Thread: A note of caution for those with deposits in US Banks

From Robert Peston, BBC's Economics Editor:

Wednesday's Picks

UBS's real loss

• Robert Peston
• 21 May 08, 08:29 AM

For months now, bankers have been taking some small comfort from the nature of their losses on subprime lending.

They have suffered markdowns, but these are not real cash losses. They are reductions in the market value of securities backed by subprime, to reflect a fall in the market price.

And that fall in the market price has been exaggerated, or so the argument runs, by the total evaporation of liquidity in these markets.

So in theory, the final losses suffered by banks could turn out to be much less than the losses they've announced, if the banks were to hold their subprime securities till all the borrowers of subprime money have either repaid or till those borrowers have defaulted and had their respective properties seized and sold.

That was, for example, the implication of a recent analysis by the Bank of England, which said that it thought subprime was being priced at a level that was surely lower than the underlying economic reality would justify.
So that's the context for assessing the significance of this morning's confirmation by UBS, the giant Swiss bank, that it has sold $22bn of subprime, Alt-A (a grade of US mortgage debt just a bit better than subprime) and prime mortgage-backed securities for $15bn.

It represents a loss for UBS of $7bn or 32% - not a notional accounting loss, but a real loss of hard cash.

And to add insult to very genuine self-inflicted harm, UBS is providing an $11.25bn loan to the buyer of all this stinky US mortgage debt, which is the fund management group BlackRock.

So UBS has suffered a genuine, eye-wateringly large loss on the sale of assets it should never have accumulated, but is remaining exposed to those assets to the tune of $11.25bn.

As I write, my brain can't quite come to terms with the extraordinary financial implications of all this, even though the terms of the deal have been known for some time.

Does it mean that the credit crunch must be nearing an end, when there is such an extraordinary example of what investors call "capitulation" by UBS?

Or does it mean that we're still at the end of the beginning, in that it's impossible to do an arms length deal even at a knockdown price?

The same question is posed by yesterday's deal that reopens the British mortgage-backed securities market, HBOS' piddling sale of £500m of securities backed by prime UK mortgages.

It's the first sale of mortgage-backed bonds by a British bank since last August.
But the amount is a fraction of what HBOS would typically have sold before the market shut down. And HBOS is paying an extraordinary amount for the money - 0.85 percentage points above LIBOR, even though the £500m is backed by mortgages worth about £800m.

It shows you how much international investors fear the prospects for the British housing market if they are only prepared to lend money to HBOS at more than 6.5%, even when the collateral is worth between 30 and 40% more than the loan.

That is scary.

So the summary of the above:

UBS (Very very big bank) sell assets that they thought was worth $22 Billion for $15 Billion, but at the same time have to 'lend' the purchaser $11.25 Billion for them to buy the assets...

They lose $7 Billion on the deal and risk a further $11.25 Billion in the process.

HBOS are attempting to 'pull off' a similar deal by the way...

^ actually it does make sense, banks need to keep certain ratios or else they get shutdown, carrying those "bad" assets in their balance sheet will affect those ratios, because international reporting standard expect those assets to be reported at market value, not accounting value. At the end, it's better to take the loss and write off as an Income Statement item rather than affecting the Balance Sheet, which is their financial position. Basically they need to move on.

There are other complexities in those deals that make a lot of sense when you look at the details, but usually those news article can't articulate the substance of it, and it looks bad on the surface without necessarily being bad fundamentally.

Originally Posted by bkkandrew

So the summary of the above:

UBS (Very very big bank) sell assets that they thought was worth $22 Billion for $15 Billion, but at the same time have to 'lend' the purchaser $11.25 Billion for them to buy the assets...

They lose $7 Billion on the deal and risk a further $11.25 Billion in the process.

HBOS are attempting to 'pull off' a similar deal by the way...

Arr... Thats OK these days. Normal business practice I think. The US borrows money from China in order to buy their goods, so it must be sensible economics.
Helps if you can just keep printing money to keep the bubble afloat though.

I've been noticing prices in the banking and associated sectors in NY going down very hard the past week or so. Some things are starting to raise questions:

1) Bond insurers are getting very close to retesting prior lows: Ambak 3.37 down 4.26% today, MBIA 8.69 down 4.35% yesterday.

