Why European Banks Are In Big Trouble

Sometimes we take the wrong things for granted.  How your car actually works – God, Martha, it takes a HUGE website to explain it!  Thankfully you can ignore all that if you have a trustworthy mechanic and know where to put the gas in. Air conditioning?  Smoke and mirrors as far as I’m concerned; how can compressing a gas result in cold air for my house?  

Banking – it’s simple right?  You put your money in, they loan some out and collect more back – sounds perfectly safe.  Not quite so fast there Junior, banking has risks too. In Finance 101, they present banks as the safety nets, then in Finance 2 you learn the truth: ain’t nothin’ safe.  Banks face two major risks, insolvency and illiquidity.  Illiquidity is easy to understand. You need enough cash flowing in to pay out current obligations every day/week/month.  Simple.

Insolvency, on the other hand, is a bit more murky. Aren’t loans guaranteed by collateral? Wouldn’t the bank just drive by and pick up Uncle Teddy’s Cadillac if he didn’t make his payments?  There’s a lot more to it than that, especially in these days of fiat money and ever-changing markets. Today’s featured read is a short paper from the DeGussa group explaining banking risks in a very clear, straightforward manner.  Especially as it relates to European banks and the huge issue they’re facing.

I really wish this paper was out back when I was in school, would have saved a weekend of hard slogging through some awful finance book, written by someone who clearly liked to hear themselves think.

 Related: Russia Ramps Up Gold Production – And They’re Ahead of Schedule

About the author

Mike Hammer

Mike Hammer has had a wide-ranging career, with trading and investing as a continuing theme. Mike graduated from UC Berkeley with a business degree, then worked with Macy's in their operations arm. He left Macy's and spent a summer trading his own account, which taught him a lot about trading in general and markets in particular. Trading through the Black Monday and the Crash of 1987 showed him how most people are unprepared for upheavals in their trading. He then joined Waddell & Reed as a financial advisor, helping regular people understand their finances and meet their life goals.

Then came the usual story - Mike met and married the lady of his dreams. They moved to upstate New York, where Mike worked first for a small manufacturing consulting company, then Cornell University. While loving the work and the higher-education atmosphere, Mike missed the world of finance. Eventually, he signed up for stock trading coaching with the Adam Mesh Trading Group, to learn from people who understood modern markets. Within a year, Adam asked Mike to become a stock trading coach.

Since then, Mike has trained over 200 individuals, spoke at several national conventions, and is a frequent contributor to conference calls across the Adam Mesh community. Mike writes The Gold Enthusiast daily newsletter, runs the Golden Hammer trading service, and participates in the Mesh Private Portfolio. He also keeps a position in international education which keep him in touch with "the student mindset". Mike closely follows the gold, energy, and financial sectors. His motto is "Plan your trade, then trade your plan!"

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