Seeking Alpha

Cheap or value trap? The market cap of the entire European financial sector ($360B) drops below...

Cheap or value trap? The market cap of the entire European financial sector ($360B) drops below that of Canada ($377B). Total EU GDP is about 8.5X greater than Canada's.
Comments (9)
  • neutrinoman
    , contributor
    Comments (700) | Send Message
     
    The entire European financial sector's market cap should be < 0.
    25 Jun 2012, 01:41 PM Reply Like
  • bbro
    , contributor
    Comments (10231) | Send Message
     
    Don't buy until the EU-17 economic sentiment indicator breaks its 9 month moving average on the upside...
    25 Jun 2012, 01:42 PM Reply Like
  • Tack
    , contributor
    Comments (14237) | Send Message
     
    bbro:

     

    Usually, there's lots of price action before sentiment catches up. People get happy AFTER they see positive moves.

     

    Where does one get that value, anyway?
    25 Jun 2012, 01:50 PM Reply Like
  • woop
    , contributor
    Comments (45) | Send Message
     
    Or perhaps Canada's financials are overvalued?
    25 Jun 2012, 01:58 PM Reply Like
  • winningtrader
    , contributor
    Comments (2476) | Send Message
     
    haha ... this is the most likely thing actually as the European financial sector is not cheap.
    25 Jun 2012, 05:03 PM Reply Like
  • GaltMachine
    , contributor
    Comments (1250) | Send Message
     
    These banks were far more levered up (40 to 1 and up) with "zero risk" sovereign bonds (Greek, Spanish, Italian, Portuguese, etc) than anything that happened on this side of the ocean so is it any wonder that people don't have a clue as to what they are really worth?

     

    What should happen is that the common shareholders get wiped out and perhaps less senior bondholders get a haircut but the depositors get protected when these things are nationalized, but what will happen is anybody's guess.

     

    I believe this is what the Swedes did with their banking crisis in the 90's.

     

    http://bit.ly/KXIrwy
    "During 1991 and 1992, a housing bubble in Sweden deflated, resulting in a severe credit crunch and widespread bank insolvency. The causes were similar to those of the subprime mortgage crisis of 2007-2008. In response, the government took the following actions:[1]

     

    The government announced the state would guarantee all bank deposits and creditors of the nation’s 114 banks.
    Sweden's government assumed bad bank debts, but banks had to write down losses and issue an ownership interest (common stock) to the government. Shareholders at the remaining large banks were diluted by private recapitalizations (meaning that they sold equity to new investors). Bondholders at all banks were protected.
    Nordbanken and Götabanken were granted financial support and nationalized at a cost of 64 billion kronor.[2] The firms' bad debts were transferred to the asset-management companies Securum and Retriva which sold off the assets, mainly real estate, that the banks held as collateral for these debts.
    When distressed assets were later sold, the proceeds flowed to the state, and the government was able to recoup more money later by selling its shares in the nationalized banks in public offerings.
    Sweden formed the Bank Support Authority[3] to supervise institutions that needed recapitalization.
    This bailout initially cost about 4% of Sweden's GDP, later lowered to between 0-2% of GDP depending on various assumptions due to the value of stock later sold when the nationalized banks were privatized.

     

    The economists Brad DeLong and Paul Krugman have proposed the Swedish experiment as a model for what should be done to solve the economic crisis currently affecting the United States.[4] Swedish leaders who played a role in devising the Swedish solution and have spoken about the implications for other countries include Urban Bäckström and Bo Lundgren."
    25 Jun 2012, 02:01 PM Reply Like
  • winningtrader
    , contributor
    Comments (2476) | Send Message
     
    When that happened in Sweden, the rest of the world was growing and managed to pull the small economies of the few countries that were in trouble out of their recessions/depressions, etc. Who is going to pull the much bigger and badder economies of Europe, Japan and the US out of their current troubles .... aliens anyone?
    25 Jun 2012, 05:06 PM Reply Like
  • GaltMachine
    , contributor
    Comments (1250) | Send Message
     
    winning,

     

    I guess it is the lesser of two evils since both alternatives are horrible but one is less bad. It's going to happen eventually anyway so prolonging the inevitable just makes the ultimate resolution that much more painful.

     

    Wiping out shareholders or socializing losses? Should the public foot the debt bill or let the banks and their enablers suffer?

     

    No good answers but I suspect that we would be better off in the nationalization scenario because it would be more acceptable to the people once they understood the alternatives. No banking panic, depositors are protected, and most bondholders are kept whole while the commons are wiped out.

     

    John Mauldin has nailed this EndGame scenario years ago and it is now that the rot is revealing itself. One way or another there will be pain in Spain that does not remain on the plain.
    25 Jun 2012, 05:19 PM Reply Like
  • bob adamson
    , contributor
    Comments (4559) | Send Message
     
    GaltMachine gives an excellent summary of the measures taken by the Swedish Government to restructure its banking system when its private banks were faced with massive defaults by Soviet Bloc borrowers with the implosion of the communist economies. He makes a good case that the US can make real progress in resolving the huge imbalances in its banking system by adopting analogous measures.

     

    Winningtrader quite accurately describes why the US would have significant economic problems implementing such policies – size and scale matters. It needs also to be noted that the US constitutional system lacks the flexibility of that of a medium sized unitary State such as Sweden and that this legal rigidity and complexity is greatly compounded by the US political culture that would not easily countenance the sort of rapid and decisive government intervention such as occurred in Sweden. It is worth noting that the EU faces an analogous set of size and scale, constitutional and political impediments to those faced by the US in this regard.

     

    The conclusion, however, need not be that the 1990s Swedish experience has no relevance to the US, UK and EU. In essence Sweden adopted on the fly and through quick, decisive and well thought through actions by its executive arm of government (supported in a timely fashion by the legislative arm and the central bank) a streamlined procedure analogous to the more cumbersome and protracted bankruptcy proceedings available through the courts in most advanced western countries. Larger or more complex political entities such as the US, UK or EU can follow an analogous course but first they each must go through the difficult and undoubtedly protracted process of establishing a legislated framework for such intervention (i.e. the ad hoc quick intervention along Swedish lines is not practical but it is possible, but by no means easy, for the necessary measures to now be legislated into law so that, should a 2008 style crisis should occur again at some point in time, public policies and executive structures and mandates will be in place so that US, UK or EU authorities can act effectively).

     

    Obviously the forgoing alone would not resolve the difficulty that winningtrader describes. All that really can be said on this score is that while the US could not have in 2007/8 resolved its banking crisis as smoothly ad Sweden did in the 1990s even if the US had the sort of legislative framework in place that I've tried to describe above, the US could have responded better than it in fact did during the 2007-10 period if such a framework existed at that time.
    18 Jul 2012, 02:00 AM Reply Like
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