Remember those stocks caused much of the mayhem back in Jan/Feb until Warren Buffett started insuring 'some' bonds himself. they are getting very close to the same situation as back then with threatened ratings downgrades, and the implications that that would cause for the underlying bonds.

2) Countrywide (CFC) the largest mortgage bank is supposed to be being bought by Bank Of America (BAC) for around $7 per share. It stands at $4.59 today down 3.57% today. Is the market speculating that B Of A is going to renege on the deal?

3) Bear Sterns (BSC) is supposed to be being bought by JP Morgan (JPM) for $10 per share. It stands at $9.50 today down a percent and the lowest since the deal was forced out by the Fed. Is the market is now betting that ths will fall through?

4) The Bank sector in general is very close to Jan/Feb levels with the Banking Index (BKX) at 77.34 down 1.52% today, compared with lows around $73. Only a few weeks ago it reached $88 when all was supposed to be sunny again.

Individual banks today:

JPM -1.49%
Merrill lynch (MER) -2.46%
Lehman (LEH) -4.71%
Washington Mutual (WM) -2.95%

Retail index (RLX) -2.06%
Homebuilder index (XHB) -3.79%

Watch what happens if these indices and banks fall through prior lows. I alerted people here that Bradford & Bingley was in trouble when it fell to new lows at 169p a few weeks back - since then it tanked by 35% down to 110p or so. You have been warned.

yep, it's coming back, the Fed action was just buying time,

^ true, meantime I'll be buying more SKF Ultrashort.

For those still with funds in Bradford and Bingley, see the latest share price:

Chart the Performance of BB:IX

^But, wait! Lehman Brothers are closing in on the 'Finish Line' too:

Lehman Selloff Accelerates

by: Word on the Street posted on: May 25, 2008 | about stocks: LEH


The eerily reminiscent slide in Lehman Brothers Holdings Inc. (LEH) picked up steam again on Friday when the stock was down $2.26, or 5.87%, to $36.24 on heavy volume of 28.3 million shares. It was dangerously heading towards its March 52-week closing low of $31.63. Already losing about 16% of its value over the past few trading sessions, the selloff in Lehman is continuing on fears of larger write-downs, and had accelerated intra-day as no one wanted to stay long ahead of a three day-weekend.

The Wall Street Journal noted that on Thursday, Greenlight Capital hedge fund manager David Einhorn spoke at the Ira Sohn Investment Research conference, questioning why the company only wrote down a $6.5 billion collateralized debt portfolio by just $200 million, and also taking issue with large, unrealized gains the firm booked in the first quarter. A known Lehman short seller, Einhorn is not the only one betting on further downside.

In looking at the options market, there is an overwhelming bias towards buying puts, with some tremendous activity in the front month contracts, particularly the out of the money June puts with a strike price of $35, $30 and $22.50 where total volume is in excess of 50,000 contracts. With growing uncertainty surrounding the value of Lehman’s financial assets, the bottom appears to be falling out.

http://seekingalpha.com/article/78747-lehman-selloff-accelerates

Also reported by WSJ:

http://online.wsj.com/article/SB121150995261316479.html?mod=todays_us_money_and_ investing

A Shorter Slams Lehman


By Peter Eavis and David Reilly

Word Count: 688 | Companies Featured in This Article: Lehman Brothers Holdings, Bear Stearns

With Lehman Brothers Holdings' second quarter set to close next week, the Wall Street firm can't seem to put questions about its fiscal first quarter behind it.

Back in mid-March when the bank reported, Bear Stearns had collapsed the day before and Lehman was in the market's cross hairs. Lehman posted a $489 million profit, calming investors. But ever since then, investors have questioned those numbers, asking whether the profit was due to some one-time, unrealized gains.

Article contunues in the subscription-only section, which cannot be reposted, due to Copyright.

The upshot is though that no-one believes their Q1 figures and are looking forward to seeing how they spin their Q2 figures this week. Any question of back-tracking and their liklihood of 'Doing a Bear' is high...

Libor Cracks Widen as Bankers Struggle With Reforms (Update2)


By Gavin Finch and Ben Livesey




May 27 (Bloomberg) -- Few companies have suffered from the subprime mortgage collapse more than UBS AG, which has taken $38 billion of writedowns and losses, replaced its chief executive officer and chairman and saw its stock tumble 60 percent.

