Friday, September 26, 2008

Financials Market Cap Decimated

Many of you would have received the "scary" email on how financials have been decimated in value. When there has been a bloody earthquake, its easy for bystanders to shout, "look at the many dead bodies". Is that a sincere warning, or just panic stricken obsevers talking? Gor those who missed the email, here's the gist:

Here's a list of the losses in market capitalization for 25 of the biggest financials since their rough peaks in October 2007. Keep in mind that these companies are not exactly emerging small cap coys but rather blue chips.

These losses include:

* A I G -Then: $178.8 billion... Now: $5.46 billion. Down 96.95%
* Bank of America -Then: $236.5 billion... Now: $123.4 billion. Down: 47.82%
* Citigroup -Then: $236.7 billion... Now: $76.34 billion. Down 67.75%
* Merrill Lynch - Then: $63.9 billion... Now: $30.2 billion. Down 52.74%
* Fannie Mae - Then: $64.8 billion... Now: $0.45 billion. Down 99.3%
* Morgan Stanley - Then: $73.1 billion... Now: $41.1 billion. Down 43.78%
* Wachovia - Then: $98.3 billion... Now: $19.44 billion. Down 80.22%
* JP Morgan Chase - Then: $161 billion... Now: $130.2 billion. Down 19.13%
* Capital One Financial - Then: $29.9 billion... Now: $16.9 billion. Down 43.48%
* Washington Mutual - Then: $31.1 billion... Now: $3.64 billion. Down 88.3%
* Lehman Bros. - Then: $34.4 billion... Now: $0.80 billion. Down 97.6%
* Goldman Sachs - Then: 97.7 billion... Now: $40.6 billion. Down 58.7%
* Wells Fargo - Then: $124.1 billion... Now: $111.25 billion. Down 10.35%
* National City - Then: $16.4 billion... Now: $2.8 billion. Down 83%
* Fifth Third Bancorp - Then: $18.8 billion... Now: $7.9 billion. Down 57.6%
* American Express - Then: $74.8 billion... Now: $37.5 billion. Down 49.87%
* Freddie Mac - Then: $41.5 billion... Now: $0.16 billion. Down 58.7%
* Suntrust Banks - Then: $27 billion... Now: $16.07 billion. Down 58.7%
* BB&T - Then: $23.2 billion... Now: $18.4 billion. Down 20.69%
* Marshall & Ilsley - Then: $11.6 billion... Now: $4.48 billion. Down 61.3%
* Keycorp - Then: $13.2 billion... Now: $5.68 billion. Down 56.97%
* Legg Mason- Then: $11.4 billion...Now: $4.96 billion. Down 56.49%
* Comerica- Then: $8.3 billion...Now: $4.74 billion. Down 42.89%
* Countrywide Financial: Then: $11.1 billion...Now: $0.00 billion. Down 100%
* Bear Stearns- Then: $14.8 billion...Now: $ 0.00 billion. Down 100%

Together these 25 companies alone have lost investors a total of $992,690,000,000 over the last 12 months... or nearly 1 trillion dollars. The email ends with the smart warning to keep buying gold and keep USD.

The above warning is too broad-stroke for my liking. Yes, we have seen great wealth destruction. The basis for the destruction are two-fold:

One, the leveraged exposure to derivatives relative to capital at risk. Some went as high as 25x leverage, hence when these instruments got whacked by 50% of more, your capital may almost disappear. Many of these are hard to mark to market, which again sent investors and analysts guessing the ultimate carnage.

Two, its a crisis of confidence as fellow financial firms do not even trust dealing with each other. There is still ample liquidity but no one is willing to lend to anybody, thus the Fed and Treasury had to step in, they did not want to, but they have little choice.

