Posted on 07/26/2008 2:11:20 PM PDT by dennisw
THE National Australia Bank has effectively kissed goodbye to $1 billion it poured into ill-fated securities backed by home mortgages in the US.
NAB chief executive John Stewart yesterday revealed the bank was increasing its bad debt provision on the securities by $830 million, which comes on top of $181 million disclosed in May.
Mr Stewart denied NAB had credibility problem, saying it had "been open and honest with the market".
He said the surprise provision would not result in cut to the bank's dividend, job losses or increases in home loan rates.
But it would cut about $600 million from its profit.
NAB shares plunged on the news, leading the share market tumble yesterday.
The stock closed 13.5 per cent, or $4.14, lower at $26.56.
Other bank stocks were also hit, with ANZ dropping $1.70 to $17.75 and the Commonwealth Bank shedding $3.14 to $43.25.
Last night ratings agency Standard & Poor's put the NAB on negative credit watch, warning the bank's AA rating was at risk if NAB's credit costs blew out or investors deserted the bank.
Mr Stewart said the global credit crisis was worse than he had thought and had yet to hit bottom. "The worst-case scenario might not be too far away from the most likely scenario," he said.
Mr Stewart took a swipe at ratings agencies, saying they had not done a "thorough" job when giving the securities a AAA rating.
He declared the bank would "make the same investment decision (today)" based on the information it had.
"If you wouldn't invest in AAA assets then you wouldn't invest in any company in Australia," Mr Stewart said.
NAB estimates the global banking sector is less than halfway through the credit crisis.
global bank losses are expected to hit between $1 trillion and $1.3 trillion.
(Excerpt) Read more at news.com.au ...
FYI...Australia is just now writing down these things, while the US has been doing it for more than 6 months. Just wait.. China and the other Asian companies have loads of this stuff that they still have not written down.
Anyone that thinks the taxpayer exposure to the Fannie and Freddie bailout will be limited to $25 Billion as the congresscritters are claiming, is sorely deluding themselves.
And we have not even begun to see the damage from off balance sheet OTC derivatives the financial institutions carry.
The next step by Congress will be to delay FASB rule changes that were supposed to come on line later this year, changes that would have required bringing the off balance sheet junk on to the books.
We aren't writing down or admitting these CMOs are only worth 10% of original value
They are being kept on the books as dubious crap with no numbers assigned to them
The government should not subsidize home purchases. It could only inflate home prices.
Of course Bush’s subsidy is only one factor in a huge problem.
Did I foresee this big a problem? No but I was sure that there would be big negatives.
And our pension funds are stuffed full of this worthless garbage, which they paid full price for and are still pretending are worth their face value.
As the boomers start withdrawing as we enter the 1st retirement wave next year (how many million are retiring again?), the funds will have to start trying to sell them to meet withdrawels.
At which point they almost all go belly-up.
We’re beyond screwed.
One thing I haven’t seen mentioned is that this financial crisis pretty much blows a hole in the idea of privatizing social security for at least a generation. SS is a lousy investment, but I don’t see anyone who’s lived through this ever agreeing to turn their “last resort” old age stipend over to Wall Street. Heck, it doesn’t do a whole lot for confidence in the whole 401K/self directed retirement paradigm.
No, we aren't. I don't believe ALL mortgage backed securities are worth only 10% of their original value... just some. Some of the oddball tranches, which carry high initial interest and high risk to various factors, should never have gotten AAA ratings. Without knowing exactly what they bought, it's hard to comment intelligently on their situation, or to extrapolate it to the economy as a whole. If it is really true, we should all be hitting the panic button.
I read somewhere else (WSJ, I think) that 80 cents on the dollar is the rule of thumb being used to value Level 3 assets (those without a liquid market)on investment bank books these days. That's a long way from 10.
OK, my general point was that the incremental bad news, for the last 6 months, has been coming from the US. Going forward, I think most of the incremental bad news will be coming from outside the US.
Of course it is....Europe too....the dollar is gonna make a might comeback.
Not all of course....
But the CMO's this bank has sure are useless otherwise they would not be holding nearly 100% reserves against them
There is plenty of blame and culpability to go around, from Congress who encouraged shoddy lending to people unqualified, to people who had no business borrowing the money in the first place, to lenders who practiced poor lending, to insurers who insured this stuff, to rating agencies who missed the risks, to insurance commissioners who never reviewed the risk portfolios of the insurers properly, to bank examiners who never saw this coming, to investment banks who bundled this stuff up and sold it to investors, to investors who thought it was OK to invest in “sub-prime” loans in the first place. This banker can blame S&P all he wants, but probably should also go look in the mirror.
I've heard smart commentary say this. Euro down and US dollar up. I'm hoping for this myself
Gold and oil have been down for two weeks
Yeah, they bought the bad stuff.
This reminds me of something that happened in some county in California about 15 years ago. The County Treasurer fancied himself a big-time investor, and he was well thought of, because the funds under his control were earning several percentage points more than his peers. It turned out he was buying securities from Merrill Lynch that had ungodly amounts of interest rate and prepayment risk, which accounted for the high initial payment rate. The market changed and the portfolio went a couple billion dollars of *poof*.
Merrill claimed he was sophisticated and the risks had been explained; he claimed otherwise, and they settled.
That was different than the current situation, though, because no one ever said the underlying assets from which his securities were derived were bad.
I think the guy was a pompous doofus AND the Merrill salesmen knew it.
Yep. And that was in Orange County.
But I have read that these “securities” were being sold as “risk free” as I remember. Only problem is that none of this “stuff” has been marked to market. Isn’t that what has happened here? This bank was made the call to just come totally clean and be done with the stinking mess. One major mess, and they are done. I don’t believe that ANY American bank has done the same.
May I offer a slight alteration to your statement: The government should not be in the business of subsidizing anything!!!
Yes the are in effect being marked to market at a value of 10% of what they were bought for
The bank is pledging to hold reserves equal to 90% of the value of these American CMOs to make their balance sheet healthy
EIther a brilliant move, or a dumb move.
They aren’t selling anything, they’ve simply taken a write-down on the stuff they own.
Now, if the market really does tank, they’ve already written off the loss, and they will look good when everybody else is still taking write-downs.
On the other hand, if people think it’s the fault of the bank, they might get hit so hard that they don’t survive.
If they can survive the hit to their earnings, there really wasn’t any risk. IF it turns out they are wrong, and in the end all these securities pay off, they will simply make a lot MORE money than they said.
Because they aren’t selling, they are just changing the book value.
BTW, anybody think that their house is really only worth 10% of what it was “worth” a year ago?
It is remarkable to see the ratings agencies punish the honest. If you mark-to-market, you are punished. If you mark-to-fantasy, they look away and pretend your finances are sound.
Of course, this is all part of the great Ponzi scheme. The ratings agencies have to play their part, which is to pretend most banks are not only solvent, but are well capitalized, so the sheeple won’t panic. They are trying to make sure this crisis unwinds as slow as possible. That should avoid the depression, but will insure a decade or more of pain.
S&P, “Shame, shame NAB. Naughty, naughty. You are NOT supposed to let the cat out of the bag.”
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