Wall Street does not get the eurozone crisis yet as Goldman Sachs reports Q3 loss
Posted on 18 October 2011 with 3 comments from readers
Goldman Sachs reported only the second loss in its 12-years as a public company in Q3 losing $393 million, the first deficit since Q4 2008 in the global financial crisis. However, financial markets now look on the brink of another meltdown as soon as next week.
Wall Street is expecting a swift resolution of the eurozone sovereign debt crisis after the summit this weekend. But German officials are already warning that this is a ‘dream’ and that the outcome will fall short of a full solution.
Up for a fall
The market is therefore setting itself up for a big fall and Goldman is likely to find Q4 every bit as challenging as Q3. Even the ultimate insider has lost money recently trading equities and mortgage-backed bonds. In July Goldman said it was planning to axe 1,000 of its 34,200 staff.
The Q3 drop in the stock market ended in a strong rally on hopes that the eurozone was really getting its act together with plans to recapitalize banks and leverage a bailout fund. Yet this is far from a done deal and the wisdom of piling debt upon debt like in the US is not widely accepted, contrary to US reports.
When the markets fail to get what they have already priced in next week there will be blood on the street. The dollar and bonds will strengthen and commodities will sell-off, including gold and silver.
US analysts simply hear what Treasury Secretary Tim Geithner tells them and actually think he might have succeeded into railroading the eurozone into repeating the folly of debt to solve debt. In truth the eurozone leaders have minds of their own and no consensus view except for pointing out that the US is in far worse economic shape than the EU.
Weak balance sheets
That might be true at the macro level but at the micro banking level eurozone balance sheets are very stretched indeed with leverage at many top eurozone banks way past the level that brought Lehman crashing down three years ago.
Nationalization is clearly awaiting perhaps 80 per cent of the eurozone banking sector but it will need a crisis to make it happen. Nobody will ever accept the blame for doing it pre-emptively. That wipes out the shareholder value of most ot the banking sector. It will also severely restrict credit precipitating a deep recession in business activity.
Once Wall Street finally gets the eurozone banking problem – rather than thinking it can inflict its own self-serving cure-all – then we will have a crash.
3 Comments posted by readers:
Jim Cramer, when asked how hedge funds were preparing to make money on the coming bank stock collapses in Europe, since short selling them there has been banned, answered, “Buying credit default swaps.” That could spread the problem everywhere.
Paul B. Farrell has another dire warning article at http://www.marketwatch.com
It’s something of a relief to hear about the Stock Market crash! This crash seems to have been coming since 2008 but hasn’t.
It is tedious to watch gold and silver prices falling again and again as investors exit the stock markets. It will be a relief to see the crash and, then, to experience the last fall in bullion prices.
When you say that the dollar and bonds will strengthen on a stock market crash, I presume you mean the dollar and dollar-bonds will strengthen.
However, who will trust US Treasuries for long after the Stock Market crashes? Who can be sure that the US will be able to repay its bonds without hair-cuts to its bondholders in, say, a year or two’s time?
It’s total debt of, what, $14 trillion is surely an underestimate since it doesn’t not, it cannot, factor in the CDS in US banks.
Hmm. Wall St. banks may be “expecting” swift resolution but a better verb here is “HOPING.” The resolution won’t be there, as the terms are Dead-On-Arrival. So yes, Wall St. is now setting itself up for a fall.
For the past two+ years, Wall St. banks have been selling CDSs to European sovereign nations and to the big Euro banks. So it should come as no surprise that Wall St. wants badly to perpetuate the “status quo” in Europe. For those reasons, it’s in the best interests of the big Wall St. banks to continue pumping as much fog as possible into the eurozone banking problem.
GS obviously lost far more than they are reporting; balance sheet and P&L statements not withstanding. Will we ever know how big the GS Q3 “loss” really was? I highly doubt it.