September 29, 2008
Credit crisis bankparade interactive.
Now credit crisis events are spreading to Europe an update of the extensive credit crisis overview was necessary. Follow this link to the guided analysis for an interactive experience or follow this link for a graphical view on the crisis. Investors assume that all problems are credit crisis related. The Fortis problems are however the result of a bad timed take-over of ABNAMRO, bad communication of capital ratio recovery actions and lack of trust in the capability of Fortis to obtain the required investments in time. From an operational perspective the bank claims it is a healthy business still generating revenues. The issues in England are different from those in Belgium and the Netherlands. The housing market in England is also deteriorating and combined with the lack of confidence in banks this has resulted in the take-over of several mortgage lenders. However, prudent banking is still there. Another company that participated in the ABNAMRO take-over has enough cash to roam the financial world for interesting bargains. Santander already showed after the take-over of ABNAMRO it is able to act swiftly, decisively and with success. As part of the take-over it acquired the Brazilian bank Banco Real and the Italian bank Antoveneta. It quickly sold Antoveneta to another Italian bank and now has the power to profit from the opportunities the credit crisis offers. Today it was announced Santander only had to pay 600 million euro for 21 billion euro in deposits and acquired also the branches of Bradford and Bingley. Earlier this year it obtained the European banking assets from General Electric. It shows the big differences between banks that joined the team that bought ABNAMRO one year ago.
September 16, 2008
Merrill take-over by BofA, an informed decision?
Yesterday I expressed my concerns regarding the rational behind the take-over of Merrill Lynch. Today several commentators are wondering why BofA is willing to pay much more than the market value. It seems obvious there is more to it than the public at this moment knows. What is in it for BofA? Maybe there is a reason to share this with BofA’s shareholders? The initial view of analysts is that it probably is a forced deal and I’m inclined to agree with this. One day after the “deal” the is a general concern whether or not BofA can absorb Merrill’s troubles. It is almost impossible to make an informed decision on such a short notice. What guarantees have been given to BofA to take this risky jump in the dark? Another interesting question is whether or not it is possible to manage two take-overs in a period that is causing serious problems for every company in the financial industry.
From a BofA perspective a Lehman take-over would have been much more transparent. Although the risk management of Lehman proved to be inadequate, the management of Lehman in general has a much better track record when you look at business ethics or management integrity.
In the past year Merrill has been accused of many things except high moral standards. I’m really curious how many billion dollar surprises will emerge once BofA really takes over control. Revisiting the credit crisis events show that a reduced level of management integrity proved to be a reliable key risk indicator of corporate failure in difficult economic times. To substantiate this I’ve included a list of Merrill events covering the last 12 months. This list was extracted from the Riskfriends guided analysis. BofA shareholder read and think again!
|
Date |
Event |
Detail |
|
2008-09-14 |
Take over |
Bank of America did take over Merrill although it was |
|
2008-08-21 |
Law suits |
Agreed to buy back $ 12 billion of ARS and pay a fine of $ |
|
2008-08-04 |
Integrity concerns |
Merrill suspected of colluding with UBS manipulating the |
|
2008-07-29 |
Capital ratio recovery |
Planning to raise another $ 8.5 billion |
|
2008-07-29 |
Investment lost |
Lone Star Funds buys CDO’s from |
|
2008-07-23 |
Law suits |
Los Angeles |
|
2008-07-18 |
Capital ratio recovery |
Sold Bloomberg part back to the company for $ 4.4 billion. |
|
2008-07-18 |
Write off |
Totaling $ 9.4 billion, 30 percent CDO, 30 percent credit |
|
2008-07-07 |
Capital ratio recovery |
Selling parts of Bloomberg and Blackrock to raise another $17 |
|
2008-06-26 |
Prediction |
$ 4.2 billion write off predicted for the second quarter |
|
2008-04-18 |
Law suits |
Pension fund CtW investment |
|
2008-04-18 |
Job cuts |
