National Australia Bank will shock Wall Street

The National Australia Bank’s decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a “meltdown”.

We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans – an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.

It means the cost of bailing out housing exposures to the two mortgage insurers will be so great that it will leave no room to bail out anything else and there are several US banks that are now in big trouble. NAB says that the dislocation in the residential market is separate from the corporate market, but the flow on is inevitable.

While global banks have been writing down their balance sheet assets, few have tackled their conduit exposures which are off balance sheet but to which they are ultimately liable.

This morning at around 6am I wrote that we had been experiencing a ‘dead cat bounce’. I had no idea that NAB would trigger the downturn and confirm what I had written. And of course Wall Street will receive a deep shock when it wakes up.

How did NAB get caught in $1.2 billion mess? They had a number of big clients who wanted to invest in these US housing loans. They were sucked in by the ‘triple A rating’ given to the securities by the rating agencies. They did not take into account that the monoline insurers who guaranteed some of the loans had no substance. To become a player NAB took out $1.2 billion in these triple A securities and 90 per cent of it has been lost.

Many Australian institutions are very angry. NAB is paying out far too much in dividends and should be conserving capital. The American bank it purchased, Great Western, was a good idea but it is now clear it overpaid for it. Fortunately it only has a small exposure to the bad loans. But what’s happening to the NAB is not the main game.

The global banks have been marking to market the assets they held on their balance sheet, but the vast amounts held in so called ‘conduit trust accounts’ have not been written down because they were not marketable. NAB wrote them down when they saw the bad mortgages.

US banks have written down $450 billion in bad housing loans. The revelation from NAB means that they will now certainly need to take provisions to $1,000 billion. But write-downs of $1,300 billion and perhaps even more are on the cards.

Where will the equity come from to cover these bad loans? The world has never attempted a rescue effort of this size and it will make liquidity in the globe very tight. That’s why corporates will be hit. All Australian companies that need equity should raise it now.

25 Jul 2008

Source: Business Spectator

4 thoughts on “National Australia Bank will shock Wall Street

  1. Simply stupid!!!…..simply stupid. Can’t blame the Aussies. I am sure the U.S. Government will use us taxpayers to bail out bad loans. And this is criminal. Let Fannie and Freddie go down the tubes like any other company that screws up. Screw up and you go broke. I am sad for the home owners who are taking this on the chin. Nasty business for them. Take the American banks and crooked loan sharks to task for this….and do not find fault with the Aussies. Hey, they are getting screwed over enough as it is and have called a halt. Can’t blame them. U.S. Government…..DO NOT……I repeat…..DO NOT take it out on us taxpayers!!

  2. It’s too late. The shareholders of Fannie & Freddie are the taxpayers, through pension funds, municipalities services and all the entities that constitute the fiber of the american society and have been buying this junk. It’s too late.

  3. The problem is systemic. The economy of the U.S. is self-destructive by design. Search for INHERENT NATIONAL BANKRUPTCY.

    The privately owned Federal Reserve is more interested in helping their coherts in extortion (investment houses, hedge funds, mortgage bankers,Fan Mae and Fred Mac executives) than in protecting the middle class.

    In Econ 101, we were told of the ancient gold guilds that extended too much paper certificates and then faced devestating runs. The Fed created too much paper money during the housing bubble and now there is a run on the guild. History repeats itself.

  4. Mr. Dolan, Simply stupid is that we’re (The U.S) is in such a bad state right now that nothing will be able to get us out of it until we admit that we’re going down the drain. We can’t blame everyone but we can’t really point the finger at just the big companies. We as “taxpayers” should have realized what was going on in the first place. And yes, FED really did create too much money and there really is a lot in circulation right now but you can’t really blame them for at least trying to get us out of the hole that we brought upon OURSELVES.

    Jason, our economy is not necessarily self-destructive by design, we just haven’t fixed the kinks. What we need to do is vote on what should and should not be done, not just kick back and watch Congress screw things up. The only reason that most of our senators ARE in Congress is because they can’t do anything useful so they make “friends” to get themselves in.

    What we need to do is not just blame everyone else and blame ourselves as individuals for being so greedy. Yes, it is human nature to have what you want but sometimes for somethings its just better to do it the harder way. The thing is, going into this recession and a depression will do just that. I think that we need things to get worse before it gets better. But then again this whole comment is opinionated and it really is just my two cents that I can not afford anyhow. oh, and on that note, please, please, for anyone that is reading this comment, I really do not want McCain. If it was any other person other than McCain, I would be very pleased. I rather like Obama, but on that note, even if it was some crazy Asian (Only saying Asian because I am) that doesn’t know how to speak English…I would vote for him/her. Please, not another Republican for the next four years. Democratic or Green or what have you….. Remember, Republican for the rich, Democratic for the poor, And Green for the Hippies. =]

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