Too big to fail? 5 largest banks Are 'Dead Men Walking'

Wednesday, Mar 11,2009, 11:59:28 AM Click:

Mar. 10 - WASHINGTON - America's five largest banks, which have already received $ 145 billion taxpayer rescue still face potentially catastrophic losses exotic investment if economic conditions deteriorate significantly, their latest financial reports.

Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and JP Morgan Chase said that their "current" of the loss of risk products - such as insurance-related bets for a loan or other assets under assumptions - has climbed to $ 587 billion in December 31. Buried in the year-end regulatory reports that McClatchy reviewed the figures reflect an increase of 49 percent in just 90 days.

Information to highlight the challenges that banks face as they struggle to navigate through a deepening of the recession in which all types of defaults are soaring.

Banks "potentially huge losses, which could be contained if the economy recovers quickly, also shed new light on the obstacles that President Barack Obama to the economic team must overcome to save the institutions that it considers too large to failure.

Although the potential loss totals include the risks identified by the Wachovia Bank, Wells Fargo, which agreed to acquire in October, they do not take into account another Pandora's box: the impact of Bank of America January 1 acquisition of faltering investment bank Merrill Lynch, one of the major derivatives dealer.

Federal regulators represent potential loss figures as the worst case. However, the risks of these off-balance sheet investments, once a minimum of reflection, have greatly increased that the U.S. has fallen into recession the highest since the Second World War, and the big banks share prices have dropped to imagine downs.

With 12.5 million Americans unemployed, and consumer spending in free fall, fears are rising that a wave of bankruptcies could be another blow to paralyze the big banks. Because of the trading products, business bankruptcies could cause a chain reaction that deprives banks hundreds of billions of dollars in insurance they bought the debt at risk or forced to disburse sums to cover the debt they guaranteed.

The biggest concerns are the banks money known as credit contracts-default swaps, which can provide insurance against defaults on subprime mortgages, such as actual payments or security for borrowers who walk away their debts.

Banks credit default swap holdings, with face values in thousands of billions of dollars, are "a time bomb, and how bad it is will depend on how the economy is bad," said Christopher Whalen, Director General Institutional Risk Analytics, a class society that banks on their degree of risk the loss of complex investments.

JP Morgan credit is credited with the introduction of market failure and is one of the most sophisticated. It remains very profitable, even after acquiring the rest of the collapse of investment banker Bear Stearns dealer, and said he had limited exposure. The New York-based bank, however, also received $ 25 billion in federal bailout funds.

Gary Kopff, president of Everest Management and an expert witness in lawsuits against banks, canvassed the banks of financial reports. He noted that Citibank now lists 60 percent of its $ 301 billion in potential losses of his wheelchair and trading of derivatives in the category of higher risk, up 40 percent in early 2007. Citibank is a unit of New York, Citigroup. In Monday trading on the New York Stock Exchange, Citigroup share closed at $ 1.05.

Berkshire Hathaway Chairman Warren Buffett, a revered financial guru and America for the second richest person after Microsoft Chairman Bill Gates, has ominously warned that derivatives "dangerous" in a February letter to its shareholders. In it, he confessed that cost his company hundreds of millions of dollars when he bought a new insurance company the burden of bad derivatives bets.

These instruments, he writes, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks ... When I read the pages of "disclosure" in (annual) of companies that are taken with these instruments, I found all the know is that I do not know what is happening in their portfolios. And then I reach for the aspirin. "

Most banks declined to comment, but Bank of America, Eloise Hale, spokeswoman said: "We do not believe that our derivative exposure is a threat to the solvency of the bank."

While Bank of America has advised its shareholders that the risk of these instruments are more than $ 13.5 billion, Wachovia as well last year said that it could overcome the major risks. In its report of $ 707 million first quarter loss, Wachovia acknowledged that it faced prime mortgage risks heavy, but said it was "well placed" to "strong capital and liquidity. "In a few months, the losses are multiplied and subject to Wachovia takeover by Wells Fargo, which soon 25 billion in federal bailout funds.

The negotiation of credit default aroused the fears of investors because they are bought and sold in a trouble, the private market which is largely beyond the reach of federal regulators. No one, except those who hold the instruments, knows who owes what to whom. Not even the banks and insurers can accurately calculate the risks.

