STOCK MARKET WATCH -- Tuesday, 24 January 2012

[Demeter]

25. Wall Street Goes to Davos: What It Wants

http://www.cnbc.com/id/46054131

As airplanes full of Wall Street’s elite land in snowy Switzerland for the World Economic Forum’s annual confab, the stakes couldn’t be higher. Europe’s banking system is on the brink — and Wall Street is its bedfellow. The agenda? Skiing, distressed debt deals, and above all: solvency...“We’re fighting the last war. The sovereign debt crisis is undermining the global banking system. We need to take the dire scenario off the table and get a credible path to a resolution,” says Tobias Levkovich, Citigroup’s chief US equity strategist.

On paper, the stakes for Davos’ Wall Street guests look very different. For example, Société Générale has $7.7 billion in European sovereign debt exposure, according to the European Banking Association. In contrast, Bank of America has only $398 million, according to its 2011 third quarter financial statement. In practice, however, the ‘dire scenario’ acts like a house of cards — falling on both US and European banks. “No bank wants to see European banks fail,” says Dean Ungar, financials analyst for UBS. “It’s not just sovereign debt: European and US banks hold each other’s debt too,” Ungar explained.

European banks depend on each other for short-term financing. If one bank fails, European lending freezes, and the ice is already forming. This January, emergency overnight borrowing fell to its lowest levels since November of last year. US banks are also increasingly reticent to lend to European counterparts, which has IMF leader Christine Lagarde warning of the threat of contagion. “The main objective at Davos is to persuade European leaders to solve the liquidity crisis. Rescue funds like the EFSF, and IMF funds are not adequate. Everyone has a stake. It’s a big problem,” says James Nixon, chief economist for Société Générale.

That said, participants don't expect Davos discussions to produce a grand deal. For years, critics of the event have said it’s all talk and no action. The deals that may actually manifest, each source agrees, will involve US banks who have the opportunity to mine the spoils of Europe’s banks. THE VAMPIRE SQUID STRIKES AGAIN...“European banks are having to significantly deleverage their assets (cut down on lending), which is great for US banks who can step in and buy the loans,” says Ungar. But US banks have competition for Europe’s market share. International banks, and private equity firms can also buy these assets. “International banks are picking up Europe’s choice assets. Sumitomo bough RBS’s [Royal Bank of Scotland’s] airplane leasing business for between 4 and 5 billion just last week,” says Nixon.