Get out of any European bank stocks!

They are the current and next casualty of this crisis. A good friend of mine who is a very successful hedge fund manager, has turned his attention from the US to start shorting European financials... and he's right!
Those who bought ABN AMRO are struggling: Fortis had to be rescued by the Belgium government and today, RBS lost close to 40% of its value. All large publicly listed banks are vulnerable.
If you already lost 50% of your money, you don't want to loose another 50%!

Sexy Banks

In light of September 15th’s “Banking Black Monday”, investors and depositors are in a state of shock. Indeed, many have lost money in the stock market and are desperate to find solutions to preserve their capital. But today the situation is a lot worse. Investors have now lost confidence in their bank and are worried that their savings will disappear in bankruptcies or mega-mergers.

Who’s next on the chopping board after Lehman and Bear Sterns? Merrill just avoided a disaster by merging with BoA. Everyone is watching AIG wipe out billions of shareholder equity, while UBS continues to announce billions of write downs. Fortis had to be bailed out by the Belgian government and what's left of ABN AMRO is being nationalized! Today, selecting a bank is like driving at 200kmph in the fog on Sheikh Zayed Road!

But some banks are sitting pretty! The Swiss private banks, and namely the Geneva Private Bankers, “Les Banquiers Privés” such as Mirabaud, look like havens of peace and safety. With the global financial meltdown, they are now strongly standing out.

Why are they safe? The partners of those banks have unlimited liability, which makes them risk averse. Instead of playing around with the capital of the bank by buying mortgage-backed securities, they leave the capital of the bank in CASH! These banks also do not lend, except to their clients and always secured by portfolios. So they have no exposure to the likes of Lehman.

Since the “Banquiers Privés” are privately held, they do not try to meet quarterly earnings forecast. Hence, they are not pressured into “selling, selling, selling” to their clients and pushing them to make risky investments. They prefer to preserve their clients capital, because their aim is to be profitable and around in 100 years time, not next quarter! Indeed, they prefer to make a little money every year, rather than risking it all for short term profits that turn sour. It’s not sexy, but it works!

Financial Crash

Article I sent on Sept 27th

Dear Friends,
With the incredible movements in the financial markets over the past 2 weeks, and with your financial safety in mind, I feel that it is important that I share with you our views on the banks and on fiduciary deposits.

We are extremely concerned with the current risk our clients are taking when they have deposits with global banks. There exists a substantial risk that new bankruptcies take place. As you have seen, in the past 2 weeks we have witnessed the disappearance of Fannie Mae, Freddie Mac, AIG, Merrill Lynch, Lehman and last night Washington Mutual. This will not stop there and European banks are not immune. We have stopped placing fiduciary deposits with UBS for the past 6 months, Dexia for the past week and now Fortis since Thursday night. We feel that these institutions may be unable to raise sufficient liquidity to continue to run their operations and could go bankrupt. The Credit Default Swaps on these banks are extremely high, indicating that the chances that UBS, Dexia or Fortis default, are very high. Fortis, in particular, looks extremely vulnerable.

Given the overall uncertainty of the financial system, we have encouraged our clients to take their money out of fiduciary deposits and to place the funds in high quality AAA government bonds. Indeed, if you hold bonds or stocks in an account of a bank that goes bankrupt, these assets are ring fenced, while your deposits and your cash goes into the general pool of assets that get distributed in the bankruptcy proceedings.

We have also told all of our clients who hold gold certificates to convert those in physical gold. Again, in case of bankruptcy, physical gold is a lot easier to get to than securities.

I realize that this picture is rather dark, but at this stage we are extremely concerned about wealth preservation and taking all measures to ensure that our clients are safe.

I strongly recommend that you limit your exposure to the institutions I mentioned and that you reduce your fiduciaries and buy high quality AAA government bonds.I remain at your disposal to discuss this further.

All the best, Gilles