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Monday, December 10, 2007


ubs follows citi -- bank failures are certainly coming

on the heels of citi, another major bank with deep exposure to the credit bubble pays for capital from a sovereign wealth fund, this time singapore, with the added step of eliminating the dividend payout. the $10bn writedown is something of a catchup for ubs, as it has held out for balance sheet opacity in the face of mark-to-market pressure and avoided writeoffs commensurate with even the limited current-industry-standard recognition of its very considerable exposure until today.

can the asian and oil state bailout/wealth transfer prevent a credit bubble unwind? again, i doubt it -- and i further deeply doubt that writeoffs are over for ubs, in spite of official optimism. this is a first-rate capital scavenging move, and no bank cuts its dividend to zero with a 12% tier one capital ratio unless they expect significant writeoffs to eat that capital.

and even if the big boys somehow negotiate the straits, a great many smaller banks are about to be dashed upon the rocks. subprime is, of course, just one leading aspect of a much larger credit bubble that is in the process of unwinding. another leader was corporate financing such as bridge loans and leveraged buyout capital. but other aspects are lagging these -- alt-a and prime mortgages, credit cards, auto loans, and of course commerical real estate -- and those lagging aspects are just starting to come home now. worst of all, as is normal following a massively excessive credit bubble, the timing is perfect for precipitating bank failures as most bank balance sheets are incredibly extended.

what that means is probably unimaginable to most americans, but here it is. via calculated risk and floyd norris of the new york times:

Figures compiled by the Federal Deposit Insurance Corporation ... show that both midsize and small banks had construction loans outstanding that were greater than their total capital. A decade ago, such loans were equal to only a third of capital for those banks.
Now ... more than 3 percent of all construction loans are classified as being nonperforming, or have borrowers that are behind on their payments. That is the highest proportion in a decade.
“I think there will be a wave of bank failures in the not-too-distant future,” [Matthew Anderson, a partner in Foresight Analytics] added, “although probably not on the order of the 1980s and 1990s. You had a lot of high loan-to-value lending going on in markets that have soured significantly.”

When construction loans go bad, they can go very bad, in part because it can take a long time to slow them down after markets begin to weaken. Construction projects, once begun, are useless if not finished.
During the Paulson Q&A on Friday, he was asked: "Do you anticipate bank failures like England saw with Northern Rock?" Paulson gave a non-answer, and the reason is probably because there are several bank failures in the offing.

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