2900 jobs in reaction to write down |
|
2008-04-17 |
Write off |
$9.5 bllion |
|
2008-04-02 |
Capital ratio recovery |
$12.2 billion raised so far |
|
2008-03-18 |
Liquidity issues |
Wachovia states that the exposure of Merrill is 3.3 the |
|
2008-03-11 |
Integrity concerns |
Congress questions Stanley O’neal |
|
2008-03-06 |
Job cuts |
Merrill Lynch said that it would stop making subprime |
|
2008-02-27 |
Investment lost |
Auction rate securities from Merrill |
|
2008-02-26 |
Management leaves |
CEO O’Neal steps down |
|
2008-02-08 |
Investigation |
SEC received request for information from the federal |
|
2008-02-07 |
Integrity concerns |
Accused by Massachusetts of fraud |
|
2008-02-01 |
Investment lost |
Merrill buying back $ 14 million of CDO’s |
|
2008-01-16 |
Write off |
$ 9.8 billion loss, write down $14.1 |
|
2008-01-15 |
Capital ratio recovery |
$ 6.6 billion cash raised issueing |
|
2008-01-14 |
Integrity concerns |
Finra investigating possible |
|
2008-01-11 |
Portfolio deterioration |
$15 billion write down expected |
|
2008-01-04 |
Integrity concerns |
Accused from hiding losses while merger was pending |
|
2007-12-24 |
Capital ratio recovery |
$ 7.5 billion acquired selling shares 13% below market |
|
2007-11-08 |
Integrity concerns |
SEC starts investigation investments |
|
2007-11-07 |
Portfolio deterioration |
Expected write offs 4th quarter another $9.4 according to CreditSights |
|
2007-11-03 |
Integrity concerns |
Merril not aware of |
|
2007-10-31 |
Law suits |
Lawsuits by shareholders |
July 27, 2008
Oops, somebody just lost $ 6 billion dollars!
No, this is not an item on Societe General, although there are definitely similarities. Can you make a guess which company caught my attention? When you think of Kervel do you automatically make the association with Wurz?
This week started with hope for the financials beating expectations of analysts. But then Wachovia surprised everybody! A loss of $ 8.9 billion was reported. Well this in itself is hardly any news nowadays. The more disturbing in this article from Yahoo is not the loss itself. It is a short reference to a previous outlook from Wachovia itself. I had to look twice, but it really happened. Only three weeks ago the company expected a loss ranging from $ 2.2 to $ 2.8 billion. This outlook from Wachovia now signals severe problems for this bank.
I will explain why, but you can draw your own conclusions with the guided analysis from riskfriends. Just select Wachovia and look at the events as they unfold. Only three weeks ago, according to Yahoo, the expectation was a loss of $ 2.8 billion. Just before this announcement the CEO had to leave. Within a week, after surprising investors and analysts with really disappointing figures, the CFO stepped down. Can you guess why?
Who believes that Wachovia’s portfolio deteriorated within 3 weeks another $ 6 billion? The market is worsening and the number of loans that are noncollectable increase, but not at this speed.
One explanation could be that the CEO and CFO decided to represent the quality of the Wachovia portfolio as optimistic as possible, hoping that the market would quickly turn around. This would be a matter of changing variables in the models used to calculate the numbers of expected defaults. Another possible reason for this difference could be an inadequate information infrastructure that is unable to calculate the impact of market movements and internal operational data on a daily interval. This can happen when essential data is simply missing or the process of validating the credit risk models against the operational performance runs on a very low frequency. Or to put it different, the operational feedback in the risk models is not functioning. Perhaps Wachovia is experiencing difficulties with the integration of Golden West Financial. There are more scenario’s possible. The mistaken outlook makes Wachovia’s position in lawsuits extremely vulnerable.
I started with a reference to Wurtz and Kervel. Kervel did not profit from his actions that were targeted at repairing his mistakes unnoticed. I think it is very likely that a similar motive drove the Wachovia management. It is the kind of behavior you often see with investors. Trying to repair losses unnoticed hoping that a swift market change will cover up what went wrong. There are more ways to hide problems from the public and an independent investigation like the one performed at SocGen should give insight in what actually happened.
