HowWealthWorks.com

[Suresh]

FT Aphaville blog: “Involuntary asset growth” and the begginings of the “true” credit crunch in 2008

Involuntary asset growth, we dare say, could become the next big news catchphrase, for it describes the current crisis facing most banks; massive, uncontrollable increases in troubled, illiquid assets on their balance sheets.

Citi have coined the term in a research note published Friday on European banks; titled simply and ominously, “Creaking”.

For European financial institutions, say Citi’s banking research team, an unwanted €450bn is heading onto (or already on) balance sheets.

[Suresh]

Bloomberg: Goldman, Lehman May Not Have Dodged Credit Crisis
...
The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. ...

VIEs, known as special purpose vehicles before Enron Corp.'s collapse in 2001, finance themselves by selling short- term debt backed by securities, some of which are insured against default.

Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial-strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.

`Significant Consequences'

Wall Street's writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime-credit histories. The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody's Investors Service and the Federal Reserve.

``There's a big number at work here and it will have significant consequences,'' said J. Paul Forrester, the Chicago- based head of the CDO practice at law firm Mayer Brown. ``The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse.''
...
The securities in the VIEs may be worth as little as 27 cents on the dollar once they're put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp.

Predictions for losses vary widely because banks aren't required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

``The disclosure on VIEs is hopeless,'' Azarchs said. ``You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup has run off the rails.''
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Bloomberg: Banks’ Hidden Junk Menaces $1 Trillion Purge

The U.S. government wants to clear as much as $1 trillion in soured loans and securities from bank balance sheets with its latest bailout plan.

That might prove a short-term respite. No sooner might the Treasury Department mop up those assets than $1 trillion or more in new ones spring up to take their place.

That is due to the potential return of assets held in so- called off-balance-sheet vehicles that banks may soon have to put back onto their books. The end result may be that banks are in no better shape to increase lending even after the government bailout.
...
At the end of 2008, for example, off-balance-sheet assets at just the four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- were about $5.2 trillion, according to their 2008 annual filings.

Even if only a portion of those assets return to the banks - - as much as $1 trillion is one dark possibility -- it would take up lending capacity the government is trying to free.

The hidden assets that may return to banks consist of mortgages, credit-card debts and auto loans, among others. Over the years, banks bundled them together and sold them to investors as securities.

Whether these assets are “troubled” or “toxic,” their return to bank balance sheets could slow efforts to get credit flowing again.
...
Investors have all but forgotten these out-of-sight assets. That’s a mistake.

True, banks won’t have to repatriate all of them. Mortgages guaranteed by Fannie Mae and Freddie Mac, for example, may have to be booked by those two companies, rather than banks.

Yet other assets will come back to banks. The tough part for investors is gauging how much. That is because the accounting- rules changes aren’t final, and their impact will depend on judgments by bank executives and auditors.

Hundreds of Billions

In its annual filing, JPMorgan said the rules change might lead it to bring back about $160 billion in assets. Citigroup estimated it may have to reclaim $179 billion.

That would equal about 9 percent of year-end 2008 assets at Citigroup, and about 7 percent at JPMorgan.
...
All told, Bank of America and Wells Fargo have a combined $600 billion in assets that may be under consideration for possible consolidation. If just half these assets come back to the banks, that would equal almost 6 percent of Bank of America’s assets and about 14 percent at Wells.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.