According to this Spiegel article, various high-profile German economists are asking the government to force banks to accept government equity participations.
The strange bit: They don't say which banks. Right now, the only major banks without government involvement are Deutsche Bank and HypoVereinsbank. And currently, those two banks appear to fulfill the solvency requirements. So on what grounds would Berlin be allowed to force a partial nationalization on them?
But it gets even better:
The reaons for the partial nationalisation are stated as follows:
Der Bund hätte zudem Einfluss auf die Geschäftspolitik und könne die Institute zur Kreditvergabe zwingen. Außerdem könne die Regierung die Banken von einer Rückkehr zu ihren früheren gefährlichen Geschäftspraktiken abhalten.
On one hand, the banks should be forced to lend more. On the other hand, the government can make sure that the banks will not return to "dangerous practices of earlier times". Right. State-owned banks do a much better job of avoiding "dangerous practices", as evidenced by the great shape of the Landesbanken. And of course being forced to lower lending standards in recessionary times does not constitute "dangerous practices".
(As posted many times already, I am not against nationalising banks that do not have an appropriate level of capital. But only to avoid setting the wrong incentives. Certainly not to force them to lend more or to institute superior risk management practices.)
Posts mit dem Label banks werden angezeigt. Alle Posts anzeigen
Posts mit dem Label banks werden angezeigt. Alle Posts anzeigen
Montag, 20. Juli 2009
Montag, 13. Juli 2009
Salary Caps at German Banks
Banks that receive government funds are only allowed to pay their top management a maximum salary of 500,000 €. HSH Nordbank is one of the biggest basket cases in German banking, so surely CEO Nonnenmacher is subject to the cap, right?
Turns out he isn't. According to the FTD, he will receive a bonus and a pension entitlement totalling 2.9 m €. That's on top of his regular salary (no idea how high that is).
How can that be? Well, technically HSH has not received money from Soffin. It "only" received guarantees of 30 bn €. The equity injection of 3 bn € came from the states of Hamburg and Schleswig Holstein, not from Soffin. So state-owned HSH can pay its CEO as much money as it likes.
Turns out he isn't. According to the FTD, he will receive a bonus and a pension entitlement totalling 2.9 m €. That's on top of his regular salary (no idea how high that is).
How can that be? Well, technically HSH has not received money from Soffin. It "only" received guarantees of 30 bn €. The equity injection of 3 bn € came from the states of Hamburg and Schleswig Holstein, not from Soffin. So state-owned HSH can pay its CEO as much money as it likes.
Keeping Legal Jobs Safe
Here's a bizarre story about Wells Fargo bank suing itself: It hired lawyers to press charges, and other lawyers to deny the allegations. And no, it's not one subsidiary suing another, it's the same legal entity suing itself. At least American lawyers don't need to fear for their jobs, it seems...
Sonntag, 5. Juli 2009
Lend them money now, or else!
Three German cabinet members are now openly saying that banks should be forced by law to extend more loans to help troubled companies:
"Sollte es zu einer Kreditklemme kommen, müsse die Bundesregierung über noch nie da gewesene Maßnahmen nachdenken, sagte Peer Steinbrück der 'Bild am Sonntag'. Auf die Frage, ob er dabei an die Einführung von Zwangskrediten denke, sagte er: 'Ich will darüber jetzt nicht spekulieren.'
Steinmeier drohte im 'Tagesspiegel': "Wenn wir in einigen Wochen sehen, dass die Banken noch immer nicht bereit sind, ihre Aufgabe als Dienstleister der Wirtschaft zu erfüllen, dann müssen wir über weitere Schritte nachdenken." Trotz massiver staatlicher Hilfe müsse er feststellen, dass viele Unternehmen bei den Banken abgewimmelt würden oder Kredite nur zu unverschämten Zinssätzen bekämen.
Am deutlichsten wurde Guttenberg. Er drohte, die Bundesregierung suche Ansätze, Banken zu der Erfüllung ihres Kreditauftrages zu verpflichten - räumte allerdings ein, dass das rechtlich schwierig umzusetzen sei."
Is this pure posturing ahead of the election, or are they seriously contemplating legislation? I find it rather hard to imagine how such legislation could work in practice: What exactly would banks be directed to do? Fulfill lending targets to specified sectors of the economy? Base their lending decisions on criteria defined by the government as opposed to their own risk assessment? And wouldn't the bank shareholders have legal claims against the government if those "forced loans" go bad?
It all sounds hopelessly impractical to me. But politicians need to be seen to be doing something, I guess...
(Source: Spiegel)
"Sollte es zu einer Kreditklemme kommen, müsse die Bundesregierung über noch nie da gewesene Maßnahmen nachdenken, sagte Peer Steinbrück der 'Bild am Sonntag'. Auf die Frage, ob er dabei an die Einführung von Zwangskrediten denke, sagte er: 'Ich will darüber jetzt nicht spekulieren.'
Steinmeier drohte im 'Tagesspiegel': "Wenn wir in einigen Wochen sehen, dass die Banken noch immer nicht bereit sind, ihre Aufgabe als Dienstleister der Wirtschaft zu erfüllen, dann müssen wir über weitere Schritte nachdenken." Trotz massiver staatlicher Hilfe müsse er feststellen, dass viele Unternehmen bei den Banken abgewimmelt würden oder Kredite nur zu unverschämten Zinssätzen bekämen.
Am deutlichsten wurde Guttenberg. Er drohte, die Bundesregierung suche Ansätze, Banken zu der Erfüllung ihres Kreditauftrages zu verpflichten - räumte allerdings ein, dass das rechtlich schwierig umzusetzen sei."
