Well said (a clear explanation of banking crises)

Via Barry Ritholtz, an exceptionally clear column on how banking crises happen by John Hussman:

The central problem facing the global economy here is leverage. In an economy where monetary authorities are at the ready to reignite bubbles after any setback, it has been possible for banks to get, say, $10 from shareholders, get another $20 by issuing bonds, get $70 from depositors, and then go out and make $100 of investments in loans, securities, Greek debt, and other assets, hoping that by leveraging shareholder capital (“equity”) 10-to-1, they would earn a high return on that equity.

The trouble comes when some of the investments go bad. In that case, a loss of anything approaching 10% on the assets will eat through the bank’s capital (“equity cushion”), at which point, the bondholders are next in line. It can’t be repeated enough that when Wall Street talks about a bank “failure,” it means the failure of the bank to pay its own bondholders. In virtually every case, big or small, the only parties that stand to lose from a bank failure are the bank’s own stockholders and the bank’s own bondholders, both who knowingly take a risk in order to reach for return.

The only question is whether a needed restructuring is orderly or disorderly.
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Now imagine a world where banks aren’t even content to leverage their balance sheets 10-to-1, and where regulators look the other way by broadening the definition of “capital” and narrowing the definition of “assets”, so that banks can [leverage] risky assets at stunningly high ratios to their own capital.

Welcome to our world.
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Weil notes that although Dexia had little more than 1% in tangible equity behind its assets, “Dexia nonetheless managed to show a capital ratio of 12.1 percent. Dexia got that ratio mainly by excluding the bulk of its assets — a process speciously referred to as risk-weighting –along with billions of euros of pent-up losses on soured holdings such as Greek government bonds.

Hussman links an important article by Jonathan Weil of Bloomberg, which shows that a number of banks have tangible assets of less than 2%, and hence leverage of 50-fold. Losses of just 2% make them insolvent, but regulators have allowed them to pretend. Worst, these include major banks like UBS, Deutsche Bank, Barclay’s, BNP Paribas, and Lloyd’s.

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China and India jockey for power in South China sea

China and Vietnam are regional rivals, and Vietnamese take considerable pride in having resisted Chinese invasion attempts. Vietnam is, of course, by far the weaker of the two.

The South China Sea, with its oil and gas, is a point of regional tensions. China wants to claim it all. Vietnam is having none of that. The Chinese are taking the better part of valor, and offering to cooperate with Vietnam in developing the oil fields. Vietnam, smart enough not to rely on China completely, has brought China’s primary rival India into the equation.

Oil is not all that is at stake. As Prokhor Tebin says in ATimes:

Sea-trade is foundation of global economy: 90% of world’s commerce travels by sea. It [the South China Sea] is the second most used sea lane in the world – over 50% of the annual merchant fleet tonnage passes through the Strait of Malacca, the Sunda Strait, and the Lombok Strait. The Strait of Malacca accounts for nearly 10 millions barrels of crude oil every day. There are enormous mineral and fishing resources, and the South China Sea is estimated to hold about 7 billion barrels of oil and 900 trillion cubic feet of natural gas.

This area, contested by “China, Vietnam, Philippines, Taiwan, Malaysia and Brunei” is a flashpoint on par with the Middle East.