Tuesday, April 1, 2008
Banks Face Biggest Crisis in 30 Years
-- Credit market turmoil poses the mostsevere crisis for banks in 30 years, surpassing Black Monday in1987, the Asia currency crisis and the bursting of the dot-combubble, Morgan Stanley and Oliver Wyman said in a joint report. Revenue from investment banking may drop 20 percent in2008, with credit businesses declining 60 percent, analysts ledby Huw van Steenis said in a note to clients today. Six quartersof earnings will be erased by writedowns and falling revenue bythis month, rivaling the collapse of the junk bond market at theend of the 1980s that put Drexel Burnham Lambert Inc. out ofbusiness, the report said. ``The industry is facing the most severe investment bankingcrisis in 30 years,'' the analysts wrote in the report. ``Globalsecurities markets are in the midst of profound cyclical andstructural change.'' UBS AG and Deutsche Bank AG, two of Europe's biggest banks,posted today a combined $23 billion of writedowns linked to thecollapse of the subprime mortgage market. In all, investmentbanks may post $75 billion in markdowns in 2008, according tothe report. Writedowns and losses on subprime-infected assetshave already cost the world's biggest banks about $230 billionsince the start of 2007. Investment-banking revenue has also stalled as the pace oftakeovers and initial public offerings declined in the firstquarter of 2008. Mergers and acquisitions bankers suffered a 35percent drop in fees during the first quarter as the value ofannounced takeovers fell to $656 billion from $971 billion ayear earlier, according to data compiled by Bloomberg. Crisis Duration Banks' earnings have been hurt for the past three quartersby the turmoil in the credit markets. In total, the crisis maylast for eight to 10 quarters, exceeding the six-quarter durationof the Asia crisis and bailout of LTCM in 1997-8, and the seven-quarter fallout from the bursting of the dot-com bubble, thereport said. The 1987 stock market crash hurt earnings in just asingle quarter, according to the report, entitled ``Outlook forInvestment Banking and Capital Market Financials.'' Regulators will also push the industry to retain morecapital as a cushion, hurting banks' return on equity in thelong term, the group added. Treasury Secretary Henry Paulsonproposed yesterday the biggest overhaul of U.S. financial rulessince the Great Depression, saying the Federal Reserve shouldexpand its oversight of financial services beyond banks. Banks are also finding their cost of capital is increasingrelative to other investment-grade companies. Traditionalsources of money, like structured investment vehicles, are lessavailable, the report said. Banks are struggling to offloadloans, leaving leverage ratios high, it said. Diversified Funding ``Firms with diverse sources of funding, with retail andcommercial deposits clearly helping, and a diversified businesswill have a funding advantage over the coming years,'' theanalysts wrote. ``This may lead to a material reassessment ofbusiness models over time.'' Zurich-based UBS today posted an additional $19 billion ofwritedowns and said it would seek $15.1 billion in a rightsoffering to replenish capital. Deutsche Bank, Germany's biggestbank, also said today it expects to book about 2.5 billion euros($3.9 billion) in writedowns for the quarter. Separately, Merrill Lynch & Co. and Citigroup Inc. hadtheir first-quarter earnings estimates cut by Goldman SachsGroup Inc., which said the two banks may post $14 billion inwritedowns on assets linked to collateralized debt obligations.