With the sub-prime comedy heating up, financial analysts (read “professional guessers”) are falling over themselves to “estimate” the global and US losses caused by the value of sub-prime mortgage assets and mortgage-bond type CDOs heading south. For example, www.bloomberg.com has recently quoted a number of analysts offering their estimates. The figures are astronomical – in the billions - yet meaningless. Remember, the 2 issues are the direct exposure to sub-prime debt which soured, and, the widespread re-packaging of them as CDOs, which, when faced with a wall of defaults, contributed to the decline in the value of all mortgage debt, in a softening real estate market in the US.
There’s no shortage of analysts offering speculative figures, but there is a massive shortage of hard facts. Why? The banks, mortgage companies and institutional investors who bought the CDOs are still churning the best way of disclosing their exposure to increasingly annoyed shareholders and the public. After all, much of this exotic “Off Balance Sheet” financing was done via “Structured Investment Vehicles” a scientific-sounding term for a jerry-built deal.
Technically, these SIVs were managed on an “arms length” basis and the banks are reluctant to call SIV debts as their own.
Biting the bullet, HSBC Holdings PLC announced on 26 November 2007 that it would place 2 of its managed funds with mortgage exposure, on its Balance Sheet and spend US$35 Billion to bail them out. While lauded as timely and aiding in maintaining transparency and its reputation, the accolades would have made more sense had HSBC acted sooner. After all, wasn’t Bear Stearns’ inability to support its funds over the summer a prescient warning of what was to come?
Still, HSBC’s move is strategic in a number of ways: By acting first, it makes the other banks look conspiratorial, secretive and evasive. Second, it distances HSBC from the bailout plan or “super fund” that was proposed by Wall Street and only officially backed by Wachovia, after it was proposed by Citigroup, JP Morgan Chase and Bank of America nearly 2 months ago. Third, those banks that belatedly decide to place the SIVs on their Balance Sheet, may be obliged to announced larger write downs than those they have so far announced – a further blow to their reputation and credibility.
© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved
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