Viewpoints

Shocked and Awed?

Where are we now? Good question. It's a global rout, with worldwide governments pumping $3 trillion of rescue capital into the financial system. Will it work? We wanted to quantify the situation with a view to divining how much remaining exposure various financial companies have to potentially radioactive mortgage assets. For the brokerages, things probably can't get too much worse, but the banks

Where are we now? Good question. It's a global rout, with worldwide governments pumping $3 trillion of rescue capital into the financial system. Will it work? We wanted to quantify the situation with a view to divining how much remaining exposure various financial companies have to potentially radioactive mortgage assets. For the brokerages, things probably can't get too much worse, but the banks may be another story, says Brad Hintz, a Sanford Bernstein analyst.

“For the survivors in the securities industry — that is, Goldman Sachs and Morgan Stanley — the remaining exposures to the residential mortgage market are relatively modest,” says Hintz. Meanwhile, Merrill Lynch argues that since it originated its own mortgages, these are in better shape than those of most banks: Merrill's retail clients have stronger credit histories than the average mortgage holder in the country, the firm claims.

That said, commercial mortgages continue to pose some risk to financial services firms. “The risk to Goldman and Morgan is that the slowing economy is going to have its own impact on the mortgage market,” continues Hintz. “Commercial mortgages haven't been a disaster yet, but they will get hit if the economy continues to slow. There will be some fallout, but it won't be life threatening.” For straight-up banks, credit cards and auto loans could become a problem, especially if these institutions weren't using mark-to-market accounting, Hintz says.

MORE TROUBLE AHEAD?

The major bank/brokerage firms are still carrying billions of dollars of potential junk on (and off) their balance sheets. (Data through Q3.)

Total Mortgage-Related Assets Sub-Prime Mortgage Assets Commercial Mortgage Assets Alt-A Exposure Tier 1 Capital
Citigroup N/A $19.6 bn $19.8 bn* $13.6 bn 8.2%
Merrill Lynch $72.5 bn 3.0 bn 19.2 bn 3.5 bn 8.7
Morgan Stanley 41.0 bn 4.9 bn** 7.7 bn N/A 12.7
Goldman Sachs 27.4 bn 3.7 bn 14.6 bn 3.7 bn 11.6
UBS N/A 6.7 bn 8.2 bn 6.4 bn 11.5 (Oct. 16)
Wachovia 312 bn 1.5 bn 45.8 bn N/A 8.0
JPMorgan Chase 480 bn 73.1 bn 186.6 bn 5.8 bn 8.9
*From Q2. ** Gross
Source: Sanford Bernstein; company reports — UBS, JPMorgan and Wachovia numbers for Q2.

CLEANING HOUSE

Write-downs and Capital Raised

In $bn (as of October 6, 2008)

Write-downs Capital Raised
Total Worldwide 585.9 432.7
Americas 334.0 235.0
Europe 227.4 175.1
Asia 24.6 22.6
Citigroup 60.8 71.1
Wachovia 52.7 11.0
Merrill Lynch 52.2 29.9
Washington Mutual 45.6 12.1
UBS 44.2 28.0
HSBC 27.4 5.1
Bank of America 21.2 20.7
JPMorgan Chase 18.8 19.7
Morgan Stanley 15.7 14.6
IKB Deutsche Industriebank 14.8 12.2
Royal Bank of Scotland 14.1 23.1
Lehman Brothers 13.8 13.9
Credit Suisse 10.4 3.0
Deutsche Bank 10.4 6. 1
Wells Fargo 10.0 5.8
Credit Agricole 8.8 8.5
Barclays 7.6 17.9
Canadian Imperial Bank of Commerce 7.2 2.8
Fortis 7.1 23.1
Bayerische Landesbank 6.9 N/A
Source: Bloomberg and Desjardins, Economic Studies

HOW DEPRESSING

Some Insight Into The Great Depression

Statistics:

  • Length of the Decline: According to NBER, the decline of the economy lasted 43 months. It would have begun in August 1929 and ended in March 1933.

  • Decline of GNP: According to the data published by Global Financial Data, the GNP declined by 45 percent between 1929 and 1933.

  • Stock Market Decline: According to the Dow Jones Industrial Average, an 89 percent decline between 1929 and 1932. According to the S&P 500 composite index, an 86 percent decline.

  • Unemployment Rate: According to Economic Report of the President data, the unemployment rate went from 3.2 percent in 1929 to 24.9 percent in 1933.

  • Employment: Employment declined by over 30 percent between 1929 and 1933.

  • Inflation: According to Global Financial Data, the price drop between the high of 1929 and the bottom of 1933 was in the -27 percent range. Between 1930 to 1933, the average yearly price fluctuation was -6.75 percent.

The Difference Between Today's Situation And The Great Depression

  • Central banks know much better how the economy works and the impact they can have on it.

  • During the Great Depression, the monetary policy remained very restrictive.

  • Today's central banks fulfill their roles as lenders of last resort.

  • Deposit insurance along with other measures help to maintain confidence in the financial system.

  • We are not forced to adhere to a fixed exchange rate tied to gold.

  • The market correction was much more important at that time (a negative wealth effect was more harmful to the economy).

  • Social safety nets are in place today.

  • Government expenditures increase in crisis situations.

  • Households can often count on more than one source of income.

