Saving The Economy or Saving Their Ass?
US banks are going to set up an $80 billion fund to limit the credit crunch, Reuters reports. The fund will buy ailing mortgage securities and other assets in a bid to prevent the credit crunch from further hurting the global economy, anonymous sources said who were too embarrassed to disclose their identity for the newswire’s story.
How noble for these titans of industry to perform such a task for the masses.
The source neglected to say that it was the lack of controls and self-discipline of management at these money-center banks that created the crunch in the first place. Enticed by huge bonuses, there was little concern for the well being of the US economy when no-money-down mortgages and leveraging transactions at 8x EBITDA were being committed to ad-infinitum.
The Reuters report goes on to say representatives from the U.S. Treasury have organized conversations among top global banks, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets. The reason why Treasury officials have to speak to global banks is due to the outstanding job US bankers did selling this junk to investors from around the world.
Further, US bankers are saying that a fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. No kidding! That is what is supposed to happen after you make bad loans.
This news report shows that the depth and duration of this debt problem is coming home to roost. The credit evaluation process for many of these loans has moved away from the investment banking departments to the CFO’s department at many of the major money-center banks.
A month ago bankers were claiming it would take three to six months to work through the $300 billion pipeline of private equity transactions. But, after having some success with financing the First Data transaction, it is not going so well for the other deals. Banks have to write the checks for the commitments they have made with limited interest by lenders to scoop up the debt in other transactions. Supposedly, private transactions are being negotiated to place this debt with big discounts being suggested–meaning the writedowns that big money-center banks took in this recent quarter will continue in upcoming quarters.
The bankers’ plea to suggest that they are attempting to help the US economy by setting up this fund is pure hogwash. The fact of the matter is that regulators and CFOs are now running the show. And they are concluding that these masters-of-universe investment bankers did some real dumb things and have a big hole to climb out of.
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