|
The following
stemmed from a conversation I had with a financial journalist for a
prominent international finance rag after her perusal of my two blog
articles: Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis and Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street.
The converstation ended up centering around the "alleged" deleveraging
of UBS and their shedding of risk. The following highlights the UBS
situation in more detail...
From http://uk.reuters.com/article/businessNews/idUKL2112783220080521
UBS AG provided 75
percent of the funding used by U.S. asset manager Blackrock to buy a
$15 billion (7.63 billion pounds) portfolio of distressed U.S. real
estate assets from UBS, the bank said on Wednesday.
UBS provided
$11.25 billion in loans to Blackrock, the Swiss-based bank said in a
statement. Blackrock raised $3.75 billion in equity from investors to
pay for the rest of the package, UBS said...
... The face value of the portfolio was $22 billion, meaning UBS received about 68 cents to the dollar on the sale.
This means
that UBS effectively financed $18.25 billion dollars of the purchase,
or 83%, a good portion being absolutely non-recourse since it was given
in the form of a seller's concession (eg. a discount). I have not seen
the full terms of the deal, but other similar deals appear to have
additional non-recourse characteristics. This is a very sweet situation
for the buyer, but as I said, it is not an absolute transfer of risk
from UBS balance sheet or an elimination of said risk for UBS
shareholders.
"It makes absolute sense because it means they are getting the problems out of their balance sheet," Skierka said. "They might have a certain exposure anyway but ... the construction of the deal is such that they will be able participate from any gains in the value of the assets."
UBS said earlier in May that the structure of the deal would give it some exposure to potential upside should the value of the assets rise.
This, in combination to the risk exposure through the loan, has definitive equity-like characteristics. As I said, they have not truly transferred the risk off of their balance sheet, they simply transformed it. They traded (equity-like) ownership of risky assets with a very thin market for credit risk exposure to Blackrock, and/or potentially even higher risk through what very well may be non-recouse debt secured by the very same risky assets that devalued to the point that they ate up the UBS balance sheet to begin with. It appears to be a shell game. They are still at risk of taking an economic loss if the value of the assets sold decrease (particularly if the loan is non-recourse), which is probably why they structured the deal to be able to participate in any increase in the "allegedely" sold assets. It sounds very much like they still own the assets doesn't it??? Like I said, a shell game!
As for the Goldman: “People are too busy focusing on accounting earnings, no one is measuring the economic risk involved in generating those accounting earnings. When the wind chooses not to blow in their direction, the shit will hit the fan much harder than the rest of the Street. I agree that a firm’s survival and ability to hold on to businesses is dependent on management capability. But publicly traded firms' managements are rewarded for accounting performance, not for reducing economic risk at investment banks and this skews decision-making,” he warns. "This was not the case when Goldman was a private partnership. Then they had to eat their own dogfood, hence they made sure it tasted good before they dined".
In the case of Morgan Stanley, they are the The Riskiest Bank on the Street. See the update as well, Reggie Middleton on the Street's Riskiest Bank - Update. You see, with all of the off balance sheet holdings, credit default swap criss-crosses with lord knows who's the counter-party (see The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk - Beware what lies beneath!), and high levels of level 3 assets and leverage (see Banks, Brokers, & Bullsh1+ part 1 and Banks, Brokers, & Bullsh1+ part 2), there is no credible way to truly ascertain the full extent of the risk these companies have taken. They, till this date, have failed to voluntarily come clean about all assets and risks, so investors such as myself and my team are forced to play Inspector Clouseau (sp?), as in the Pink Panther. Simply adding the contents of off balance sheet entities and JVs can and will throw off the stated leverage of many of these firms as they rapidly attempt to delever in a downward spiraling market. I don't think the question to ask is whether the pure play investment banking model is better than the supermarket model, but whether mis-managed asset securitization and related trading practices truly had a better economic risk vs. return proposition for equityholders than the more traditional M&A advisory fee/brokerage/proprietary trading models or yore. From an accounting earnings perspective, it appeared as if the broker-banks could do no wrong, but when economic risks are factored into the equation, and more telling the advantage of 20/20 hindsight, it appears as if risk return proposition was really not all that good.
This is an interesting take on GS's and MS's latest actions, http://boombustblog.com/component/option,com_myblog/show,Goldman-and-Morgan-Stanley-get-wise.html/Itemid,85/.
In order to get a firm grasp on the magnitude of the current crisis, I suggest you pour through this series when you get the time - http://boombustblog.com/component/option,com_myblog/show,The-Asset-Securitization-Crisis-Series-to-date.html/Itemid,85/.
Trackback(0)
 
|
TrackBack URI for this entry
Subscribe to this comment's feed
, but nothing to the right of this
I like the new layout, but its too wide for my laptop, so the last column does not appear unless you scroll across.