News & Notes: Banking Edition - January 21, 2008
The Wall St. Journal’s market blog had an interesting post noting the ineffectiveness of the Fed’s rate cuts in relation to the performance of the S & P 500; they even provide a graphic showing the performance of the S & P since the fed began cutting rates. The story here is pretty clear: rate cuts aren’t going to inject confidence into a market that is losing money and is in danger of losing a lot more, nor will cheap money really mitigate the impact of those losses.
An update on the Northern Rock situation, the current scheme err plan is to package the bank’s $50 billion debt to the British tax payer into government backed bonds that can be sold to private investors. My gut reaction to this is: selling the debt of an insolvent bank sounds an awful like selling debt securities backed by mortgages originated to home buyers with shoddy credit. I know, I know, the government is backing the securities. BUT, doesn’t the idea of selling the debt owed to you by an insolvent entity by guaranteeing it yourself sound a bit, well, off?
The Bank of China is set to report a $2 Billion write down related to subprime; considering the role of countries like China in financing the “Great American Debt Binge” I wouldn’t be surprised to see more announcements like this in the future. The bigger problem here is the lack of transparency in the Chinese banking system, which could mean we won’t really know the true extent of any additional problems until it’s much too late.
German Bank WestLB anticipates a billion euro loss on top of a similar amount in write downs due to a combination of subprime exposure an unauthorized trades. As a result of the losses the bank is looking into merging with rival and its owners have pledged to inject the necessary cash to cover the losses. Finally, two traders have been sacked for market manipulation and are now facing criminal charges.
The current banking/credit crisis is beginning to remind me of the aftermath of the tech crash, people thought they were gods during the boom times and abandoned common sense and ignored the rule of law. I anticipate another round of major corporate scandals coming down the pike.
Here is a quick rundown of UBS’ plans to restructure after its $14 billion worth of subprime write downs. To be honest I really don’t take most company’s “restructuring” announcements seriously as they all sound the same, the usual rhetoric of putting the “right people in the right places”, “changing the way we do business”, etc. I’d feel better about them if they were to walk into a conference call, report the bad results and then note the progress already made in improving things for next time, otherwise it’s just talk. I prefer results over happy business talk.
Sources:
Graphic Courtesy of the Wall St. Journal
BBC News: “Rock plan ‘best meets objectives” – January 21, 2008
The Wall St. Journal: “Bank of China’s Subprime Hit: Up to $2 Billion” – JASON LEOW, JAMES T. AREDDY
BBC News: “WestLB expects billion euro loss” – January 21, 2008
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