Interest Rate Roundup

Tuesday, February 19, 2008

Better get a bigger container

The "well-contained" credit problems keep growing. Now there are signs of trouble ...

At Credit Suisse (from the Wall Street Journal):

"Swiss bank Credit Suisse Group, until now relatively unscathed by the credit crisis, Tuesday said first-quarter earnings will be reduced by $1 billion from mismarkings and pricing errors by traders which led to the reduction in the value of some asset-backed securities by $2.85 billion.

"The news came only a week after the company reported robust fourth-quarter profits largely free of any impact from subprime-credit exposure. The Zurich-based bank said it is reviewing whether the change in value of the securities will impact last year's earnings as well.

"In the first quarter to date, we estimate we remain profitable after giving effect to these reductions," the bank said."

At Lehman Brothers (also from the WSJ):

"Many investors have been surprised at the ability of Lehman Brothers Holdings Inc. to navigate the credit crunch, given the size of its exposure to potential land mines.

"But there are growing signs that the New York investment bank's latest quarter will be the rockiest since the mortgage crisis began. Behind the worry: Lehman is sitting on a big pile of commercial real-estate loans, and that market is deteriorating, potentially causing bigger-than-expected write-downs.

"In recent weeks, credit markets have worsened, and Lehman believes it is now facing a write-down in the $1.3 billion range, according to people familiar with the matter. That has risen from a recent estimate of $800 million to $1 billion, and from a $830 million write-down in the fourth quarter."

At Bank of Montreal (from Bloomberg):

"Bank of Montreal, Canada's fourth- largest bank, said it will report costs of about C$325 million ($323.9 million) for trading and investment writedowns in the first quarter.

"The Toronto-based bank also said in a statement today it named Thomas Flynn as Chief Risk Officer, replacing Robert McGlashan."

And in the leveraged loan market (once more from the WSJ):

"U.S. and European banks, already reeling from persistent losses on mortgage investments, are facing a new hit as the global financial crisis spreads to deteriorating corporate debt.

"UBS AG and Credit Suisse Group last week announced the write-down of a combined $400 million in the value of leveraged loans as part of their fourth-quarter earnings reports. That signals more misery right around the corner for banks that barreled into these low-rated corporate loans, which typically are issued by banks and sold to investors like junk bonds, and are stuck holding them. Leveraged loans served as buyout-related debt that fueled a merger boom until the credit slowdown.

"Credit Suisse, Switzerland's second-largest bank in stock-market value, valued its leveraged-finance portfolio of loans and bonds at a 6.3% discount as of Dec. 31. That suggests the loans and bonds have an average value of 93.7 cents on the dollar. Meanwhile, two corporate-loan credit-derivative indexes have fallen sharply in the past two weeks, indicating negative sentiment and falling demand.

"If the trend holds, analysts and investors are bracing for as much as $15 billion in leveraged-loan-related write-downs at commercial and investment banks in the first quarter, further depleting capital levels already sapped by the mortgage mess. Estimates of the markdowns range from 2% to 10%."

Indeed, U.S. banks are in such bad shape, they're tapping the Federal Reserve for massive amounts of money. Per the FT ...

"US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

"The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

"US officials say the trend shows that financial authorities have become far more adept at channelling liquidity into the banking system to alleviate financial stress, after failing to calm money markets last year.

"However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

"The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

I'm just going to go back to a long-standing message of mine -- This was NEVER just a residential mortgage problem. Lenders played fast and loose with credit in several markets, from residential real estate to commercial real estate to LBO-land. Now, they're paying the price.


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