writedowns

Bank losses in perspective

Jim Kim — Mon, 01 Sep 2008 07:22:24 -0400

So just how bad are banks getting hit? The Financial Times undertook an analysis of bank losses in relation to historical profits. Merrill Lynch really stands out. Since the credit crunch started last year, Merrill has posted after-tax losses of more than $14 billion. That amounts to about half of Merrill's profits since the beginning of the decade. Whew! Historical profits were adjusted for inflation via a system from www.measuringworth.com. The second highest loss-to-historical profits ratio belongs to UBS. So the market gives, and the market takes. These ratios just might get worse before they get better. At some point, Lehman Brothers may nudge its way into their company.

For more:
- here's the article

Alt-A loans, the coming convulsion?

Jim Kim — Fri, 15 Aug 2008 13:28:58 -0400

There is a subtle undercurrent of fear on Wall Street about Alt-A loans. JPMorgan has about $19.5 billion worth of exposure to Alt-A mortgages, and it likely is not alone. I would be surprised if banks have written off much against these assets. CalculatedRISK notes that "subprime delinquencies appear to have peaked in December of 2007, and subprime foreclosure starts may have peaked in January of 2008," according to research firm Clayton. "Unfortunately, Alt-A seems nowhere near its peak yet." Delinquencies and foreclosures seem to be on an upsloping curve. This may be the start of another wave of writedowns.

For more:
- here's the CalculatedRISK item

Citigroup's predicament on CDOs

Jim Kim — Thu, 31 Jul 2008 13:09:48 -0400

The conventional wisdom right now is that Merrill Lynch's big move to offload its portfolio of collateralized debt obligations just might force Citi to follow suit. So how large would the writedown be? Goldman Sachs analyst William Tanona has suggested that if Citi's CDOs were marked at the same valuation (22 cents to the dollar), it would require a massive $16.2 billion writeoff. Ouch. Media reports hold that Citi has valued its securities at about 50 to 60 cents to the dollar; it's comfortable with that because most of the CDOs are pre-2005. It may not be forced to mark all the way to 22 cents, so there's a lot of uncertainty as to how these securities will ultimately be valued. In any case, it seems that Citi's hand is being forced.

For more:
- here's the Financial Times item

Bill Gross: Writedowns to hit $1 trillion

Jim Kim — Wed, 30 Jul 2008 13:41:01 -0400

According to the Financial News Online writedown-o-meter, banks collectively wrote off $205 billion as of June. Since then, the total has climbed higher. While we've heard many people suggest that the worst is over, Bill Gross, the outspoken bond manager at Pimco, is not one of them. He suggests that banks may ultimately be forced to write down more than $1 trillion, according to Financial News Online. Whew! He told clients there's about $5 trillion in mortgage-related risky assets on bank books. The flip side is that these potential losses will require additional capital, which may prove hard to come by. We'll see more asset sales, more dividend cuts, and less lending. None of this is good news. I'd like to think that $1 trillion is way high, but who knows.

For more:
- here's the article

Citi feeling pressure to take more writedowns?

Jim Kim — Tue, 29 Jul 2008 21:51:30 -0400

While Merrill Lynch has moved to puts its collateralized debt obligation woes behind it, Citi still has about $23 billion in net exposure to such securities. It's doubtful CDOs are going to magically recover in value anytime soon, so the bank will likely be pressured to follow the lead of Merrill Lynch. Deutsche Bank analyst Michael Mayo predicts Citi will take third-quarter writedowns of about $8 billion, reports TheStreet.com. The bank may take another $1 billion due to monoline exposure. So this raises an obvious question: Will Citi need to raise capital once again? The answer would appear to be yes if it takes another big writeoff. The issue is how to raise capital. No doubt, it's very actively shopping assets--a given. But we may see a big investment or equity issue, despite the dilutive effects. And of course, there's always the possibility of dividend action.

For more:
- here's the article

Bank earnings are going to be ugly

Jim Kim — Tue, 15 Jul 2008 07:56:01 -0400

Are you ready for the next round of earnings reports? It's going to be pretty ugly. It'd be nice to think that the potential bad news--and analysts have grown more cautious as earnings dates approach--has been priced in already. But you just don't now. The environment in which big banks and brokerages will report is combustible, to say the least. Merrill Lynch and JPMorgan Chase will kick off on Thursday. Citi will follow on Friday. Bank of America will report on Monday, followed by Wachovia on Tuesday. The size of writedowns will be important. Write-down estimates have been climbing steadily higher, but they might be even worse now than expected. Few are optimistic.

For more:
- here's a CNNmoney article

What's up with Merrill Lynch?

Jim Kim — Mon, 23 Jun 2008 08:15:48 -0400

Merrill Lynch is due to report second-quarter earnings next month. Ahead of the news, most analysts have been busy paring their estimates. CNBC notes that a month ago, analysts were expecting, on average, 44 cents a share. Now that's down to 16 cents a share. There are a host of worries behind the cuts. They really cropped up at the end of last week, when rumors were rife that the firm would make a pre-announcement on earnings. The rumor was that it would write down securities tied to Alt-A loans. Merrill announced that it is not preparing an earnings announcement. Still, the uncertainty in this climate can lead to some big stock swings.

For more:
- here's a CNBC article

Capital raising to get harder for commercial banks

Thu, 22 May 2008 06:59:54 -0400

We all get the sense that banks are due for some more capital raising. But it comes down, in large part, to upcoming writedowns. If they are much worse than expected, banks will have to hit the capital trough again, notes Investors' Business Daily. The problem is, raising capital will only get harder, especially if we assume the SWF and private equity money has dried up. Many have already pushed to the limit of preferred sales. At some point, common shareholders will be forced to protest the terms and dilutive effects. Common share offerings will be iffy propositions at best. The article makes an interesting point. Commercial banks may have the harder time if other asset classes--auto loans for example--hit some turbulence.

For more:
- here's the article

Second-quarter earnings still a question mark

Thu, 15 May 2008 06:59:55 -0400

Goldman Sachs analyst William Tanona has reduced his second-quarter earnings estimates at Bear Stearns, Lehman Brothers and Morgan Stanley, notes the AP. For the second-quarter, the sources of reduced earnings growth likely will shift. The key contributors this time will not be writedowns from troubled securities, CDOs and leveraged loans. Rather, it will come from weakness in core business lines, such as investment banking and principal and proprietary trading. As noted previously, losses from credit spreads on their own debt (a fair value issue) will lead to losses, even though there might be write-ups from other securities (see previous item). All in all, he also believes that on a valuation basis, top banks are now a good buy.

For more:
- here's the AP article

Banking industry future still cloudy

Wed, 14 May 2008 06:59:57 -0400

So is the worst really over? We've been hearing as much from lots of executives as of late. But not everyone is buying it. Case in point: Former Fed official Vincent Reinhart says banks face an additional $650 billion plus in writedowns and losses. That's on top of the $350 billion already suffered. So we may see yet another round of intense fund-raising. The question is, who will invest? Likely, banks will have to offer even better preferred terms, if that's even possible. As the second quarter closes, we're definitely seeing a kind of cover-your-bases tone to analysts' comments. But are we going to see another Bear Stearns-like implosion? Hopefully we're past that. But a few downside surprises wouldn't be all that, well, surprising.

For more:
- here's a New York Post article