Banking `Write-Down' Bloodbath:
Royal Bank of Scotland Royally Impaired
Nov. 14, 2007 (EIRNS)The banking "write-down" bloodbath continues to spread through the world's largest banks:
- On Nov. 14, HSBC took a $3.4 billion "impairment charge" on its third quarter report, which consisted of its subdivision, HSBC Finance, provisioning $3.4 billion for loan-loss reserves to cover losses from its deteriorating U.S. mortgage portfolio. HSBC had already announced in September, that it would shut down its Decision One Mortgage unit; on Nov. 14, it announced it would close or consolidate 260 consumer-lending branches in the U.S., which is one-fifth of the HSBC's U.S. consumer-lending units (HSBC owns both Beneficial Finance and Household Finance lending companies). HSBC was compelled to take an immense $10.6 billion loss due to non-performing U.S. mortgages during 2006. HSBC (the HongKong and Shanghai Banking Corporation) is Britain's largest bank; it is one of the ten largest in the world.
- During the third quarter, the effect of the ongoing systemic collapse of the dollar-based world financial system, struck Japan's banking system hard. Mizuho Financial Group, one of Japan's Big Three banks, took a $630 million write-down, largely due to its exposure to U.S. Mortgage-Backed Securities. During the same quarter, Sumitomo Mitsui, another one of Japan's Big Three banks, reported a $288 million write-down.
- Fannie Mae, a giant in the secondary housing market, and the biggest source of money to the U.S. housing market, announced Nov. 11 that its third-quarter loss more than doubled to $1.39 billion. Fannie Mae stated that its loss arose as the housing crash caused a mark down in the value of Fannie Mae's risky derivatives contracts. Fannie Mae owns or guarantess $2.7 trillion of U.S. mortgages; were Fannie Mae's situation to continue to implode, that, by itself, would disintegrate the $20 trillion U.S. housing bubble.
- A cavalcade of banks is lining up to announce writedowns for the fourth quarter, though normally such announcements would not come for two more months. On Nov. 13, Bank of America announced, for that quarter, that it would carry out write-downs of $3 billion; Bear Stearns announced it would write-down $1.2 billion; it is anticipated that Merrill Lynch will announce $3-4 billion, and Citigroup $10-11 billion in write-downs for the fourth quarter. However, all this constitutes only a fraction of the true losses that the banks are actually carrying on their books.
- The Royal Bank of Scotland (RBS), the second largest bank in Britain, and the seventh largest bank in the world, is experiencing deepening problems, which includes a sizeable exposure to the highly volatile credit derivatives market. RBS merely typifies the problem of the entire British banking system, that while it maintains a stiff upper lip, the rest of the body is decomposing.
RBS' stock price has plummeted from 691 1/2 pence to 387 1/2 pence, since the beginning of 2007, a loss in total stock capitalization of 29.4 billion pounds ($60 billion). RBS possesses billions of dollars worth of assets linked to CDOs, MBS, and other non-performing paper. On Oct. 31, Sandy Chen, analyst at the British investment firm Penmure Gordon, downgraded RBS' stock from "hold" to "sell", meaning that deeper problems will cause RBS stock to fall further. Chen told the Nov. 14 London Daily Telegraph, that his concern is that when an RBS-led consortium acquired the Dutch banking giant ABN Amro on Oct. 10 for $102.7 billion, it also acquired ABN's troubled financial condition. Chen noted that ABN Amro holds 1.5 trillion euros ($2.17 trillion) notional value of credit derivatives, which is more than 5% of all credit derivatives in the world. These are highly risky instruments. "Given the ongoing deterioration in credit markets and the pressures on some key counterparties, we see a risk of substantial mark-to-market charges." That is, these derivatives are going to be considerably marked down in value.
Citigroup financial analyst Simon Samuels warned that RBS is dangerously "ueber-leveraged." It does not have sufficient bank capital to cover all the future losses that are just over the horizon. As representative, the Royal Bank of Scotland indicates that the collapsing British banking system will soon be royally flushed.