Tag Archives: Wachovia

Icelandic, european, american and UK banks collapse

This is starting to sounds like something from a film.  Banks are falling like dominoes.  

1. We’ve all been worried about Kaupthing Edge and IceSave but here we are witnessing the nationalisation of Glitnir Bank. The Icelandic Government has taken a 75% stake in Glitnir for around £468 million after the company faced funding problems.  

Given that Iceland is a small nation – something like 300,000 people – whose banks rely on getting funding from international money markets, the news that the Icelandic Crown is down even further today will not help.  The remaining banks will effectively have to pay even more for their borrowing than before.  If Kaupthing Edge or IceSave need to borrow any money in the short term where will it come from?  I had some of my savings in IceSave but have transferred them to a UK bank. 

2. Bradford & Bingley nationalised.  The government provided a £14bn loan to protect customers’ deposits but the interest charged on this loan will have to be paid by other UK banks.  In other words the bank that goes bust leaves a mess that the more prudent banks have to pay for.  

3. The Netherlands, Belgium and Luxembourg have all chipped in to prop up Fortis with £8.9bn.  Smaller nations like Belgium and Iceland bailing out huge banks – I wonder how much money they have left to keep doing it if required.  Come to think of it, how will we keep doing it?  More borrowing.

Also in Europe:

Munich, Sep 29, 2008 – Hypo Real Estate Group has secured a major new credit facility which is designed to shield the company from the impact of the current malfunctioning of the international money markets.

Hypo Real Estate Group, Press release, 29.09.08

Did they say “current malfunctioning”?  I think they mean the current rationalisation of an industry that has been malfunctioning for at least a decade.  Also today, Hypo got rid of quite a few of its directors – strange if it’s just a malfunctioning market.  Anyway, the $50bn loan guarantee should keep afloat Germany’s second biggest commercial property lender.

4. Citigroup is rescuing Wachovia, the fourth largest US bank.  Citigroup is in no great shape itself but if it survives this era of financial meltdown it will be another banking giant.  This period of consolidation is likely to result in some truly enormous banks.

5. $620 billion pumped into the market from the Federal reserve but still markets around the world are today in turmoil.  The $700 billion rescue package or criminal misuse of public funds, depending on your opinion, has just been rejected although no doubt it will be back tomorrow in a different form.  Regardless of whatever measures are taken I am certain that more banks will fall.

So, are my savings safe?  They can be with a few different techniques.  Read my earlier posts How to get 100% protection on savings and Are my savings safe to see how.

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Bradford & Bingley to be nationalised

The government has averted what would almost certainly have been another Northern Rock style run on the bank by taking action to nationalise B&B – the UK’s 8th largest bank – before the doors open on Monday.  It is said that depositors will not lose any money.  Apparently they are still looking for buyers for the various parts of the business although the bit that nobody wants will be kept in public ownership.  In other words the UK tax payer will keep hold of the self-certification and buy-to-let mortgage portfolios.

There are some really interesting features both of the events themselves and of the media coverage that it has so far received.

1. There seems to be anger at the nationalisation, not because taxpayers are once again taking on the undesirable parts of the business, but because shareholders are losing their money.

Shareholders who invested £400m in B&B during its rights issue last month are likely to be enraged at a nationalisation. Northern Rock was nationalised earlier this year and shareholders are likely to receive zero.

FT.com

Are they saying that B&B might not have gone bust?  You must be kidding.  Nobody was going to come in and buy them because events are moving too fast for appropriate due diligence to take place.  No bank can afford to take on the risk of buying a failing bank without proper research.  It would be irresponsible to their own shareholders.  And who is expected to compensate them anyway?  The same taxpayers who’ve just bought up the risky mortgage book that only exists because of the irresponsible lending activities that had previously been earning profits for the shareholders?  The FT continues:

However it is possible that the level of compensation paid to investors in this case could be higher, as unlike Northern Rock, B&B was not being supported by an emergency Bank of England loan.

Incredible.  Even more incredible as the FT also says this in the same article:

A further rating downgrade could also make it more difficult for B&B to access the Bank of England special liquidity scheme which some analysts estimate funds around 15 per cent of its loan book.

Don’t they read their own articles?

2. I’ve written about the Credit Default Swap (CDS) market before and it’s interesting to note what happened to B&B just prior to nationalisation.

 B&B, which was downgraded to one notch above junk status, saw its shares sink to an all time low of 20p on Friday. It was facing the possibility of another credit rating downgrade which would have made it almost impossible to raise money in the wholesale markets. Its credit default swaps have ballooned to 1500 – one of the highest of any bank in Europe – making it very difficult for the bank to fund itself in the wholesale markets.

FT.com

THE CDS market doesn’t always predict a bank’s demise but it is certainly a very good indicator of what the markets think about the potential for default.

3. Customers were voting with their feet at the first whiff of danger.

On Saturday B&B pulled in additional staff into its 200 branches to help deal with the larger than usual volumes of customers withdrawing money. There were queuing problems reported in just three branches – Doncaster, Finchley and Southport.

FT.com

Is it time to increase the Financial Services Compensation Scheme maximum to £50,000?  Or would people still panic and withdraw their money?  I wish I had some statistics to answer that question.

Meanwhile we await news of Wachovia and Fortis…

WaMu – the biggest bank failure in US history but not the last

The demise of WaMu was the biggest bank failure in US History.  Nearly 10 per cent of its retail deposits were withdrawn in the lead-up to the failure (mostly deposits that were above the FDIC’s insurance limit).  Talk about shorting banks leading to a fall in confidence?  These days we make a pretty definite statement when we take our savings elsewhere.  It may be a self-fulfilling prophecy but nobody wants to be the last one off the sinking ship.

The failure wiped out shareholders in the bank.  JP Morgan Chase didn’t take on the holding company’s debts, just the juicy bits that were worth keeping. In fact, why would anybody come to the rescue of a bank now in the knowledge that they will be able to buy up the assets cheap after the bank goes into administration?  The best bits of WaMu were sold to JP Morgan for $1.9 billion.  WaMu was valued at over $30 billion a year before its collapse so that’s a pretty good bargain!

So who’s next to go to the wall?  Looks like Wachovia.  The sixth largest US bank saw its shares plummet 27% on Friday and is looking for buyers.  The struggling bank has $122 billion of distressed debts so it’s difficult to see who would want to come in and save it rather than wait for it to go to the wall and come in afterwards to pick up a bargain.