Thursday, September 18, 2008
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)
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
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