French Banks Deserve the Skepticism
Janet Tavakoli, president of Tavakoli Structured Finance, is also feeling déjà vu. She gave Benzinga Radio her insights from inside the finance world on the dual banking crises in Europe and the United States.
For Tavakoli, this isn’t a new crisis but rather the continuation of the same one that arose in 2008:
“The things that caused the crisis in 2008 are still following through [financial] systems to cause problems today. The artificial pump-up in stock prices that you saw due to money-printing and what appeared to be a temporary recovery was in no way a real recovery. We haven’t had improvement in the United States in unemployment, and we haven’t had any real productivity gains. What we have seen is the financial services sector become a much larger portion of the overall economy.
This is true for Europe as well, and there is widespread linkage between American balance sheets and those of Europe. Surprisingly (or perhaps not), there has been little to no reform in this area. Tavakoli:
One thing to keep in mind is the censorship that [has occurred] in the media. The word “interconnectedness” was almost censored out of the financial reform in the United States and you also don’t hear it much in Europe.
When AIG was bailed out, for example, Societe Generale was one of the major beneficiaries, along with Goldman, of the tens of billions of dollars that were transferred from AIG to the banks. If AIG had gone under, any reasonable liquidator would not only not have made new payments to those banks, it would have looked at collateral payments that were already made that they thought had hedged their positions and would have said ‘We need to examine the CDOs because this is a classic situation for fraud, we’re going to claw back that collateral and decide how much we will settle with you for – and it’s going to be 20 cents on the dollar or at most 40 cents on the dollar.’ Yet all of [the banks] got payouts that, in sum, were 100 cents on the dollar. It’s unconscionable.
When you look at the global banking system, it’s very interconnected and the problems of the US banks are in many ways the problems of the European banks – which means assets aren’t being marked to their fair value, they’re getting low cost funding which is basically subsidizing them, there were no consequences for maleficence, so that has just encouraged people to look for big bucks and maleficence in other areas. So now you see that kind of activity bleeding into derivatives, currency trading and derivatives, commodities trading and derivatives, and into regular interest rate derivatives and credit derivatives.
Let’s not forget that there is currently a whopping $700 trillion worth of notional value derivatives on balance sheets.
A lot of games are still being played in the global financial system, and none of these banks are really well-managed, none of them are in any way well-regulated, and all of these problems are coming home to roost.
Of course, these banks are so closely linked that the failure of one entity threatens the entire system. Sovereigns are forced to bail the banks out, taxpayers foot the bill… We know how this works.
But this story at least provides some clarification on all the rumors currently swirling around France’s biggest banks (which are some of the largest in the world). Here’s Tavakoli:
“I don’t know for a fact whether the rumors are true or not. What I do know is that because we know there is this risk in the system, these rumors are going to persist. And if Societe Generale isn’t the target, the next one will be Dexia or Depfa. But the reason these rumors are circulating is we never reformed the banking system. We don’t trust bankers to disclose their risks.
We have a crisis of confidence because we’ve had bank CEOs say that they didn’t understand the risks of subprime mortgages, derivatives, and other things that were on their balance sheets.
Until you can trust that assets are worth the ratings they have, that they are being priced accurately, and that securitized assets packages are worth what people are trying to sell them for, the system is going to be pretty much frozen and vulnerable to rumor and innuendo. [Bank executives] can complain about rumors all they want, but they themselves were the source of the merit of past rumors.”
When you put it that way, these rumors actually seem quite logical: investors don’t want to be fooled again, and banks aren’t giving them any real information. But the question remains:
How many more puffy media interviews, conference calls and laughably dishonest letters to staff will we have to endure before these banks start to implode?
Be sure to check out the audio of the interview in its entirety: Janet Tavakoli on French Banks, Bank of America, Current Comparisons to 2008
Subscribe to the Benzinga Attention podcast feed in iTunes: Benzinga Strategies
And for our full range of podcast content, visit the Benzinga Radio homepage.
© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.