01 April 2008

Banking Crisis Worsens, but Spring is in the Air....

Wall Street's motto is "Never Give Up. Never Surrender. Greed is only a few heartbeats away from fear."

Banks are leading the rally on first of month 401k money from the US, hopes that the banks have or are reaching a bottom by European speculators based on the Lehman shares offering raising $4 billions, a quick pump from the Yen-dollar carry trade, the apparent revelation that the Treasury has agreed to backstop any Bear Stearns losses for the Fed, and... a little fresh lipstick.

Banks Face Biggest Crisis in 30 Years, Report Says
By Edward Evans

April 1 (Bloomberg) -- Credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the burst of the dot-com bubble, Morgan Stanley and Oliver Wyman said in a joint report.

Revenue from investment banking may drop 20 percent in 2008 before a further $75 billion in markdowns, analysts led by Huw van Steenis said in a note to clients today. Six quarters of earnings will have been erased by writedowns and falling revenue by this month, rivaling the collapse of the junk bond market at the end of the 1980s that put Drexel Burnham Lambert Inc. out of business, the report said.

''The industry is facing the most severe investment banking crisis in 30 years,'' the analysts wrote in the report. ''Global securities markets are in the midst of profound cyclical and structural change.''

Banks' revenue from their credit businesses may drop as much as 60 percent, the analysts said, and the firms will have to provide more transparency to investors who buy their loans. At the same time, regulators will push the industry to retain more capital as a cushion, hurting banks' return on equity in the long-term, the group added.

Banks' earnings have been hit for the past three quarters by the turmoil in the credit markets, the report said. In total, the crisis may last for eight to 10 quarters, exceeding the six- quarter duration of the Asia crisis and bailout of LTCM in 1997- 8, and the seven-quarter fallout from the bursting of the dot- com bubble, the report said.

Investment-banking revenue has also stalled as the pace of takeovers and initial public offerings declined in the first quarter of 2008. Writedowns and losses on subprime-infected assets have already cost the world's biggest financial institutions about $230 billion since the start of 2007.

Zurich-based UBS AG today posted an additional $19 billion of writedowns and said it would seek $15.1 billion in a rights offering to replenish capital. Deutsche Bank AG, Germany's biggest bank, also said today it expects to book about 2.5 billion euros ($3.9 billion) in writedowns for the quarter.

Separately, Merrill Lynch & Co. and Citigroup Inc. had their first-quarter earnings estimates cut by Goldman Sachs Group Inc., which said the two banks may post $14 billion in writedowns on assets linked to collateralized debt obligations.