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Thursday, 23 October 2008

RISK RATING: THE SMOKING GUN?

The banking crisis appears remarkable for so much depending on just one asset class? If you are puzzled as to why US legislators and EU politicians are especially angry about the central role of the ratings agencies (Standard & Poor's, Moody's Investors Service and Fitch Group) in the financial crisis, read on. Ratings agencies are arguably more vital to the financial system than even accountants! Why? Because the ratings agencies value banking assets more succinctly or persuasively than accountancy firms. As a theological reminder, it is important to bear in mind that risk grade ratings (using Letters A,B,C,D with + or – and numbers 1.2.3 etc.) are essentially the aggregate of re-payment default and final loss after recoveries. The potential to default and loss given at default are estimated historically over a full economic or credit cycle pertaining to many thousands of examples of asset classes, obligors, counterparties, and very large pools of millions of retail loans, credit cards, mortgages etc. A credit risk grade expresses the known likely % within large populations of borrowers that some will default on loan repayment. Risk grades can also reflect market risks of tradable financial instruments if they are suitably long-established with a reliable history of price volatility. It is on the basis of the risk grades that financial assets have value and prices (or spreads). These risk estimates have to adjust however depending upon the maturity of a loan. That is to say if a loan (asset) has a maturity of months or a few years only, say 1-3 years, then if repayment of principal and interest can be forecast to occur in a downturn or other predictable shock period, or cycle turning point, then the average default rate over a whole cycle is not the true representative risk-price. This is the problem especially with SME loans, credit card and car loan debts which are short term, while mortgage debts are much longer term and are likely to experience one or two economic cycles. Corporate loans are also rated according to the company's type and size since a large % of small firms (about 10% close or fail each year) and firms that are heavily borrowed, such as property developers, do not generally survive well over economic cycles, similarly for certain classes of household borrowings such as overdrafts and general consumer credit.
The credit crunch story of ratings begins with Moody's and Fitch the first bond ratings agencies, both formed in 1913. S&P followed in 1941. Only Moody's is publicly quoted (as of 2000). Its revenues grew fast, as did the other two global raters, reporting the highest profit margins of any company in the S&P 500 index for five years running; shares up 500% in 4 years, earnings up 900 % in 7 years, with nearly half of its revenue coming from its collateralized debt obligations (CDO) ratings service, until in the past year it lost over 60% share value to a P/E of 5 ($2bn income, $1bn profit, $5bn mkt.cap.) Two years ago, by the winter of 2006 it was clear something was going wrong with the risk ratings of CDOs most of the contents of which (about 90-95%) were originally rated triple-A by the three ratings agencies. This was hardly unexpected, however, as US real estate began falling in certain areas in 2005 and in the US there is always a risk of mortgagees abandoning their properties when the remaining equity is below the remaining debt; the only recourse of the lenders is to the value of the property, not the borrower, unlike in Europe. In areas between San Francisco and Los Angeles a large % of new house buyers have negative equity today of approx. 66% compared to the outstanding loans! Before the end of 2006, about 750 CDO bonds had been downgraded in the previous 2 years. They fell in value by about $25bn (or 2% of the total mortgage backed CDOs) because of falls in repayment rates by sub-prime U.S. mortgage holders, according to Lehman Brothers Holdings who claimed to maintain the most thorough analysis. CDOs (a broad term for unregulated fixed income asset-backed securities, mainly bonds supported by mortgages or credit card debt) were designed to sell chunks of banks assets to free up capital for faster lending growth (fueling 'credit boom' economies). CDOs could average 5-8% yields and given their high credit-rating appeared to be very good value to investors; Cdos were easy to sell. The first CDOs were packaged by Drexel Burnham Lambert in '87. In those days (since '78) the term 'sub-prime' meant high credit-worthy borrowers just below the highest grade. In late 1992 the term suddenly changed meaning. It now meant low credit-worthy borrowers? In 1992 at the end of the outgoing George H. W. Bush administration regulation had changed allowing financial brokers, not just commercial banks to offer mortgages. It was then when financial engineers at JP Morgan figured out how large amounts of sub-prime mortgages could be included in investment-grade CDOs. The sub-prime mortgage market grew dramatically at an annual rate of 25% between 1994 and 2005, a tenfold increase in a decade. By early 2007 CDOs were worth over $2tn (almost as much as all banks' own capital), of which a quarter was