Update: Also see my list of Bankrupt global financial institutions.
Recently, the pace of writedowns by major money center banks has increased. UBS announced today it wrote down $19 billion. Deutsche Bank announced today it wrote down $4 billion. Lehman Brothers was forced to raise over $4 billion in equity capital. Merrill Lynch and Citigroup are expected to write down tens of billions as well. These are massive sums.
The question therefore becomes when will investors stop propping up these banks and refuse to buy new equity capital they have been issuing since the housing bubble started these horrific writedowns? One has to believe that these banks cannot continue to go to market to receive equity infusions in an attempt to bolster their balance sheets. At some point, investors will say ‘enough is enough.’
It is when the investing community at large refuses to take on more losses as these companies write off more and more in losses that we will begin to see major banks fail or be bailed out. To date, there have been four major financial firm failures and bailouts: Bear Stearns in the U.S., IKB and West LB in Germany and Northern Rock in the UK. All of these events were related to the meltdown in global mortgage markets in some way.
Americans are unaware of the extent to which other economies have suffered mortgage bubbles that are now unwinding. This is true especially in the UK, Ireland and Spain. But it also true in South Africa, Canada and Australia to name a few more countries.
And we are only in the beginning phases of the credit unwind process. The only primary credit market crater because of underlying bankruptcy has been the U.S. sub-prime lending market. This has spilled over into innumerable markets causing spreads to widen in high yield and mortgage derivate bonds (CDOs, etc) to lose value. But, one should fully anticipate the underlying bankruptcy problem to spread as recession takes hold. The sub-prime problem is now spreading to Alt-A mortgages and should eventually affect prime mortgages. Expect underlying default and bankruptcy to spread to other asset classes. Other asset classes to watch: commercial real estate, auto loans, credit cards, high yield corporate debt.
We are facing a credit crisis of unheralded proportions, the largest since the Great Depression. This is truly a global phenomenon and we have a very long way to go before this crisis is over. Globally, we will need leadership in the financial markets, in our national regulators, in economic and monetary stewardship and, most importantly, at the helm of our respective national governments. The U.S. Presidential contest in 2008 is an election of the greatest importance since 1932.
Let’s hope the U.S. can pick a President up to the task.
See also:
Credit Crisis Timeline for a timeline for the credit crisis, timelines by institution, loss estimates, and running tallies for writedowns and capital raising.