Dag NAB It! How NAB's Writedown of U.S. Portfolio Could Hurt Financials

Just when you thought it was safe to go back in that water.....a great white shark from the Great Barrier Reef goes and bites your leg off. While yesterday's US equity market meltdown was home-grown, it left the SPX in no man's land. A month ago, short equity risk was far and away Macro Man's biggest position, but now he has virtually nothing in equities except the tiny, wretched remains of the large cap/small cap trade and a modest long vol position in Europe.

For Macro Man, the most interesting recent developments have come from Down Under (and Just Over). While it has yet to garner too many substantial headlines, the news that National Australia Bank [NAB] has written down its US RMBS portfolio to 10 cents on the dollar could send shockwaves through the financial system.

Much of NAB's book was made up of AAA securities, so to mark them down so drastically certain suggests that "the model", whatever it is, is broken. Now, when you consider that a whole host of banks are either marking this stuff much higher on their balance sheets, or have moved it to the limbo of "Level 3" make-up-whatever-price-you-want assets, a publicly-disclosed 90% write-off on similar assets could represent a rather unpleasant dash of cold water in the face of much larger fish than NAB. No doubt a host of banking execs are cursing NAB into their Cheerios this morning; after all, nobody likes a whistle blower, especially when there's plenty of other bad news to deal with.

Meanwhile, we may have seen the first SWF stop loss in the financial sector. Rumours are swirling that Temasek, Singapore's "other" SWF, has puked some of its stake Merrill Lynch. So far from being the White Knight who saves the day with their hordes of cash, it appears that SWFs may exacerbate some of the selling pressure. Oh dear.

In any event, recent developments may tempt punters back into a trade that can only be described as "equity market crack", long energy/short financials. While it's tempting to call the recent, ahem, "setback" in that trade "just one of those things", Macro Man cannot help but wonder if the sharp reversal of fortune hasn't exacted more enduring damage, or is at least telling us something about slowing growth outside of the US. Remember, kids, don't believe the pipe!

Finally, it's worth noting that the 1 year anniversary of the beginning of last year's FX carry collapse has just passed. Macro Man mused last week about the chances of history repeating or rhyming in NZD/JPY....and sure enough, the cross has started coming a bit lower. Will the same hold true in EUR/JPY, where the pattern is almost identical?

If so, it will require Mrs. Watanabe and the reformed DOTW to capitulate. Recent data suggests record retail longs in NZD/JPY, so one lives in hope...one lives in hope.

Comments

[venividivici]

Four months ago the ceo of National Bank boldly announced that the worst of the credit crisis was behind the banks. Yesterday he described it as a black hole with no end in sight.

[Coelacanth]

Among your other observations on this thread....I've been very focused on EUR/JPY lately. Anecdotally, it's hard for me to imagine that it won't be a jaw-bone fest out of Europe if it gets much past the 170.00 - 171.00 handles. Didn't French Finance Minister Legarde complain to the Japanese a couple of G-7 meetings ago that they need to let the Yen strengthen?

It seems like every day we hear another story about the pernicious inflation problem out of emerging Asia. If I saw correctly....Malaysia, Thailand, The Phillipines & a few other non-descript countries from the region have raised their central banking rates. (Even Brazil surprised the other day by raising their key banking rate to a whopping 13%. Did The Economist magazine article about their "creative" inflation measures shame them a bit? LOL.)

With Japanese CPI running at a 10 year high, Japan may eventually have to go back on it's stance of not raising rates and start raising late this year or early 09'. Even if they don't its hard not to tie them in with the over all updraft of inflation out of the region.

Conversly, the euro-zone is cracking and as the data gets weaker and weaker traders IMO will begin to "price out" future rate increases. When recent comments like ECB Governor Liebscher's push the pair higher I think to myself.....wonderful! A higher entry point to short the pair.

[gigem77]

It sounds like a race to the bottom.

[xsuddensam]

We ain't seen nothin' yet!

I got a kick out of Sen. Dodd's euphemism for fraud: "....poor lending practices"

Another one which cracks me up is "lack of transparency"

We're going down and we're going down hard and no one will go to jail. Oh, there will be a scapegoat or two like in the S&L scandles of the eighties. Which reminds me, McCane (one of the "Keating 5") should have shared a cell with his main money guy Charles Keating.

Alas, this is the American way. Keep the sheep dumb and happy and you can get away with almost anything.

[bgamall]

We never should have bailed out Freddie and Fannie. What if their junk goes to 10 cents? What if we have to bail out every bank in the world and our dollar goes to 10 cents? Then what? And Chris Dodd was bought off by Bush/Greenspan when they financed the Iraq Oil War with Liar loans. So it is hard for one frauder to call fraud fraud. Easier for a frauder to call it "poor lending practice".