sub-prime mortgages. At first this was considered a good thing. Sub-prime mortgages were an important social policy, growing the property-owning democracy and appropriately underwritten by federal government agencies Fannie Mae and Freddie Mac. In 1994, less than 5% of mortgages in the US were sub-prime. Home ownership increased 1.94% annually during the Clinton administrations, reaching 67.7% by 2000. Today, of about $11.6tn in outstanding mortgages, one-quarter are sub-prime and Alt-A loans. In the '80s S&L crisis, by comparison only about one tenth as much at today's prices was sub-prime and yet even at that level was partly blamed for the '90-'91 recession! A major problem for investors in CDO securities was the absence of a liquid secondary trading market with price transparency. Investors or their brokers had no screen service they could look up to check daily prices. Consequently, investors (unless they were market insiders) did not know when values dropped as defaults increased. There was no easy way then or since for investors to find out what their CDOs are worth in the market, which is not an uncommon problem for many bank bonds, but became alarming for a market that grew to become huge in scale. Though, from a regulator's viewpoint, however, CDOs represented only about 2% of the total of world financial assets (totaling $118tn by end of 2005). Even today, the delinquency in the underlying US mortgages is estimated at about 3.5%, but 3-4 times this in sub-prime mortgages (say 13% of $700bn) and rising. Indicators did emerge of the market value of the bonds, but mainly the valuations (ABX index etc.) are based on risk gradings. CDOs are variable in their contract details and not easy to compare. To date write-offs have totaled about $505bn, or 4.3% of the total mortgage market.
The difficult-to-chart slide in CDO values exposed the little understood role played by rating companies in assessing risk and acting as the only de facto regulators in a market that lacked official watchdogs. Again, from a regulator's perspective the market was considered to be a professional interbank and institutional investor market. Most of the world's CDOs are owned by banks and insurance companies, and the people who regulate those firms rely on the ratings to provide a sound basis for valuations of CDOs. But, the market changed once regulations were relaxed to allow Alternative Investments to be included in retail investment funds, pension and insurance funds. Rating agencies facilitated this greatly by maintaining high risk grades for new issues, surprisingly so when signs of possible recession were on the horizon and obvious at least to economists. The ratings agencies did more than value CDOs by giving them letter grades; they helped banks and other financial firms create CDOs (e.g. wrapping together 100 or more bonds and other securities, including debt investments backed by home loans) and then slice and dice them into tranches, each with a separate grade. The raters told CDO originators how to get most profit by maximizing the tranches with the highest ratings so that typically 80%-95% will be AAA and the rest AA or A.
All pretence that financial engineering could dispel expected risks was lost on August 16 2007 when, after an internal revision of its ratings practices, Moody announced new corrected ratings models. These ignited the credit crunch like a dirty bomb devastating $trillions of assets and derivatives and in turn most the world's biggest banks, and as yet untold numbers of investment funds worldwide! If a company's bond is given a triple-A rating, it means Moody (or its nearest competitors ,S&P and Fitch) believes unsecured loans to the company (its bonds etc.) are as safe as Government debt, an extremely high probability of lenders being repaid the principal plus interest, bonds that could become collateral for at least 80% of face value. A great deal more in loans and funding was teetering on the values of CDOs. The lower the rating - from Triple A to Double A to Single A - and on down to Baa, below which the bond or loan is rated junk, certainly not investment grade i.e. high-risk! rapidly $100s of billions of CDOs dropped 4 to 17 notches, from highest grade to lowest grade and over a year were discounted by 60% to 80% to over 90%!
It has been essential for nearly a century that all bonds by publicly quoted issuers receive a credit rating. Ratings services are paid for by issuers, and only in some cases by investors, through fees or subscriptions. As debt markets grew, investors sought two ratings, Moody's and Standard & Poor's, a duopoly and sometimes as a third check, Fitch, which with Moody's and S&P, is internationally recognised by all regulators. Basel II, for example, requires 3 independent ratings from which banks may take only the middle or lowest value for risk assessment if the ratings differ. Until 3 ratings were required and not merely 2, Banks could avoid Moody's, which was known for giving lower ratings than its competitors until recent years when some of their strict internal rules were abandoned.
