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Friday, October 17, 2008


UBS, CS bolstered

just yesterday the delevering of UBS was noted here. the financial times today offered that the swiss national bank cleanup of UBS and CS was a particularly effective one.

Switzerland’s rescue of UBS from its morass of dud assets does two things efficiently: it cauterises the bleeding from UBS’s ragbag of subprime and real estate assets. It also injects capital without provoking a shareholder revolt. Up to $60bn of securities will be hived off into a bad bank. UBS will take the hit on the first 10% of losses. Beyond that equity cushion, any further losses become the problem of the Swiss National Bank, which is funding the remaining $54bn of assets via a loan. The loan’s terms, Libor plus 250bp, are hardly penal. But this is not a commercial transaction. UBS shareholders do not escape entirely painlessly. They will suffer some dilution to their earnings and ownership. But, crucially, the bank has at last succeeded in largely de-risking itself. Across the road at Credit Suisse, where there are different problems, the bank has raised SFr10bn in capital from private investors rather than the state. Switzerland’s two banking giants may now be almost impregnable. They are also almost unrecognisable.

the tier 1 capital for the two national champions has been raised to 11.5% and 13.7%, making them two of the strongest banks in europe. as noted by jpmorgan, euro banks will be forced to continue delevering regardless -- but UBS and CS appear now to be well ahead in that journey.

again, it is not too late to move savings out of the dollar and into a safer store of value to protect against unforeseen and perhaps unforeseeable consequences of government actions in the united states. i rambled in conversation with hbl yesterday:

american total debt, unlike that of any other nation-state, is large in relation to the absolute pool of global savings which can fund it. on an annual basis, the rate of increase in american debt has effectively consumed 100% of the rate of global savings -- in other words, the rest of the world is operating on a balanced budget at an equivalent surplus.

given that, and given further that the american government is set to wildly expand its borrowing rate -- a deutsche bank report i saw excerpted by menzie chinn at RGE admitted the possibility of new issuance of treasury debt exceeding $3.3tn to fund government -- over the next fiscal year!

the float on gov't debt currently is just $5.9tn or something [$10tn less $4tn "owed" to entitlement programs like SSA by the general fund] -- but (shockingly) it's not just that they're expanding the gov't debt by a thoroughly-argentinian 50% in one year.

they are talking about borrowing from global savings an amount that cannot be borrowed. it can not happen. if anything, the american current account deficit that would theoretically finance this will contract, not expand, as international trade slows with global recession.

so what is the consequence? as far as my meager reasoning can reveal, government will force the liquidation of domestic private debts, hoarding all domestic savings -- compelling savers not only to shun new corporate and individual credits in favor of treasuries, but to liquidate existing loans granted to corporate/individual parties to transfer assets to treasuries. and they'll end up paying whatever rate is required to get that done.

this echoes the comments of george magnus months ago. as government facilitates the flight form corporate assets by expanding the government balance sheet, a revolt against treasuries is a distinct possibility -- as is a serious dollar crisis. london banker (hat tip darkcloud):

Such hyperbolic growth in the fiscal deficit and debt is unsustainable, even with such very tolerant creditors as the Japanese, Gulf Arabs, Russians and Chinese. They can see that each dollar added to the Fed’s balance sheet is tinder for burning those already held or denominated in their reserves. They can project the curve forward. At some point, they must react and restrain further debasement of their reserves and investments, either by collectively raising the prices charged for the resources and products they export, the interest charged on existing and future debt, or the forced exchange of debt for equity ownership of real economic assets.

Or all three.

The cycle of debt deflation is just getting rolling. The banks were only the first bailout and already the federal deficits are ballooning unsustainably. What will be the recourse when municipalities and states face default through catastrophic tax and revenue shortfalls? What will be the recourse when large commercial employers, industries and infrastructure confront failure from collapsing consumption expenditure? What will be the consequence when unemployment, homelessness, political disaffection and crime are resurgent and threaten the political fabric?

i continue to consider a wholesale currency collapse as the more remote as dollars are and will continue to be needed to pay down debt as systemic delevering overwhelms government countermeasures. but in truth no one knows where this will lead, and placing savings where they will safely retain real value regardless should be the paramount concern.

meanwhile, current studies continue to indicate that swiss francs, being backed by a prudent swiss government facilitating a very high domestic savings rate (36% of GDP), and benefitting from a massive current account surplus as well as a tremendously positive net international investment position (131% of GDP at 3q07), are if anything undervalued as a result of the carry trade.

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The line between the funds of the QIA and the private fortune of the al-Thani family can be questioned, but last I checked, sovereign wealth funds were funded by states -- not the private sector. The current convention of calling funds raised from another country's government "private" strikes as off, unless you think the public wealth of a place like Qatar is really private. SWFs invest for a host of reasons -- returns being one, but not necessarily the only.


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brad -- i don't follow. was this the comment you intended to attach?

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