An article in a regional Australian newspaper this week provides information that the big banks around the world have yet to come clean about their full exposure to the US housing market. For the National Australia Bank, like many banks around the world, the Triple A status of US mortgage funds and the back-up of insurance seemed like a safe bet for getting some higher returns in total safety and security. We all now know different, of course but the small print of these deals has still yet to be fully taken on board and dealt with by many banks.
The NAB is the first bank in the world to make a realistic and fully open assessment of its losses to the US sub-prime market. It is writing down no less than 90% of the money it placed into American housing in its accounts. As the article says, this will shock Wall Street and will reverberate around the world.
Most other banks have taken writedowns on their investments into sub-prime but have valued them based on a possible return to higher values in the property market as it recovers. This might be a sensible approach but the recovery back to the higher levels of 2006/7 is clearly years away – maybe as much as ten years by some estimates.
The other factor not mentioned by banks is that they face exposure to loss not only of the money they deposited with American sub-prime instruments, but they also face longer term exposure if prices keep falling. The NAB points out that with the mortgages they have backed, 55% are not performing, which is a shocking figure. But they are writing down 90% of the $1.2 billion they invested, as they could also face further calls on their cash under the terms of the investment they made.
There is no way the insurers can carry the scale of losses which are occurring, and these will undoubtedly bounce back onto the banks around the world which are exposed. As prices in the US fall, and the sums recoverable from defaulting mortgages plummet, as so many properties come onto the market all at once, there could well be further cash calls made to bring the values back to level.
These potential losses are referred to in the article in financial jargon – conduit loans. What they imply is that the NBA guarantees the full value of the mortgage to the sub-prime instrument seller. The loss is all theirs, and as the losses climb, the full value of their investment in sub-prime will probably be wiped out, or possibly their losses could even exceed what they deposited.
The article estimates that the losses to be met from the sub-prime fiasco will climb past the optimistic estimates of Lehman Bros and others made last year – the $450 billion level – to over $1 trillion, possibly even reaching $1.2-1.3 billion.
The first tranche of losses has been borne by the world’s bankers, with the US government doing all it can to boost up the economy with tax rebates, and interest rate cuts. The next tranche will be borne by the banks which have to face further losses, and by the US oand other governments which will have to act to ensure their banks are not dragged down as the world rushes around searching for the funds to keep the financial system from creaking or cracking.
The good thing is that if other banks follow suit and declare a more realistic figure for their losses as the NBA has done, it will actually help the situation towards its solution. By trying to deny the full losses in the pipeline, banks are not helping governments to stop a meltdown, and the fear of a major world banking crisis lingers on as people sense that there are more losses yet to be declared. It is healthier to state the full losses, and get the system back onto a more honest, sober, and less fearful footing.
In the US as prices fall, demand fcr housing is increasing, and US house-building shares are seeing a recovery. Life will go on, but only once the world has admitted the mess it is in. It has taken an Australian Bank to start the process, maybe because Australians have less fear for the future of their economy than the European banks that carry far larger amounts of this risk.
As the word deals with this situation, the shock of facing the awful losses, and the anger at the American mortgage-sellers’ deceit will not be easily forgotten. But carrying on in semi-denial as to how bad the situation is, does not help. The world runs on confidence before it runs on cash, and being in denial yourself, is not the way to build confidence in others. The National Bank of Australia has shown courage in admitting the truth, which makes it easier for others now to follow suit.
The NAB is part of a banking group which includes the Clydesdale Bank, The Yorkshire Bank and a few others around the place.
Pictured – Chief Executive of the NBA (from google images).
UPDATE – On MSNBC, Foreclosures Up 121% In A Year.