Is this pure posturing ahead of the election, or are they seriously contemplating legislation? I find it rather hard to imagine how such legislation could work in practice: What exactly would banks be directed to do? Fulfill lending targets to specified sectors of the economy? Base their lending decisions on criteria defined by the government as opposed to their own risk assessment? And wouldn't the bank shareholders have legal claims against the government if those "forced loans" go bad?
It all sounds hopelessly impractical to me. But politicians need to be seen to be doing something, I guess...
(Source: Spiegel)
Donnerstag, 18. Juni 2009
IKB
Remember IKB?
One of the first dominoes to fall in Germany's banking crisis, IKB used to be a 91 % subsidiary of fully government-owned KfW. The bailout back in 2007 ultimately cost the taxpayer nearly 10 bn €.
After the bailout, KfW's 91 % stake was unceremoniously sold to Lone Star in the fall of 2008 (low price, unknown terms&conditions).
And what do we read in today's FTD?
IKB had already asked for 5 bn € in government guarantees earlier this year. It is now asking for additional 7 bn €.
I'm confused:
Why is Berlin guaranteeing bonds issued by a bank owned by LoneStar? What was the point of selling the bank to LoneStar, if the risk stays with the taxpayer?
One of the first dominoes to fall in Germany's banking crisis, IKB used to be a 91 % subsidiary of fully government-owned KfW. The bailout back in 2007 ultimately cost the taxpayer nearly 10 bn €.
After the bailout, KfW's 91 % stake was unceremoniously sold to Lone Star in the fall of 2008 (low price, unknown terms&conditions).
And what do we read in today's FTD?
IKB had already asked for 5 bn € in government guarantees earlier this year. It is now asking for additional 7 bn €.
I'm confused:
Why is Berlin guaranteeing bonds issued by a bank owned by LoneStar? What was the point of selling the bank to LoneStar, if the risk stays with the taxpayer?
Dienstag, 2. Juni 2009
More on the "Bad Bank Law"
Today's press is full of articles criticizing the proposed bad bank law (for example this article on Spiegel Online).
The gist: As banks will ultimately still be responsible for their toxic assets, it's not attractive for them to place them in a bad bank, and it doesn't help their capital base either. Therefore, it is expected that the whole concept will turn into a flop.
Sure. If you want to give banks an incentive to remove problem assets, and if you want to improve their capital base without massive capital increases (either by "normal shareholders" or via nationalization), you need to buy those assets from the banks at attractive prices, i.e. way above fair value. In the process, bank shareholders win, taxpayers lose. The law commendably tries to avoid this wealth transfer, but the inevitable consequence is: This doesn't really help the banks. What they need is fresh capital, and the law doesn't offer them a way to get it.
Der Spiegel has also finally discovered another very valid point:
The plan only deals with "toxic securities", as if American subprime stuff was the only problem facing German banks. Good old-fashioned non-performing loans are not covered. Unfortunately, those non-performing loans are now starting to roll in, and will soon turn into a flood: Germany is in its worst recession ever, and bank loans have a nasty habit of becoming non-performing during recessions.
The gist: As banks will ultimately still be responsible for their toxic assets, it's not attractive for them to place them in a bad bank, and it doesn't help their capital base either. Therefore, it is expected that the whole concept will turn into a flop.
Sure. If you want to give banks an incentive to remove problem assets, and if you want to improve their capital base without massive capital increases (either by "normal shareholders" or via nationalization), you need to buy those assets from the banks at attractive prices, i.e. way above fair value. In the process, bank shareholders win, taxpayers lose. The law commendably tries to avoid this wealth transfer, but the inevitable consequence is: This doesn't really help the banks. What they need is fresh capital, and the law doesn't offer them a way to get it.
Der Spiegel has also finally discovered another very valid point:
The plan only deals with "toxic securities", as if American subprime stuff was the only problem facing German banks. Good old-fashioned non-performing loans are not covered. Unfortunately, those non-performing loans are now starting to roll in, and will soon turn into a flood: Germany is in its worst recession ever, and bank loans have a nasty habit of becoming non-performing during recessions.
Mittwoch, 27. Mai 2009
The State of Germany's Banks
Check out this interesting interview regarding the state of the German banking system, with particular focus on the Landesbanken.
(I don't agree with every detail, but overall it's a pretty insightful and knowledgable description. Picked up via Naked Capitalism.)
Edit: Verlorene Generation discusses the interview in detail.
(I don't agree with every detail, but overall it's a pretty insightful and knowledgable description. Picked up via Naked Capitalism.)
Edit: Verlorene Generation discusses the interview in detail.
Dienstag, 19. Mai 2009
HSH Nordbank doing "better than planned"
HSH Nordbank just published Q1 financials. Well, sort of. They actually published a shortish press release with some condensed financials. It's not really noteworthy, except for this particular bit:
The press release trumpets "HSH Nordbank Q1 better than plan", and goes on to say that the pre-tax loss of 188 m € is 60 m € better than initially planned by the bank.
Sounds good, right? Well, except that this "plan" which they massively outperformed has - to my knowledge - never been published. I searched all through their webpage, and couldn't find any old document which shows us their plan. So the public was never told what they were aiming for. They still don't disclose the plan now, i.e. we still have no idea what they are aiming for in Q2 and beyond. But they tell us that they are very happy about outperforming their plan: "Hey, what's a sizable loss, as long as it's better than what we secretly feared when we drew up our confidential plan, right?"
(Oh, and another detail, just to be finicky: While 188 m € is indeed the pre-tax loss, maybe it should be noted that the after-tax loss is 260 m €, because they had to book some additional tax liabilities. But of course the press release only mentions pre-tax, and you need to go all the way to the condensed p+l to realize that after-tax, the loss is actually much bigger than pre-tax.)
