Archive for the ‘Banking Strategy’ Category
What an interesting and contradictory set of headlines. We really are an an economic crossroads with no roadmap. The only change I observe with Banks at least in Canada is that they have directed their advertising towards deposit accounts and Investment Certificates. Interesting times.
US banks ease lending standards
Geithner calls for housing finance reform
US housing starts make modest rebound
US house mortgage arrears mount
US pressure grows to extend tax cuts for rich
US builder slump deepens in August
Call for careful overhaul of US mortgage lending
Fed needs firepower to zap deflation monster
The Euro authorities (CEBS) reviewed 91 banks using two scenarios. They review against benchmark and adverse scenarios. Benchmark assumes modest economic recovery, and adverse assumes a double dip recession. A host of assumption on GDP, unemployment etc were used to assess under those scenarios and are outlined in the document attached.
Bottom line – 7 banks failed to meet the tier 1 threshold of 6% under the adverse test.
- Hypo Real Estate Holding (Germany)
- ATEbank (Greece)
- DIADA (Spain)
- Espiga (Spain)
- Banca Civica (Spain)
- Unnim (Spain)
- Cajasur (Spain)
This from the report:
As a result of the exercise, under the adverse scenario 7 banks would see their Tier 1 capital ratios fall below 6%, with an overall shortfall of 3.5 bn € of Tier 1 own funds. The threshold of 6% is used as a benchmark solely for the purpose of this stress test exercise.
What struck me though is the large number that are too close to call. There are another 17 banks who came in within 1% of the 6% threshold for tier 1 capital. This a total of 24 out of 91 banks – more than a quarter. Eyeballing it, Spain, Greece and Germany are in worst shape (yes Germany).
If we look at those who are in single digits for tier 1 then that is well over 50%. All in all not an encouraging assessment despite the claims that the Euro banks are in good shape. They are still bound to the Euro governments for support to ensure that the Euro area does not experience an economic collapse in event of another 2008.
I cannot but help believe there is a deeper problem relative to the situation in Greece.
Three people died in a central Athens bank that was set ablaze by Greek protesters on Wednesday during a march against government austerity measures, aimed at saving the country from bankruptcy
At one level it is a financial crisis and it should get sorted out with banks involved taking losses eventually as debt will have to be written off or at least placed on such terms as to make repayment unlikely.
But this situation is altogether different and deeper than Argentinean or Thai defaults of the past decades. Here we have a population with the same passport as Germans, French or British killing people and blaming the IMF for their own profligacy.
The world is in a state of transition between old style nations (nation states) with finite borders that largely contain their problems internally insulated from the world to a world of globally interconnected market states where responsibilities are much fuzzier and it is all to easy to blame others for ones own misfortunes. This new market state world has an objective of enhancing the opportunity of individuals versus the previous state that was designed to enhance opportunities of groups including unions, the aged, youth etc.
This new world brings responsibilities and accountabilities with it but the Greeks are at the front end of the change and not liking it much. The implications for Europe and their responsibilities in all this is also embarrassingly clear too.
All of this makes it hard for banks to operate effectively and responsibly with these upheavals in financial markets which have no clear end game.
This is a complex article at ProPublica that in simple terms illuminates all that was wrong with CDO’s and synthetic CDO’s. These instruments allowed investment bankers like Magnetar to circumvent insider trading rules. The story of Goldman Sachs being charged by the SEC for fraud is only the beginning. Financial reform is the last thing many financiers and bankers will have to worry about as this story takes hold.
Magnetar involved all the big names and most are listed here. You will see many recognisable names, eg. Citi, Wachovia, Deutsche, Lehmans, UBS, Mizuho, JP Morgan. At this point it appears to be only guilt by association, however there is nothing good or right in this tale. Propublica quote this participant. “The deal was a disaster. He shook his head at being reminded of the details and said: “After looking at this, I deserved to lose my job.”
Magnetar’s approach had the opposite effect — by helping create investments it also bet against, the hedge fund was actually fueling the market. Magnetar wasn’t alone in that: A few other hedge funds also created CDOs they bet against. And, as the New York Times has reported, Goldman Sachs did too. But Magnetar industrialized the process, creating more and bigger CDOs.
Magentar founder Alec Litowitz speaks at a private equity conference held at Kellogg School of Management at Northwestern University in February 2007. (Nathan Mandell)
What Magnetar were able to do was fund the housing bubble and bet against it bursting all at the same time. They were able to do this using CDO’s and building them all the while knowing the bubble would burst. The beauty of what they did was to create cash flow to fund their short selling of their own CDO.
Magnetar’s (Nearly) Perpetual Money Machine
By buying the risky bottom slices of CDOs, Magnetar didn’t just help create more CDOs it could bet against. Since it owned a small slice of the CDO, Magnetar also received regular payments as its investments threw off income.
I read, listen and watch as much as anyone, yet the credit crisis caught me off guard, and not until Aug 2007 did I write about it here. In fact even I was looking at this from a far too narrow perspective in retrospect.
Back to basics and the promise of social lending | bankwatch
Social Lending by definition carries the promise of at least eliminating the problem that the financial markets experienced this week. A promise of a simpler financial process, one that is easily understood and explainable. It won’t replace the worlds capital markets, but if it can provide at least a small alternative to those who choose, then mission accomplished.
However when I read this following story today, I can only express incredulity. As poorly prepared as this poor blogger was, it turns out I was still a month ahead of the chair and a director of Citibank.
They are either lying or stupid. There is no in-between – take your pick.