Source: DesJardins Economic Studies

TARP LIFELINE

Government bailout package includes $250 billion to be invested directly in banks

The U.S. $700 billion TARP (Troubled Assets Relief Program) plan makes it possible to buy back problem securities. Of this amount, $250 billion are immediately available, a $100 billion extension is available without Congressional approval and another $350 billion could be granted, subject to approval. Nine companies, corresponding to two-thirds of the newly constituted banking system, have been initially selected to receive the first $125 billion in the following investments.

Citigroup JPM Chase Wells Fargo Bank of America Goldman Sachs Merrill Lynch Morgan Stanley Bank of New York Mellon State Street
Gov. Invst ($bn) $25 $25 $25 1 $15 $10 $10 $10 $3 $2
Assets ($bn)2 $2,100.4 $1775.7 $609.1 $1831.2 $1081.8 $966.2 $987.4 $201.2 $146.2
Market cap ($bn)3 $101.4 $106.5 $110.9 $133.1 $58.4 $32.7 $23.3 $39.8 $24.5
Employees 374,000 200,000 160,500 206,597 32,569 60,000 46,383 43,100 27,110
Headquarters New York New York San Francisco Charlotte New York New York New York New York Boston
Notes: Bank of America is buying Merrill Lynch,1 =includes $5 bn for purchase of Wachovia; 2 =from most recently reported data, Q3 data for BofA, Goldman Sachs and Morgan Stanley; all others Q2 data; 3 = closing price for 10/14 x shares outstanding.
Sources: USA Today, SNL Financial, Bloomberg News, Wall Street Journal, Ladenburg Thalmann analyst Dick Bove

COMMERCIAL AND RETAIL BANK FAILURES

From 2003 to 2007, there were 10 bank failures in the U.S. Already, in 2008, 13 banks have failed, and that includes the biggest bank failure in American history — Washington Mutual's collapse on September 25. Before it went belly up, Washington Mutual was the sixth largest bank in the U.S.

Bank Failure Date ‘08 Location Deposits Assets Full/Partial Acquirer
Douglass National Bank 1/25 Kansas City, Mo. $58.3 mn $58.5 mn Liberty Bank and Trust
Hume Bank 3/7 Hume, Mo. 13.6 mn 18.7mn Security Bank
ANB Financial 5/9 Bentonville, Ark. 1.8 bn 2.1 bn Pulanski Bank And Trust Co.
First Integrity Bank 5/30 Staples, Minn. 50.3 mn 54.7mn First International Bank and Trust
IndyMac Bank 7/11 Pasadena, Calif. 19.6 bn 32.01 bn FDIC
First Heritage Bank 7/25 Newport Beach, Calif. 233 mn 254 mn FDIC, Mutual of Omaha Bank
First National Bank of Nevada 7/25 Reno, Nev. 3 bn 3.4 bn FDIC, Mutual of Omaha Bank
First Priority Bank 8/1 Bradenton, Fla. 227 mn 259 mn SunTrust Bank
The Columbian Bank and Trust 8/22 Topeka, Kan. 622 mn 752 mn Citizens Bank and Trust
Integrity Bank 8/29 Alpharetta, Ga. 974 mn 1.1 bn Regions Bank
Silver State Bank 9/5 Henderson, Nev. 1.7 bn 2 bn Nevada State Bank, National Bank of Arizona
Ameribank 9/19 Northfork, W.Va. 102 mn 115 mn Pioneer Community Bank, The Citizens Saving Bank
Washington Mutual 9/25 Henderson, Nev.; Park City, Utah 188 bn 307 bn JPMorgan Chase
Main Street Bank 10/10 Northville, Mich. 86 mn 98 mn Monroe Bank & Trust
Meridian Bank 10/10 Eldred, Ill. 36.9 mn 39.2 mn National Bank of Hillsboro, Ill.
Source: Fierce Finance

RESCUE ME

Non-bank financial firm rescues

Rescued Firm Acquirer Deal Date Stake Total Deal Value Sale price/share 8/31/07 price/share
Bear Stearns JPMorgan Chase 3/24/08* 100% $1.2 bn $10 N/A
Fannie Mae U.S. Treasury 9/7/08 79.9 100 bn**+ 0.00001 $63.20
Freddie Mac U.S. Treasury 9/7/08 79.9 100 bn**+ 0.00001 54.97
Merrill Lynch Bank of America 9/15/08* 100 50 bn 29 71.36
Morgan Stanley Mitsubishi UFJ 9/29/08 21 9 bn 29 60.21
Goldman Sachs Warren Buffett 9/23/08 16** 10 bn+ 115 174.23
AIG U.S. Treasury 9/23/08 79.9 122.8 bn++ N/A 64.27
Wachovia Wells Fargo 10/10/08*+ 100 15.4 bn pending 46.43
UBS Swiss government 10/16/08 9.3 6 bn N/A 52.24
*Deal announcement date
*+Deal set, Citigroup bows out
**Including common stock and warrants for preferred shares
**+The U.S. Treasury initially bought $1 bn of senior preferred stock in each company, but has the option to purchase up to $100 bn of a special class of shares in each company.
+Includes $5 billion common stock and $5 billion warrants for preferred shares
++Government credit facility=$85 billion + 37.8 billion on 10/9/08
Source: Company reports
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