The press release trumpets "HSH Nordbank Q1 better than plan", and goes on to say that the pre-tax loss of 188 m € is 60 m € better than initially planned by the bank.
Sounds good, right? Well, except that this "plan" which they massively outperformed has - to my knowledge - never been published. I searched all through their webpage, and couldn't find any old document which shows us their plan. So the public was never told what they were aiming for. They still don't disclose the plan now, i.e. we still have no idea what they are aiming for in Q2 and beyond. But they tell us that they are very happy about outperforming their plan: "Hey, what's a sizable loss, as long as it's better than what we secretly feared when we drew up our confidential plan, right?"
(Oh, and another detail, just to be finicky: While 188 m € is indeed the pre-tax loss, maybe it should be noted that the after-tax loss is 260 m €, because they had to book some additional tax liabilities. But of course the press release only mentions pre-tax, and you need to go all the way to the condensed p+l to realize that after-tax, the loss is actually much bigger than pre-tax.)
Behind the Scenes of Germany's Bad Banks
The FT print edition ran an interesting article today. It was entitled "Berlin forced to dilute bad bank scheme".
The FT claims that Berlin (as in: the finance ministry and the chancellery office) had initially wanted to "saddle taxpayers with hundreds of billions of Euros" to remove toxic assets from bank balance-sheets. But they were forced to change plans, because many parliamentarians from both SPD and CDU revolted and threatened to vote against the proposal. In the end, the government had to relent and proposed the amended version we know now (i.e. banks are responsible for losses of their toxic assets, and need to devote future profits to pay back any shortfall).
The story was apparently "privately confirmed" by government officials, though the finance ministry refused official comment.
(Here's a summary of the bad bank proposal)
The FT claims that Berlin (as in: the finance ministry and the chancellery office) had initially wanted to "saddle taxpayers with hundreds of billions of Euros" to remove toxic assets from bank balance-sheets. But they were forced to change plans, because many parliamentarians from both SPD and CDU revolted and threatened to vote against the proposal. In the end, the government had to relent and proposed the amended version we know now (i.e. banks are responsible for losses of their toxic assets, and need to devote future profits to pay back any shortfall).
The story was apparently "privately confirmed" by government officials, though the finance ministry refused official comment.
(Here's a summary of the bad bank proposal)
Sonntag, 17. Mai 2009
Bayern LB
Everyone knows that BayernLB is a disaster and has lost tons of money last year.
But how has the bank been doing in the longer run?
I took a look at their historical financial statements, as published on the bank's Investor Relations webpage all the way back to 2001.
BayernLB's RoE was as follows (in brackets: including changes to IFRS "Neubewertungsrücklage", which are not booked through p+l, but directly affect equity):
2008: -58.5 % (-76.8 %)
2007: 0.8 % ( -8.4 %)
2006: 8.3 % ( 8.2 %)
2005: 8.6 %
2004: 3.8 %
2003: 3.5 %
2002: 2.9 %
2001: 3.1 %
2000: 7.2 %
In other words: BayernLB never earned very much. In good years, it managed around 8 % RoE, but 2000-06 average was only 5 %, and cumulative profits over those 7 years were barely 3 bn €.
Then, it all evaporated: In 2007-08, 7.6 bn € of equity was lost.
(Note on methodology: IFRS from 2006 onwards, HGB up to 2005; RoE defined as "net profit / year-end equity". "Stille Einlagen" included in equity, and the "Vorabgewinnabführung auf stille Einlagen" is included in the net profit. Minorities are excluded.)
(Previous post on same subject)
But how has the bank been doing in the longer run?
I took a look at their historical financial statements, as published on the bank's Investor Relations webpage all the way back to 2001.
BayernLB's RoE was as follows (in brackets: including changes to IFRS "Neubewertungsrücklage", which are not booked through p+l, but directly affect equity):
2008: -58.5 % (-76.8 %)
2007: 0.8 % ( -8.4 %)
2006: 8.3 % ( 8.2 %)
2005: 8.6 %
2004: 3.8 %
2003: 3.5 %
2002: 2.9 %
2001: 3.1 %
2000: 7.2 %
In other words: BayernLB never earned very much. In good years, it managed around 8 % RoE, but 2000-06 average was only 5 %, and cumulative profits over those 7 years were barely 3 bn €.
Then, it all evaporated: In 2007-08, 7.6 bn € of equity was lost.
(Note on methodology: IFRS from 2006 onwards, HGB up to 2005; RoE defined as "net profit / year-end equity". "Stille Einlagen" included in equity, and the "Vorabgewinnabführung auf stille Einlagen" is included in the net profit. Minorities are excluded.)
(Previous post on same subject)
Samstag, 16. Mai 2009
Germany's Bad Banks
So this is how Germany's bad bank proposal is supposed to work:
- A bank can create a bad bank as a subsidiary
- It transfers toxic assets to the subsidiary
- The subsidiary issues a bond to its mother company
- The bond is guaranteed by Soffin (i.e. the German taxpayer)
- The bank has to pay an "adequate fee" for the guarantee
- From its dividends (if any), the bank has to make payments to the subsidiary stretched out over the next 20 years to cover any arising shortfall
- If the bank's payments are insufficient (i.e. the bank simply doesn't earn enough money to fill the hole), the taxpayer will be on the hook
What it boils down to is:
Is the "adequate fee" for the guarantee high enough to compensate the taxpayer for the risk?
As there is no objective way to determine the "adequate fee", the fee will probably end up taking into account each bank's ability to pay. Those banks with good ability to pay (i.e. comparatively low risk) will probably not make use of the facility, as they have other ways to find financing. Whereas those banks that really need the facility will be unable to pay enough.