Rating a corporate bond, involves rating a company, and companies have assets, business models, balance sheets, management qualities, shares if public, and, most importantly, credit history. A rating is based on a quantitative model plus qualitative human judgment, just as banks do internally. Increasingly banks have become almost wholly dependent on external ratings and their internal analytics have therefore suffered. Rating a structured-finance instrument like a CDO is different if it is an asset-backed security vested in a 'failsafe' or 'bankruptcy remote' Structured Investment Vehicle (SIV) or Special Purpose Entity (SPE), which more often than not is a registered company in an off-shore tax-haven managed by lawyers and/or an accountant. Rather than having an established corporation or bank as direct issuer, the securitized (structured) bonds are backed by pools of debts (either mortgages, or auto loans, or credit card loans or other loan types, not a mix of these (usually from a single national jurisdiction) but can be from more than one bank or mortgage broker , building society etc.) These are collected, packaged into tranches, rated per tranche, and sold on by banks' arms-length SIV/SPEs or others (while the banks or agencies that originated the assets continue to manage them for a fee and who may contribute commercial paper and/or insurance against defaults above certain % levels in the issued bonds). Higher ratings were believed to be ensured (justified) by various credit enhancements including over-collateralization (pledging collateral in excess of the debt issued), credit default insurance, and equity tranche investors willing to bear the first 5% losses and mezzanine investors the next 5%. The high ratings achieved allowed banks to sell on mortgage assets paying them 8% or higher in the form of bonds that paid the senior tranche (80-95% of the total) only say 5-6%. The banks called the difference 'the spread' and booked it as profit. Such a wide spread should have indicated to experienced secondary market traders that the bonds were much riskier than they appeared. Banks could use the spread to cover the insurance and CP cost of securing higher grades, but also borrowed to do so thereby keeping the spread as profitable additions to own capital i.e. they replaced the funds loaned (enabling accelerated loan growth), sold of much or most of the risk, and still generated a profit equivalent to what they would have earned had the loans remained on their balance sheets – or so they thought that is, until Moody's discovered a bug error in its rating model software!
After August 16 2007 when Moody's announced new improved ratings models, rating agencies lowered the credit ratings on $1.9tn in mortgage backed securities by July 2008. The downgrades may have averaged about 50% of the face value a year earlier, but that became academic when Merril-Lynch sold $30bn of CDOs for 22 cents on the dollar, which now looks actually a good deal?! About 6m sub-prime mortgages were securitized in the US (of over 7.5 million first-lien sub-prime mortgages outstanding) and one quarter of these resulted in possible foreclosures by 2008! Big banks and other financial firms around the world reported losses of approx. $435bn by mid-July 2008 and $505bn by end of September, equal to about one fifth of all banks' capital reserves. Approx. 16% of sub-prime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21%and by May 2008 it was 25%.
The U.S. mortgage market is just under $12tn with approx. 9.2% of loans delinquent or in foreclosure by August 2008. Sub-prime ARMs are 6.8% of the loans outstanding in the US, but 43% of foreclosures in 2007 when 1.3m properties were subject to foreclosure filings (up 79% compared to 2006).
HSBC was the first bank to announce a large write-off in mortgage backed assets of $10.5bn in January 2007. Such announcements by other banks followed in a steady stream ever since.
As we all now know the knock-on multiplier effect of these risk down-grades, write-offs, interbank credit crisis etc. is enormous. The question is how different would this have been if the risk gradings had been realistic from the start? The market would not have grown so fast. The credit boom economies would have been curtailed to slower growth. Property values would not have ballooned so much and the recession therefore less severe. Why were the ratings wrong? Most structured bonds are collections of mortgage or credit card loans originally packaged by banks and evaluated and underwritten by other banks based on rating agencies risk grades. Credit card securitizations are many times riskier assets (higher default risk) than mortgages because credit card debt is unsecured, yet as much credit card debt has been securitized and sold off banks balance sheets just as sub-prime mortgages have been (both just over $900bn in the US, but credit card bonds have a much shorter maturity, typically 4-5 months!). The insurance cover of now $54tn in CDS also poses tens of $billions in losses. $16 trillions or so have been written off world stock market equity capitalisations! Much of this would have happened anyway whenever recessions hit. But, could a much more manageable situation have arisen if $ trillions had not been over-rated? The measure of manageable has to be within the Basel capital reserve ratios of the banks at 8% of net risk-weighted assets.The actual impact looks like being 2-3 times this! (For more on this see the attached comment.)