Yet on 85 percent of the days between July and mid-April, the Zurich-based bank told the British Bankers' Association that it could borrow in the money markets at lower interest rates than its rivals. Not even the U.K.'s Lloyds TSB Group Plc, which only wrote down $1.4 billion, could obtain the rates UBS said it was able to get, according to data compiled by Bloomberg.

``Even when the market knew UBS was massively exposed and Lloyds wasn't, that was not reflected in Libor,'' said Antony Broadbent, an independent banking consultant and former analyst at Sanford C. Bernstein & Co. in London.

Such discrepancies are creating a crisis of confidence in the London interbank offered rate published daily by the London- based BBA and taken from the contributions of UBS, Lloyds TSB and 14 other banks. Rates on corporate bonds, leveraged buyouts loans, derivatives and even U.S. mortgages are pegged to Libor.

The criticism has prompted the BBA to accelerate a review of the 24-year-old system of setting rates. The findings, due May 30, may determine how fast the banking industry recovers from the credit crisis.

`People Get Hurt'

``You've got to fix Libor,'' said Tim Bond, head of asset allocation strategy in London at Barclays Capital, a unit of Barclays Plc, one of the banks that provide quotes to the BBA. ``You don't ever want to be in a situation like this again, where people can get away with quoting whatever rate they like. Real people get hurt like this.''

Libor is a benchmark for about $350 trillion of debt- related securities and derivatives, according to the Bank for International Settlements in Basel, Switzerland. The rate that San Antonio-based AT&T Inc., the biggest U.S. phone company, pays on $2 billion of notes it sold on March 27 floats at three- month Libor plus 0.45 percentage point.

``Libor is baked into the global financial system,'' analysts at JPMorgan Chase & Co. led by Terry Belton, global head of fixed-income and foreign-exchange research, wrote in a May 16 report. ``The question of whether a benchmark could be designed that is less flawed than Libor is debatable; whether such a benchmark could effectively replace Libor is not.''

Libor Exposed

Every morning the BBA, an unregulated trade group, asks member banks how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes, and publishes them at about 11:30 a.m. in London. Three-month dollar Libor was set at 2.64 percent today.

Libor was thrust into the spotlight in August as the subprime-mortgage contagion spread and banks were suddenly wary of lending to each other because of mounting losses that reached $383 billion as of last week, data compiled by Bloomberg show.

Three-month Libor soared to 2.40 percentage points above yields on Treasury bills on Aug. 20, the widest margin since December 1987 and up from 0.39 percentage point a month earlier. The figure was 0.80 percentage point today.

The credit crisis exposed Libor's flaws, according to Peter Hahn, a London-based research fellow for Cass Business School and a former managing director at Citigroup Inc. That's because the BBA publishes the names of contributors and their rates, giving lenders an incentive to underestimate borrowing costs to keep from appearing like they are in financial straits.

Rates `a Lie'

In the first four months of 2007, the difference between the highest and lowest rates for three-month Libor didn't exceed 0.02 percentage point, according to JPMorgan. In the same period this year, it was as wide as 0.17 percentage point.
The BIS said in a March report that some lenders may have ``manipulated'' rates. Strategists such as Bond at Barclays went as far as calling the reported rates a ``lie.''

The BBA said on April 16 that any member deliberately understating rates would be banned. The cost of borrowing in dollars for three months rose 0.18 percentage point to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze in August.

Lesley McLeod, a BBA spokeswoman in London, would only say the association's review is ``ongoing'' and a ``robust process.''

Libor would be more reliable if banks offered rates anonymously, removing the stigma of appearing like they are having trouble accessing capital, said Bond at Barclays.

More U.S. Banks

For Brian Yelvington, a strategist at bond research firm CreditSights Inc. in New York, the solution is for the BBA to insist on proof that the rates quoted are based on real transactions. That way, there would be ``no way to hide since it goes from being a poll of sorts to a confirmed trade,'' he said.

The discrepancies wouldn't have been so pronounced if Libor were set at 10 a.m. New York time, making it less skewed toward Europe, JPMorgan wrote May 16. Only three U.S. banks contribute rates to the BBA: Citigroup, Bank of America Corp. and JPMorgan.

