Month: March 2015

Weekend reading links

Excellent: David Stockman on the Heinz/Kraft merger

Red-flags: FT-Alphaville on Rocket Internet’s corporate structure (also see my post on RI here)

This is how you deal with a crisis: Moscow major fires 3000 civil servants and cuts wages (Disclosure: Long RUB)

Not worth much: Interesting article on Piraeus bank and the “negative goodwill” item I discuss in my posts (h/t Klaus Kastner)



Must read: Eric Falkenstein on Piketty

Just read this fantastic post on Piketty’s book by Eric Falkenstein. He tears apart Piketty’s nonsensical work (the guy seriously believes it is a law of nature that the return on capital (r) is  bigger than the growth rate (g) in the economy  over the long run) step by step. Falkenstein’s arguments touch a variety of topics and show that he possesses tremendous interdisciplinary knowledge.

Read it. Memorize (and understand) his arguments and confront your egalitarian friends with them!


Has the US banking system really been “fixed”?

This excellent post by spontaneous finance (SF) is about the absurdity of current (and future) banking regulation rules. Spontaneous finance has some excellent posts on this topic and I recommend them all.

However, I do not want to talk about the topic of the post, but about the table at the bottom of the article because I think it has a big effect on market participants’ perception of the problems of the Eurozone.


It shows the “risk weighted assets” (RWA) as percentage of total assets for various global banks. As you can see, US banks use much higher risk weights than their European counterparts, i.e. they seem much more conservative. Given that – as a consequence of nonsensical regulation – banks have a lot of leeway in assessing RWAs the market thinks that European banks have some issues – otherwise they would not play with the numbers (models). Conversely, US banks look as if they can afford higher weights and therefore the market basically assumes US banking problems have been “fixed” (by the fed).

Now, I do not want to dispute the core assumption that European banks try to hide behind favourable self-assessments – they probably have to. I also agree that some of those US banks listed in the table (notably Wells Fargo, one of Warren Buffet’s main investments) indeed look fine. But I think it is wrong to deduce from this that the US banking system as a whole is much healthier than Europe’s, something we hear day in and day out from people who use the alleged health of the US banking system as a proof that the solution of Europe’s problems is the “United states of Europe,” i.e. more competences to the ECB or any other central authority.

My thesis rests on two simple arguments:

  1. Bank balance sheets of US and EU banks are not comparable without adjustments
  2. More importantly: the mortgage market in the US is outside the (private) banking system

Ad 1.)

As SF mentions, there is a big difference between IFRS (used by European banks) and US-GAAP when it comes to the treatment of derivatives. Whereas US-GAAP allows for netting of derivative liabilities and assets, IFRS requires them to be stated gross on both sides of the balance sheet. This matters especially for banks with huge investment banking operations, such as UBS or Deutsche Bank (DB) which, presumably for this reason, also rank at the bottom of the table above. In the case of DB, for instance, the difference amounted to 30 percent of their total assets at the end of Q3 implying that their RWA/total assets ratio would have been some 40 percent higher, had DB reported under US-GAAP.

But still, even if we adjust European banks’ ratios accordingly, US banks seem to have significantly higher ratios. Why?


I think the main reason why US banks look better has to do with the fact that European banks also hold mortgages on their balance sheet, whereas in the US mortgages are mainly underwritten by state agencies (Fannie and Freddy) that are usually not included in US commercial banking sector analysis. And mortgages have very low risk weights. Funnily enough, I could not find the risk weighted assets for Fannie and Freddie (I gave up after half an hour) on their IR pages to compare them to their overall assets (this alone makes me suspicious, maybe somebody familiar with the US banking system could provide me the figure). To illustrate: these monsters, both significantly larger than DB, have had negative equity until recently and total assets to equity ratio well over 50x suggesting that they are very thinly capitalized. And still a potential problem, if you ask me.

In my view,  the fact that they repaid the money received during the financial crisis proves nothing, as I can only imagine the tremendous political pressure exerted on management and regulators to repay tax-payer money. Politicians like success stories (and probably to show Europeans how “it is done”). Given these incentives, it is likely that dividends were paid out of capital.


When comparing the health of the US and European financial system (and, hence, assess the likely path of monetary policy), it is not enough to just look at private commercial bank statistics, as is usually done. This is due to the differences in mortgage markets explained above. Just comparing commercial bank balance sheets would suggest that EU banks are less conservative in their use of internal risk models. This is legitimate when comparing individual banks, but leads to nonsensical conclusions when talking about the financial system overall. Without including Fannie and Freddie, no statements about the US banking system can be made, especially after the experiences of 08/09. These are not risk-less entities and have a tremendous effect on the system. If anything, the fact that they are controlled by government probably means they are more risky. I find it puzzling that nobody seems to care about them anymore.

Including Fannie and Freddie’s assets (and their sliver of equity) in the analysis would probably show that the US financial system is as little fixed as the Euro banking system. Maybe that’s the reason why the fed has been accommodative for so long?

Follow up on Greek debt

This post is a follow-up to this post.

I read a very interesting article in FAZ during the weekend (unfortunately only in German). It quotes Mr Varoufakis, the Greek finance minister, saying that the letter to the Eurogroup was deliberately formulated in an opaque way. He further claims that he was encouraged to do so by various representatives of EU governments, as this would make it easier for them to push “this trough” their respective parliaments. Checks and balances anyone?

Is he lying?

I sincerely believe Varoufakis is telling the truth. As I have written here, the representatives of the creditor countries have an interest in pushing out the inevitable write-off. This is made possible because of nonsensical GDP accounting practices that do not know the concept of provisioning against expected losses and losses are only recognized when definitely acknowledged. I wrote that the rules are deliberately nonsensical such that the ruling classes can stay in power despite unsustainable policies. Voters will only realize that the money is lost when it increases their budget deficits and leads to tax increases, until then the loans are just (abstract) headlines in newspapers. So much for homo oeconomicus and policy irrelevance

No doubt, money will continue to pour down this bottomless hole, unfortunately it will do nothing to revive the Greek economy…