Are any of the major firms still in trouble or in danger of collapsing like Lehman and Bear Stearns? Well, many have missed a critical indicator. Back in September 14, 2008 ten of the world's largest banks will form a fund with a value of $70 billion, each putting in $7 billion to help restore lending to troubled firms. The banks are Bank of America (BAC), Barclays (BCS), Citigroup (C), Credit Suisse Group (CS), Deutsche Bank AG (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Merrill Lynch (MER), Morgan Stanley (MS) and UBS AG (UBS). You will find that many major banks did not participate. One can conclude that these ten banks are themselves most at risk - hence they are willing to pony up to shore up confidence and hope to buy time and save their own skins. Its actually not so altruistic but desperate.

If you want to know who might fail, well, look at the ten. Some are in more trouble and could not even participate to lend, such as Wachovia.
Of the ten, some are better placed because they have managed to sell more shares or have more capital injections. Goldman Sachs is safe for obvious reasons. JP Morgan is also OK and may actually be buying another firm or two for the right price. Merrill Lynch is now under Bank of America. Bank of America is not completely out of the woods as it now has Merrill's toxic assets, and will need to sell units and shore up capital, but still better placed than most. Morgan Stanley bought a lifeline by selling 20% to Mitsubishi UFJ, but also not entirely safe. Barclays is relatively OK and should be looking to buy one of the major distressed firms.

The European ones have been relatively quiet and may have escaped the carnage by being more global than the rest and having relatively low exposure to toxic US assets. The most at risk still should be UBS. Citigroup is a unique animal. I still think they have grave problems but their banking side is very solid. In fact, during the heightened uncertainty over the last 2 weeks, Citibank has seen an enormous jump in deposits as switched their brokerage accounts over to Citi's bank deposits. The bank is OK, its the investment banking side that is still up in the air.

Following is the list of 10 largest banks in the world in terms of market capitalization size, as released by Bloomberg on February 2008. Market capitalization is a way of measuring the corporate or economic size of a public listed company. The market capitalisation now may be significantly different since then but these are the banking giants. They are the new leaders, will they be able to grab the opportunities in front of them given the gaps created by the financial implosion?

Industrial & Commercial Bank of China, ICBC (China)

ICBC BankThe Beijing based ICBC Bank underwent one of the most remarkable faces of growth barely 2 years after going public, which gives a clear indication of investors’ preference in the emerging China market. ICBC offers a wide range of personal and corporate banking services which include loan, deposit, credit card, underwriting, trading and currency settlement.

ICBC was listed simultaneously on two exchanges - the Shanghai Stock Exchange and Hong Kong Stock Exchange in 2006, making it the first and only company to do so. ICBC has won numerous accolades and awards from various international magazines including Bankers, Global Finance, The Assets and Finance Asia.

Market capitalization - US277.514 billion.

HSBC Holdings (UK)

Earlier this year, HSBC was named as the world’s most valuable banking brand by The Banker Magazine. The bank was incorporated in England and Wales, with its main office located in London. In 1992, HSBC was involved in one of the world’s largest banking acquisition, after assuming full ownership of Midland Bank.

The merger also saw the beginning of HSBC setting up strong market presence, particularly in Europe. Apart from United Kingdom HSBC now also has significant operation in France, Czech Republic, Germany, Ireland, Switzerland, Turkey as well as Malta.

China Construction (China)

The bank was first established as the People’s Construction Bank of China and was changed to the current name in 1996. The bank’s rise to prominence is also helped with the involvement of Bank of America which injected some significant amount of investment for the past few years. In 2005, the China Construction bank landed into a scandal that involved the Chairman of the company, Zhang Enzhao.

Zhang was alleged to have received one million dollars bribe from an American company, which in return asked for an award of contract. Zhang eventually resigned from his post. The bank has more than 13,000 branches across its native country China, as well as active operation in Singapore, Hong Kong, German, Africa, Japan and Korea.

Market capitalization - US165.234b.

Bank of China (China)

Bank of ChinaThe third and final bank from China to make it to the top 10. In China, there is the term referred as the ‘Big Four’ banks and Bank of China is one of them.

