Maybe the ECB Will Sue Goldman?

Today's WSJ reports on a Goldman strategist's report to hedge fund clients that takes a "head for the hills" view of European banks. The report, according to the WSJ, opines that "as much as $1 trillion may be needed to shore up European banks." This report is not a product of GS's Research department, which is interesting. It also is explicitly tied to trading desk revenues as it offers hedge fund clients a way to implement the specific strategies outlined in the report by calling GS trading. Bearish euro bets are part of that strategy, clearly.

The article doesn't give a link to the actual report, so bear that in mind when reading this post, as I always like to review a primary source myself. GS's assessment of the US economy and recovery is very main stream, and I wouldn't guess that it's too different from that of the economic analysis group.

Apparently, there is a bank-by-bank analysis of capital adequacy of the European banks. I can' imagine that ECB officials will be happy to hear about the recommendations in this report. Hopefully, they won't issue a press release threatening legal action!

As we head into the fourth quarter, and after reading lots of analyst work on banks and currencies, it seems like we are entering another risky period, with eerie similarities to the earlier crisis. What's more, Dodd Frank will provide no protection or improvement in crisis readiness, because nobody knows how to implement its laundry list of mandates.

Brad Sabel and other partners at Shearman & Sterling have done some insightful analysis on these issues. The Volcker Rule, which is a key part of derisking the global situation, is light years from implementation at this point. Similar to the earlier global crisis, we may be in a situation where stress tests and ECB pronouncements show major European banks to have adequate capital, but we won't know who the weak sister is until some external event forces the curtain back.