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Letter Re: Australian Bank Move Exposes the Magnitude of the Global Credit Collapse
James,
This afternoon, The
National Australia Bank (biggest in Australia, by assets) let the cat out
of the bag: They have decided to just fess up and mark down
every
US mortgage CDO, SIV, and so forth in their portfolio by 90%.
What that means is they are coming flat out and saying that all this re-bundled,
repackaged, looks like a bond but it ain't, US real estate paper that was being
carried "Off Balance Sheet" and gumming up the works in banks around
the world is worthless and they are making it official. (The
loans that they represent will not, in their estimation, ever be repaid, hence,
loan paper = worthless.)
The world has been tip-toeing around this for the better part of a year. (Off
Balance Sheet is bank speak I believe for "It's here, we paid for it/lent
it out, but it's not really here so don't count it on our financial statement." You
try that with your friendly IRS guy!
Ha! Funny, though, how they magically appeared when the Fed said they would
take it as collateral for loans...) That means that all these "Write-downs" we've
been seeing (i.e; saying that the paper certificate you bought at $10 is now
worth $8, $7, $6, $5...etc)
the banks have been slowly dribbling out have been understated.
I don't know if Wall Street will simply ignore this and dish out spin, but
I can bet you that the international banks holding large quantities of this
stuff
denominated in US dollars will not. I'd also bet that large entities overseas
who don't hold this stuff will take it as writing on the wall for other entities
that do...and they'll sell to save their own skins.
That could quite possibly touch off a selling-storm in US dollar denominated
assets or firms they fell are at risk from either their own holdings or their
vulnerability
to downside economic risk come monday, at least in the Asia Pacific markets,
if not before.
A wave of bank bankruptcies or "failed banks" could get thrown
into the mix as well. This is because these paper "things" being
declared more or less worthless effects the overall value of a bank--i.e.
the ratio of
it's "Assets" against
the amount of debt it is carrying. (leverage) Banks are already leveraged up
to their eyeballs, way beyond what Joe citizen would be allowed to do. (which
they've been trying to delay the inevitable news that this stuff is not an
asset any longer.)
I do not know precisely what effect this will have, but I believe it could
spark a sell off in US denominated securities and other assets, which will
flood the market with US Dollar stuff and the dollar will be in very deep trouble
as far as a piece of paper that has value.
Real things of value, like metal and other tangible goods (as opposed
to imaginary
IOU paper,
which is what most securities are) will take on a whole new life. In addition
to what I have already done, I am going to endeavor to get
my hands on more, soonest. (Not like it will go down in price anyway, no matter
what happens.)
I hope that whoever is in charge at the top can keep this under control. I'd
say we'll have a clearer picture by mid-next week where this may be going. -
Jim D.