Bank of China is the first bank established in the land of the dynasties. In the earlier years, the bank acted as the Central Bank but then its role was replaced and then converted into a full-fledge commercial bank. While the bank has overseas operation in Australia, United Kindom, Canada, United States, Brazil, Japan, Philippines, Malaysia and Korea, the overseas business only accounts for less than 5 percent of the company’s overall revenues.

Market capitalization - US165.087b.

JPMorgan Chase (US)

JPMorgan Chase BankJPMorgan Chase offers investment banking, financial services, wealth and asset management, and private equity. The current entity is a result of a series of mergers, with its original name did not sound anything like the current, which was the Chemical Banking Corporation.

JPMorgan is based in the downtown of New York, Manhattan. Additionally, the investment wing of the bank operates a number of offices around the world, with major presence in the United States, London, Tokyo, Singapore and Hong Kong. BusinessWeek ranked JPMorgan in the Top 10 Best Places to Launch a Career in 2006.

Market capitalization - US159.615b.

Banco Santander (Spain)

Banco Santander BankBanco Santander is the largest bank in Spain, and the second largest in Europe. The bank, which involves in retail banking, asset management and insurance, and global wholesale banking, employs more than 120,000 people worldwide, serving 68 million customers, a figure higher than the whole population of Spain.

Altogether, the group operates in more than 10,000 branches worldwide. The group is also one of the premium sponsors for McLaren-Mercedes F1 team. Banco has strong market presence in Portugal, United Kingdom and in Latin America including Brazil, Mexico, Chile, Argentina, Venezuela, Uruguay, Colombia, Peru and Puerto Rico.

Market capitalization - US109.862b.

Mitsubishi UFJ Financial, MUFG (Japan)

MUFG BankMitsubishi UFJ Financial groups runs The Bank of Tokyo-Mitsubishi UFJ, which is a result of a merger between The Bank of Tokyo-Mitsubishi and UFJ Bank Limited in 2006. The group, which is listed in five stock exchanges - Tokyo, Osaka, Nagoya, New York and London, is presently the largest financial services company in Japan in terms of size of assets.

Headquartered in Tokyo, Japan, the company holds a total asset of US1.2 trillion and is one of the biggest companies in the Mitsubishi Group. MUFG is now headed by the the President and CEO, Nobuo Kuroyanagi, an MIT business graduate.

Final word is that the "scary email" is too broad-stroke. In a proper restructuring process following a bubble implosion, we need to see companies failing. Why so scared? The gratifying thing is the speed with which this is happening, which will mean a swifter return to financial health. What you don't want to see is the Japanese experience where bad debts and bloated assets were not restructured since early 1990s. Till today Japan is still struggling with the "non-restructuring" dragging the economy along. Over the last 5 years we have seen a bit more restructuring in Japan. If only they did what the American are doing now, the economy would have recovered by 1995/1996 easily. It took them 18 years or so to get from 30,000 to 12,000. They could have gone from 30,000 to 10,000 in 2 years and get rid of the excesses and bad debts and recapitalise.

While many are harping on the $700bn fund and how the taxpayers are on the hook for it, taxpayers may actually benefit in two ways: better confidence so that the financial system works again thus eliminating the contagion effects spreading to other non-financial sectors which may result in even more staggering job losses for the broader economy; by pumping in capital now into troubled firms in exchange for higher rates and preference shares, the fund may actually make money after a few years when things normalise. We have to remember amidst all the carnage, a lot of the housing assets are trading at below replacement value, its just that there is no buyer now as fear grips everyone. While there had been a $1 trillion being wiped from the market cap of financials, there are also $7 trillion residing in money market deposits and checking accounts. Its a matter of ensuring the money cycle flows again. You don't want what the Japanese went through - till today there is still massive sums in deposits there, if it does not move (spend or invest) its brings everything to a halt. At the end, chances are good that the $700bn may actually make some money after 3-4 years.

