Wednesday, 10 September 2008 05:00

The Big Bank Bust

I have commissioned additional work on the banking crisis, for I feel we are at the nadir of another BIG downturn. More than one of the big institutions are at the brink of a bust, and I think the markets are generally too optimistic. Let's add to where we have come thus far:

The Asset Securitization Crisis Analysis road-map to date:

  1. Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
  2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
  3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  5. Municipal bond market and the securitization crisis - part I
  6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
  7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  9. More on the banking backdrop, we've never had so many loans!
  10. As I see it, these 32 banks and thrifts are in deep doo-doo!
  11. A little more on HELOCs, 2nd lien loans and rose colored glasses
  12. Will Countywide cause the next shoe to drop?
  13. Capital, Leverage and Loss in the Banking System
  14. Doo-Doo bank drill down, part 1 - Wells Fargo
  15. Doo-Doo Bank 32 drill down: Part 2 - Popular
  16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
  17. The Anatomy of a Sick Bank!
  18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
  19. GE: The Uber Bank???
  20. Sun Trust Forensic Analysis
  21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
  22. Goldman Sachs Forensic Analysis
  23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
  24. Pt one of three of my opinion of HSBC and the macro factors affecting it

Now, on to the Big Bank Bust and its Impact on the Real Economy - the next major installment of the Reggie Middleton on the Asset Securitization Crisis (this, combined with my trades and blog/media experience should be a book one day).

Before we go one though, the let's take the tab of the effect of the bust on the big banks...

A) The story so far...

Commercial and Investment Banking no more in vogue

  • Asset writedowns surpass US$500 billion

Since the beginning of the crisis, the global banking community had asset writedowns worth more than US$550 billion. This asset securitization crisis, which initially manifested itself as a subprime mortgage problem, has spread to other asset categories and has become a full fledged credit crunch. The problem is not restricted to the US alone, with banks across Europe and Asia recording significant asset writedowns. The US subprime mortgage market's collapse in 2007 has led to banks worldwide reporting US$508 billion in losses due to declining value of papers/securities tied to home mortgages, commercial mortgages and leveraged loans.

Citigroup Inc tops the list with asset writedowns worth US$55 billion, followed by Merrill Lynch, UBS, HSBC and Wachovia. Banks continue to clean up their balance sheets and write down toxic assets in the face of worsening credit quality and emerging problems in new asset categories - or at least they are eliciting the façade of doing such, as the we have uncovered several financial institutions who have undertaken rather aggressive accounting practices in an effort to blunt the "accounting effect" of devaluing assets or at the very least, make them look better to the public. These factors indicate that the problem in the global banking industry persists. Banks are also incurring losses on account of auction rate securities which were sold as safe investments due to rising pressure from regulators. According to the International Monetary Fund (IMF), in its April report, banks' losses are estimated to be approximately US$510 billion, about half its forecast of US$1 trillion for all companies. Nouriel Roubini, an economist at The New York University, believes the losses would reach US$2 trillion in 2009.

  • Banks continue to writedown assets - Brief review of the last quarter results

Banks have written down significant amounts of assets in the last few quarters as asset quality continues to deteriorate and securities tied to mortgage have diminished in value. In 2Q 08, asset writedowns totaled US$107.2 billion, with the Americas region accounting for US$70 billion, followed by Europe (US$34.5 billion) and Asia (US$2.4 billion). Although asset writedowns declined to US$107 billion in 2Q 08 from US$171 billion in 1Q 08, they have crossed the half a trillion mark. Banks in Europe and the Americas have incurred significant losses (almost equal) on account of direct/indirect exposure to the US real estate market. The US banks' writedowns stood at US$253.4 billion (50%), while that for European banks was US$227.9 billion (45%).

In the current quarter (3Q 08), banks recorded write downs of US$9.8 billion (source: Bloomberg as of September 9, 2008). The total asset writedowns reached US$508.4 billion.

