Which Banks Will Survive? 17 comments
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Professor Bennet Sedacca put together a three part set of articles on the credit markets this past week. One recurring theme is how the equity market speaks in a very different tone than the credit market. Here are links to the first two articles in the series:
A Tale of Two Markets, Part 1
A Tale of Two Markets, Part 2
Let's take a closer look at a snip from A Tale of Two Markets, Part 3.
Consider the case of American International Group (AIG), the once great insurance behemoth. It's now, in my opinion, been reduced to a company that is spinning out of control, unable to determine how bad its credit portfolio is and how bad its investment portfolio is. Mind you, this is a company with $1 trillion in assets, but bonds that are going down in price quickly and probably not coming back anytime soon. I have been contemplating ever since Stage 2 of the Credit Crisis began what company would be first to not be able to finance themselves.
I thought it could be Lehman Brothers (LEH) (it still could), Merill Lynch (MER) (they sold their Bloomberg stake and other assets and diluted common shareholders at 10-year lows just to stay alive), but I hadn’t considered AIG and the insurance companies. But I am now.
Take a look at how AIG bonds are trading after its disastrous announcement. It's absolutely un-economical, in my opinion, to raise more capital as it already buried equity and preferred buyers on its last asset-raising go-round, so I don’t know how it stays alive.
Its comments in the press clearly demonstrate the lack of risk-controls. The problem here, of course, is that AIG isn’t alone. It's just one of scores of companies that cannot finance themselves. The credit market is speaking, loud and clear.
AIG 5 Year Corporate Spreads versus 5 Year Treasuries
(click on chart to enlarge)
Note that prior to the credit crisis’s beginnings, AIG paper traded at a mere 69 basis points above 5 year Treasuries and has ballooned all the way to 675 basis points above Treasuries.
I watch the debt trade all day as trades stream across my screens and it is the same here as it is for many regional banks and brokers. Some banks I expect to survive, like Bank of America (BAC), JP Morgan (JPM), UBS (UBS) and Wells Fargo (WFC), which trade pretty well.
Citigroup (C), with all of its troubles, and all of its lack of controls and general disdain for clients, will likely survive in one way or another. It's probably too big to fail but I imagine will likely be broken into many parts.
Sedacca is one of the brightest minds in fixed income. His opinion about possible potential survivors is based on credit spreads.
A quick check will show that those are also some of the stronger trading bank stocks in the equity markets as well. Like Sedacca, I expect Citigroup to survive. I just doubt Citigroup survives in one piece, something I have been saying since last Autumn, if not before.
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This article has 17 comments:
concisetrading.blogspo.../
Ryan
Listen up skippy and listen up good, you may think you know what you're talking about, but in reality you fail to realize what's happened. Think for once damnit. Think beyond your limited capacity and the numbers you cherish. Are you stupid enough to really believe that the government is going to want to foot the bill for all the likely failures if what you profess is to take place. Of course they won't. That's why the government just injected $300B of liquidity into the banking system a la the housing bill.
Game, set and match. Go look for the sky to fall, as we're not there yet. But the smugness is really too much.
The government let most S & Ls fail during the last big credit/financial crisis. Why not banks this time? The sky has already fallen. The question now is who will survive and get back up. AIG, LEH and MER probably wont.
where's the lack of analysis, damnit. sorry user if that offends you.
I made a point regarding the housing bill. Where's your counterpoint?
Thanks so much.
Can you not answer the question/point that I raised? If not, then why bother to respond. $300B is on its way. Now, do you have a point?
1. You are buying a AA rated credit at mid B levels.
2. AIG's business model is not at risk.
3. Leadership and operating performance have been weak but both are being addressed via new leadership and attempts at cleaning up the balance sheet.
4. Eventually, CDO's and other structured instruments will find a floor and a bounce will occur. I don't know when that will happen. I do however know that once a floor is found you will see that previous write downs were too conservative and hence AIG and others will actually record a mark to market gain on some of these assets.
The $300B, obviously comes from the taxpayer, but it will be in the form of repackaged loans with an FHA guarantee.
Lender cuts the loan principal to 90%, issues a new FHA backed mortgage, and then can sell it in the market. Should be as liquid as a T-bill. Thus, the cash gets directly to where we desperately need it, these lenders' balance sheets. I think it will have a tremendous effect, especially with some of the biggies.