Some really sobering financial news

[Newt]

I would normally link to this content but the site requires signing up. I doubt they will object to posting the content here. This is long and mainly deals with US banks but is worth a read anyway since the current crisis is global. In case you weren't aware, Jan 20 is the day we inaugurate a new President so Bush is gone and Obama will be dealing with this mess.

Sell-Off Is Sobering Welcome From Wall Street

 

By Binyamin Appelbaum and Heather Landy

Washington Post Staff Writers

Wednesday, January 21, 2009; Page A01

 

As Washington celebrated, New York fretted.

 

The Dow Jones industrial average yesterday fell below 8,000, shedding 4 percent, its bleakest performance on any Inauguration Day since the index was started 124 years ago. Nasdaq and the Standard & Poor's 500-stock index both plunged more than 5 percent.

 

Disillusioned investors fled financial companies as fresh evidence mounted that the industry's problems are larger than previously understood, larger than the response so far mustered by the government and perhaps larger than the resources remaining in its rescue program.

 

The possibility of bank nationalizations, in which governments take direct control of financial institutions, is being debated in Britain and elsewhere, as some of the world's biggest banks report surprisingly dire results. The industry's plight, tightly intertwined with the ongoing recession, is among the great challenges confronting President Obama.

 

Problems have spread to companies that investors considered conservative and safe. Institutions including German giant Deutsche Bank, money managers State Street and Bank of New York Mellon, and even several members of the Federal Home Loan Banks system have revealed unexpected and significant problems, leaving almost no part of the financial industry untouched.

 

Losses at companies already tarred by the crisis also have been deeper than analysts expected. Regions Financial, a large southeastern bank, yesterday reported a fourth-quarter loss of $6.2 billion, greater than its total profits in the past five years. Citigroup said it lost $19 billion last year.

 

The Royal Bank of Scotland disclosed this week it may have lost $41 billion last year, leading the British government to announce a second bailout for the company that increases the government's stake in one of Britain's largest banks

 

The federal government's promise to prevent the failure of large U.S. banks may be exacerbating their problems. As banks sink, financial analysts increasingly are warning that government intervention is inevitable and could come at the expense of shareholders, perhaps in the form of nationalization. This appears to be driving away investors and hastening the intervention. As with the government's summer promise to save Fannie Mae and Freddie Mac, but only if necessary, the last resort has become the expected outcome.

 

Until banks can attract fresh capital from debt or equity investors, it will be difficult to stabilize and jump-start lending, said Binky Chadha, chief U.S. equity strategist at Deutsche Bank in New York. But the government's patchwork approach to the bailout has would-be investors sitting on the sidelines, he said.

 

"In each episode of financial intervention, the rules have been a little different," Chadha said. "Hopefully [the new administration] will lay out the rules, and it will be a lot clearer. In the meantime, the textbook model of wiping out the equity holders is clearly a concern, and should be a concern."

 

The basic problem facing the financial industry, and the new administration, is that banks lack the money to cover their losses. The capital reserves that banks are required by regulators to maintain against losses have been badly eroded.

 

The banking industry has acknowledged losses of roughly $1 trillion since the start of the financial crisis. Goldman Sachs last week projected that this total could more than double. Nouriel Roubini, a professor at New York University's Stern School of Business noted for his pessimism, said yesterday that losses could hit $3.6 trillion.

 

The Bush administration pumped almost $300 billion into U.S. banks, but the scale of investment is dwarfed by the still-emerging problem. The government's actions stemmed the market's panic in the fall, but it did not succeed in stabilizing the industry.

 

Investors now appear to be stampeding again. Shares of Wells Fargo have lost roughly half their value since the start of the year. Bank of America is down 64 percent. J.P. Morgan Chase is down 43 percent. Citigroup is down 58 percent. Those are the four largest U.S. banks.

 

Obama administration officials are considering several approaches focused on the troubled loans and other assets that are the source of the losses, including the creation of a government-owned "bad bank" that would buy troubled assets from financial firms, quarantine them and then sell them, generally at a substantial loss. The aim is to revitalize lending. Bad banks have been created by countries including Sweden, but the idea has never been tried on a comparable scale.