(In any case, it seems lawmakers were worried that banks might not be able to afford the required fee, as the law explicitly allows fees to be paid by issuing new shares. Doesn't say anything about how those shares would be valued, though.)
And one thing I don't quite understand:
Why create a complicated structure (a bad-bank-SPV issuing a bond, transfer of toxic assets to SPV based on a valuation, a long-term repayment schedule from bank to SPV), if the effect is more or less the same as a direct taxpayer guarantee for the bank itself?
In addition, there's the incentive issue: A guarantee means that upside goes to shareholders, and downside is picked up by the taxpayer. Though this is probably more of a theoretical problem, as semi-government banks in the current environment probably won't dare to aggressively play the system. And anyway, problems might also arise from the opposite direction: Politicians asking "rescued" banks to do them favors, i.e. to keep troubled borrowers alive...
For reference:
Previous post on this subject
Post on Verlorene Generation
Post on BlickLog
Post on EconBusinessGermany
- A bank can create a bad bank as a subsidiary
- It transfers toxic assets to the subsidiary
- The subsidiary issues a bond to its mother company
- The bond is guaranteed by Soffin (i.e. the German taxpayer)
- The bank has to pay an "adequate fee" for the guarantee
- From its dividends (if any), the bank has to make payments to the subsidiary stretched out over the next 20 years to cover any arising shortfall
- If the bank's payments are insufficient (i.e. the bank simply doesn't earn enough money to fill the hole), the taxpayer will be on the hook
What it boils down to is:
Is the "adequate fee" for the guarantee high enough to compensate the taxpayer for the risk?
As there is no objective way to determine the "adequate fee", the fee will probably end up taking into account each bank's ability to pay. Those banks with good ability to pay (i.e. comparatively low risk) will probably not make use of the facility, as they have other ways to find financing. Whereas those banks that really need the facility will be unable to pay enough.
(In any case, it seems lawmakers were worried that banks might not be able to afford the required fee, as the law explicitly allows fees to be paid by issuing new shares. Doesn't say anything about how those shares would be valued, though.)
And one thing I don't quite understand:
Why create a complicated structure (a bad-bank-SPV issuing a bond, transfer of toxic assets to SPV based on a valuation, a long-term repayment schedule from bank to SPV), if the effect is more or less the same as a direct taxpayer guarantee for the bank itself?
In addition, there's the incentive issue: A guarantee means that upside goes to shareholders, and downside is picked up by the taxpayer. Though this is probably more of a theoretical problem, as semi-government banks in the current environment probably won't dare to aggressively play the system. And anyway, problems might also arise from the opposite direction: Politicians asking "rescued" banks to do them favors, i.e. to keep troubled borrowers alive...
For reference:
Previous post on this subject
Post on Verlorene Generation
Post on BlickLog
Post on EconBusinessGermany
Freitag, 8. Mai 2009
Commerzbank
The best thing you can say about Commerzbank's Q1 results is that their loss is smaller than AIG's. Apart from that, what can possibly be positive about a quarterly loss of 0.9 bn € (1.3 bn €, if you choose to eliminate the one-time-gain from the disposal of Cominvest) and an additional -1,1 bn € of "sonstiges Periodenergebnis" (which doesn't go through the p+l, but still lowers the remaining equity)...
Freitag, 1. Mai 2009
HSH Nordbank: Same old Story...
This was bound to happen:
According to the FTD, the shareholders of HSH Nordbank are fighting about the terms of the upcoming capital increase.
Flowers and the Sparkassen think the price is too low. Sure, because they don't want to participate. Apparently, the last injection in 2008 was priced at 55€/share, valuing HSH at nearly 5 bn €. Now, PWC is valuing the shares at 11-20€, i.e. 1-2 bn € for 100 %.
I'm in no position to value HSH. But considering that the bank has a book equity of 2.1 bn €, has lost lots of money in 2008, business prospects and further loss exposure are (at best) uncertain, worldwide bank sharse (with the exception of China) trade far below book value, and HSH is anyway only alive at this point due to massive state guarantees, this already sounds like a rather generous valuation to me.
And anyway: Capital increases are usually priced at a discount to entice shareholders to participate. All the more so if a company is in trouble. If Flowers thinks it is too cheap, he should participate. Or find somebody else who is happy about getting the chance of participating at such an irresistible, rock-bottom price. But no, he doesn't want to do that.
Instead, he gets a second opinion from Deloitte arguing that HSH has a higher fundamental value. And he argues that a low valuation will cause a ratings downgrade, because rating agencies will take it as proof that the owners have no faith in the business model. This will increase financing costs, and therefore isn't in the shareholders best interest. Wow! So let's all pretend that the bank is worth more than it is, because ratings agencies and the customers will of course believe us, and this will lower financing costs. Great idea! And what a coincidence that it benefits Flowers and hurts the taxpayer...
According to the FTD, the shareholders of HSH Nordbank are fighting about the terms of the upcoming capital increase.
Flowers and the Sparkassen think the price is too low. Sure, because they don't want to participate. Apparently, the last injection in 2008 was priced at 55€/share, valuing HSH at nearly 5 bn €. Now, PWC is valuing the shares at 11-20€, i.e. 1-2 bn € for 100 %.
I'm in no position to value HSH. But considering that the bank has a book equity of 2.1 bn €, has lost lots of money in 2008, business prospects and further loss exposure are (at best) uncertain, worldwide bank sharse (with the exception of China) trade far below book value, and HSH is anyway only alive at this point due to massive state guarantees, this already sounds like a rather generous valuation to me.
And anyway: Capital increases are usually priced at a discount to entice shareholders to participate. All the more so if a company is in trouble. If Flowers thinks it is too cheap, he should participate. Or find somebody else who is happy about getting the chance of participating at such an irresistible, rock-bottom price. But no, he doesn't want to do that.
