Connecting the Little Dots to the Big Dots David Lian 26 September 2008
Just how bad is this sub-prime and now credit crunch disaster anyway?
60
50
Citigroup Merrill Lynch UBS HSBC Lehman Brothers AIG RBS BoA IKB Fannie Mae Morgan Stanley Wachovia Deutsche Bank Ambac MBIA Barclays JPMorgan Credit Suisse Washington Mutual HBOS Bayerische Landesbank Freddie Mac Societe Generale Mizuho Financial Dresdner Bank Bear Stearns Fortis WestLB BNP Paribas UniCredit Lloyds TSB Nomura DZ Bank Natixis Swiss Re HSH Nordbank LBBW Commerzbank Mitsubishi Sumitomo AXA
Losses $billion
Individual bank losses since credit crunch hit in Sept 2007
Source: Reuters 11/9/08
70
Top 3 winners of the Bank Loss Olympics
40
30
20
10
0
1100
1000
600
500
0 AXA Commerzbank Mitsubishi Sumitomo HSH Nordbank LBBW Swiss Re DZ Bank Natixis Nomura Lloyds TSB BNP Paribas UniCredit Fortis WestLB Bear Stearns Dresdner Bank Mizuho Financial Societe Generale Bayerische Landesbank Freddie Mac HBOS Credit Suisse Washington Mutual JPMorgan Barclays MBIA Ambac Deutsche Bank Wachovia Morgan Stanley Fannie Mae IKB BoA RBS AIG Lehman Brothers HSBC UBS Merrill Lynch Citigroup
Cumulative Losses $billion
Total (cumulative) bank losses since credit crunch hit in Sept 2007 Source: Reuters 11/9/08
1200
IMF Forecast of Total Bank Losses Globally
900
800
700 58%
Total Declared Losses to Date
400
300
200 42%
100
@ $35b/month run rate About 17 months to go
How did many investment banks initially respond to their developing problems?
By following standard operating procedure!
Oracle of Investment Banking Golden Rule 1 Complete lack of transparency is the key to successful investment banking.
Golden Rule 2 Share all profits with yourself and donate all losses to everyone else.
Golden Rule 3 In all dealings with outsiders, refer to Golden Rule 1.
Case Study: Merrill Lynch Asset Sale - A whole lot of Bull?
CEO: “We could use some capital, but we won’t sell shares, we’ll just sell some assets.” July 2008 Q2 earnings discussion
CDO Jackpot Assets
Merrill Lynch sells assets to Texas-based Lone Star Funds
Pa y
(25+
75)% of t ota l prov valu ided e as c ollat eral Loan 75% of t Gen ota l erou valu s fi e n an c ing term s CDO s
CDO Jackpot Assets
r dolla e h t ¢ in lue 2 a v 2 k e o Pric o bo t t n scou i d 88%
Yeeha!
But wait a minute….what is that smell?
1 scoop Bull CDO = 22¢ (after 88% discount)
BULL CO.
75% finance for 1 scoop Bull CDO = 16.5¢
Balance Sheet 16.5¢ (from loan) + 5.5¢ (from LSF) = 22¢ payment
Assets Cash Loot Property Loot CDO Jackpot
xxxx xxxx xxxx
Liabilities Admitted Denied Hidden
xxxx xxxx xxxx
Collateral for loan = 1 scoop Bull CDO No market for Bull CDO offered for on-sale by LSF LSF defaults on loan from Bull Bull seizes collateral lodged by LSF “True” price of 1 scoop Bull CDO = 5.5¢
As the saying goes...if it looks like one and smells like one….then it is one!
ECONOMICS 101: If a free market rejects what you’re selling, that implies its market value is precisely ZERO!!
D. . R . U T.
Moo?
t he n i g n i h polis hat w All the e g n a on’t ch w d l r o w is! it really
So what led to the $700b bail out fund proposed by the US Treasury Secretary Henry Paulson?
Countdown to the Big Meltdown
New Century Financial
Bear Stearns
BNP Paribas
European Central Bank
Northern Rock
Bear Stearns
4/07
7/07
8/07
8/07
2/08
3/08
Files for Chapter 11
2 hedge funds collapse
2 hedge funds collapse
€204b liquidity injection
Nationalised by UK govt
Sold to JP Morgan Chase
Merrill Lynch
Lehman Brothers
Freddie & Fannie
15/9/08
15/9/08
7/9/08
7/08
5/08
4/08
Sold to Bank of America
Files for Chapter 11
$5.4t debt nationalised
2nd biggest bank collapse in US
$37b write downs total
Estimates $1,000b min. global losses
Morgan Stanley
Indy Mac
UBS
IMF
Goldman Sachs
AIG
HBOS
17/9/08
18/9/08
21/9/08
21/9/08
21/9/08
??/9/08
Nationalised by US govt
Sold to Lloyds TSB
Converts to commercial bank
Converts to commercial bank
Paulson proposes $700b TurdCo fund
US national debt explodes to $11,300b
What is the likely end game?
Something pretty ugly...
Shadow Banking system implodes
Global Economy sinks into Deep Recession or even Depression Investment banks collapse
Money market funds collapse
Leveraged hedge funds collapse
Private equity funds collapse
“Real” economy implodes
SO BE PREPARED! Credit-starved businesses collapse
Leveraged businesses collapse
General employment collapses
Bankruptcies sky rocket