The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘asset values

“Hold your nose, however. Mr Geithner’s proposal is worth a try” | Geithner

This weeks leader in the Economist sums up my perspective well.  Its not great that taxpayers have to include those pesky Wall Street types in the scheme to sort out the Banks, but its better than all the alternatives of  flat out bankruptcy, flat out nationalisation, or doing nothing.  Each of those three alternatives have significant knee jerk ramifications for US and the world economies.

Banks, and particularly US banks are perceived to be over-valued on their assets, and no amount of debate can cure that impression now.  With asset values down by 60% (Equities) to 30% (real estate) its a safe bet there are some bad loans out there.

The Geithner approach will flush those out, and coupled with the stress testing under way right now, will bring back some elusive certainty to bank valuations, ergo the financial system.

Saving America’s banks | Economist

Hold your nose, however. Mr Geithner’s proposal is worth a try, not least because, as any leader at the Group of 20 summit in London next week will tell you, fixing American banks is one of America’s—and hence the world’s—most urgent economic priorities. However unpalatable it is to shower public largesse on big vulture funds, one of the few ways to see if there is any residual value in all the toxic waste left on the banks’ books is to induce someone to buy it. Without a subsidy, there are many reasons for private investors to hold back. Above all, they do not have the same information advantages as the seller, which is only too keen to offload the worst assets on its balance-sheet while hanging on to the good stuff. The trouble is, the proposal barely has a hope unless banks agree to sell assets, and therein lies Mr Geithner’s unfinished task: arm-twisting them to do so. Many banks value their assets well above the prices they would fetch in an open (albeit illiquid) market. They have incentives to keep them there: the lower the price, the more capital they need to raise; in these capital-constrained times, that means the closer banks are to insolvency.

Written by Colin Henderson

April 1, 2009 at 23:04

UK government, RBS, and Lloyds begin the bad asset removal process

In the first real appearance of specific moves towards the inevitable Great Unwinding RBS announce plans to reduce their balance sheet by 25%.

RBS to cut balance sheet by 25% |

Royal Bank of Scotland will this week unveil plans to shrink its balance sheet by up to a quarter over the next three to five years as Stephen Hester, chief executive, sets out a strategy to return the state-controlled bank to the private sector.

Note the timeframe of three to five years – I suspect this will be on the shorter end of that timeframe or even less than three years.  More significantly I wonder if 25% is enough.  In any event the key is that it results in assets being valued at a level that is justifiable, and realistic.

The methodology for management of this writedown is to transfer loans to some “to be described” government vehicle.  Ths involvement of the government and allowing entire loans to be transferred has risks associated with the approach.  First of all which loans will be transferred and how will RBS owners and bondholders be made to pay for the benefit of removal of those loans?

Secondly, what of the loans that remain on the RBS balance sheet?  How will they be valued, and thus what is the true equity value of the new smaller RBS.

Lastly what of the derivatives, and how to unwind them.  With a world moving to less assets and less asset value these must have far less if any basis for existence.  Note RBS is the largest bank in the world measured by Assets and note the size of the derivatives that are more than double the base amount of loans.

At the end of June, RBS’s balance sheet had swelled to almost £2,000bn, the largest of any bank in the world. Excluding matching derivatives contracts, it currently has assets of £1,000bn-£1,100bn.

Lloyds are also going to be participating and above comments apply equally.

Lloyds Banking Group, which includes HBOS, is also expected to seek cover for hundreds of billions of pounds of assets. Treasury officials will over coming days finalise the details of the scheme, which is the centrepiece of the government’s plan to kick-start lending to the economy.

Relevance to Bankwatch:

The approaches here will have to be waatched carefully and focussed on the appropriate end outcome.  That outcome should be a realistically value bank.  In the event that bank value is negative which is the real unsaid issue here, then the government may need to stand behind the despositors to avoid unprecedented bank runs and chaos, but that cannot change the goal of getting to realistically valued assets.

As the extent of the value of derivatives for each bank relative to their loan totals, the real story of unwinding the ponzi elements of the financial markets will appear and we will get closer to a smaller yet more realistic world financial market.

Written by Colin Henderson

February 22, 2009 at 22:17

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