Instead, he gets a second opinion from Deloitte arguing that HSH has a higher fundamental value. And he argues that a low valuation will cause a ratings downgrade, because rating agencies will take it as proof that the owners have no faith in the business model. This will increase financing costs, and therefore isn't in the shareholders best interest. Wow! So let's all pretend that the bank is worth more than it is, because ratings agencies and the customers will of course believe us, and this will lower financing costs. Great idea! And what a coincidence that it benefits Flowers and hurts the taxpayer...
Dienstag, 28. April 2009
Deutsche Bank
Ackermann likes to brag that Deutsche Bank needs no government support. But the thing is: While the bank has no formal government guarantee in place, it will surely be able to get government support if it turns out to be needed. All market participants know this, and they do business with Deutsche Bank based on this implicit guarantee, provided for free by the German taxpayer. That certainly improves Deutsche's business prospects, and lowers its funding costs. So maybe, just maybe, Ackermann would be well advised to keep a lower profile...
Montag, 27. April 2009
Chinese Banks
Banks everywhere are struggling to stay alive. Banks everywhere? No, there's a mystical faraway country where things are different: Chinese banks are still posting record profits.
ICBC's Q1 results were out today, and profits are up 6 % yoy. Quarterly profits of 35 bn RMB = 4 bn €. If they can keep that sort of performance up for the rest of the year, they'll be posting more than 15 bn € of 2009 net profits.
Two things struck me as noteworthy:
- Everyone keeps talking about the massive increase in lending by Chinese banks. But ICBC's balance-sheet shows that bank deposits have risen even more. In other words, it's not just borrowers wanting more money. It's also depositors saving more.
- Fascinatingly, loan loss provisioning is down sharply from last year. Their net reserving in the quarter was just 400 m €, less than 0.1 % of their loan book. It's obviously in accordance with HK-GAAP. But can it really be appropriate? Is it conceivable that there are hardly any default risks that should be provided for?
In any case, the numbers as stated are very, very good. Let's see if they stay that way over the next few quarters...
ICBC's Q1 results were out today, and profits are up 6 % yoy. Quarterly profits of 35 bn RMB = 4 bn €. If they can keep that sort of performance up for the rest of the year, they'll be posting more than 15 bn € of 2009 net profits.
Two things struck me as noteworthy:
- Everyone keeps talking about the massive increase in lending by Chinese banks. But ICBC's balance-sheet shows that bank deposits have risen even more. In other words, it's not just borrowers wanting more money. It's also depositors saving more.
- Fascinatingly, loan loss provisioning is down sharply from last year. Their net reserving in the quarter was just 400 m €, less than 0.1 % of their loan book. It's obviously in accordance with HK-GAAP. But can it really be appropriate? Is it conceivable that there are hardly any default risks that should be provided for?
In any case, the numbers as stated are very, very good. Let's see if they stay that way over the next few quarters...
Hypo Real Estate
HRE published its full annual accounts over the week-end.
The number that was pre-released to the press some time ago was a loss of 5.5 bn € in 2008.
A quick look into their balance-sheet tells us that they really lost 7.8 bn €, not 5.5 bn €, because an additional 2.3 bn € was booked into their "revaluation reserve", which is now a negative 4.2 bn €.
Total equity is now officially negative, at -1.5 bn €.
We are also told that "pre-tax profit is expected to be negative at least in 2009 and 2010", because "further impairments ... expected as a result of the downturn in the economic climate".
Can anybody tell me any reason why the government is offering 1.4 € per share for a bankrupt bank with negative equity and more losses in the pipeline?
The number that was pre-released to the press some time ago was a loss of 5.5 bn € in 2008.
A quick look into their balance-sheet tells us that they really lost 7.8 bn €, not 5.5 bn €, because an additional 2.3 bn € was booked into their "revaluation reserve", which is now a negative 4.2 bn €.
Total equity is now officially negative, at -1.5 bn €.
We are also told that "pre-tax profit is expected to be negative at least in 2009 and 2010", because "further impairments ... expected as a result of the downturn in the economic climate".
Can anybody tell me any reason why the government is offering 1.4 € per share for a bankrupt bank with negative equity and more losses in the pipeline?
Mountains or Molehills?
On the week-end, the SZ had front-page news about a "leaked" list of problem assets at German banks. In essence, the article says: "According to a list, there are 816 bn € of problem assets, but we can't really give you a breakdown, and we can't really say how much of a problem those assets really are. Maybe a big one, maybe a small one. Heaven knows."
I find it a bit frustrating how the German press keeps tossing around numbers that are essentially meaningless. Take Hypo Real Estate as an example:
Sure, the bank is a big mess, no doubt about that. But according to the list, it has 267 bn € of problem assets. Their latest financial statements (9/08) tell us that the bank has total assets of 392 bn €.
So 70 % of their whole book (which mostly consists of loans, not subprime securities) is "problem assets"? Well, if you classify every loan that may possibly have to take some sort of haircut due to falling real estate prices as a "potential problem asset", you may end up at 267 bn €. But it is quite inconceivable that HRE will incur losses that come anywhere close to 267 bn €. And because of that, the number as such is meaningless. All it does is tell the public: "The risks are huge." Which they undoubtedly are, but you don't need an arbitrary 816 bn € number for that.
Having said that, I also think it is ridiculous that BaFin now wants to prosecute the people reponsible for the leak. Instead, they should make a full disclosure and tell people exactly what the list means, caveats and limitations and all.
I find it a bit frustrating how the German press keeps tossing around numbers that are essentially meaningless. Take Hypo Real Estate as an example:
Sure, the bank is a big mess, no doubt about that. But according to the list, it has 267 bn € of problem assets. Their latest financial statements (9/08) tell us that the bank has total assets of 392 bn €.
