European banks are exposed to Greek and other peripheral sovereign debt. Their leverage is very high and quite dangerous. The official pledge by European leaders to recapitalize the banks puts even more pressure and focus on the old continent.
In the US, banks have been hit harder at the beginning of the crisis, and with lower leverage, it now seems that they have moved forward. Well, it seems that they have moved forward in sophistication:
Bank of America
Like in Europe, Bank of America denied it needed more capital. The investment from Warren Buffet was probably not enough. After the markets closed for the week, BAC announced that they would issue $2.8 billion in shares. that will eventually raise the Tier One Capital.
This is a good move, but it still raises questions about the previous denials, and raises another question: what else are they hiding?
Morgan Stanley (and others)
In recent months, worries grew also about the soundness of US banks. This was reflected in a lower value for their bonds. This also means that future bond auctions would cost more.
But apparently there’s good in every bad: if your debt is worth less, this is a profit. Amazing! Here is the explanation by Richard Woolnough:
In their defence, the banks can argue that they have made a gain because they have sold debt to bond holders who have made a loss. Indeed, if they could buy back the debt at these lower levels they would crystallise the gain.
But can they buy back their debt? It’s questionable. In the case of Morgan Stanley, 98% of their profit.
US banks may have learned a few lessons from the crash, but it’s good to see that they remain highly sophisticated…
Further reading: Leverage of Global Banks by Jean-Pierre Chevallier (in French, but the numbers speak for themselves).
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