There was no disaster, just investment stagnation. Why? Because the rules were changed and the banks were allowed to evade capital requirement by calling bad loans "non-performing" and keeping them on the books rather than writing them off.
I don't see why something similar won't happen in the US. The banking sector is the most favored sector in the economy. It has been protected by the marines when necessary (gunboat diplomacy). Keeping it afloat is the primary task of the Federal Reserve, despite what they legislative mandate says.
I think there also needs to be a distinction made between real banks and pseudo-banks. If Lehman fails who cares beside a bunch of speculators that trade in its paper?
If Bank of America fails then there is a real problem. The issue is cloudy in a case like Citigroup which has both sorts of business. I'm guessing that they are treated as separate subsidiaries in order to comply with the banking laws, so that a failure in the investment area may not affect the banking division. None of this would have happened if the Glass-Steagall hadn't been repealed.
It was designed to prevent speculation by banks. Another disaster to place at the feet of the GOP. Policies not Politics ---- Daily Landscape
I agree that some form of long term "intensive care" ward for banks is something likely to happen. What's interesting is that the problems do not quite come only from the banks:
Out of the shadows: How banking's secret system broke down (...) while investors are scrutinising some of the industry's best-known names, a spectre will be silently haunting events: the state of the little-known, so-called "shadow" banking system. A plethora of opaque institutions and vehicles have sprung up in American and European markets this decade, and they have come to play an important role in providing credit across the financial system. Until the summer, structured investment vehicles (SIVs) and collateralised debt obligations (CDOs) attracted little attention outside specialist financial circles. Though often affiliated to major banks, they were not always fully recognised on balance sheets. These institutions, moreover, have never been part of the "official" banking system: they are unable, for example, to participate in Monday's Fed auction. But as the credit crisis enters its fifth month, it has become clear that one of the key causes of the turmoil is that parts of this hidden world are imploding. This in turn is creating huge instability for "real" banks - not least because regulators and bankers alike have been badly wrong-footed by the degree to which the two are entwined. "What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending [that is] so hard to understand," Bill Gross, head of Pimco asset management group recently wrote. "Colleagues call it the `shadow banking system' because it has lain hidden for years, untouched by regulation yet free to magically and mystically create and then package subprime loans in [ways] that only Wall Street wizards could explain."
(...) while investors are scrutinising some of the industry's best-known names, a spectre will be silently haunting events: the state of the little-known, so-called "shadow" banking system.
A plethora of opaque institutions and vehicles have sprung up in American and European markets this decade, and they have come to play an important role in providing credit across the financial system. Until the summer, structured investment vehicles (SIVs) and collateralised debt obligations (CDOs) attracted little attention outside specialist financial circles. Though often affiliated to major banks, they were not always fully recognised on balance sheets. These institutions, moreover, have never been part of the "official" banking system: they are unable, for example, to participate in Monday's Fed auction.
But as the credit crisis enters its fifth month, it has become clear that one of the key causes of the turmoil is that parts of this hidden world are imploding. This in turn is creating huge instability for "real" banks - not least because regulators and bankers alike have been badly wrong-footed by the degree to which the two are entwined.
"What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending [that is] so hard to understand," Bill Gross, head of Pimco asset management group recently wrote. "Colleagues call it the `shadow banking system' because it has lain hidden for years, untouched by regulation yet free to magically and mystically create and then package subprime loans in [ways] that only Wall Street wizards could explain."
The real failure is with the regulators who should have reacted on this one about 15 years ago when the growth of structured vehicles was first becoming aparent. Yet they didn't. Why?
To me, CDOs and SIVs are banks. They may not look like a bank but they sure smell like one.
Indeed.
And what I really, really don't understand is how banks managed to keep off their balance sheets contingent lines like many of the SIVs and conduits seemed to have (ie, the banks had no legal choice but to refinance, if all else failed and the conduit chose to exercise it) - and for pretty damn huge amounts. A contingent commitment is still a commitment. How on earth did these disappear? In the long run, we're all dead. John Maynard Keynes
How on earth did these disappear?
It's the biggest bank robbery in history, with the banks as the criminals.
The write-offs revisions came from the fact that everybody wants to exercize the clause, and Citi's risk management staff did had not even realized the clauses where in the deals when they were made.
Note that we have no way to be sure that all the shit is back into the books, only what Citi will want to tell us: since the only risk for the holders is the counterparty risk on Citi, their best strategy is to keep some of it as long as possible to cash in the high-yield coupon, and send it back when the default is effective or just before Citi actually goes belly up. Pierre
The total absolute super cluster fuck.
Now THAT was funny :))
A contingent commitment is still a commitment. How on earth did these disappear?
Footnotes [to financial statements] also contain disclosures relating to contingent losses. Firms are required to accrue a loss (recognize a balance sheet liability) when both of the following conditions are met: It is probable that assets have been impaired or a liability has been incurred. The amount of the loss can be reasonably estimated. If the loss amount lies within a range, the most likely amount should be accrued. When no amount in the range is a better estimate, the firm may report the minimum amount in the range. SFAS (Statement of Financial Accounting Standards) 5 defines probable events are those "more likely than not" to occur, suggesting that a probability of more than 50% requires recognition of a loss. However, in practice, firms generally report contingencies as losses only when the probability of loss is significantly higher. Footnote disclosure of (unrecognized) loss contingencies is required when it is reasonable possible (more than remote but less than probable) that a loss has been incurred or when it is probable that a loss has occurred but the amount cannot be reasonably estimated. The standard provides an extensive discussion of loss contingencies.
I think I'm developing a taste for dark humour.
Citi reduced ratings to "Hold" from "Buy" on Bank of America, JPMorgan Chase & Co., Wachovia Corp., Wells Fargo & Co., PNC Financial Services Group Inc. and First Horizon National Corp. Charlotte, N.C.-based Bank of America, the nation's largest financial institution by market capitalization, saw its stock price target reduced to $42 from $58, versus a close Friday at $42.16. The analysts said BofA continues to be "one of the premiere banking franchises," but they expect significant declines in earnings per share in 2008 "largely due to our view that capital markets and credit losses will be worse than expected, and while the stock is cheap we see little upside potential."
Charlotte, N.C.-based Bank of America, the nation's largest financial institution by market capitalization, saw its stock price target reduced to $42 from $58, versus a close Friday at $42.16. The analysts said BofA continues to be "one of the premiere banking franchises," but they expect significant declines in earnings per share in 2008 "largely due to our view that capital markets and credit losses will be worse than expected, and while the stock is cheap we see little upside potential."
Notice they didn't say the bank was in trouble, just that its earnings would decline. For the Wall Street types it's not sufficient to be profitable, the firm has to see profits increasing. This mind set is fine for stock market speculators, but they are treating a weak stock market as being equivalent to weak firms.
I'm holding on to my bank stocks, and planning to increase my investment in one of the "real" banks shortly. Policies not Politics ---- Daily Landscape
If Lehman fails who cares beside a bunch of speculators that trade in its paper?
All the corporates that get liquidity from Lehman's trades on the market and from direct investments.
