Sunday, November 22nd, 2009

Buy US banks – Once They’ve Fallen Another 40%

Aug 19th, 2008 | By David Stevenson | Category: Stock Market Investing

Investors around the world have been waiting and praying for months for a clear sign that the money markets are finally starting to defrost –so far, to no avail. But within the last month, there’s been a big rally in US banking stocks. That’s got investors excited.

After all, it was the US banks that kicked off the global carnage last year, when all those subprime mortgage woes began moving out of the internal audit departments and onto the front pages.

So does the bounce mean that we can all breath a bit easier now?

No. Here’s why…

How Merrill Lynch has made life harder for other banks

US financials have rallied sharply in the past month. But trying to get to grips with what’s really been going on in Wall Street’s banks isn’t easy. Sure, some banks are ‘fessing up to their lending sins. Merrill Lynch (MER) last month cleared its books of a massive $30bn of dodgy debt, for just $6.7bn – a huge write-down to just 22 cents on the dollar.

But while Merrill’s move may seem a step towards getting over the credit crisis, it is in fact muddying the water for everyone else.

That’s because Merrill has set a new low-ball benchmark that its peers may be very reluctant to follow. Take Citigroup (C) for example. In July, it said it was valuing its CDOs (collateralised debt obligations – packages of assets backed by loans such as mortgages) at about 61 cents on the dollar, clearly a much higher level than the Merrill clearout price.

As Goldman Sachs analyst William Tanona points out, if Citigroup were to write down its own $22.7bn of CDOs to similar levels, it’d need to take a $16.2bn hit.

So it seems fair to suggest that there’s still a good deal of ‘blue sky thinking’ in a lot of bank asset valuations. As Tony Jackson says in the FT, “in spite of improved disclosure by the banks, the picture of their liabilities is still quite fuzzy”. And Deutsche Bank analyst Mike Mayo is putting it politely when he says that Merrill’s action “raises ongoing credibility issues for the industry”.

This is far from being the only outstanding problem for banks to deal with. There’s the small matter of ‘mis-sold’ bonds. Merrill, Citigroup and UBS have together repurchased $40bn of auction-rate securities (I won’t go into these securities here, but suffice to say they were meant to be both liquid and risk-free, and turned out to be neither) from disgruntled investors, against a backdrop of lawsuits and fines – another recipe for extra balance sheet damage.

Then of course, there’s the knock-on effect on bank balance sheets of further house price falls. Also, there’s business debt. Last week, Moody’s Investors Service said that the global corporate bond default rate could reach 10% if the US sinks into a protracted recession. And there’ll be more credit card defaults as consumers run out of cash and lose their jobs. You get the picture – things look grim.

Read the Full Article

Source: Buy US banks – Once They’ve Fallen Another 40%


AdvertisementExposed! Five Myths of the Gold Market

Claim a gram of FREE GOLD today, plus a special 18-page PDF report, and find out:

* What's been driving this record bull-run in gold?
* Why most investors are WRONG about gold & inflation
* How to buy gold — at low cost with no hassle

Get this in-depth report now, plus a gram of free gold, at BullionVault here...



More on this topic (What's this?)
Citigroup's Death Rattle
Big Moves For Bank Stocks
The Coming Blowback of Banking Fraud
Read more on Banking, Subprime lending at Wikinvest
Tags: , , , ,

By David Stevenson

Related Articles



About the Author

David StevensonDavid Stevenson joined MoneyWeek as Associate Editor in May 2008. Having started a career in the City with Morgan Grenfell, David joined Oppenheimer as a fund manager in 1983, starting on the UK desk before managing the European fund in 1986. He has subsequently managed equity portfolios for Hill Samuel, Cigna and Lloyds TSB subsidiary IAI International, and has worked as an analyst for stockbroker BNP Securities. After a brief period running his own business, David then returned to the financial world in 2007 as investment writer for the Motley Fool.

See All Posts by This Author

Money Week

Money Week gives you intelligent and enjoyable commentary on the most important financial stories of the week, and tells you how to profit from them. We have a wide range of financial professionals who write regularly for us, come to our monthly "Roundtable" discussions, and who contribute their expertise to the ongoing MoneyWeek debates. We write articles that we would want to read ourselves.

See All Posts from This Publication

Leave Comment