Closest To 'Great Depression' Without A Time Machine



The rescue plan for AIG was supposed to be followed by calm, but the reverse happened. US financials collapsed like O'Reilly being punched by Mike Tyson (loved to see that happen). The way Citigroup, Goldman Sachs, Morgan Stanley and the rest have been falling yesterday seems to indicate that there is a complete washout on confidence in US financials. This has very little to do with AIG. Investors are just completely giving up trying to assess or tabulate correctly the counterparty risk. Investors have given up trying to assess the gravity of the implosion as any writedowns seem to be in line for a further writedown just weeks later.

The fact that Wachovia can call up Morgan Stanley to inquire if they could merge seems like an act of desperation. There is very little sense strategically for them to merge, but the fact that one or both are openly fishing tells me that credit and margin or even collateral cross lending between financials have completely disappeared.

Its clear that the broker-dealer-investment banking business model is highly inferior and poorly regulated. Universal banks would be upgraded in the eyes of long term serious investors. Thats a huge shift which should affect the corresponding valuations accorded to both sides.

Companies that will continue to be whacked in coming days will largely be the broker-dealer types and financials that largely rely on funding and leverage to squeeze fees. Many of these firms will have to raise capital quickly while their share prices are still stable. The following list are those supplied by UBS that are most vulnerable to be the next to fail and will have to raise a huge amount of capital immediately (market cap):

Anglo Irish Bank (US$5.4bn)
Bank Mandiri (US$5.4bn)
Citigroup (US$96bn)
Danske Bank (US$18bn)
Lloyds TSB (US$29bn)
Macquarie Group (US$9.5bn)
National Australia Bank (US$31bn)
Taishin Financial (US$1.6bn)

The situation is pretty bad now that there will be a run on certain banks, if it is not happening already. Hence I believe the Fed and maybe other central banks will have to step in very soon to guarantee all deposits. This is as close you can get to the Great Depression without a time machine. Cash is still royalty.

p/s photos: Celest Chang Yu Hua


Comments

SecretGarden128 said…
Dali Sifu

"Its clear that the broker-dealer-investment banking business model is highly inferior and poorly regulated" --> I beg to differ. Yes it is poorly regulated, but I think the traditional broker-dealer-IB model is fine. The investment banks are in deep shits now becos they are too greedy and get into principal position in particular prop trading themselves.

On a more serious note, what would be your take on the short - medium term outlook for investment banking professions? In particular, your advice for some junior i-bankers who might get laid soon?
Datuk said…
Dear Dali,

It's really thought-provoking when i glanced the title of this article and induced me to ponder what can be done to save us from the upcoming "great depression" as a result of combined factors of a massive financial meltdown and demand skrinking after the hyper inflation cycle.

After spent 2 weeks to study the history of recessions and depression (1929-1932),I can't think of any measure other than "stay out" from any types of investments i.e. equity, comodities, bon, derivatives etc.

If you are financially unhurt this time around at least until end of next year .....you will retire super rich in 2010-2011 periods.

Be sensitive and cautious to all new developments...be opened, be critical and be conservative this times around.

No one will save us except ourselves ! Stay out from market !
Salvatore_Dali said…
secretgarden (do u mind if i made fun of yr handle, its a book title about the pleasurable zones of a woman - masturbation... u sick kinky fella)

inferior - still too much traditional lipservice, free lunches n karaoke sessions to do biz, not much value add for over 20 years ... too cyclical driven

poorly regulated - if they were well regulated, they would not be here in the first place ... they need an independent body to set proper capital to risk exposure ratios, to make rules on mark to markets for illiquid assets ... to have proper table for derivatives exposure next to their capital base

If u r an Ibanker fm Europe or US, u can try yr luck in Asia, still some hiring by SWF, PE firms and local banks. If u r frm Asia, u would to go to MENA (MIddle East) and take the "dire posting" which u dread... come back when things r better
anomaly said…
the ib model definitely needs to be rehauled, may have worked fine in the past but not now when the products are getting more complex.

Try China/MENA, forget bulge bracket, go for boutiques

bulge bracket bankers are hanging by the beach cos everything is on hold...
finally the devil in structured products clothing reveal himself to the whole wide world. Im sure we are not anywhere near bottom. Back to 'old school' the way banks and insurance should do their businesses? thanks for some good articles dali.
Ivan said…
Dali,

I am wonder about Citigroup- the huge amount of capital that this bank need to raise up . .. .

Anyhow, I strongly believe FED will come to help . .but problem is. .while I will missing my job... so bad. . .

Down to the road, end up... no job, then switch to study. . ..

again . .thanks Dali for your good article..is good for read and try understand & not waste time in lRT as well . ..yooy. . .
solomon said…
I do agree with Dali's statement ie. Its clear that the broker-dealer-investment banking business model is poorly regulated. So what had they do or mitigated the situation?

Of yr to be failed bank list, the relevant one to this region is Mandiri Bank(a strait across).

Going back to history, when you have a run on deposit / redemption of financial products, do watch out for excessive currencies fluctuation. Think back to what the country are facing in 1997/98. Of which, I think the currencies speculators will be more active than usual now. Central bankers who had poured in large liquity may be wary that their currencies will be hit later.
It will be a classic case that interest rate might not be effective, rather Central bankers'/Treasuries leadership quality that will calm the financial storm. We have seen how the regulators stop speculation in commodities, but I have not seen how a regulator stop the currencies speculators. Dali, what say u?
Ivan said…
Dali,

As been expected by major of us, FED will step in and help the market. Today FED annouce pulmp US 800B into the market.

Will it help for Citigroup and other bank?

Soruce say that citigroup want buy WAMO.. good deal? I thought Citi also need some liquidity..do Citi still dare to involve in M&A?