5 comments:

ROBERT MCDOWELL said...

To achieve investment-grade ratings for CDOs, credit enhancement was needed to insulate investors from fluctuating payment patterns (and cardholder charge-offs in the case of credit card securitized bonds). Credit card defaults in the US are about 4.5% and rising. Common forms of credit enhancement are excess spread, a cash collateral account (CCA), a collateral invested amount (CIA), and subordination. The first mortgage-backed bonds were created in the late 1980s by a trader "Lewie" Ranieri, head of the mortgage desk at Salomon Brothers, known for the huge funding flow he netted for his firm. (In the '90s his example inspired JP Morgan to see the value of these bonds for including sub-prime mortgages along with prime and the ideas spread from there as JP Morgan financial engineers left and joined other banks.) The bonds were divided into tranches whereby the best quality could be bought at AAA to AA+ (investment grade, usually 80% of the total) and the Mezzanine (sub-investment grade and 10% of the total), and Basement (junk 10% of total). Basement is also called 'equity' and tends to be bought by the asset-originating bank. What Ranieri did was turn large pools of mortgage loans into standard, quality tiered, easy-to-sell bonds. If packaged correctly, according to one of several standards, mortgages could become a huge, new tradable bond market. This of itself is not new. German banks for years have been issuing Pfandbriefe whereby big banks without much retail deposit-taking could issue bonds backed by corporate loans. But, while these were also issued off-shore, especially in low-tax Luxembourg, at least the banks as issuers stood fully over the bonds, also supported by the rating agencies. All bonds need investment-grade ratings in order to be sold to institutional investors.
With a structured bond, the pools of debt could be built or modified in order to attain a high investment grade rating for most of the issue. In 1995, the Community Reinvestment Act (CRA) was revised to allow for the securitization of CRA loans into the secondary market for mortgages. The amount of ratings analysis that the ratings agencies were charging for was being heavily competed for by banks such as RBS Greenwich Capital, JPM, Bear Stearns, Lehmans, Barclays, UBS, ABN AMRO and others who could engineer structured products with a variety of contractual details that the ratings agencies were then contracted to rate. Moody's told the FT, "Moody's has published extensively on our position that each possible business model brings with it potential conflicts. The real issue is how credit rating agencies manage them. The quality of our ratings opinions, commentary and analysis has been and continues to be our primary concern and commercial considerations are never a factor in the rating assigned to an issuer or transaction. Our ratings and research are our only products, and our reputation is our only capital." Sam Jones has told the story in the FT of the personalities and pressures, including how at the start of the new millennium, it was almost impossible for CDOs to get a triple-A from Moody's if the collateral was mortgages. The agency had a "diversity score", which prevented securities with homogeneous collateral pools from gaining the highest rating. This does not make intuitive sense unless diversity could be created with a mix of opposing or unconnected risks in which case the highest rating would also be impossibly. Anyway, the story is that S&P and Fitch did not have such a score and were gaining increasing shares of the rating of mortgage CDOs. Moody's therefore abolished its diversity score in 2004 and its CDO ratings volume rocketed, probably because it was also generatingratings a notch higher than the others, or charging a bit less for doing so? By 2006, CDO ratings were worth 40% of its total revenue.
In Europe an ABN AMRO team announced a new super-product that Moody's became engaged with - the CPDO (constant proportion debt obligation). This was designed for achieving triple-A ratings, but also paying investors more than 10 times comparable triple-A instruments! This is a paradox, an apparent disproof of the high risk high reward principle. CPDOs were not mortgage-backed, but collections of bets on creditworthiness of hundreds of European and US corporations via indices. The first CPDO deal in August 2006 was rated AAA/Aaa yet paying LIBOR plus 200bp and focusing on market risk (spread risk not normally covered by rating agencies) rather than credit risk. Then S&P followed soon after, but Fitch said it couldn't understand how that was achieved as its own models put CPDOs at barely above junk. As other banks rushed our their own versions of the CPDO, they went to Moody's and S&P for the ratings. Moody's later admitted the rating is highly volatile compared to other triple-A rated products, and later CPDOs were more conservative at AAA/Aaa with a much lower spread.
In May '08 the FT reported that Moody’s awarded incorrect triple-A ratings to $billions of CPDOs due to a bug in its models and later when the coding error was corrected in 2007, the ratings were calculated at up to four notches lower causing considerable losses to the Net Asset Values and downgrades led to some CPDOs defaulting. Moody's undertook an external investigation by law firm Sullivan & Cromwell. It reported in July '08 that staff had "engaged in conduct contrary to Moody's Code... Specifically, some committee members considered factors inappropriate to the rating process when reviewing CPDO ratings following the discovery of the model error." Moody's instigated a company-wide review of methodology and modelling as a result, and began disciplinary proceedings against staff. There were many modeling bugs that got spotted from time to time that were ironed out so as not to affect the results by the Moody's rating committee making other changes to the models. Later, when more widely tested on mortgage backed assets, the down-grades indicated, particularly as default rates were seen rising in 2007 that the adjustments could be as many as 17 notches lower to 'junk'!