 

It is increasingly likely that any approach will require more than the roughly $320 billion remaining in the financial rescue program approved by Congress in the fall, several officials said.

 

The problems continue to grow.

 

A number of banks once considered healthy have been hobbled by the acquisitions of troubled institutions, often in deals urged by the U.S. and European governments. Investors are increasingly fearful of losses at Wells Fargo, which they viewed as the healthiest of large U.S. banks before it swallowed Wachovia. Bank of America needed more than $20 billion in additional government assistance in part to help it swallow the troubled investment bank Merrill Lynch.

 

Meanwhile, banks that specialize in managing money for large institutions have become the latest quiet corner of the financial industry infected by the crisis. Bank of New York Mellon reported yesterday it earned $28 million in the fourth quarter, less than a tenth of the amount Wall Street had expected.

 

State Street said that it had unrealized losses of about $9 billion as of the end of 2008, a massive figure that surprised analysts who previously regarded the company as relatively sheltered from the crisis. The company's shares fell by 59 percent yesterday as several financial analysts said State Street could be forced to raise capital.

 

Problems in Europe also grew. The Irish parliament voted yesterday to complete the nationalization of Anglo Irish Bank, the country's third-largest bank. It is the second round of government bailouts for the Irish banking industry.

 

The action in the markets underscored the need for Obama to set his sights on repairing the banking system before turning his attention to a broader economic stimulus package, said Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods.

 

"What gets at the core economic issues of the day is fixing the financial system," Gardner said. "This all started from a crisis in the financial system, and it's going to be solved by fixing the financial system."

[Emma two]

In case you weren't aware, Jan 20 is the day we inaugurate a new President.

 

The event was widely covered by the UK media too, they didn't say much about the earthquake which hit the southern states though........................belived caused by old confederates turning in their graves in South Carolina.

[corydoras]

Yes Newt I read or heard similar news over here yesterday. Not good news at all my friend. RBS shares fell below 12p on Monday. Not much better today. I just scraped this off of Bloomberg's

 

 

Currency: GBp Price 12.200 Change 1.900 % Change 18.447 Bid 12.100 Ask 12.200 Open 10.500

[ColinW]

Do Americans pick their names by throwing a handful of Scrabble pieces into the air?

Just in one article we have

 

Binyamin Appelbaum

Heather Landy

Binky Chadha

Nouriel Roubini

Barack Obama

 

Come on, they aren't real names, surely?

[Alan Stubbs]

It is a worrying situation of the company falls below the net worth of its assets. That suggests the managment of the company is the cause of the loss in value.

 

It is galling that having had to go cap-in-hand to the Bank of England, Northern Rock a now nationalised bank, is rewarding its staff with a bonus for repaying

a tranche of its bail-out loan on time.

 

I loathe the use of hindsight to justify a position, but it does seem that too many senior figures in the banking industry were victims of the 'everything's rosy because I'm in charge!' school of chutzpah.

The example of Sir Freed Goodwin, until recently the head of RBS, is typical... paying way over the odds to buy out other banks which then fail to produce dividends. It's right that they should lose their jobs, but wrong that they

should be rewarded for failure.

 

The British national debt, covered by Government bonds, according to articles in the press and on the radio, is in danger of being downgraded as an investment vehicle. This means that they would need to attract a higher rate of interest

as they are deemed to be 'less safe'. This in itself makes our debt more expensive and yet, we have a Prime Minister, who thinks he has single-handedly resolved the crisis. I'm not a party political animal, but it does strike me as odd,

that having pooh-poohed every suggestion made by opposition parties he is belatedly implementing them as if they're his idea.

 

For all their indecision and back-stabbing, the Lib Dems are lucky to have Vince Cable, as he is one of those who pointed out over 8 years ago the folly of the British Government's financial policy. One of the few things Michael Heseltine

ever said that would remain in the memory for more than 5 minutes, was in a speech at the Tory Party conference a few years ago after Gordon Brown described his financial policy as 'Post-modern endgenous growth theory' to which

Heseltine said 'They weren't Brown's words, they were Balls'" - Apparently, the Gordon Brown speech was written by the Chief Secretary to the Treasury, Ed balls.

[Newt]

It is upsetting that the people who actually were in charge of the various companies that took the bad risks that blew up and so were responsible for getting us into this mess will not suffer in any significant way.

