The big bank rescue is set to kick off: Gottliebsen

The real game – the biggest bank rescue the world has ever seen – looks like it may be about to begin. It was heralded by amazing scenes on Wall Street.

There was less than an hour to go before trading on the New York Stock Exchange ended and the Dow was trading at 10,434 points. Then in that final hour it jumped more than 370 points or around 3.7%.

What happened tells us a lot about the capital world we live in and what is ahead.

During the night European finance ministers had been discussing aspects of the Greek rescue package, including delaying payments and shifting more liabilities to the banks.

At the same time Belgium’s Dexia bank signalled that it was one of many European banks that had lost all its capital in big gambles in Greek and other insolvent countries.

The only difference between Dexia and the French and German banks is that Dexia has been punting on insolvent US state governments, so its impending demise directly affected the US.

US Federal Reserve chief Ben Bernanke played a role in the night’s action by indicating that he was seriously considering handing the investment banks more money to speculate with via a QE3 money-printing exercise.

In other words it was another day (night) an the office, with politicians and central bankers showing that they either had no idea what was happening around them or could not face it.

The shorters had established massive positions. Then out of the blue came an FT report stating: “European Union finance ministers were examining ways of co-ordinating recapitalisations of financial institutions after they had agreed that additional measures were urgently needed to shore up the region’s banks.”

Someone had actually told the ministers what the problem was – “their banks have lost their capital!” This was a new element in the game and suddenly the politicians were facing one of the key problems – or so the traders believed.

No one on the New York trading floor was sure what that meant but it was better not to be short so we saw massive short-covering and as that happened traders came in to boost the market further.

It does not mean that the market woes are over, just simply that the market was oversold. We might get another rally but we will see more enormous volatility with bank shares in the front line.

But the problems will not go away. Oliver Marc Hartwich explains in his article this morning that the German public has reached the end of its tether with politicians, Greece and the euro.

But what a shock the Germans will get when they discover that their beloved Deutsche Bank probably needs more help than any other single European bank, although in total the French banks require more money.

Just how any rescue will be co-ordinated is not known but it will either break up the euro or see Europe coming together.

In the turmoil ahead Australian banks may pay a lot more for their overseas borrowings, which fund about 40% of their book.

This article first appeared on Business Spectator