Monday, November 12, 2007

Banking Blood Bath

Very interesting albeit scary article about what is on the balance sheets of the big investment banks.

Nouriel Roubini's Blog: The bloodbath in credit and financial markets will continue and sharply worsen (2007-11-05)

It also points to this FT article (from 2007-11-04) predicting more write downs at Merrill Lynch, Citigroup, and UBS: What’s the subprime damage to banks?

The first article also looks into how many structured product assets are valued on an internal model valuation method, also named 'Level 3' (level 1 means you just take market prices, level 2 means you base your valuation on other prices of similar asset classes - level 3 basically means you make up your own prices).
Look at the info Citigroup just filed with the SEC today: they have $135 BILLION in LEVEL 3 ASSETS.

I have a neat idea.

Why don't we take every single major financial institution out there and then divide their total Level 3 assets by their equity capital base and make comparisons?

This will give us a better idea as to which of them may really remain solvent at the end of the day. Shall we?

Let's have a look at Citigroup. Their equity base is $128 billion. Therefore, their Level 3 assets to equity ratio: 105%

How about Goldman Sachs? Level 3 assets are $72 billion, equity base is $39 billion. Their Level 3 assets to equity ratio is 185%.

Morgan Stanley: $88 billion in Level 3, equity base is $35 billion. Ratio: 251% (WOW!)

Bear Stearns: $20 billion in Level 3, equity base is $13 billion. Ratio: 154%

Lehman Brothers: $35 billion in Level 3, $22 billion in equity. Ratio: 159%

Merrill Lynch: $16 billion in Level 3, $42 billion in equity. Ratio: 38%

Here is the Level 3 assets to equity ratio summary:

Citigroup 105%

Goldman Sachs 185%

Morgan Stanley 251%

Bear Stearns 154%

Lehman Brothers 159%

Merrill Lynch 38%

This becomes very interesting now, doesn't it?

Looks to me like Goldman Sachs and Morgan Stanley are by far in the WORST situation among the investment banks.

And yet the media is focusing all of their attention on Merrill Lynch---which actually has by far THE LEAST EXPOSURE of all of them.
BTW, UBS reported in third quarter 2007 CHF 23.4 billion in 'level 3' assets. This in addition to another CHF 21.6 billion in MBS and CDO assets. UBS has equity (without Goodwill) of CHF 33 billion.

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