Interesting goings on in the financials. UBS (NYSE:UBS) got the ball rolling (and a few heads) with the announcement of a write down of SFr 4 billion resulting in a forthcoming loss for the third quarter. Credit Suisse (NYSE:CS) also taking its truth serum, announced up to SFr 800 million in write-downs but its third quarter will still be showing black ink.Getting rid of the uncertainty by taking the "big bath" write-off is a cleansing experience, an expurgation of evil, and as market reaction demonstrated, investors welcomed the action.
Citigroup (NYSE:C) also assesses its credit woes, subprime writeoffs, and consumer linked weakness and announces its $5.9 billion loss but a return to normalcy for the fourth quarter.
Is business truly back to normal or do investors sense the demise of Charles Prince? Has the bleeding actually stopped or is there anticipation of a typical Citi night of the long knives being heralded? The restructuring announced at the beginning of the year needs to take hold for Mr. Prince to survive. Since the first quarter of 2006, operating results have been frustrating to investors as operating leverage has been negative for every quarter with the exception of the second quarter of this year. Clearly, there is no positive news forthcoming re operating leverage in the third quarter.
The "dislocations in the mortgage-backed-securities and credit markets, and deterioration in the consumer-credit environment" are ubiquitous to a degree. With a bank like Citi that covers the "field" as broadly as anyone, it is difficult not to step in a "cowpie." But investors are growing tired of management's inability to navigate the field. Rather than blame the cow, it's getting to be time to blame the cowboy.
It should not go unnoticed, but the US recently suffered its biggest bank failure since 1993. NetBank [NTBKQ], a $2.5 billion in assets bank went down the pipe and into the hands of the Office of Thrift Supervision [OTS] who immediately named the FDIC as receiver. NetBank's insured deposits ($100,000 limit, $250,000 for IRAs) were snapped up by another Internet based bank, ING (NYSE:ING). A reminder that uninsured deposits were not acquired. Customers with uninsured deposits will get 50 cents on the dollar now for uninsured balances. They get to stand in line with other creditors for the other half.
The news release from the OTS spelled out the reasons for failure. "NetBank sustained significant losses in 2006 primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies." The OTS failed to mention a series of ill-conceived acquisitions and diversification efforts.
Trying to manage too many businesses while failing to manage the balance sheet was a prescription for disaster. Bank investment at times seems carefree and simple. Bank consolidations occur with some regularity and banking essentially is a hedge fund business, controlling a large amount of assets with a sliver of equity, all under the imprimatur of FDIC guarantees.
Equity investors generally understand the repercussions of leverage, but depositors sometimes forget. There is no reason for anyone to have greater than $100,000 exposed in a single bank. Be aware of your bank's balance sheet, its ratings, and its earnings.
Disclaimer: I, my family, or clients have a current position in Citigroup and Credit Suisse. None have a position in any of the other securities mentioned in this post.