While I think the Fed & Treasury have little choice but to go ahead with the plan, the negative is that we are seeing liquidity being pumped to arrest market falls, which will make us go through the cycle again of asset reflation. What can you do?

p/s photos: Song Jina


Dragonfly Red said...

Don't suppose the IMF can help?

jackson said...

Hi Dali,

The losses are humongous.

But money does not just vanish in thin air right?

So whose pocket does all THAT money goes into?

I am really curious and hope you could enlighten us.


jackson said...

Hi Dali,

The losses are humongous.

But money does not just vanish in thin air right?

So whose pocket does all THAT money goes into?

I am really curious and hope you could enlighten us.


clk said...


The money didn't just vanish, it was used up over the last decade or so, with the last man holding merely an IOU today.

You can imagine a pyramid scheme where the first guy sold an IOU for say $1 which is then sold/resold to many parties a at a higher prices, with the final price tag say $100. Along the way, many have made money with the last guy holding an IOU for $100 and he's looking for a new "sucker". Then he looks back at the guy before him who then show him a piece of collateral paper that states $100 value on another piece of paper.

He enforces this collateral, and find the collateral worth maybe $2 to begin with, so as the last guy, he's got to write-off $98! Presto, $98 dissappears as far as the last guy standing is concern but many earlier chaps pocketed the $ and are sailing on a cruise in the Carribean!

That is what I believe as a layperson happened in layperson language. Sub-prime, mortgages etc. are all sophisticated name for IOU.

clk said...

To further add on, the many people who pocketed some of the money includes the following:

a)Govt-taxes on the earlier profits
b)Brokers/Intermediaries who earned commissions
c)CEOs/Mgrs salaries/bonuses from profits made earlier
d) Suppliers e.g. ad agencies, printers, PR agencies etc. who help spinned the storyline

So you see, the $98 made lots of rich people in the process. Why the $98 disappeared now is because to begin with, the IOU was only worth $1 or maybe $2 by now and not $100.

And as the last guy holding the IOU, you pay the price, but because the last man standing owes other innocent people as well, the Govt will try to support this man as the other innocent by-stander (e.g. insurance policy holders, bank deposit account holders etc.) will experience collateral damage in the process.

Ivan said...


thanks for your sharing.
is super good to explain in layman language :P

Ivan said...


Thanks for the posting of the article. It is very useful. At least, we know how much the market cap for top financial company now.

May I know what is the next company will be bailout? Any idea?


The Rock said...

Looking at WaMu, I think many more regional banks in US will be seized.

700b doesn't look like it is enough to save the whole US banking sector.

They should recapitalise the banks like what malaysia did. Danaharta to take over bad loans and Danamodal to recap the banks. The US govt should hire Malaysians to run the Finance ministry there...! I think they [the Americans] really deserve this..while the rest of the world is slogging hours to produce goods for them to consume using money that Asians lend them.

Born2Reign said...

Thanks Dali and clk for the simple and helpful explanation. I'm going into gold n silver...

clk said...

Excerpt from the Sydney Morning Herald webpage:

Every dollar which passes through the tortuous gravy train of the financial system has been leveraged, cut up and diluted by all manner of useless products and services.

A fraction of every dollar was shaved away by derivatives on property, equities and debt, by asset consultants, fund managers, mortgage and share brokers, by financial planners with their trailing fees by securitisers, ratings agencies, traders in every manner of security, currency and commodity. All paid a poultice.

Then there are the companies and their assorted service providers: the investment bankers, remuneration consultants, ``independent experts'' to bless the transactions, proxy solicitation advisors to solicit votes, PRs for media, internal and external, advisors for tax and leasing, corporate governance experts, management consultants to tell managers how to manage.

The dazzling array of financial products - from CLOs and CDOs through ETFs, ETCs, all manner of warrants and options, futures, long-short funds, hedge funds, funds-of-funds, index funds and so on, on and on - all piling leverage on leverage.

The $1 became $10 and was split 100 ways.

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