The full meltdown in the subprime market has not been fully disclosed nor fully felt yet. More importantly, the numerous repercussions to the global economies have yet to be fully translated…….that is pain to be felt by ALL.
All the recent announcements by the major banks writing provisions for subprime losses; Merrill Lynch at US$8.4Billion, Citigroup at US$11Billion and Morgan Stanley at US$3.7Billion, HSBC at US$3.4Billion, BOA at US$3Billion, Goldman Sachs at US$1.48Billion and UBS at US$3.4Billion. Goldman Sachs’s writedown is lesser than the rest of the market players even though it has the highest percentage of Level 3 assets is a testament of the great risk management done by GS. All the banks are playing a dangerous game.
What these major banks have done is ingeniously transferred an embarrassing problem from their balance sheets to ‘off balance sheet’. Potentially, it means that the banks can sweep even ‘more of the latent problems under the carpet’ given that it is now an off balance sheet item?! Yes, no doubt they are taking the ‘hits’ on the their bottom line profits this year, but then again, this year has been record breaking profit announcement for most if not all American financial institutions. So what is the big deal about writing off and making provisions for subprime losses?
The best part about is that if the situation improves, the banks can always write back in these provisions as profits or rather extraordinary gains…….and they become ‘heroes’ of the free world.
There is also the whole game of re-classifying assets moving it down progressively from Level 1 to Level 3 and then thereafter, writing it off.
Out of the entire estimated US$10Trillion mortgages in the U.S., about US$1.2Trillion is subprime mortgages and so far the world’s largest banks have only written down about US$60Billion so far. Would it be reasonable to assume that the subprime situation could progressively get worse through the next 12 months?
Even the former Chairman of the Federal Reserve, Alan Greenspan admitted that he didn’t foresee that the subprime issue could be such a significant problem. It is a serious problem as it is a structural weakening of the
What have been comforting in the past three months have been two strong initiatives. Firstly, the concerted global effort by all the central banks of the world to ‘pump’ liquidity into the financial marketplace to ward off a financial meltdown has been helpful. The total liquidity injected to the marketplace to date is about US$400Billion which is significantly more than the write offs. Does this tell us something?
Unfortunately, this cannot be the long term solution. Government cannot be made responsible for bailing out the greedy private enterprise/sector.
Secondly, the joint decision by the major mortgage banks, the US government and the Federal Reserve to ‘freeze’ mortgage interest rates for the next five years will provide relief to the marginal borrowers and reduce the need for foreclosures.
What is important is that within the next five years, the US economy has to move from its currency slowdown to a re-energized economy, otherwise, the situation of the marginal borrower and the value of the marginal property will not improve through time.
More recently, some of the big boys have invited new investors to come in with cash injection to shore up their capital base. Merrill Lynch is a case in point where Temasek bought a less than 10% stake in Merrill Lynch for a consideration of $5Bn.
The subprime issue is not over yet and we cannot discount it at this moment. We will be doing a more in depth research and will be coming out with an update in the near future.
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