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July 9, 2008
SEC report, old news?
Today the SEC issued a report on the three major rating agencies. I understand the SEC has to obtain hard evidence before it can intervene. The rating agencies are willing to implement the SEC’s recommendations. This shows that they have realistic management. But really, this is all old news!
The investigation delivered a typical after the fact report. Those responsible for keeping an eye on the financial world should take responsibility too, because they also failed terribly.
If you look at the fundamental causes of the credit crisis it is not just a falling house price issue. It is also about financial institutions creating complex products. Products that receive a rating that creates value for the issuer. Ratings that convinced investors there was limited risk. Products that were exchanged in small and not very transparent markets. Products that were insured by companies that did not check adequately the underlying collateral’s nor validated the selling practices. Rating agencies as well as insures proved they didn’t understand the credit risks of these complex products. Bond and mortgage insurers failed in calculating the right premium for these risks. Also their insurance increased the illusion that investments carried limited risk and delivered high rewards. All these players in the subprime were profiting and it was in their interest that risk calculations had a favorable outcome. I’m not implying here that these players were deliberately influencing their risk calculations. At the minimum you can state that they overconfident presented their calculations to the market.Also after the fact rating agencies are now revisiting their models.
The regulators failed to see that the large players created an illusion and that everybody seemed to profit from it. Making money is what is expected from commercial companies, but regulators are payed by the government and their primary focus is to ensure financial markets are stable and free from manipulation. Who is looking at the performance of the regulator?
Their conclusions are hardly surprising and a little late. Already in October last year S&P was under fire as a result from conflict of interest. This year Moody blamed their mistaken ratings to errors in their computer models suggesting that we should blame their computers and not their modelers and the validation of their work.
When you take a look at the credit crisis interactive analysis here and select the rating agencies you can see for yourself their power and their failures.
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July 7, 2008
Big rewards at no risk!
Analyzing the credit crisis, you can do that interactively yourself here, shows that the most troubled companies all have been in the news with integrity issues.
Some financial institutions did fire risk managers or at least blamed their risk management department for the unforeseen impact of the crisis. Any risk manager should have had a strategy in place that manages situations in which market mechanisms stop functioning. Risk managers know that VaR calculations do not cover extreme events. In the past the LTCM case, an analysis can be found here, already showed that markets can stop functioning. The best risk management department off course predicts when such events are likely to happen and enable a company to profit from such events. It looks like only Goldman Sachs managed to do this.
But what to do when the CEO starts making decisions that are conflicting with business ethics and that increase legal risk? The credit crisis interactive analysis shows that integrity issues are the most threatening and most damaging problems for a company. Just take a look at the events at Bear Stearns and Countrywide or remember what happened at Enron. These type of problems are difficult to manage by a company’s internal function, whether it is risk, compliance, audit or the board of directors. The internal functions simply do not have the power nor the authority to withstand a CEO. The board of directors are often at too much distance to remain in touch with the operational reality and at the same time they are often to close at the personal level to remain independent. UBS recognized this, be it a little late.
The credit crisis will probably result in more legislation or more focus at Basel II pillar three. Shareholders and employees became victims from inadequate management. Senior management however often walked away with millions of dollars. Big reward at no risk!
Some examples:
- O’neal from Merrill Lynch rewarded with $160 million leaving his bank in real trouble.
- Groenink from ABNAMRO rewarded with $ 40 million leaving his bank to be split into 3 pieces.
- Charles Prince from Citi rewarded with almost $ 100 million
- Sullivan from AIG rewarded with $ 47 million severance package
- Angelo Mozilla to profit from sale to BofA.. estimations vary but are in the range of several tens of millions.
Today Yahoo! reports that Countrywide employees fear for their severance pay.When will the first employee out of a job due to failing management start a lawsuit demanding equal severance pays?
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