Source: Bloomberg

Citigroup Inc leads in terms of asset writedowns as it recorded a significant loss in 2Q 08. The bank wrote off assets worth US$11.7 billion, taking the total asset writedowns to US$55.1 billion. Citigroup's top line declined 8.1% y-o-y to US$27.9 billion in 2Q 08. Driven by higher asset writedowns and increasing loss provisions, the bank incurred a net loss of US$2.5 billion in 2Q 08 as against a net profit of US$6.2 billion in 2Q 07. Citigroup raised US$13.9 billion in 2Q 08 to strengthen its balance sheet, thereby resulting in a total capital of US$49.1 billion raised in the last year. Furthermore, as of today, the bank has recorded losses of US$500 million in its auction rate securities.

Citigroup also sold its German consumer unit for US$4 billion to Credit Mutual Group on July 11, 2008.

Merrill Lynch & Co followed Citigroup as the prolonged credit crisis led to further write downs (amounting to US$51.8 billion so far). In 2Q 08, the company incurred a loss of US$9 billion, while it raised US$4.3 billion. Merrill Lynch's top line fell 74.2% y-o-y to US$6.05 billion in 2Q 08. The company's net profit declined 317.6% y-o-y due to lower revenues and further asset writedowns. It registered a net loss of US$4.7 billion in 2Q 08. Merrill Lynch wrote off losses of US$5.7 billion so far in 3Q 08. To maintain liquidity, the company has raised US$11.7 billion thus far in 3Q 08. As of July 28, 2008, it issued common stock worth US$7.3 billion (or $22.5 a share) to the public. Temasek Holdings, which owns and manages the Singapore government's direct investments, was the largest bidder and acquired shares worth US$0.9 billion.

Moreover, to boost its capital, Merrill Lynch liquidated its 20% stake in financial media company, Bloomberg L.P. for $4.425 billion, to Bloomberg Inc.

UBS AG continued its asset writedowns as it recorded losses of US$6 billion in 2Q 08. As of September 9 2008, the company's accumulated losses aggregated US$44.2 billion. The company raised US$27.7 billion in capital to support its operations, of which US$15.9 billion was raised in 2Q 08. UBS AG's top line plunged 28.4% y-o-y to US$17 billion in 2Q 08 due to lower revenues from securities borrowed (43.1% y-o-y to US$6.1 billion). The decline in top line coupled with asset writedowns hurt the company's net profit, which fell 107.7% y-o-y to US$348.2 million in 2Q 08.

HSBC Holdings Plc ranks fourth in terms of asset writedowns with accumulated losses of US$27.4 billion as of date. The bank raised US$5.1 billion in capital in the current credit crisis scenario. HSBC incurred a loss of US$9.5 billion in 2Q 08, due to rising low quality assets. Furthermore, HSBC raised US$3.9 billion to support its balance sheet. The bank's top line increased 8.3% y-o-y to US$47.2 billion in 1H 08 due to continuing operations. The net profit declined 29.1% h-o-h to US$7.7 billion in 1H 08 on account of rising loss provisions and asset write down. HSBC raised capital of US$1.2 billion in 2H 08. On September 3, 2008, the bank issued 6.75% subordinated 20-year bonds worth US$0.65 billion to public investors.

Wachovia Corporation Plc's presence in poor quality assets led to a loss as asset writedowns amounted to US$22.7 billion as of date. The company pumped in capital worth US$11 billion to boost its balance sheet. Wachovia was the worst hit in 2Q 08, as its write downs totaled US$13 billion. The company raised capital of US$7.5 billion to provide liquidity and support its deteriorating operations. Interest and fees on loan income fell 19.9% y-o-y to US$6.2 billion in 2Q 08. Consequently, the company's top line declined 16.5% y-o-y to US$8.6 billion. Driven by higher asset writedowns and reduction in interest income, the net income dipped 480% y-o-y to US$8.9 billion in 2Q 08. In 3Q 08 (to date), Wachovia has further written down assets (auction rate securities) worth US$275 million; the company has not raised any additional capital.

Last modified on Wednesday, 10 September 2008 05:00