In Between Days: A Global Bear Market, G20 Pledges to Do Something?

by CC September 23, 2011 12:03 am • Commentary


While the S&P 500 would still need to drop another 4% to 1,090.89 in order to officially enter bear market territory, global equities led by weakness in Europe and Asia now find themselves in an official bear market.  The Bloomberg World Index, which is a capitalization weighted index of all equities tracked by Bloomberg, is down nearly 4% today, and it is down 21% from its closing high on May 2nd.  The threshold we’re using here for a bear market is a 20% decline that was preceded by at least a 20% rally.

The Economist

LAST night Herman Van Rompuy, President of the European Council, addressed a packed audience in New York. In person, he is surprisingly winsome and self-deprecating—”I am charismatic. I am just the only person aware of it.”—but it’s hard to escape the conclusion that Europe’s leaders simply do not grasp the enormity of the euro crisis.

Incredibly, Mr Van Rompuy didn’t even talk about the euro until after forty minutes, and even then it was only to repeat the same old EU mantras: Greece will not default because it cannot be allowed to default (ruling out a basic step that this paper and many others see as necessary); more integration and monitoring will solve the crisis; Eurobonds are not necessary or useful. At no point did Mr Van Rompuy acknowledge the severity of the crisis—record CDS spreads, collapsing confidence in European banks, over 5% rates on 5-year Italian bonds and so forth—or suggest that Europe would be taking quick, effective action…

…With the IMF upgrading its estimate of European bank losses, major insurers openly pulling their deposits from euro-periphery banks, and a EU double-dip becoming increasingly likely, it’s fast becoming clear that Europe’s can-kicking exercise has run out road. The continent’s leaders, however, still seem to be in deep denial about the urgency and gravity of the situation, blinded, perhaps, by teleological expectations of an ever-closer union.

Talk of opportunities to use this crisis to create a EU Finance Minister “with much more power and influence” may warm euro-federalist hearts, but it doesn’t offer a realistic solution to the euro’s near-term problems.

Business Insider

There’s a totally baseless rumor going around that Morgan Stanley is about to issue a press release about their French bank exposure.

We have no idea if that’s the case, but the stock is tanking, and not helping things is this ZeroHedge post about Morgan Stanley’s exposure to French banks… which have been getting killed.

According to Morgan Stanley’s latest 10K, which has the figures as of December 31 2010 (check them out below), the bank has $39 billion in exposure to French banks, up $30 billion since 2009…

…It’s important to note that the 10K data materially distorts actual exposures in many ways. The distortion is primarily because the 2010 10K is out of date. It did not include the updated 1Q11 data, which shows that MS shrunk these gross exposures by $17.4bn during 1Q11 to $21.6bn.


1) in OTC derivatives, the data excludes the netting of offsetting positions (i.e. netting long and short positions against each other) and collateral – a huge flaw given the large gross numbers associated with derivatives

2) the FFIEC data includes only one side of reverse repo positions, not factoring the offsetting “matched book” positions – another large overstatement

3) the data does not include hedges on loans such as CDS protection purchased; and 4) this data includes cash deposits by MS at French banks – a materially lower risk than making a loan to a French bank.

After adjusting for these flaws, Morgan Stanley has publicly stated that its net exposure to France is ZERO, and its net exposure to PIIGS is just $2bn – the lowest in the industry along with GS.


The world’s major economies pledged on Thursday to prevent the euro zone’s debt crisis from undermining banks and markets but announced no new specific measures to shore up confidence in the global economy.

Under pressure from investors to show action, finance ministers and central bankers from the Group of 20 economies said they would take all steps needed to calm the stresses wracking the global financial system.

“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the G20 said in a communique after a dinner meeting that focused on the European debt crisis.