You may have heard that some shit is going down in Europe. This came as some surprise to me since I stopped paying attention to that whole continent when the banks were all fixed in December. What could possibly go wrong? I asked myself loudly, to drown out all the "Greece talks near [success / catastrophe]" I'd otherwise be hearing. Well, for one thing, some of those banks actually refused to be fixed just because they were, and I hope I'm representing their claims accurately here, "not broken":
"The fact that we have never taken any money from the government has made us, from a reputation point of view, so attractive with so many clients in the world that we would be very reluctant to give that up," said Josef Ackermann, Deutsche Bank's chief executive, explaining to analysts last week why the German lender didn't borrow from the ECB.
Mr. Ackermann said Deutsche Bank still is scarred from its experience borrowing from the Federal Reserve in the first phase of the financial crisis in 2008. U.S. regulators encouraged banks to borrow under the cloak of promised confidentiality, but when the banks' identities were subsequently disclosed by the Fed, the recipients were dubbed bailout recipients. "We learned a lesson," Mr. Ackermann said.
It's a valuable lesson. While once government largesse was free and secret, we've recently seen all sorts of strings being attached to bailouts, from minor inconveniences like "if you take our bailout we'll make you pay off (some of) your debts" to game-changing restrictions like "I don’t want my tax dollars to be used for some sort of pro-gay stunt like this.”*
But as a result of that lesson, the Journal reports, some of the classier European banks (DB, Barclays, Standard Chartered, etc.) have refused to take three-year 1% money against pretty cats-and-dogs collateral, not because they can necessarily get a better economic deal elsewhere, but because they want to be free to pay zillion-dollar bonuses just as soon as business improves / promise junior mistmakers that they'll be paying zillion-dollar bonuses just as soon as business improves which will be any day now / make "it's halftime in Düsseldorf" ads that don't attract partisan ire / tell potential clients "umm, yeah, you could do your deal with those guys, but did you know that they took a bailout in the form of universally available underpriced loans?" Never fear, though: not everyone let pride stand in the way of cheap money. And I'm sure lots of people would feel great to be on a list with BBVA, Santander, UniCredit, BNP Paribas and SocGen. I'll say it again: what could possibly go wrong?
The European Central Bank’s unprecedented 489 billion euros ($638 billion) in three-year loans has flooded banks with funds, which in turn have been recycled into sovereign bonds, as French President Nicolas Sarkozy advocated on Dec. 9. As a result, investors have made more money on French and so-called euro-area periphery bonds than on bunds, U.K. gilts and Treasuries, which delivered some of last year’s biggest returns.
“The freer funding has been a game changer,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “It was dubbed the Sarkozy trade. What it does is offer breathing space, particularly for Spain and Italy. What helps Italy inevitably benefits France.”
France’s benchmark 10-year bonds yield 2.87 percent, down 32 basis points since Dec. 7, the day before the ECB unveiled its loan plan. Italian and Spanish 10-year bond yields have fallen 34 basis points and 43 basis points respectively.
I kid, I kid: that's not going wrong. That's going right! As a Swiss asset manager helpfully explains a bit later in that article, "French bonds offer significantly more yield than Germany. No chance of a default." And if the intent of the ECB's LTRO funding facility was in fact to get back-door financing to the dodgier European sovereigns (from France on down), it makes sense that the dodgier European banks are the ones taking most of the money - because they have the most patriotic and/or government-strong-arming reasons to actually use that money to buy French/Italian/Spanish bonds.
Which are therefore bulletproof. But even if you thought that French or Italian yield premia might represent a possibility of default, that's okay because banks have to have a capital buffer based on market prices so they should be well capitalized against losses on those bonds. Unless:
European bank supervisors may discuss easing requirements for lenders to hold capital against sovereign debt this week as part of more than 30 meetings this month to track banks’ progress in complying with updated requirements, two people with knowledge of the discussions said. ...
“Calculating the capital needs on the basis of very volatile sovereign yields wasn’t the right thing,” Nicolas Veron, a senior fellow at Bruegel, a Brussels-based economics research group, said in a phone interview.
So, I don't know. Like I said I stopped paying attention to Europe and am now going back into eurohibernation until there's another headline about Greece which, I mean, what are the odds of that happening this week. But against the backdrop of the Sarkozy trade and debates around capital treatment for sovereign bonds, Deutsche's/Barclays'/etc. decision to avoid this morass entirely looks appealing, and not just from the perspective of avoiding restrictions on comp. If you've got a bank financing program that is predicated on providing attractive loans for trashy assets - and you've got pretty clear government support for acquiring trashy assets, or at least assets that give some people some indigestion, with those loans - then taking out those loans doesn't just suggest that you might be dangerous because you needed the money. It also suggests that you might be dangerous even if you didn't need the money - because you're using it to get further bound up with your dodgy sovereigns. And if you've got a brand that is better than that of a lot of European sovereigns, cheap funding may not be enough to convince you to do that.
* Okay that last one is fake. While I've got you here, though: is anyone else surprised that it took over 36 hours of public Lloyd support for a court to rule in favor of gay marriage in California? Seems slow for the Government Sachs I knew.