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Barclays risky assets move a little too cozy

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Barclays has come up with an interesting way to solve an optical problem. Concerned that the bank’s shareholders are nervous about possible future writedowns of wobbly assets with a value of $12.3 billion, it has sold them to its own employees.

This isn’t necessarily a bad idea. But there are two things to dislike about this deal. First, it looks pretty cozy to sell to your own workers. And second, the deal looks potentially very favourable for the purchasers.

The deal does not remove the assets from Barclays’ balance sheet. What it does is allow the bank to pull them out of its mark-to-market book, where their carrying value is contingent upon the financial health of some monolines with whom Barclays has taken out credit insurance.

To do this it makes a loan to an entity, which then buys these assets. The loan still sits on Barclays’ books but does not have to marked to market. Even so its value is ultimately still tied to the performance of the assets.

Securitization survives the fall

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A year after the government’s seizure of Fannie Mae, Freddie Mac and AIG , not to mention the bankruptcy of Lehman Brothers that sent the global financial system into a tailspin, very little has changed to prevent debt from being sliced and diced, again and again.

This is a mistake. Although there were many factors contributing to the downfall of the global financial system, the repackaging of toxic debt into esoteric financial products was at the heart of the credit crisis when it erupted in 2007.

Citi’s dirty pool of assets

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Hard as it may be to believe, shares of beleaguered Citigroup are on fire.

The stock of the de facto U.S. government-owned bank is up some 300 percent after it cratered at around $1 back in early March.

The over-caffeinated stock maven Jim Cramer keeps calling Citi a “buy, buy, buy” on his nightly CNBC television show. Even the more sober-minded writers at Barron’s are pounding the table a bit, predicting Citi shares could double in price in three years.”

A CIT CDO problem

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CIT isn’t supposed to be a systemic threat, but a potential failure of a big lender, even if its customers are small and medium-sized businesses, is bound to shake up some corners of credit markets. That’s a rule, isn’t it?

The FT is reporting that the problem area is likely to be synthetic CDOs – the really fun structured products that are made up of sliced and diced credit default swaps referencing individual companies. But this time it looks like the losses just may be in investors’ heads.

PPIP is a pipsqueak

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The Treasury Department is finally out with its final version of a plan for ridding the banks of toxic assets and you have wonder why the Obama administration even bothered.

Treasury will now fund the program with $30 billion in government money. Back in March, Treasury Secretary Tim Geithner was talking about kicking in between $75 billion and $100 billion into the program.

Investor protection, Singapore style

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Who needs a whole new government agency to protect  consumers from irresponsible banks? Authorities in Singapore have taken a refreshingly straightforward approach in tackling banks deemed to have been less than scrupulous when selling structured notes dragged down by the failure of Lehman Brothers: they banned them.

The Monetary Authority of Singapore on Wednesday banned 10 banks from selling structured notes until they can prove that they have improved processes to highlight the risks involved. Banks including DBS and ABN Amro, now part of Britain’s Royal Bank of Scotland, are out of the business for at least six months. Hong Leong Finance receivd a two-year ban. (The full list is here.)

Hybrids securities come home to roost

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It’s not just consumer and real estate loans that have wreaked havoc on the banking system, but another favorite financial product championed by big banks during the boom years: hybrid securities.

The Wall Street Journal reports that these securities, which are a blend of equity and debt, helped fell six family-controlled Illinois banks that imploded last week. During the boom, hybrid securities, or trust preferred securities, became a perfect product for banks that wanted to raise funds that would count toward their Tier 1 capital cushion without diluting common shareholders. Investors who typically invested in debt loved hybrids because they offered higher yields at a time of extraordinary low returns in traditional investments like corporate debt.

Just say no to CDOs

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Enough of tinkering around the edges, it’s time for tough reform. The Obama Administration’s plan to overhaul the regulation of the financial system doesn’t go far enough when it comes to the securitization market — a source of credit that both it and Wall Street see as vital to the future of consumer and commercial lending.

If the administration wants to ensure that the excesses seen during the credit boom don’t happen again, it should ban the repackaging of these securities into even more complicated debt structures like collateralized debt obligations.

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