA tranches) can treat AAA paper as a risk free asset; the reserve requirements are minimal. A downgrade to AA increases the reserve requirements markedly, and CDOs are generally downgraded more than a mere grade or two when they fall (I wish I could be more crisp here, but Basel II makes matters more complicated). Thus a loss of the bond guarantor AAA has a quick and nasty impact on bank capital adequacy.

This is a big difference between European banks like Deutsche, which have generally embraced Basel II, and U.S. banks, which are a bit behind the curve on that front. So it's easy to see why Ackermann is worried, and why ECB president Jean-Claude Trichet is trying to tell people not to panic:

"I certainly would not mention anything like waves of tsunami or any other mention of that sort," Trichet said at a press conference in Frankfurt. "The fact that this correction continues along various markets is not something which should surprise us, it's an ongoing process."

If the CEO of Deutsche Bank says there's a tsunami coming and the president of the ECB says there's nothing to worry about, I'd start getting worried.

Comments

[Frogman:]

Look no further than the credit spread increase on the creditex.com...itraxx 5 Yr Crossover...up over 21% this WEEK!! Parabolic move...The ECB's typical "clueless" response to this tsunami that you have pointed to is like when the US was bombing Iraq and that "war minister" said that 'he had America right where he wanted them' as his building was being targeted by a US made Tomahawk...:o) I love it!!...I am short the FXB (British Pound) because of impending rate cuts by "Tricky" the frenchman....but looking for another "surfboard" like play to ride this wave any suggestions?

2008 Feb 10 06:42 PM