Sunday, July 12, 2009

How Much Will Financial Aftershocks Imperil Recovery?

Two large financial events are brewing that both reflect the poor lending practices of the past several years and that have the potential to further weaken Anglo-Saxon economies. First, (and found in many other sources), the large lender CIT is in trouble:

CIT Hires Bankruptcy Specialist Skadden as Bond Access Wanes

July 11 (Bloomberg) -- CIT Group Inc., the century-old lender to 950,000 businesses that has been unable to persuade the Federal Deposit Insurance Corp. to guarantee its debt sales, hired bankruptcy specialist Skadden, Arps, Slate, Meagher & Flom LLP as an adviser amid a plunge in its stock and bonds. . .

The Wall Street Journal, citing people it didn’t identify, said the hiring comes as CIT prepares for a possible bankruptcy filing. . .

The federal agency, run by Chairman Sheila Bair, is in discussions with CIT about how the lender can strengthen its financial position to get approval, including raising capital, said one of the people. CIT’s measures to improve its credit quality, such as by transferring assets to its bank, have been insufficient, the person said.

Could a CIT bankruptcy create important negative aftershocks?

On a less macro issue, will a CIT filing help GE, which can pick up business as well as enjoy wider margins, or will it raise questions about whether GE Capital is as strong as Mr. Immelt claims?

Across the pond, the Sunday London Times reports (courtesy CR) in Lloyds braced for 13 (billion pound) writeoff:

LLOYDS BANKING GROUP is poised to write off as much as £13 billion on its loans to commercial property, businesses and mortgage holders as the crisis engulfing the taxpayer-backed bank deepens.

First-half results due to be posted in three weeks will show that its losses are accelerating, in spite of recent suggestions that the worst of the recession is over.

UBS analysts expect Lloyds to announce a bottom line half-year loss of £6.3 billion as a result of the soaring provisions.

The writeoffs for the first six months of the year would match the losses recorded by Lloyds TSB and HBOS in 2008, as they consummated their disastrous merger. The expected bad debt charge is almost twice what Lloyds paid for HBOS when they came together under the government’s watch last autumn. Total writeoffs for this year at Lloyds could exceed £20 billion.

These are large numbers. What's left of the company?

Things are so bad at Lloyds that:

Lloyds is also fighting off a full-frontal assault from Brussels, over claims it may have benefited too much from state aid.


The article goes on to praise the profitability of Lloyds. Profitable while losing money under the British equivalent of GAAP is a nice trick. Yes, of course when all Bank of England and British Government policy is directed at helping Big Finance, Lloyds can be profitable, but it continues to look just as Nassim Taleb has said, which is that over long periods of time, the banking industry is just like the airlines industry: net, it has not made a dime: losses have equalled or exceeded profits.

In the meantime, the Democratic National Committee is not readying the 2010 equivalent of "Springtime in America" ads for the midterm elections.

Dry financial powder may come in handy.

Copyright (C) Long Lake LLC 2009

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