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Tuesday, April 1, 2008

Watch The EAST Buy The West For CENTS On The DOLLAR

Those of you who are going out there BOTTOM FISHING in equities generally, but FINANCIALS specifically should really really stop watching BubbleVision (CNBC).

Banks Face Biggest Crisis in 30 Years, Report Says (Update2): “Credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the burst of the dot-com bubble, Morgan Stanley and Oliver Wyman said in a joint report.”

You see, it’s not just about the WRITEDOWNS. When they stop, when they are done, it is NOT business as usual. The massive writedowns are just one factor in this complex mess. Future REVENUES and future PROFITS will be much much diminished for YEARS to come.

“Revenue from investment banking may drop 20 percent in 2008 before a further $75 billion in markdowns, analysts led by Huw van Steenis said in a note to clients today. Six quarters of earnings will have been erased by writedowns and falling revenue by this month, rivaling the collapse of the junk bond market at the end of the 1980s that put Drexel Burnham Lambert Inc. out of business, the report said.

Banks' revenue from their credit businesses may drop as much as 60 percent, the analysts said and the firms will have to provide more transparency to investors who buy their loans. At the same time, regulators will push the industry to retain more capital as a cushion, hurting banks' return on equity in the long-term, the group added.”

The entire financial system is desperately raising capital to REPLACE lost capital. They are obviously NOT keeping pace. Capital is currently being destroyed FASTER than it is being replaced. That means balance sheets will continue to SHRINK… and SIGNIFICANTLY so. This will result in a cycle of CREDIT TIGHTENING, whether the Fed likes it or not.

Translation: INVESTMENT BANKING revenues will suffer massively. CREDIT businesses will suffer just as massively. Not only will the top line suffer, but the bottom line as well as COMPETITION for the remaining crumbs heats up.

“Banks' earnings have been hit for the past three quarters by the turmoil in the credit markets, the report said. In total, the crisis may last for eight to 10 quarters, exceeding the six- quarter duration of the Asia crisis and bailout of LTCM in 1997- 8, and the seven-quarter fallout from the bursting of the dot- com bubble, the report said.

Investment-banking revenue has also stalled as the pace of takeovers and initial public offerings declined in the first quarter of 2008. Writedowns and losses on subprime-infected assets have already cost the world's biggest financial institutions about $230 billion since the start of 2007.

Zurich-based UBS AG today posted an additional $19 billion of writedowns and said it would seek $15.1 billion in a rights offering to replenish capital. Deutsche Bank AG, Germany's biggest bank, also said today it expects to book about 2.5 billion euros ($3.9 billion) in writedowns for the quarter.

Separately, Merril Lynch and Citigroup had their first-quarter earnings estimates cut by Goldman Sachs Group Inc., which said the two banks may post $14 billion in writedowns on assets linked to collateralized debt obligations.”

The GREAT GLOBAL DE-LEVERAGING has only just BEGUN. So much of the excess must still be unwound. Sure there will be bounces. Some of them will be quite large, violent and quick. This action is a dream for nimble traders to be sure, but dangerous for those looking to establish more permanent LONGS at the BOTTOM. We are not there yet. Bottoms are ground out and built over time. Wait for the frustrating, range bound trading that lasts a year or more. THAT will be the bottom.

“Banks are also finding their cost of capital increasing relative to other investment-grade companies, as traditional sources of money like Structured Investment Vehicles exit the market, the report said. Banks are also struggling to offload loans, leaving leverage ratios high, it said.”

UBS Says Ospel Resigns After Writedowns Lead to Loss (Update5): “UBS AG, battered by the biggest writedowns from the collapse of the U.S. subprime mortgage market, reported a 12 billion-franc ($11.9 billion) first-quarter loss and said Chairman Marcel Ospel will step down.

The bank will seek 15 billion francs in a rights offer to replenish capital, on top of 13 billion francs already raised from investors in Singapore and the Middle East. UBS will write down $19 billion on debt securities, bringing the total to almost $38 billion since the third quarter of 2007. Zurich-based UBS also said today it will cut jobs at the investment bank.”

UBS is currently up pre-market. Talk out there is that these writedowns indicate that the WORST of the banking crisis is now behind us. This is of course WISHFUL THINKING. The market has also taken the capital raising EFFORTS by UBS as a good sign. Emphasis is on EFFORTS, because they have yet to raise that capital and the COST OF CAPITAL will be HUGELY important.

