A Britney Banking Crisis

No, I did not mean Britney as in Brittany, France.  I did mean Britney as in Britney Spears.  This banking crisis is a lot like the Britney Spears crisis.  Neither problem can stay out of the headlines.  And the longer they go on the more sordid they become.  And the Fed shows up in both soap operas…the Fed Fed and then Fed(erline).  However, Fed(erline) is proving to be far more adept at handily the Britney crisis than the Fed is the banking crisis   The subprime crisis is to business reporting what Britney Spears is to Page Six reporting…the gifts that keep on giving.

No, I did not mean Britney as in Brittany, France.  I did mean Britney as in Britney Spears.  This banking crisis is a lot like the Britney Spears crisis.  Neither problem can stay out of the headlines.  And the longer they go on the more sordid they become.  And the Fed shows up in both soap operas…the Fed Fed and then Fed(erline).  However, Fed(erline) is proving to be far more adept at handily the Britney crisis than the Fed is the banking crisis   The subprime crisis is to business reporting what Britney Spears is to Page Six reporting…the gifts that keep on giving.

 

Sadly neither seems close to any happily-ever-after ending.  

 

The news from Citibank today and (Merrill this Thursday) is a reminder that the scale of losses for banks is more unthinkable than even Britney’s kid sister getting pregnant.

 

But let’s be fair.  Citi and Merrill are not alone.  From Morgan Stanley to UBS banks have had hell to pay for diving into the deep end of the credit derivatives pool and tossing risk management to the wind (the mortgage desk).  

 

I also still wonder how insulated the banks are that got the subprime trade “right” and shorted subprime outlets/indices/stocks to failed counterparty payments on these positions…the fallacy of the hedge.  Monolines are a part of the hedge and their ability to pay is compromised.  Today for instance Citibank said it was setting aside $900mln in reserves against subprime hedges that are unlikely to pay out.   That is the first time I am aware of a bank preparing for counterparty failure on correct bets/hedges in subprime.  Credit is due here for return to reality check.  Britney I am afraid has yet to demonstrate any sign of returning to reality.

 

Citi, like Amex last week, noted problems surfacing in their consumer loans (read credit cards).  Commercial loans will surely be stress tested assuming the US economy slows rather markedly even if avoiding recession (I am in the Goldman camp here…nearly unavoidable…debate should e about depth/duration).  I also wonder what happens when CDS market sees corporate default rates climb and what kind of payouts emerge in this market – again the counterparty failure scenario or fallacy of hedge (PIMCO’s Gross said in his back of the envelope calculation that investors could lose $250bln in this market and BNP with a worst case set of assumptions said it could be as high as $1.5trln).  

 

Are Sovereign Wealth Funds the answer?  Yes though partially and temporarily.   Not even SWFs have an endless appetite for high dividend yielding preferred bank stocks…China Development Bank comes to mind.   Banks at the end of the day have to stand on their own two feet and no amount of outside capital will make the business profitable.  Meanwhile a major global slowdown will complicate an already complicated bank lending and profitability environment.  Moreover, like a pop star that is out of control, newer vintage loans repackaged into toxic securities will make for business reporters chasing new write downs from banks in 2008, not unlike what we can expect from the paparazzi on the next visit by Britney to the Westwood Carl’s Junior drive-thru window.   

 

David Gilmore

Foreign Exchange Analytics has it's roots in both the emerging information technologies and the global economy that characterized the last two decades.  As currency transaction volumes soared in the wake of the 1985 Plaza accord, the need for timely concise information on what forces were driving and would drive exchange rates became critical.   David Gilmore was one of a new breed of analyst that saw a void of relevant, market moving... More