Disgraced though HSBC may be, what with the $4 billion-plus it paid in fines to regulators last year, and the 17% drop in profit that entails, the old Hongkong and Shanghai Banking Corp. managed to shrink less than its friends in Frankfurt in an unusual race backwards, thereby dethroning the Germans as Europe’s largest bank. Read more »
The entire editorial staff of DealBreaker is being let go. Starting tomorrow, it’ll be written by Andrew Ross Sorkin.
On to another, even schlockier DB: Did a bunch of directors and VPs in Deutsche bank Lev Fin get laid off yesterday? Are cuts in industrials and consumer happening today? That’s what we’re told, though our tipster is French and still pissed about the Maginot line so who knows if he’s to be trusted. Biases aside, it would be a plausible solution to the German bank’s “profitability problem” for 2008. Update: Deutsche Bank’s troubles are a pretty good indicator of how badly things are going for global finance. Last month, Deutsche Bank reported a 48 percent decline in fourth-quarter profits, but said it had no subprime write-downs. Got that? Deutsche Bank is suffering huge profit declines and (maybe) laying people off despite not being exposed to the subprime sludge its rivals and Wall Street competitors have all conveniently made their fall guy.
Yesterday we heard two discordant voices on the possibility of the monolines getting downgraded. Jamie Dimon, the chief executive of JPMorgan Chase, said that he does not think downgrades of the insurers would be “a big deal.” Deutsche Bank chief Josef Ackerman, however, described the potential downgrades as “a tsunami-like event comparable to subprime.”
So who is right? Well, maybe both chiefs are. As Yves Smith has explained, the European banks were major buyers of CDOs and RMBS. Operating under Basel II, which links reserve requirements to the riskiness of a bank’s investments, the Euro banks were able to treat triple A paper as basically risk free investments they could hold without impacting their reserve requirements. But a downgrade of the insurance on this paper could result in the banks having to bolster their reserves, possibly worsening the credit crunch or requiring a firesale of the CDOs
“A downgrade to AA increases the reserve requirements markedly, and CDOs are generally downgraded more than a mere grade or two when they fall (I wish I could be more crisp here, but Basel II makes matters more complicated). Thus a loss of the bond guarantor AAA has a quick and nasty impact on bank capital adequacy,” Smith writes.
Which is to say, because Basel II requires banks either to hold highly rated (and, on paper at least, less risky) portfolios, or to hold high levels of capital in reserve, the banks could be forced to slow lending in order to accumulate capital, go hunting for additional capital injections or sell off their now risky CDO portfolios.
In the US banks had less incentive to invest in highly rated paper because they have been required to hold the same amount of capital against AAA-rated paper as they do against BBB-rated paper. This is the most likely explanation for why the European banks are more worried about a downgrade of the monolines than their US counterparts. Deutsche Bank CEO: Bond Insurer Downgrade Will Create Debt ” Tsunami” [Naked Capitalism]
Some of you might call that favortism but A. Oh, it is? I wish I had a problem with that and B. You’ll be singing a different tune when you behold the glory that awaits you after the jump. All I will say is that it was sent to us by the greatest reader of all time, who “ripped it out of a glossy mag that was in [his] South Beach hotel room” and that when I called Deutsche to make sure it wasn’t a joke, there was a good ten seconds of stifled but totally professional giggling on the other end before the magical pronouncement: “I’m embarrassed to tell you this, but yes, it’s real. Enjoy.”
From copyranter, how did this man get this woman on top of this building? Easy – a “passion to perform,” a desire to be “lifted even higher,” and a Deutsche in a box.
Step 1: Cut a hole in the logo
Step 2: Put your Deutsche in that box
Step 3: Make her sit on the box
And that’s the way you do it. Deutsche Bank. A Passion to Perform…oral sex on our Logo. [copyranter]
The hauntingly empty lobby of Bear Stearns
Yesterday’s showdown over the fate of two big Bear Stearns hedge funds “marks an important test of the financial markets’ resiliency,” according to this morning’s Wall Street Journal. So the natural question is: how did the financial markets score? What does the report card look like on the day after several investment banks flinched from pushing these two funds over the edge?