 

I'd love to see each and every CEO, CFO, and every other senior decision making "O" of each and every large institution (including the government 'oversight' people) sacked with no bonus and required to pay back their last year's earnings and do 200 hours of unpaid community service.

 

Not likely but it surely would make the next generation of high powered money managers at least think about what they were doing.

[ColinW]

The stupidity of some of the people in control at banks is quite frightening. We have a bank in Britain called the Halifax whose bosses tried to get capital from a rights issue. Despite the fact that the share price was falling so fast that to buy the shares at their offer price would be insane, they went ahead with the process and spent God only knows how much printing and mailing all the crap that went with this process to hundreds of thousands of small shareholders like me. Talk about throwing good money after bad.

What makes me really angry is that these obviously terminally stupid people have been paying each other a fortune in salaries and bonuses

 

The boardrooms of this country are full of people whose only qualification for being there is having been to the right public school and therefore knowing which knife to eat their quails' egg soup with.

[Guest Rabbit]

The problem goes back to one major event the loans for property to folk who had a poor credit rating. The banks just lumped them all together the good risks with the not so, and the plain hopeless cases and sold them off to other banks. As soon as the defaults started to ring up the whole house of cards collapsed.

 

To make matters worse GREEDY CEO's who were only interested in getting richer whilst understanding that high risk lending continued for over a year after they should have stopped, this was the case with Northern Rock and Lehman and many others.

 

So we have decided to bail out these banks whilst the very men who profited from the collapse are rich and free and the nations are gripped with unemployment and financial ruin for many.

 

And yet our Premier's popularity is sky high, which is odd given that it was he as Chancellor encouraged this sort of banking activity through the 90's Still however he is hell bent on bankrupting this nation by propping up these banks with OUR money so ensuring that every new born baby stars it's life with a £17k debt .

[Newt]

The problem goes back to one major event the loans for property to folk who had a poor credit rating.

Ah yes - the "sub prime" loans. What a lovely term for risky/unsafe/unsound loans.

 

The theory was that since housing always increased in value, taking back properties from defaulting buyers was safe enough since the bank could resell most of them at a profit.

 

A truly wonderful plan as long as inflation continued.

 

Oops.

[Vagabond]

And yet our Premier's popularity is sky high,

 

Not with me it isn't !

 

Ever since the current gang came to power the danger signals have been evident.

 

As Chancellor, Brown was responsible for thieving FIVE BILLION POUNDS A YEAR from the pension funds - and this is still ongoing, (that's right, five thousand million pounds EVERY year) leaving many with the prospect of poverty on retirement - quite aside from the current fiscal mess.

 

As Chancellor, Brown sold off our gold reserves at a time when the gold price was at rock bottom.

 

This is not my first (or last!) post reminding everyone about the above.

 

As Chancellor, Brown totally failed to control reckless lending. There will always be reckless would-be borrowers, but until recent years they have been held in check by hard-headed lenders. The very phrase "sub prime loan" ought to sound warning bells.

 

..and as Rabbit says, now Brown is (unelected) Prime Minister he is saddling every newborn child with a huge slice of the National Debt.

 

Now there is a first - Newt, Rabbit and Vagabond agreeing on something!

 

Brutal reality 1. - people buying a house on mortgage are not "home owners" and won't be until the mortgage is paid off. I bought on mortgage, like most, because there was no other option, but didn't rest until the mortgage was paid off early. The feeling that my house was not wholly mine was not a comfortable one. I would no more think of borrowing on a second mortgage than burning my fishing rods!

 

Brutal reality 2 - people borrowing large sums on dubious assets in order to start a business are not "businessmen" but chancers. The recent rise (and fall) of "buy to let" chancers is an example that makes my point for me.

 

...and BTW, whatever you think of Margaret Becket, she obviously thinks we are all stupid. "Signs of recovery in the housing market" she says.

 

What is that based on ? "Housing agents report there has been an increase in the number of enquiries"

 

Well, OF COURSE there has been an increase in enquiries - every half-assed chancer in town is hoping to pick up a property on the cheap. Our family building business has been inundated recently with enquiries from chancers and time-wasters.