Rating a new security requires the basic assumptions: duration of bond, payment, collateral details, and their risks to be assessed by running monte-carlo simulations whereby every possible outcome is measured from the millions of possible combinations of risk values, and then the average result gives the rating. It is intuitively impossible for the average result to be AAA/Aaa unless almost all results are that high in which case there must be a comprehensive design flaw, but at the time this was 'Emperor's clothes' criticism.
That Moody's was so late in taking account of rising delinquency rate rises is shocking since this data was well-known and could also be factored in based on European and Japanese data covering past property bubble bursts – in countries were there is less incentive for borrowers experiencing negative equity to quit their homes. US delinquency rates were edging up since 2005 when US housing prices began falling. US data showed housing crashes (in hotspots more than over the whole country) falling in or before economic recessions to the long term trend, which would mean 30% falls once property bubbles would burst! Delinquency (60 days overdue payments) is the first of three key measures rating agencies use to assess the soundness of a mortgage-backed bond. The second shows the number of people delinquent for more than 90 days and the third is the number of foreclosures. These comprise a danger-alert system on any mortgage bond and could cross threshold triggers when insurance and guarantees are called upon. If homeowners miss three payments in a row, mortgages debt is transferred to debt recovery, which may involve foreclosures. There are typically three Key Risk Indicators (KRIs) given traffic light colours, green, amber, and red.
Warnings of a US housing bubble burst had been around for 2-3 years at least and some major write-downs had already taken place by HSBC, UBS, Citigroup and others. But triple-A rated bonds were thought safe - highly rated by all three major ratings agencies. Soon amber lights were on and red beckoned. At the end of July, Moody's decided to update its rating models. The review was publicly announced on August 2. New delinquency assumptions were calibrated and on August 16 (a mild, rainy day in New York) Moody's released the results and downgraded 691 mortgage bonds. The two other big ratings agencies, Fitch and S&P, were issuing steep downgrade notices too. The process of re-grading thousands of bonds took weeks. In the final months of 2007, Moody's downgraded more bonds than in the previous 19 years combined. Panic took hold and soon the world's banks stopped lending to one another. It turned out that Moody's had failed since 2002 to update its basic statistics (available regularly from industry sources) about the US mortgage market. Equally shocking is that others, including banks, must have been doing so, even if only their own internal experience, yet this did not filter through to the ratings agencies?
Much of the problem concerned evaluating the quality of the collateral. E-mails obtained by the SEC (securities regulator) from the rating agencies - S&P, Moody's and Fitch - paint a picture of resources overwhelmed by the scale of internal audit and revisions necessary. Moody's denied serious problems with its methods. "[We] change methodologies on a regular basis to enhance them and to reflect recent events and our best estimates of the future." But, on the face of it, that appears incorrect. In early 2007, banks pumped out more mortgage backed bonds than before that the rating agencies continued to rate.
US legislators are investigating the role the rating agencies played in the credit crisis. Some senators have called for fines if blame is proved. It is more likely that large sums will be demanded by plaintiffs in the courts. In a July report, the SEC (echoing earlier demands by regulators and politicians in Europe, such as Germany's Angela Merkel and the European Commission's Charlie McCreevey) asks for greater transparency from the rating agencies, to disclose modeling information. The European Parliament commissioned a major report on the matter. Other bodies have commissioned similar enquiries. The rating agencies are co-operating fully with the authorities. But this has become very sensitive as the number and value of civil court cases mushroom.
In the meantime, confidence has gone in financial centres around the world, governments are bailing out banks and, lawmakers are threatening the rating agencies. But, in financial markets credit ratings are everywhere and therefore discrediting the ratings agencies severely, or letting them fail to the extent of their work and role ceasing, poses enormous risks. If one or more of the big 3 agencies close, there are other smaller ones that may in time fill the gap. Europe wants to see some new European ratings agencies created or existing ones emerging to be global players. This is not easy. Re-establishing faith and trust and all the historical data required is an immense task that few companies could attempt, maybe Thomson-Reuters, Bloomberg, or Markit or others, or some firms that have not formed yet but that might partner in some independent way with banks, exchanges, clearing houses or global custodians. Or Moody's, S&P and Fitch will reform and survive, either as continuations of the current businesses or totally new?