If “Plays Well With Others” was one of the subjects being tested, several of the investment banks who were exposed to the losses at the hedge funds scored very well. JP Morgan Chase, Goldman Sachs and Bank of America all reached negotiated deals with Bear Stearns to limit their risk. Although the details are sketchy, it seems that these deals involve Bear Stearns buying back collateral assets the banks had seized, forestalling a need to auction them off.
Merrill Lynch didn’t score quite as highly in this category, and late yesterday afternoon proceeded with an auction of Bear Stearns assets it had seized. We’re told the auction met with mixed results. Some of the higher-quality assets with less exposure to the subprime market met fetched what the Journal calls “reasonably high prices.” Other assets—variously described as “sludge,” “junk in investment-grade clothing” and “immoveable objects” by traders we talked to—faired less well. The Naked Capitalism blog describes them as fetching “atrocious prices.” Deutsche Bank also seems to have opted to auction off its collateral rather than cut a deal with Bear Stearns.
But at a more fundamental level, the test may have revealed a foreboding weakness in the credit derivatives market. JP Morgan, Goldman and Bank of America are said to have pulled back from auctioning off the collateral because earlier feelers put out to potential buyers revealed that the assets they had seized would have “fetched so little in the market,” according the Journal. The idea is that if they had brought down the the Bear funds, the investment banks would have hurt themselves as well. As Alphaville puts it, “So the picture becomes clearer: eat, be eaten, eat each other, but stop before you accidentally eat yourself.”
But something even more ominous also may have convinced the banks to reach a settlement a real market test for these assets—the CDOs rarely traded and are priced according to complex mathematical models—might have demonstrated that they were worth far less than they were valued at on the books of hedge funds and investment banks. This could cause a ripple effect, forcing re-valuations at many hedge funds that hold similar assets, and at the banks that lend to them.
“As its two credit focused hedge funds with about $20bn of highly leveraged assets are put on ventilators, there is real pressure in the market for the creditors not to sell the collateral for fear of undermining the value of the CDOs and other debt packages. As we all know, they are near impossible to price accurately, due to the nature of the underlying distressed assets, and if these CDO’s are valued downwards, then all hedge funds who own similar subprime assets will have to do the same and hey presto we have a falling market, more defaults and the house of cards comes tumbling down,” Finbar Taggit writes today.
In short, by flinching from auctioning off the CDOs, JP Morgan and the other banks that reached deals with Bear Stearns may have prevented what some feared would become the much heralded “systemic event” in which the collapse of one hedge fund brings down all the others. But the cost of doing so appears to be keeping the actual market values of many of these assets more or less financially illegible. And keeping markets and regulators illiterate when it comes to reading the risks of these products.
One trader we spoke to described the outcome as a “cartoon moment.”
“As long as Wiley Coyote doesn’t realize he’s run off the cliff, he won’t fall,” he said. “These guys don’t want to look down because they are afraid there may be no there there.” Bear’s Woes Test Markets’ Mettle [Wall Street Journal] Bear Stearns Staves Off Collapse of 2 Hedge Funds [New York Times] Subprime sector hit by $1bn assets sale [Financial Times] Bear feast – be sure not to eat yourself [FT Alphaville]
The results of yesterday’s “Which bank has the dirtiest working conditions” poll are in. Some of the results may surprise you, some may not. If you actually read what we wrote about Bear Stearns’s in-house cafeteria and its 42 health-code points violations, for instance, you won’t (or shouldn’t) be surprised to learn that it landed in the top three (and if you read the part about contaminated food and inadequate levels of personal cleanliness and are still stunned, don’t invite us over to your home any time soon). If you didn’t know, though, that the 85 Broad is basically one step away from a gas station restroom on the Garden State Parkway (going South), you might be a bit caught off guard to learn that the Kingdom also landed at the top of the list of shame (all that glitters is not gold, indeed). Let’s examine the cold hard (dirty, disgusting, scatological) facts now.