From Giants To Junk

Ulli Uncategorized Contact

Jon Markman wrote an interesting piece called “Big banks vulnerable to takeover,” which touches on more fallout from the reckless real estate era. He calls it the ushering in an era of ‘reverse colonization’ with reference to large foreign investments into UBS and Citigroup. Here’s part of it:

In the past two weeks alone, Singapore announced that it would make a $10 billion investment in UBS, and the Abu Dhabi Investment Authority pledged to make a $7.5 billion investment in Citigroup.

Both investment groups are expected to take board seats, which means these moves alone put the fate of two of the largest banks in Europe and the United States in the hands of managers from regions that not long ago were dismissed as high-risk. So who’s too risky now? The purchases were made via convertible securities that pay stunning yields of 9% and 11%, which essentially classify UBS and Citigroup as junk-bond-level credits. It looks like developed markets are the new emerging markets.

This didn’t have to happen. But the big Western banks committed the same sin of hubris that toppled the European, Russian and Chinese monarchies of centuries past. They took their power for granted, trampled the rights of their constituencies and wasted vast sums of money entrusted to them by taking risks they didn’t understand.

We really need to be plain about this: Companies such as Washington Mutual, which announced a $1.6 billion write-down of home-lending-unit losses Monday, essentially took money placed in passbook savings accounts by hard-working, conservative customers — many of them retirees — and shoveled it to low-income, Fantasy Island condo flippers. Bankers paid 2% or less to customers they obviously considered suckers and lent it out at 6%-plus to customers they courted.

This didn’t have to happen. But the big Western banks committed the same sin of hubris that toppled the European, Russian and Chinese monarchies of centuries past. They took their power for granted, trampled the rights of their constituencies and wasted vast sums of money entrusted to them by taking risks they didn’t understand.

We really need to be plain about this: Companies such as Washington Mutual, which announced a $1.6 billion write-down of home-lending-unit losses Monday, essentially took money placed in passbook savings accounts by hard-working, conservative customers — many of them retirees — and shoveled it to low-income, Fantasy Island condo flippers. Bankers paid 2% or less to customers they obviously considered suckers and lent it out at 6%-plus to customers they courted.

It’s hard to disagree with his view, but only time will tell if other cash-flush foreign companies will take the opportunity over the next few weeks/years to pick up or support failing U.S. institutions. Deep down, I hope that this will not happen to a great extent; however, if it means that sane and fiscally responsible lending and business activities will return, then I find it easier to accept that kind of a change.

Contact Ulli

Leave a Reply