Toxic Banks: Not Just US Problem

I've heard some people remark that the credit crunch has shown the weakness of US banks as compared to the rest of the world (which generally means Europe, when it comes to the financial industry). I found that hard to believe, because it seemed that some of the names hit hardest were European banks. So I was interested to read in the Financial Times Lex column (sorry, no free link) that sub prime credit write downs by banks have totaled $493 billion worldwide. Of that, $250 billion was in the US, but $221 billion was in Europe, with $22 billion elsewhere.

And yet, the European economy has not taken the same hit as that of the US. The housing bubble in the US has been one factor, but there's been a similar bubble in many parts of Europe - Spain, Denmark, the UK, and Ireland. I'm guessing that the relative strength of the euro has been the reason. But it seems that won't be lasting long:

The US and European economies are of similar size, as are their banking industries, which both have market capitalisations of about $1,000bn. Yet European banking stocks have outperformed since the credit crisis began. So far, US banks have suffered most. The worst is yet to come in Europe.

Those in the US looking for economic salvation by investing overseas are likely to find that the safety is only temporary. Ah, well, misery loves company.

London Bridge Is Falling Down...

For all the bad financial news coming out of the U.S., Europe is having its own share. A rogue trader costs Société Général $7 billion in France - and the person's superiors might have known what was going on, as management did throughout all the stupid choices of financial institutions here. The euro has dropped, London's FTSE index has dropped, and British bank Northern Rock, which was supposed to get a bailout from private equity group Olivant has just heard that its white night rode right past (because of inflexible conditions given by the government, so Olivant is claiming).

To hope that a financial mess in the U.S. could be contained, with other countries propping prospects for investors, is naive. When the economy becomes global, it by definition becomes interrelated. You can't see one part tumble and expect that everyone else will be left standing. You certainly can't expect that a financial system that decided to go for the high risk "easy" profits can avoid eventually paying for that free lunch.