Market Slumps After European Banks Admit They Can't/Won't Raise Capital; Will Proceed With Asset Liquidations InsteadIt was about an hour before the market close, which means it was time for the latest FT rumor. Only this time, unlike the 3 or so times before, the bazooka was not only a dud, it caused the inverse reaction of that intended, and led to a broad market selloff. The reason: according to the FT (and certainly take this with a salt shaker if previous experience is any indication) is that European banks have balked at the prospect of recapitalizing at current levels ("Why should we raise capital at these [depressed share price] levels?” said one eurozone bank boss. The average European bank’s equity is trading at only about 60 per cent of its book value.) and instead will opt for asset liquidations. Now, whether they won't, or, as we have claimed since the first day we heard of the ludicrous "recap" rumors, they can't, simply because absent a massively dilutive rights offering, nobody in their right mind would lend to an industry which continues to be locked out of short-term funding markets for the 4th month in a row, is largely irrelevant. As a result no new money can come in: a key prerequisite to any European recapitalization plans. Of course, it is one for a "blog" to say that, it is something else for the FT to confirm it, even if it is a rumor. So what will banks do instead: why proceed with all out asset liquidation, and sell anything that is not nailed down. The strawman is that this is capital needed to fund the banks' requirements for higher capital ratios per Basel III and what not. The truth is that banks desperately need any capital just to operate as a going concern, forget some Basel Tier 1 ratio that will only be relevant in 2016. So yes: the bitter truth comes out - recap out; liquidations in, especially of USD-denominated assets. Next step: the realization that he who sells first, sells best. So yes, the "hope, idiocy and #mathfail" induced rally was fun while it lasted. And now it is back to reality.
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