|  | | 2007 News and Press Releases | | |
HEADLINE NEWS:
The Next Credit Scandal, The real outrage of the credit crunch has been in the way major banks disclosed potential losses. Now, there are billions more in undisclosed risk.
Peter Eavis - Fortune
CNNmoney.com. November 26, 2007
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EXCERPT: The major banks have already reported billions in unexpected losses from complex investment vehicles known as CDOs. Now they face big risks from other corners of the debt markets -- but don't expect them to warn investors anytime soon. The failure by banks to properly inform shareholders of their potential losses is perhaps the biggest scandal so far of the credit crunch that began this summer. Earlier this year, for example, Merrill Lynch, Citigroup and Bank of America gave almost no indication that one particularly toxic debt product -- CDOs, or collateralized debt obligations -- could be the source of billions of dollars in losses. Those losses came to light this fall, blindsiding shareholders and pummeling banks' stock prices. The lack of disclosure not only has unsettled investors, but also has raised the prospect that large losses are lurking in other parts of the banks' businesses. One likely new trouble spot: Conduits, the opaque structures banks set up to provide debt funding to borrowers. Often, the debt issued by the conduits is collateralized with assets, like mortgages. Conduits typically aren't consolidated on a bank's balance sheet. But banks are often on the hook to fund them if investors stop buying the debt they've issued. When that happens, a lot of risk can get moved onto the balance sheet. In a similar way, a good chunk of Citigroup's CDO losses occurred because it had to honor prior commitments to fund a large amount of debt previously issued by CDO structures. The financial services giant was ultimately forced to bring onto its balance sheet $25 billion of short-term CDO-debt backed with risky mortgages. (CDOs explained) Now, conduits could trigger a similar process at many big banks. Since demand for certain types of conduit debt has shrunk dramatically and bad loan numbers on subprime debt are soaring, banks could well end up absorbing large amounts of conduit debt. Citigroup (Charts, Fortune 500) had off-balance sheet conduits with assets totaling $73 billion as of Sept. 30. And Merrill bought $5 billion of assets from its conduits in the third quarter, a move that led to pre-tax losses of over $500 million in the same quarter. Almost every major banks has significant conduit exposure. But if conduits are becoming a problem, banks are not saying much about it in their financial statements. A close look at what happened with CDOs at Citigroup and Merrill shows just how little investors are told -- and should make investors wary about how little they know about banks' exposure to conduits. |
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