European and American Banking Implosion Imminent

Zero Hedge is reporting that there is no way for Europe to avoid a total meltdown of its banking system, which in turn means there is no way for America to avoid a total meltdown of its banking system either.  Of course, this is something Austrian economists have seen coming for a long time now.

Basically the banks have levered up debt by four times the underlying collateral, and then intertwined that collateral with multiple loans issued by different banks.  If I understand the situation correctly (and believe me it is complicated), different banks have used the same collateral to back different loans, which clearly means that if one loan defaults, all the other loans would be left with no collateral backing them.

This means a cascade of defaults will occur across all the major banking institutions and governments of the world, since all of those institutions are intertwined, should Europe default.

This leaves the government and central banks with two choices.  They can either engage in Zimbabwe style money printing and bailouts to avoid any defaults, which in turn will lead to socialist chaos, or they can let the unwind occur, which would lead to a total collapse of the banking system and governments.   There is no middle ground.

The issue with Europe is that there is no central banking authority like the Fed that has the ability to create unlimited bailouts, which leads me to think this might end in a cascade of defaults.

Either way this global ponzi is coming to an end… Soon.

Like within weeks.

If a financial wizard sees something wrong with my layman’s interpretation of these reports, please be sure to leave a comment.

Zero Hedge reports:

Most importantly, this means that now US bonds are now completely irrelevant and don’t need to blow out for the final unwind to occur: all that needs to happen is for European bonds to continue collapsing, which will in turn put the banks who have sold CDS on said countries into bankruptcy,as what selling CDS effectively is is a marginless way of going long the underlying security, i.e. naked longs. And no, ISDA’s attempt to destroy the sovereign CDS market will have no impact as an event of default does not need to occur: banks will simply bleed to death due to daily variation margins demanding more and more and more cash each and every day as spreads blow out wider. Recall that in CDS trading, variation margins has to be posted and positions netted at the end of the trading day with virtually no exceptions. Which means that a CDS trading at infinity (or the underlying bond trading at zero which is equivalent) will put the seller of such product into insolvency, whether or not an actual event of default has been declared, thus making ISDA involvement irrelevant.

At this point we would like to request a moment of silence for Europe (and thus America, which will promptly implode without its transatlantic counterpart) because it is now inevitable that AIG’s fate will be shared by Europe when (not if) global central banks finally lose control of European rates, which in turn will collapse.

And once again, lest we be accused of hyperbole, here is Bloomberg, citing the head of fixed income at Evolution Securities

Thomson Reuters reports:

Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements. What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again. Essentially, it is a chain of debt obligations that is only as strong as its weakest link.

With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.

This Ponzi implosion has been building since the US went off a real gold standard back in the 30’s.


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  • Anonymous

    I, too, am astounded reading about this Shadow Rehypothecation creating this fractional reserve to infinity banker wet dream. I’m trying to undertand it, because it sounds like the collapse. Here some other stories that help:

  • Well, to keep things on the positive side, at least we (Austrians) won’t be blamed for the collapse (hopefully). Smallest silver lining ever but that’s how it goes.