So 70 % of their whole book (which mostly consists of loans, not subprime securities) is "problem assets"? Well, if you classify every loan that may possibly have to take some sort of haircut due to falling real estate prices as a "potential problem asset", you may end up at 267 bn €. But it is quite inconceivable that HRE will incur losses that come anywhere close to 267 bn €. And because of that, the number as such is meaningless. All it does is tell the public: "The risks are huge." Which they undoubtedly are, but you don't need an arbitrary 816 bn € number for that.
Having said that, I also think it is ridiculous that BaFin now wants to prosecute the people reponsible for the leak. Instead, they should make a full disclosure and tell people exactly what the list means, caveats and limitations and all.
Samstag, 25. April 2009
Bad Bank Babbling
Following a heated discussion on various bad bank proposals (as documented in the various links in this post), I thought it might be helpful to summarize the various ways that problem banks can be dealt with:
1. Muddling through
The "simplest" option is to do nothing: Solvency standards are relaxed, accounting standards changed, in the hope that the problem will eventually go away. After all, if the banks are profitable with their new business, they will eventually earn enough to cover the current hole, right?
The advantage: No courageous and difficult political action is required
The problem: Bank customers are not stupid. Especially not now, after all that has happened. So they will be extra-careful, and refuse to do business with any shaky bank that doesn't receive comprehensive government guarantees. And that means: If things work out well, and future profits start flowing, they will eventually flow to shareholders again. Whereas if things don't work out well (if the hole is simply too big to be filled), the taxpayer is on the hook.
In other words: Socialize losses, privatize the gains.
There are several variations of "muddling through":
a) Do absolutely nothing
Simply allow the banks to go on with their business. If they can raise additional capital on the market, they should. Whereas if they can't, the government has to extend guarantees to keep the customers happy. Discussion: See above.
b) Create bank-specific "bad banks" without external help
In other words, banks put their toxic assets in newly created subsidiaries / SPVs. As long as they get no outside guarantees, and no external party buys any of the assets, this doesn't change anything: The bank still owns the same assets, they are simply one legal layer removed. "Smoke and mirrors", in other words. The vanSuntum proposal is part of this category.
c) Create an industry-wide "bad bank" without external help
This is the Enigma/Blick-Log proposal: Banks have to pool their bad assets in an industry-wide captive insurance pool. This is better than a/b, because it eliminates the non-systematic risk (that one bank's bad assets perform worse than average). However, the systematic risk (that the total industry's bad assets perform worse than expected) remains.
In my impression, the systematic risk element of the current mess is much more important than the non-systematic risk. Therefore, while I believe that this proposal helps a bit, I also believe that it doesn't go far enough: If the overall hole turns out to be too big for the industry to handle, the taxpayer needs to step in to socialize the losses. Whereas if the hole turns out to be smaller than expected, the shareholders of the various banks get to privatize the profits.
Oh, and there's also a technical problem: You need to allocate the various assets to "risk classes" and assign insurance premium payments to each class. This is highly subjective, and once you force companies to take part, there will be endless haggling about "fair" premiums (with every bank insisting that its main asset categories are less risky than other banks main asset categories). While you can set the premiums ex-post based on actual incurred losses, that obviously reduces the insurance-element of the scheme: If asset class A ends up with huge losses, and asset class B ends up with small losses, and you retroactively assign huge premiums to class A and small premiums to class B, what happened to "insurance"? You'd effectively have separate insurance pools for separate assets, and that would sharply reduce the desired spreading of risks between the various banks.
2. Remove problem assets
The government can acquire the problem assets, or "insure" them (i.e. guarantee them against a fee). There are essentially two approaches here:
a) Pay "fair value" and/or charge a "fair fee".
The advantage: If the prices are indeed "fair", there is no wealth transfer from taxpayer to shareholders.
The problems: First of all, who determines the "fair" bit? With all the political pressure, subjectivity all too easily translates into intransparent fighting among lobbyists and interest-groups. Secondly (and quite possibly even worse): It's quite likely that a removal of assets at "fair value" means that many banks are insolvent. Which brings us back to scenario 1, i.e. the taxpayer havnig to guarantee the downside (otherwise, the insolvent bank cannot survive), whereas potential upside can still go to the shareholders.
b) Pay a "generous value" and/or charge an "affordable fee".
The advantage: The banks become more healthy, insolvency risk recedes.
The problem: The taxpayer pays for it all, and the shareholders can rejoice.
IMHO, this is by far the worst of all possible options.
3. Nationalization
If a bank cannot meet a reasonable solvency standard (based on reasonably honest accounting rules), shareholders are asked to provide additional capital. If no private investor is willing to commit additional capital, this proves that private investors consider the bank's fair value to be negative. Therefore, it can be nationalized without any compensation for existing shareholders.
The advantage: From then on, it's "left pocket, right pocket", no more wealth transfer from taxpayer to shareholder. If there is any long-term upside, the taxpayer gets it in return for taking care of the current mess.
The problem: If the hole is big, the cost for the taxpayer is big. But it's still better than filling the hole and giving parts or all of the upside to the shareholders (as is the case in options 1 and 2).
As for corporate governance: Politicians are not good at running companies. That's obvious, and the Landesbanken mess is just the latest reminder. So it would be important to minimize political meddling and to make sure the banks are managed like private companies. It would probably help to have them report to the finance/economics ministries in Berlin, as opposed to state presidents. Ensures at least a minimum level of economic/business know-how that seems to be completely lacking on a state-level (if the Landesbank debacles are any guide).
And yet another, long-term caveat: When the banks are eventually reprivatized, care needs to be taken that they are not sold off too cheaply.
