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RBS Record Loss as Systemic Banking Crisis Deepens

Companies / Credit Crisis 2008 Aug 10, 2008 - 02:08 PM GMT

By: Nadeem_Walayat

Companies Best Financial Markets Analysis ArticleThe Royal Bank of Scotland (RBS) Lost a record £691mln during the first six months of 2008 set against a profit of £5 billion for the same period last year, as the bank continued to write down the value of assets in the face of mounting bad debts as a consequences of exposure to the US subprime housing market. The loss was lower than analysts estimates that had varied to as high as 1.6 billion, following its most recent write down of £6 billion.


This was reportedly the second largest loss in British banking history following Nick Leeson's antics at gambling on the Nikkei 225 contracts in 1995 which brought down Barings Bank with a loss of £827miln. The RBS loss follows hard on the heals of a £12 billion cap in hand rights issue capital injection to shore up the banks balance sheet as the bank also sought to sell more liquid assets.

In less than 9 months RBS has gone from King of the Hill following from its successful but extremely expensive £50 billion bid for ABN Amro last year to scrambling in near panic for equity injections to cover mushrooming mortgage backed derivatives losses. The current valuation of the RBS at £38 billion is a far cry from the dreams of mid 2007, that would see RSB as one of the biggest banks in the world, having already attained the Number 2 slot in the UK. Despite an upbeat message by the CEO , Sir Fred Goodwin that underlying profits were strong at £5 billion, however the CEO failed to speculate on future write downs which given the meltdown in the banking system could amount to ten times the original estimate of world wide banking sector losses of $200 billion, therefore implies RBS and other banks have barely begun to write down the real level of losses as much of the previous profits were based on fake valuations of illiquid mortgage backed derivatives packages that helped boost past profits.

RBS underlying profits of £5 billion have yet to be tested during a UK recession as the banking crisis deteriorates, therefore bad debts and derivatives losses could mushroom, that are contrary to the current mainstream reporting that suggests that the worst is behind RBS on the reported 'good news' of losses of only £691miln. To me it seems like a number plucked from the air as the real writedowns have yet to be acknowledged as the banks seem eager to report losses in relative terms to other banks so as they do not stick out like a sore thumb, therefore RBS losses by the end of this year could be well beyond £2 billion for the 6 months to December 2008.

The ongoing crisis is not just limited to RBS but rather systemic of the whole western banking system as the estimated amount of losses keeps doubling every few months from the original $200 billion, to $400 billion, to $800 billion, with most recent estimates putting the losses doubling again to $1600 billion. The potential losses are exploding higher than even my pessimistic estimate of $1 trillion from nearly a year ago, as already global banks have declared losses of $500 billion through which they have virtually exhausted the markets ability to provide them with new capital, this suggests that the next phase of the crisis as the losses continue to mushroom is for more government bailouts and possibly many, many more banks being nationalised right across the globe. For instance today's estimates of a handful of US banks at risk of going down the Indymac route is farsical, as losses of $1600 billion implies that hundreds of banks will go bust or end up in the hands of governments through nationalisation or similar banking system collapse procedures.

The original subprime mortgage market was estimated at a miniscule $200 billion, so readers may be wondering how could such a small market generate such huge losses ? The answer is derivatives trading. The value of derivatives contracts traded between financial institutions and based against the value of underlying assets utilisaton suspect valuation models to boost book values, such as US subprime mortgages has mushroomed to an estimated $500 trillions. Therefore market exposure is magnified many times, perhaps as much as 30 times the size of the original market. Therefore the $200 billion subprime mortgage is resulting in deleveraging of possibly as high as $6 trillions and there in lies the problem, in that the real market value of the assets is nowhere near the value the banks have booked them as to boost past profits. Another impact of the housing market related deleveraging is forced sales of other assets by the banks that are able to be traded to cover losses resulting in derivatives contracts based on those assets also falling in value and triggering a chain reaction of mark down in asset values across the board as further forced sales take place.

The problem is that the truth of the potential losses as the derivatives markets continues to deleverage is not being told to the public, and that truth is that many of the western banks are effectively bankrupt! Insolvent ! in that their assets do not cover their liabilities as the real derivatives losses are off the banks balance sheets in the form of exposure to the unraveling estimated $500 trillion derivatives markets. The public will only know the true extent of the crisis long afterwards as the banks drip feed losses to the public in the form of quarterly earnings statements that misleading imply that the bad debts have now been written down only for the following quarter to reveal even larger losses and further writedowns. Expect this to continue for probably several years as the real level of losses is eventually revealed, far after the public has experienced asset value destruction and erosion in wage purchasing power through inflation statistics that manipulated official inflation measures under report.

One of the key requirements for a sign to an end to the global banking crisis is for the US housing market to stabalise, which the most recent data suggests is not happening yet. However the US central bank and government having thrown the moral hazard rule book into the dustbin many months ago are embarked on a programme of ever escalating bailouts and liquidity provided to the banking systems to bring to a halt to the slide in US house prices so as to unfreeze the ongoing chain reaction of loss of confidence in the financial system. Given enough money the slide in housing housing market can be brought to a halt as the US and other governments wrack up bailout debts to the tune of several trillions of dollars,

The outcome for which is price inflation coupled with asset price deflation due to the explosion in the amount of debt printed by governments whilst at the same time banks sell assets to cover losses and hence all the hall marks for a prolonged period of Economic Depression.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Arctec
10 Aug 08, 17:02
Banks that may go bankrupt

A list of Banks that may fail and go bankrupt.

http://bankruptbanks.blogspot.com/


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