ROBERT MCDOWELL said...

23 November 2007, NEW YORK, Reuters reported that investors in a structured deal sold by UBS that was backed by the debt of financial companies lost around 90% of their investment according to Moody's Investors Service. Moody's cut its rating on one tranche of a deal issued via UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) nine notches to "C," one step above default, from "Ba2," after unprecedented spread widening in credit default swaps on financial companies included in the deal hit triggers that required it to be unwound. The unwind of the deal known as a Constant Proportion Debt Obligation (CPDO) caused an approximate 90% loss for investors!

ROBERT MCDOWELL said...

22 October 2008 - Standard & Poor’s (S&P), announced the Rating Review Triggers ("Triggers") tool on its ABSXchange platform. Available free of charge for both ABSXchange users and other market participants, the tool gives investors more information about the ongoing performance of collateral pools backing individual mortgage securities and an early warning indicator of potential future rating actions on these securities. It is one of a number of measures S&P is taking to improve the transparency of structured finance instruments, including publishing more information about assumptions and stress tests underpinning its analysis and "what if" scenario analyses that show how ratings might be affected by extreme economic or market conditions. ABSXchange is an internet-based portal that offers deal performance data, portfolio monitoring capabilities, cash flow analysis, advanced analytics and detailed reporting for the structured finance market. It provides the same quality of data and analytics throughout the life of a structured finance transaction as existed at its initial offering. The development is part of the first major update to the ABSXchange platform since it was acquired by S&P in September 2007. The platform is run by S&P’s new business unit, Fixed Income Risk Management Services (FIRMS), which is separate from S&P’s ratings business. The unit provides timely market intelligence and analytic insight for risk-driven investment analysis, including the debt, structured finance, derivative and credit markets. David Pagliaro, Director, Standard & Poor’s, commented: "The launch of Triggers on ABSXchange is further evidence of our commitment to increasing transparency in structured finance at a time when insight and risk mitigation have never been more important. ABSXchange plays a central role in research, trading, risk and portfolio management activities and sets the standard for ABS analytics. S&P intends to continue to enhance its functionality to anticipate the demands of a rapidly evolving market." Triggers offer users a view of credit performance of RMBS (retail mortgage backed securities) tested against specific metrics. It provides a visual indicator of credit performance to denote a transaction's trends across two positive and four negative tests. The positive tests assessed are pool factor and credit enhancement ratio, while delinquency ratio, delinquency growth, cumulative loss growth and cumulative loss ratio are monitored as negative tests. At a certain test threshold, Triggers notifies the user that a transaction will need to be reviewed and raises the possibility of a rating review. S&P ratings analysts use Triggers as an ‘early warning system’ in their surveillance of European RMBS transactions. Performance data, including details of interest and principal payments as well as underlying portfolio performance, is received from the transactions servicers. Servicer reports on performance data are uploaded onto ABSXchange and Triggers shows the result in the form of green (positive) and red (negative) indicator lights on the ABSXchange-based dashboard based on the tests. If all the positive or negative tests are met, it prompts a review by the analysts based on the transaction's overall performance.

ROBERT MCDOWELL said...

23 October 2008 - One of the biggest full service banks in the US, Wachovia, unveiled third quarter pre-tax losses of $23.9 bn yesterday. Around $18.8 bn of the loss was down to write-downs on securities and loans. The figures also reflect a 24% drop in total assets under Wachovia's management from December '07 to September '08. This was driven by ratings downgrades more than by, as was statement claimed, by investors rattled by the collapse of banks such as Lehman Brothers and Washington Mutual, withdrawing their money (reflected as goodwill writedown) as the FT stated. According to the Guardian, the loss is the biggest by a bank since the credit crunch began, almost doubling the $12 bn loss revealed by the Switzerland's UBS, in the first quarter of '08. The net loss for the third quarter of the year compares with profits of $1.62 bn in the same period of 2007. Wachovia had already sought a saviour amid the crisis and a takeover by California-based bank Wells Fargo is currently under consideration by respective shareholders.

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