4. Controlled insolvency
The most radical proposal: Why should the bleeding be limited to the shareholders and the holders of hybrid capital? Why do unsecured creditors need to be protected? Sure, "normal" bank deposits are sacred. Too many political promises have been made, and it makes sense to protect the "little man". Secured creditors are also protected, because they have their collateral. But unsecured creditors can take losses.
In other words, the banks should enter insolvency proceedings. That doesn't mean they should close down. Business can and should continue, but creditors need to accept a haircut, quite possibly a severe one. It happens all the time in other industries, why not in banking?
The advantage: Taxpayer cost is minimized. It might still cost something if the hole turns out to be really huge, but definitely far less than in all other options.
The problem: It would be the end for nearly every Western financial institution (as in: none of them would survive with its present ownership structure intact). Much (if not most) of unsecured debt is held by other banks and insurance companies. It was hard enough for the system to survive the Lehman collapse. Any more big institutions to go down that route, and all the dominoes will be falling. It would take a lot of political courage to effectively restart the world financial system from zero. And it would take extensive international cooperation and agreement: Once one big country goes down that route, it effectively forces all other countries to go along (Think AIG: If the US had not propped up AIG with government funds, Deutsche Bank would apparently have lost 13 bn $. Game over for Deutsche Bank). The international repercussions could be huge, because some countries would lose out, and others would gain. As for Germany, there's an additional aspect to consider: The biggest part of the problem are the Landesbanken. Can the government as owner of these banks really refuse to inject more capital and to let unsecured creditors bite the bullet? Is it politically feasible to let state-owned banks screw up and then pretend they are limited-liability companies, bye-bye and thank you very much?
Summing up:
IMHO, option 4 is the most consistent one from a theoretical point of view. It would also be the fairest one, because it places the pain with the investors (which bought shares and bonds of their own free will), not with the taxpayer. But it's not politically feasible. Way too complicated. So the "smallest evil" is probably option 3, i.e. nationalization (without paying anything to shareholders and hybrid capital owners). Options 1 and 2 involve unnecessary and inappropriate transfer of wealth from taxpayer to shareholders.
1. Muddling through
The "simplest" option is to do nothing: Solvency standards are relaxed, accounting standards changed, in the hope that the problem will eventually go away. After all, if the banks are profitable with their new business, they will eventually earn enough to cover the current hole, right?
The advantage: No courageous and difficult political action is required
The problem: Bank customers are not stupid. Especially not now, after all that has happened. So they will be extra-careful, and refuse to do business with any shaky bank that doesn't receive comprehensive government guarantees. And that means: If things work out well, and future profits start flowing, they will eventually flow to shareholders again. Whereas if things don't work out well (if the hole is simply too big to be filled), the taxpayer is on the hook.
In other words: Socialize losses, privatize the gains.
There are several variations of "muddling through":
a) Do absolutely nothing
Simply allow the banks to go on with their business. If they can raise additional capital on the market, they should. Whereas if they can't, the government has to extend guarantees to keep the customers happy. Discussion: See above.
b) Create bank-specific "bad banks" without external help
In other words, banks put their toxic assets in newly created subsidiaries / SPVs. As long as they get no outside guarantees, and no external party buys any of the assets, this doesn't change anything: The bank still owns the same assets, they are simply one legal layer removed. "Smoke and mirrors", in other words. The vanSuntum proposal is part of this category.
c) Create an industry-wide "bad bank" without external help
This is the Enigma/Blick-Log proposal: Banks have to pool their bad assets in an industry-wide captive insurance pool. This is better than a/b, because it eliminates the non-systematic risk (that one bank's bad assets perform worse than average). However, the systematic risk (that the total industry's bad assets perform worse than expected) remains.
In my impression, the systematic risk element of the current mess is much more important than the non-systematic risk. Therefore, while I believe that this proposal helps a bit, I also believe that it doesn't go far enough: If the overall hole turns out to be too big for the industry to handle, the taxpayer needs to step in to socialize the losses. Whereas if the hole turns out to be smaller than expected, the shareholders of the various banks get to privatize the profits.
Oh, and there's also a technical problem: You need to allocate the various assets to "risk classes" and assign insurance premium payments to each class. This is highly subjective, and once you force companies to take part, there will be endless haggling about "fair" premiums (with every bank insisting that its main asset categories are less risky than other banks main asset categories). While you can set the premiums ex-post based on actual incurred losses, that obviously reduces the insurance-element of the scheme: If asset class A ends up with huge losses, and asset class B ends up with small losses, and you retroactively assign huge premiums to class A and small premiums to class B, what happened to "insurance"? You'd effectively have separate insurance pools for separate assets, and that would sharply reduce the desired spreading of risks between the various banks.
2. Remove problem assets
The government can acquire the problem assets, or "insure" them (i.e. guarantee them against a fee). There are essentially two approaches here:
a) Pay "fair value" and/or charge a "fair fee".
The advantage: If the prices are indeed "fair", there is no wealth transfer from taxpayer to shareholders.
The problems: First of all, who determines the "fair" bit? With all the political pressure, subjectivity all too easily translates into intransparent fighting among lobbyists and interest-groups. Secondly (and quite possibly even worse): It's quite likely that a removal of assets at "fair value" means that many banks are insolvent. Which brings us back to scenario 1, i.e. the taxpayer havnig to guarantee the downside (otherwise, the insolvent bank cannot survive), whereas potential upside can still go to the shareholders.
b) Pay a "generous value" and/or charge an "affordable fee".
The advantage: The banks become more healthy, insolvency risk recedes.
The problem: The taxpayer pays for it all, and the shareholders can rejoice.
IMHO, this is by far the worst of all possible options.
