Wednesday, August 13, 2008

Losses recognised to date - and where to look for more

I was somebody who believed in 2006 that most the risks were outside the US banking system. I knew very risky loans were being made - but most were being securitised.

A lot of them wound up in the European banking system - witness Natixis and UBS.

I did however underestimate the losses that would wind up in the US banking system - and Tanta is now saying that it was a little more complicated than my 2006 view. (See this Tanta post I mildly disagree with.)

But data is what I tend to crave. Bloomberg publishes a list of total losses recognised in this crisis so far. The number just passed 500 billion - which means I think it is about half-way there...

Here is the list - but I have done something else - I have divided it into US Investment Banks (Lehman, Bear etc), US Banks dominated by investment banks (Citicorp, JPM), and conventional US banks (Fifth Third, Keycorp).

The conclusion - conventional US banks are only about a sixth of the losses. The Europeans have hurt MUCH more. What Tanta derides as conventional wisdom of 2006 was mostly correct.

What is interesting about this list is the absence of one core type of financial which is loaded with long term assets, CDOs, mortgages and other potentially toxic stuff. Where are all the life insurance companies?

I have a few shorts in that pile. There are probably plenty more - but I don't see anyone publicly berating those incomprehensible piles of mediocrity.

If you are looking at conventional banks you might find some credit losses. Indeed I am short a few conventional banks in anticipation. But they are not where I think the really good ideas are.

Thoughts anyone.


Post script: my classification of institutions seems fair enough in most cases - though JPM has made a fair few of its losses outside the investment bank. I also classified Barclays as a US investment bank. That seems fair enough to me...

The Bloomberg list does not include other culprits such as the GSEs, mortgage insurers and bond insurers. If anyone has a more complete list please forward it to me...



Anonymous said... has predicted a lot more to come

John Hempton said...

The losses that have occured to date have included some degree of double counting.

Ambac has taken reserve for some charges. The people who own the security insured by Ambac have also taken some reserve because Ambac's credit isn't worth much. The loss only occurs once...!

This will continue to occur until the worst is over - and then some double counting will be reversed.

But I think we are a long way from reversing the double countng...


Anonymous said...


I wonder about assets held by Asian banks, particularly in China. Is there a reason that these institutions avoided CMOs? Or are they simply not recognizing the losses on these instruments?

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