Any changes may be little more than cosmetic as a wholesale restructuring would disrupt the global financial system, said Barry Moran, a money-market trader at Bank of Ireland in Dublin.

``But the last thing you want to be doing in the middle of a financial crisis is implementing massive changes in the way the world's benchmark rate is set,'' Moran said.

UBS, the world's biggest wealth manager, and Lloyds TSB, the U.K.'s largest provider of checking accounts, underscore the wide range in rates quoted to the BBA since July.

HSBC, RBS

UBS's three-month offered rate in dollars averaged 1.3 basis points less than Libor from July through April 15. By contrast, Lloyds TSB quoted rates that were 0.04 basis point above Libor on average. A basis point is 0.01 percentage point.

In that period UBS ousted Peter Wuffli, 50, as chief executive officer after subprime-related losses at a hedge fund run by the bank, and Chairman Marcel Ospel, 58, who helped form UBS through a merger a decade ago, stepped down. UBS has slumped to 25.84 Swiss francs in Zurich from last year's high of 77.05 francs on Feb. 9, 2007. Dominik von Arx, a UBS spokesman in London, declined to comment.

HSBC Holdings Plc, Europe's largest bank by market value, gave rates that averaged 1.4 basis points less than Libor. The London-based bank has taken $19.5 billion in writedowns and charges. Royal Bank of Scotland Group Plc, the U.K.'s second- biggest bank, submitted rates that averaged 0.9 basis point below Libor. It has reported $15.3 billion in losses and writedowns.

HSBC spokesman Patrick McGuinness in London and RBS spokeswoman Carolyn McAdam in Edinburgh declined to comment.

From Bloomberg (Dubbed Gloomberg by some...):

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAA11bsMpVD4&refer=home

Bank failures to surge in coming years

SAN FRANCISCO (MarketWatch) -- By April, Gary Holloway was almost three years into retirement.

He'd built a new home by a lake in Texas, bought a boat and was working on his golf game. While taking on some part-time work, Holloway also traveled for months across the U.S. with his wife, from Seattle to Washington D.C., catching up with old friends and family.

That life of leisure abruptly changed about six weeks ago when Holloway got a phone call from his former employer, the Federal Deposit Insurance Corp., or FDIC, which regulates U.S. banks and insures deposits.

Holloway, a 30-year FDIC veteran, had worked extensively with failed lenders in Houston during the savings and loan crisis in the late 1980s and early 1990s, when thousands of thrifts collapsed.

Earlier this year, the FDIC began trying to lure roughly 25 retirees like Holloway back to prepare for an increase in bank failures. It's also hiring about 75 new staff.

Holloway quickly went back to work. ANB Financial N.A., a bank in Bentonville, Ark. with $2.1 billion in assets and $1.8 billion in customer deposits, was failing and an expert like Holloway was needed to value the assets and find a stronger institution to take them on.

"I was very excited about coming back," Holloway said in an interview. "I'm now 57. There's still a lot of life left and the juices are flowing again."

Full article:http://www.marketwatch.com/news/story/bank-failures-surge-credit-crunch/story.aspx?guid=%7B2FCA4A0C-227D-48FE-B42C-8DDF75D838DA%7D&dist=msr_1

Originally Posted by bkkandrew

From Bloomberg (Dubbed Gloomberg by some...):

i think bloomberg reports it pretty straight.

IMO marketwatch.com and cnbc are ridiculous in how they're always searching to find a positive spin to put on bad news.

some of the headlines on marketwatch are especially comical.

Of course they are lying, banks are known for concealing and manipulating data to get away with it,

You are no longer the customer, they work for the government with their silly compliance, and take your money away by playing Russian roulette with it,

that's how deregulations and years of M&A has brought to us, time to re-nationalize those and seize their CEO assets

Originally Posted by raycarey

Originally Posted by bkkandrew

From Bloomberg (Dubbed Gloomberg by some...):

i think bloomberg reports it pretty straight.

IMO marketwatch.com and cnbc are ridiculous in how they're always searching to find a positive spin to put on bad news.

some of the headlines on marketwatch are especially comical.