"I do not trust the numbers on them," said David Wyss, chief economist for the New York credit-rating agency Standard & Poor's.

The risks of these below-the-radar of insurance has become very clear last September with the collapse of investment bank Lehman Brothers and insurer American International Group Global, the two main distributors swap. Their risk of insolvency to zero the value of billions of dollars of contracts held by banks and others.

Until then, we realized everyone is well on the markets, "said Vincent Reinhart, a former top economist at the Federal Reserve Board.

Lehman and AIG failures questioned their guarantees on hundreds of billions of dollars in contracts and triggered a decline in risk, which led to the current tightening of credit.

Since then, the government has committed $ 182 billion to save AIG, and, indirectly, investors of the other side of the swap. AIG recorded a fourth quarter 2008 last week a loss of more than $ 61 billion, the worst quarterly performance in the history of American companies.

The five major banks, which represent over 95 percent of U.S. banks trading in this range of complex derivatives, has refused to say how many of the AIG bailout money flowing to them to make good on those contracts.

Responsible for the banking industry that most exotic trades are less at risk - such as interest rate swaps, in which a bank may be tempted to limit potential losses by the exchange rate of a variable interest loan for the fixed rate of interest of another.

In their annual reports to shareholders, the banks say that the insurance credit default swaps or other derivatives are required to post collateral in cash.

However, even after deduction of collateral risk, banks exhibition is "a big, big number" and a concern, said a senior official in a banking regulatory agency, speaking on condition of anonymity because that the Agency policy restricted public comment.

In their reports, the banks said their profit potential risks and future losses of derivatives exceed $ 1.2 trillion. The potential short-term losses of $ 587 billion to easily exceed the combined banks $ 497 billion in so-called "risk-based capital" means the assets they hold in reserve for disaster scenarios.

Four of the banks reserves have already been completed by taxpayers bailout, topped by Citibank - $ 50 billion - and the Bank of America - 45 billion dollars, over $ 100 billion loan guarantee .

Banks quarterly financial reports show that on December 31:

_ JP Morgan has the potential of the derivatives losses of $ 241.2 billion, surpassing $ 144 billion of its reserves, and exposure of $ 299 billion.

_ Citibank has the potential of loss of $ 140.3 billion, exceeding its $ 108 billion in reserves, and future losses of $ 161.2 billion.

_ The Bank of America $ 80.4 billion in the course of exposure, below its reserve of $ 122.4 billion, but $ 218 billion in total exposure.

_ HSBC Bank USA has current potential losses of $ 62 billion, more than triple its reserves, and the total potential exposure of $ 95 billion.

_ Based in San Francisco Wells Fargo, which agreed to take charge of Charlotte-based Wachovia in October, said the potential of losses totaling nearly $ 64 billion, below the bank's reserves of $ 104 billion dollars, but the total of future risks of approximately $ 109 billion.

Kopff, the bank shareholders expert, said that several major banks, the risks are so great that they are "walking dead."

Banks credit default portfolios have little control because they are out books entries that are largely unregulated. However, government officials said in late February that the examiners of the federal review of the top 19 banks in exchange of exhibitions in the coming weeks as part of "stress tests" to evaluate the institutions of the ability to resist the deterioration of the economy.

Hale, the spokesman for Bank of America, said that the bank uses swaps insurance against its loan portfolio - it "if the value of earnings they are willing to lose the value of hedging .

She stated that the Bank of America thousands of parties who are the guarantors of the insurance contracts like to write "the surest guarantee - in cash and U.S. Treasury, minimizing the risk of about 35 per cent. " The guarantee is adjusted daily.

Bank of America's report of 80.4 billion dollars of exposure is not guaranteed and is also the default value of each of thousands of customers return, which is unlikely, "said Hale. Counterparties are the investors of the other side of the face, often, other banks and investment banks.

In response to questions from McClatchy, spokesman for HSBC Brazil Neil said that the bank manages around its derivatives contracts "to ensure that credit risks are accurately assessed, properly approved (and) monitoring regular. "

MCT A graph is available, the file name 20090309 BANKS ECONOMY.

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Representatives from Citibank, JP Morgan and Wells Fargo declined to comment.