The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘bank leverage

Bank asset revlauation – unfortunately its the next mortgage crisis

In keeping with the theme that bank assets need to be properly valued before confidence can be returned to the system, this piece summarises the next immediate problem.  As you read this, bear in mind that the American system for most states employ the non-recourse system.  This little known implication just came known to me recently, and further explains the extent of the fear on bank asset value.  Non-recourse means the homeowner can walk away from a home where the mortgage exceeds the home value with no recourse from the bank back to that homeowner for the shortfall.  This is quite different than other countries, and frankly an insane provision for a rational economy.

Decay is spreading to the upper floors of America’s mortgage market | economist

The sums involved are depressingly large. In the worst case, losses on the $600 billion of securitised Alt-A debt outstanding—roughly the same as the stock of subprime securities—could reach $150 billion, reckons David Watts of CreditSights, a research firm. Analysts at Goldman Sachs put possible write-downs on the $1.3 trillion of total Alt-A debt—including both securitised and unsecuritised loans—at $600 billion, almost as much as expected subprime losses. Add in option ARMs, a particularly virulent type of adjustable-rate loan, many of which are essentially the same as Alt-A, and the potential hit climbs towards $1 trillion.

The amounts are alarming.  Bear in mind these amounts will also have been securitised and purchased by banks elsewhere.  The above statistics suggest that even Roubini’s estimate (courtesy of John Maudlin)  of 50- 60% of US bank assets being bad could in fact be optimistic.

This is the challenge facing Geithner, and his preparatory words to Congress and G7 this week suggests to me he understands the extent of the challenge.


Written by Colin Henderson

February 14, 2009 at 18:14

How can a bank with over 2 trillion in assets fail?

econnov20th1The headlines surrounding Citi are reminiscent of a wolf pack circling its prey. But how can a bank such as them fail? And how can it go from making a billion dollar offer to purchase Wachovia to failure?

Citigroup stock drops to 13-year low, fear grow | Reuters

NEW YORK (Reuters) – Citigroup Inc faced a crisis of confidence on Wednesday as investors questioned the survival prospects of the U.S. banking giant, and its shares tumbled 23 percent to a 13-year low.

The second-largest U.S. bank by assets has been reeling on concerns that mounting losses from credit cards, mortgages and toxic debt could overwhelm its efforts to slash costs and add deposits. Last month, Wells Fargo & Co dealt a blow by derailing Citigroup’s bid to buy Wachovia Corp.

Some facts, and I go back to my earlier posts on bank leverage.

Total Assets: $ 2,050 Bn

Total Liabilities $ 1,924 bn

Equity $ 126 bn

Normal Net income (2006) $21 Bn

Lets do the math here:

debt to equity = 15 :1 – on the high side even for banks. Capital is 6.2% of assets. Basel 2 requires 9% + I believe so they are already on the wrong side of that barometer.

Scenario: if their losses are $50 bn or more then equity is reduced to $76 bn. Ratios become 25 :1 and 3.7%.

In any other industry, this is called bankrupt.

Relevance to Bankwatch:

Unfortunately this calculation could be performed with similar results on too many large banks.  The reality is that the government ownership of certain banks is the only way for them to make it through this crisis and have any opportunity to exist and plan on the other side.  This will also curtail innovation.

Perfect time for financial system alternatives, and I hope the banking regulators see the irony in that, and let it happen.

Written by Colin Henderson

November 21, 2008 at 13:37

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