I think Bloomberg should be proud of their moniker, as, indeed, it is merely a reflection of accurate reporting when all the news is gloomy...

Price98.250
Change-4.250
% Change-4.146


Chart the Performance of BB:IX

Bare in mind that the Rights offer is 82p. The closer we get to that wipes out the discout (or incentive) for shareholders to buy into the rights deal. Anywhere below 90p and the rights offer will fail, B&B won't get the emergency cash and they do a Northern Rock... (Well assuming Broon & Co have the funds to bail-out this time)

Oh and the price has now dropped to 97.75. I do hope no-ne still has savings with this bank. I have given you two month's notice of this...

From The Daily Telegraph:


http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/29/cndebt129.xml
US and European debt markets flash new warning signals


By Ambrose Evans-Pritchard, International Business Editor

Last Updated: 6:40am BST 29/05/2008





The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.

Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.

But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.

"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."

Lehman Brothers took writedowns of just $200m on its $6.5bn portfolio of sub-prime debt in the first quarter even though a quarter of the securities had "junk" ratings, typically worth a fraction of face value.

Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said.

The jump in corporate bankruptcies has not yet been picked up by the usual indicators, which tend to lag the market, lulling investors into a false sense of security. The true losses are already known to specialists in the business, said Mr Sels.

[quote=bkkandrew;640684]
Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. quote]

Whats phase 111 then?

^Beans & guns?

Back to Bradford & Bingley. Closed down a further 7% today to 90.25. I wonder if the queues outside branches will start tomorrow...

^Now at 88p, just 6p from the rights issue price, which is now bound to fail. UBS and Citi now have to split the £300M bill. Meanwhile, B&B will 'merge' with The Crock...

As predicted:

SHARES SUSPENDED

http://www.londonstockexchange.com/LSECWS/IFSPages/MarketNewsPopup.aspx?id=1856932&source=RNS

TPG Capital (”TPG”), a leading global private investment firm, has agreed to invest approximately £179 million and become a major strategic investor owning 23% of the Company upon completion - A Restructured Rights Issue will raise approximately £258 million and, together with TPG’s investment, will raise additional capital of approximately £400 million, net of expenses. All shares will be issued at an offer price of 55 pence per share

- Difficult economic conditions have led to a decline in net interest margin and increasing arrears. Underlying profits for the first four months of the year amounted to £56 million compared to £108 million in 2007. The trading update highlights a more cautious outlook for the year

- Steven Crawshaw has stepped down as Group Chief Executive with immediate effect as a result of serious illness. Chairman Rod Kent has become Executive Chairman

(My comment): Crawhaw's illness appears to angina attacks, no wonder, as his bank goes bust!

Hope you all got your money out, I did give you about 3-months notice!

Oh and don't be fooled by this latest 'bad money after good' 'investment'. The new rights issue price has been reset to 55p (from 82p, which was doomed to failure as the shares slid). Current share price after the shares began trading again is 64p - down over 27% on Friday's close!

Feds arrest two former Bear Stearns hedge fund managers

by The Associated Press Thursday June 19, 2008, 8:19 AM


Federal authorities said two former Bear Stearns managers have surrendered in New York City to face criminal charges in the wake of the collapse of the subprime mortgage market.



Daniel Acker/Bloomberg NewsRalph Cioffi, former manager at Bear Stearns, is escorted by police officers to federal court in Brooklyn borough of New York today.

Authorities in Brooklyn are expected to give details later Thursday on the case against Ralph Cioffi, of Tenafly and Matthew Tanin, of Manhattan, who are ex-managers of Bear Stearns hedge funds that collapsed last year.

Officials told The Associated Press that the former executives are suspected of misleading investors about the risky subprime mortgage market. They have been the target of the yearlong probe.


Justin Lane/EPAMatthew Tannin, a former Bear Stearns hedge fund manager, is escorted by law enforcement officials after being arrested in New York today.
Tannin's attorney has declined to comment and Cioffi's attorney has not responded to a phone message.

Last month, Bear Stearns shareholders approved JPMorgan Chase's $2.2 billion buyout at about $10 a share. Back in January 2007, before mortgage defaults began clobbering banks and draining demand from the debt markets, Bear Stearns had traded at $171 a share.