3. Nationalization
If a bank cannot meet a reasonable solvency standard (based on reasonably honest accounting rules), shareholders are asked to provide additional capital. If no private investor is willing to commit additional capital, this proves that private investors consider the bank's fair value to be negative. Therefore, it can be nationalized without any compensation for existing shareholders.
The advantage: From then on, it's "left pocket, right pocket", no more wealth transfer from taxpayer to shareholder. If there is any long-term upside, the taxpayer gets it in return for taking care of the current mess.
The problem: If the hole is big, the cost for the taxpayer is big. But it's still better than filling the hole and giving parts or all of the upside to the shareholders (as is the case in options 1 and 2).
As for corporate governance: Politicians are not good at running companies. That's obvious, and the Landesbanken mess is just the latest reminder. So it would be important to minimize political meddling and to make sure the banks are managed like private companies. It would probably help to have them report to the finance/economics ministries in Berlin, as opposed to state presidents. Ensures at least a minimum level of economic/business know-how that seems to be completely lacking on a state-level (if the Landesbank debacles are any guide).
And yet another, long-term caveat: When the banks are eventually reprivatized, care needs to be taken that they are not sold off too cheaply.
4. Controlled insolvency
The most radical proposal: Why should the bleeding be limited to the shareholders and the holders of hybrid capital? Why do unsecured creditors need to be protected? Sure, "normal" bank deposits are sacred. Too many political promises have been made, and it makes sense to protect the "little man". Secured creditors are also protected, because they have their collateral. But unsecured creditors can take losses.
In other words, the banks should enter insolvency proceedings. That doesn't mean they should close down. Business can and should continue, but creditors need to accept a haircut, quite possibly a severe one. It happens all the time in other industries, why not in banking?
The advantage: Taxpayer cost is minimized. It might still cost something if the hole turns out to be really huge, but definitely far less than in all other options.
The problem: It would be the end for nearly every Western financial institution (as in: none of them would survive with its present ownership structure intact). Much (if not most) of unsecured debt is held by other banks and insurance companies. It was hard enough for the system to survive the Lehman collapse. Any more big institutions to go down that route, and all the dominoes will be falling. It would take a lot of political courage to effectively restart the world financial system from zero. And it would take extensive international cooperation and agreement: Once one big country goes down that route, it effectively forces all other countries to go along (Think AIG: If the US had not propped up AIG with government funds, Deutsche Bank would apparently have lost 13 bn $. Game over for Deutsche Bank). The international repercussions could be huge, because some countries would lose out, and others would gain. As for Germany, there's an additional aspect to consider: The biggest part of the problem are the Landesbanken. Can the government as owner of these banks really refuse to inject more capital and to let unsecured creditors bite the bullet? Is it politically feasible to let state-owned banks screw up and then pretend they are limited-liability companies, bye-bye and thank you very much?
Summing up:
IMHO, option 4 is the most consistent one from a theoretical point of view. It would also be the fairest one, because it places the pain with the investors (which bought shares and bonds of their own free will), not with the taxpayer. But it's not politically feasible. Way too complicated. So the "smallest evil" is probably option 3, i.e. nationalization (without paying anything to shareholders and hybrid capital owners). Options 1 and 2 involve unnecessary and inappropriate transfer of wealth from taxpayer to shareholders.
Freitag, 24. April 2009
Another Bad Bank Proposal
Interesting discussion (in German) at Weissgarnix regarding yet another bad bank proposal made by Prof. van Suntum (INSM).
I won't discuss it here, as I already left lots of comments over there. Suffice it to say that I agree with Weissgarnix, who calls it "Nebelkerzen" ("smoke and mirrors").
Other posts on this topic (in German): right here, Blicklog and Verlorene Generation
I won't discuss it here, as I already left lots of comments over there. Suffice it to say that I agree with Weissgarnix, who calls it "Nebelkerzen" ("smoke and mirrors").
Other posts on this topic (in German): right here, Blicklog and Verlorene Generation
Mittwoch, 22. April 2009
Germany's Bad Banks
According to the FTD, the current government thinking regarding "bad banks" is as follows:
- Sell toxic assets at fair value to SPV
- Government guarantees the fair value, and receives guarantee fee from banks
- If final value falls below estimated fair value, government makes up for the shortfall
- If final value is in excess of fair value, the bank gets the upside (this part is a bit unclear, because it is not explicitly stated; but usually, a guarantee only covers the downside -> if the government were to take up- and downside of an asset transferred at fair value, there would be no need for a guarantee and a guarantee fee, the government would simply take over the asset, and that's that)
Quick assessment:
If the assets are indeed transferred at "fair value", and the government receives an "appropriate" guarantee fee, that's a reasonable solution.
However, there's an obvious problem: Who will determine the "fair value" and the "appropriate guarantee fee"?
(If the "fair values" are too generous and/or the fee too small, then bank shareholders win and the taxpayer loses out.)
- Sell toxic assets at fair value to SPV
- Government guarantees the fair value, and receives guarantee fee from banks
- If final value falls below estimated fair value, government makes up for the shortfall
- If final value is in excess of fair value, the bank gets the upside (this part is a bit unclear, because it is not explicitly stated; but usually, a guarantee only covers the downside -> if the government were to take up- and downside of an asset transferred at fair value, there would be no need for a guarantee and a guarantee fee, the government would simply take over the asset, and that's that)
Quick assessment:
If the assets are indeed transferred at "fair value", and the government receives an "appropriate" guarantee fee, that's a reasonable solution.
However, there's an obvious problem: Who will determine the "fair value" and the "appropriate guarantee fee"?
(If the "fair values" are too generous and/or the fee too small, then bank shareholders win and the taxpayer loses out.)
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