Thursday, July 3, 2008

The year for everything else

(FT Alphaville) Amid all this general market turmoil, lest we forget that it started - and is still continuing - as a severe banking crisis: this, on UBS, from Citi analysts today:

UBS has taken $38bn markdowns over 3Q07-1Q08 on problem assets, but still carries $83bn of identified risk exposures, which are likely to require further markdowns after renewed weakness in market prices and among monolines. We factor in SFr7bn markdowns for 2Q08.

And this, via Bloomberg yesterday, from Meredith Whitney:

Merrill, the third-biggest U.S. securities firm, will probably lose $4.21 a share and write down $5.8 billion of assets. Citigroup will probably lose $1.25, compared with her prior estimate for a gain of 21 cents. She forecast Citigroup’s writedown at $12.2 billion.

Most of those writedowns are still coming from the usual culprits: asset backed securities, structured finance and of course, as we have laboured, monolines. (Whitney sees the latest monoline downgrades costing ML $2.5bn and Citi $3.6bn)

And after that, it’s over for the banks? Not so, it seems. Citi analysts point out a number of “unidentified” risks for UBS on the horizon. For which, there is, of course, read across to the rest of the sector.

As the “real” economy continues to tank, a plethora of secondary factors will impact bank earnings, constrain expansion and curb business.

Consider, for example - now that the crunch is beginning to impact non-financial corporates - the effect of drawdowns on credit lines. Discretionary drawdowns are threatening to further constrain bank balance sheets as companies behave conservatively, seek to hoard cash to cover liquidity positions and borrow as much money as is available to them. The below table from a recent BoA credit strategy report;


Then, of course, there’s nasties like PIK - payment in kind - bonds. Harrah’s was the latest company to “toggle” its PIKs yesterday; opting to pay the interest on existing bonds by… selling more bonds.

In the words of Jeffrey Rosenberg at BoA:

If 2007 was the year of subprime, 2008 should count as the year for everything else.

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