However, the two men’s assertion that the first time they knew Citi had billions of dollars of CDOs on its books was in September 2007 – when they began a series of nightly calls that became known as “defcon calls” – came under scrutiny.
Mr Angelides pointed to internal documents that appeared to contradict Citi’s assertion – in an analysts’ call in October 2007 – that its exposure to CDOs was $13bn.
If anyone remains in doubt, then check the stats in this bankwatch post. This was public information by the time I got it.
This post was September 2007. Note that month 1 on this chart is Jan 2007 so it highlighted the problem to be precipitated between the peak period SubPrime ARM resets of September 2007 through May 2008 (grey bars). This nails the problem to September 2008 quite precisely.
Bank shareholders need to ask better questions of their Chairman and boards methinks. Do not get overwhelmed by those excessive dividend payouts. They know and if they do not they are asking the wrong questions.
McKinsey provided a list here of the latest risk assessments done by three groups. I had the WEF one already, so its was interesting to review and compare the three.
- World Economic Forum Global Risks 2010 (In collaboration with PricewaterhouseCoopers Global Thought Leadership group)
- Economist Intelligence Unit’s latest global business risk assessment
- Eurasia Group, Top Risks and Red Herrings for 2010
Relevance to Bankwatch:
This is a sobering list (see below for complete table of contents of all three. The news today is full of:
- Greece, Portugal and Spain country risk problems
- government debt, particularly US, UK and Japan
- consumer debt – all western countries, with special mention to Canada, UK and US
- possibility (likelihood) that we are in the midst of a commodity price bubble
- post crisis statistical recovery associated with a continued consumer recession (approximate quote from Larry Summers at Davos)
- total failure of confidence and trust in banks and their management (Dimon, Lewis, RBS etc)
- US government deficit at unprecedented levels
- potential for catastrophic economic collapse in China (asset bubble, unsustainable government spending
- polarisation of banks into zombie /utility banks and risk takers
- deflation resulting from developed countries and their population deleveraging
The list could go on, and we all see these things through our own lens. These are the things we know about. If we look down the list below, and pick some outlier events such as
- US/ China trade war,
- Muslimisation of Turkey and alliance with Syria and Iran,
- a real global pandemic
Even one such event would have dramatic impacts on confidence, currencies, interest rates and therefore inflation/ prices. Banks and there customers are not immune whether in UK, US, or Switzerland. The results of the risk outcomes will have effects on us all.
I keep going back to Homer-Dixons The Upside of Down. That book set the tone for the 21st Century for me, and provides a backdrop for financial planning, and therefore bank planning for its customers. The view of the last 20 years to buy stock and wait is no longer an adequate plan. Not a good time to be laboured with expensive infrastructure, or to be increasing that infrastructure.
Lots to think about.
Here is a summary of the coverage of each report.
World Economic Forum – Global Risk Report 2010
- food price volatility
- oil price spikes
- major fall in US $
- sowing Chinese economy (< 6%)
- fiscal crises
- asset price collapse
- retrenchment from globalisation (developed)
- retrenchment from globalisation (emerging)
- burden of regulation
- underinvestment in infrastructure
- international terrorism
- nuclear proliferation
- North Korea
- Afghanistan instability
- transnational crime and corruption
- Israel- Palestine
- global governance gaps
- extreme weather
- drought and desertification
- water scarcity
- NatCat cyclone
- NatCat earthquake
- NatCat inland flooding
- NatCat coastal flooding
- air pollution
- biodiversity loss
- infectious diseases
- chronic diseases
- liability regimes
- Critical information infrastructure (cli) breakdown
- nanoparticle toxicity
- data fraud/ loss
Economist Intelligence Unit
Growth without jobs
The global economy is set to endure a "jobless" recovery, but governments are ill-equipped to deal with the economic and political consequences of entrenched high unemployment.
Austerity and unrest
Moves by many countries to introduce fiscal austerity measures in 2010-11 could spark social unrest, particularly in eastern Europe but also in the developed world.
We have fractionally raised our forecast for global economic growth in 2010, but we remain concerned that unsustainable factors are driving much of the recovery.
Preventing the next crisis?
The process of reforming global financial regulation is well under way, but policymakers are reluctant to demand measures that could undermine the economic recovery.
Key issues for 2010
The world economy is improving, but the fading of short-term factors that have supported recovery thus far will feature among the key issues to watch for in 2010.
The UN climate-change summit in Copenhagen has ended in failure. It has produced a heavily diluted agreement that omits concrete targets and lacks unanimous support.
A global carbon market?
Carbon trading is at the centre of proposals to limit greenhouse-gas emissions. But for trading to achieve useful scale, a global benchmark for carbon prices is needed.
Rising global risk appetite and the spillover of liquidity from the developed world are creating conditions for asset-price bubbles in emerging markets.
1 – US-China relations
2 – Iran
3 – European fiscal divergence
4 – US financial regulation
5 – Japan
6 – Climate change
7 – Brazil
8 – India-Pakistan (no, not Afghanistan)
9 – Eastern Europe, elections & unemployment
10 – Turkey
I could not agree more with this quote from Niall Ferguson. The problem is leverage, and securitization is nothing more than leverage that is not appropriately recorded on the balance sheet. There is no amount of regulation, bank taxes or bonus taxes that will decrease the propensity for the next crisis until that simple recognition is agreed.
"I don’t think it was really the banks’ involvement in hedge funds that were nearly as much of a problem as banks involvement in securitized MBS collateralized debt obligations."