The Bankwatch

Tracking the consumer evolution of financial services

The hush hush work going on in the banks’ to correct matters

In the back rooms of the large banks, capitalism is alive and well.  Financial engineers, those very same folks who created the derivatives and CDO’s are busy addressing the problem, leaving glimmers of hope that hte reason for the banks’ relative silence is that they own the problem and will fix it.  Banks and bankers are nothing if not resilient.

Bankers find new focus amid the rubble | Financial Times

Many of them are now engaged in financial restructuring, which involves dealing with toxic assets and freeing up or protecting capital. But they will not get fanfares in earnings reports because the work they are doing – and have in some cases been doing for more than a year – is very hush-hush.

Their work often began in shoring up their own employers’ balance sheets, but has increasingly become a client business.

This is one reason for keeping the work quiet. There is huge sensitivity over anything leaking into what remains a highly tetchy market for bank securities of all kinds, still beset by the fear of panics.

The nature of the work is split in tow broad areas, with a key point noted above that this turning into a business for banks, which explains the CitiBank request the otehr day to participate in the US PPPIP arrangement.   They are already doing it so why not lever the expertise across the system.  The work they ar doing is:

The work is split between derivatives – unwinding synthetic collateralised debt obligations, for example – and work with cash assets.

According to another structured finance specialist, it is much easier to get rid of derivative exposures.

“The synthetic side, the derivative structures, can be unwound more easily,” he says. “They still lose capital, but it makes the asset go away and frees up the remaining capital, which you cannot do with the cash assets.”

The resulting mix of this work, government stress testing and the PPPIP should provide for a good balance of incentive between the competing issues of eliminate bad assets, avoid bank nationalisation and maintenance of country fiscal credibility.  It is clear some banks will not survive but those who do will be stronger and hopefully smarter.

Clearly the value of banks balance sheets, and there for true value of the equity base is essential to reaching that certainty required for the system so operate properly.  To that end, the questions is speed and system endurance meantime.

Written by Colin Henderson

April 3, 2009 at 12:46

Posted in Uncategorized

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