“Standard & Poor's cut UBS's long-term counterparty credit rating by one level to AA- and said it may lower the rating further after the “risk management lapses, earnings volatility, and need for new capital.”

The bank's Tier 1 capital ratio, a key measure of solvency, will rise to about 10.7 percent after the rights offer, UBS said. Without the capital increase, the ratio would have fallen to about 7 percent, the bank said.

UBS, with about 2.3 trillion francs in private-banking assets, said clients in Switzerland withdrew funds in the first quarter. The Swiss redemptions were offset elsewhere and net investments were “slightly positive,” Chief Executive Officer Marcel Rohner said on a conference call today.”

IF these attempts fail, Tier 1 capital ratios will be dangerously low and capital flight will accelerate as clients close accounts. This is DO or DIE for UBS.

Lehman Attempts to Soothe Investors With Stock Sale (Update2): “Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, is seeking to raise at least $3 billion from a share sale after speculation it's short of capital drove the stock down 42 percent this year.

Lehman is offering 3 million convertible preferred shares in a sale that will be “an endorsement of our balance sheet by investors,” Chief Financial Officer Erin Callan said in an interview yesterday. Demand was three times greater than the amount on sale as of late yesterday, according to a person familiar with the deal who declined to be identified before it ends today.”

Lehman too is attempting to raise capital. My question is this: If EVERYBODY in the financial industry got whacked recently and THEREFORE needs to raise capital simultaneously, who are they going to get it from? I believe there really is only one answer: SOVEREIGN WEALTH FUNDS.

Watch the EAST buy the WEST for CENTS on the DOLLAR.

Well played. Just well played.

Related Headlines:
Leveraged Loans Fall by Record as Bank Losses Deepen (Update1)
Deutsche Bank to Write Down Record 2.5 Billion Euros (Update4)
Merrill, Citigroup Estimates Cut by Goldman on CDOs (Update1)
Dollar Advances Most in Almost Two Weeks as UBS Seeks Capital

Related Posts:
The Fed is Almost out of Ammo, Citigroup and UBS Too


Anonymous said...

good for countries like Saud and etc (except Afgan - they got hashish, and that will always be in demand) cause if they don't do SOMETHING, they clearly wont be viable for very long ... they need to diversify out of oil and figs, and this is at least a minimal step.

Anonymous said...

Don't forget the other option, that nobody gives up the capital everyone needs. Then some of our distinguished players will go belly up. A fitting fate most of them!!

Thai said...
This comment has been removed by the author.
Thai said...

Ben, do you think the fed will eventually actually 'print' money (as opposed to its current policy of swapping quality treasuries for garbage debt but not actually expanding the money supply)?

I realize this is hard to predict, but it ultimately is at the heart of the debate between the precious metal community and the deflationists.

The thing that freaks people like me out are comments made by Bernanke like: dropping money from helicopters'.

The two issues require diametrically opposite investment strategies and one does have to choose.

Ben Bittrolff said...


I don't think they will resort to printing money. The consequences are well known, far reaching, and immediate.

In this information age, any central banks that resorts to outright printing, would have a near instantly useless currency.

If they were ever to prepare to print, they would put capital controls in place first. That would be the 'warning signal'. Without capital controls, its just a mouse click to flip into another currency...

Globalization won't allow for the wild printing of currency.

Thai said...

What form would those capital controls take?

I am a firm believer in modeling 'Black Swan' low probability high impact events... we do it all the time in my field of medicine when we are unsure of our diagnosis-- it tends to keeps us out of the courtroom

Ben Bittrolff said...


"What form would those capital controls take?"

The same that they always take.

First there will be limits. Look to Argentina a couple of years ago. There Joe Sixpack wasn't allowed to withdraw more than $2k USD from their accounts a month, let alone send it overseas.

Then there will be forced conversions and repatriations. In the late 1930's FDR outlawed gold and forced Joe Sixpack to convert at a fixed, arbitrary rate to USD.

Thai said...

Ben, thanks!

I really appreciate your thoughts...

Do you think it likely market rumors would circlulate early enough to forewarn retail investors like myself (with funds in US brokrages like Fidelity) before capital controls were instituted in America?

Was there a leak giving astute retail investors time to get their money out before things went to pot in Argentina?

Or do you think the US government could move fast enough and with enough secrecy to prevent retail investors from acting to protect themselves?

Again, I realize the likelyhood of such an event is incredibly low (I really am not paranoid)-- but I do think high impact low likelihood 'what if's' are a good idea to contemplate now and then.

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