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Buddy, can you spare a dime?

A whole raft of headlines over the weekend to cheer up the weary investment banker.

First, there’s the news that BNP and Credit Agricole
are going to fight over ownership of SocGen, after the French bank
declared almost $10 billion in losses from rogue traders and subprime.

Then another saying that Massachusetts’ regulators are accusing Merrill Lynch of fraud, for selling securities to the City of Springfield that were backed by subprime mortgages.

Then the news that Goldman Sachs
are ramping up their debt exposures by creating a mezzanine debt fund
with $12.5 billion in capital and another $7-$9 billion in borrowed
money.

This flies in the face of everyone else who can’t raise
a bean for the life of them as the subprime meltdown continues.
Companies reported losses so far include:

  • Citigroup:                    $18.0 billion
  • UBS:                          $13.5 billion 
  • Morgan Stanley:             $9.4 billion
  • Merrill Lynch:                 $8.0 billion 
  • HSBC:                           $3.4 billion 
  • Bear Stearns:                 $3.2 billion 
  • Deutsche Bank:              $3.2 billion 
  • Bank of America:             $3.0 billion 
  • Barclays:                       $2.6 billion 
  • Royal Bank of Scotland:    $2.6 billion 
  • IKB:                              $2.6 billion
  • ShocGen                        $2.0 billion
  • Freddie Mac:                  $2.0 billion 
  • Credit Suisse:                 $1.0 billion 
  • Wachovia:                     $1.1 billion

Source: Company reports

This lot, edited from the BBC’s website,
totals $75.6 billion declared losses to date.  This misses smaller
losses, such as BNP Paribas, Bank of Tokyo-Mitsubishi UFJ and others,
many of whom are reporting $500 milllion or more losses.

Finally,
there’s the knock-on impact of the subprime as it rolls into the
insurance communities of America.  A good example is Ambac Financial,
who can’t find anyone to invest in a bailout due to their exposure to
subprime risk.  As a result, there was the news that the banks are bailing
out the monoline insurer in a $15 billion plan.  The banks involved are
Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société
Générale, BNP Paribas, UBS and Dresdner. 

Why? 

Because
these are the banks most exposed to their subprime debts and Ambac
can’t find anyone else to help them out due to the risk.  Bit of a
vicious circle that one, isn’t it?

It also intrigued me that Ambac Financial’s "About Us" section of their website says:

"Ambac
Financial Group, Inc., headquartered in New York City, is a holding
company whose affiliates provide financial guarantees and financial
services to clients in both the public and private sectors around the
world. Ambac’s principal operating subsidiary, Ambac Assurance
Corporation, a leading guarantor of public finance and structured
finance obligations, has earned triple-A ratings from Moody’s Investors
Service, Inc, Standard & Poor’s Ratings Services and Fitch, Inc …"

Really?  Not sure I’d invest in the leading guarantor of structured finance obligations.  Maybe that’s why the next line is:

"…
Moody’s has placed Ambac’s triple-A rating on review for possible
downgrade. Standard & Poor’s has placed Ambac’s triple-A rating on
"negative outlook." Fitch has placed Ambac’s triple-A rating on "rating
watch negative." Ambac Financial Group, Inc. common stock is listed on
the New York Stock Exchange (ticker symbol ABK)."

Ah well,
thanks for the credit rating agencies in being so fast to alert us to
these potential problems.  I guess they had to wait until after Ambac announced fourth quarter net losses of $3.2 billion  to realise there was an issue, didn’t they?

Meanwhile,
whilst Goldmans leverage debt for good investments, everyone else is
scrabbling around to try and work out how much debt exposure and
related systemic risk really exists in the markets.

Some say
that the overall subprime losses are expected to be around $200
billion, best case.  Others say that if you add in all the monoline
insurers and other knock-on effects, such as corporate defaults due to
lack of access to capital, and worst case is expected to be up to $500
billion.

No wonder millionaires are stuffing their savings back under the mattress. 

Buddy, can you spare a dime?

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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