US Investment Bank Revenues Loss Crisis - Trillion Dollar Bank Losses in Toxic Subprime Banking Assets and Loans

Investment bank revenues plunge in the June quarter, not inspiring with the overhang of trillion dollar bank losses on toxic assets and loans. We live amongst a financial house of cards, and we have been dealt a bad hand. The trillion dollar bank losses on toxic assets and loans highlight corporate and political largesse. They are the perfect expression of the overhanging chaos and cultural degeneration we face. The sheer magnitude is bewildering in itself, perhaps more bewildering is the herd’s benign acceptance of these losses. We are seemingly living in a newsreel of greed, delusion and political buffoonery.

The trillion dollar bank losses are the crux of the global financial crisis. Are they realistically able to be covered? The investment banking business is an important barometer. In the June quarter Bank of America Corp's investment banking quarterly revenue cratered nearly 40 percent. JPMorgan Chase & Co was down 24 percent and Citigroup investment bank quarterlies revenues were down 26 percent. Goldman Sachs Group Inc and Morgan Stanley are due next week. This is no surprise we have the European sovereign debt crisis, the BP Gulf oil spill, and extreme stock market volatility.

Since the start of 2007 major European and American banks have lost more than US $1.1 trillion on toxic assets and bad loans. This is what we are told, it is most likely significantly worse. The IMF forecasts the U.S. and Europe's banks to lose about $2.2 trillion in the 2007-10 period. Individually it's a matter of saving whatever we can as the ring of fire engulfs us. Banks in the past earning seasons gloat over huge profits while the world burns. Now we see investment bank revenues plunge, will the financial house of cards continue to be propped up government aid? The overhang of trillion dollar bank losses on toxic assets and loans is a millstone that won’t just go away.

The trillion dollar bank losses on toxic assets and loans present a toxic mix of politics and economics. Politicians drive further into the realm of economics and finance than ever before. The best example we have historically is Germany’s Weimar Empire. That ended very badly. The massive quantitative easing to absorb the trillion dollar bank losses on toxic assets and loans has stalled the depression. The concern is that it has merely delayed the great depression redux. 

What the past few weeks have shown is the more politicians intervene how demonstrably worse the world becomes. Financial markets still remain on edge after the trillion-dollar European rescue package. One has to pull off the blinkers and see the European crisis for what it is. It is about politics, not about economics.  

Roll back the clock before the advent of the Euro single currency and Greenspan’s enabled trillion dollar derivatives market. In this framework Greece misses a payment, default follows and Greece devalues the Drachma. Greece adjusts, the world accepts and the world moves on as before.  

Now we see European sovereign ratings rattled, 1000 point falls on the Dow and European contagion. These events hardly signal global financial integration as a resounding success. Unless you are a bank and have your trillion dollar bank losses on toxic assets and loans underwritten by a bludgeoned apathetic public.

The International Monetary Fund (IMF) forecasts American banks are to lose around $885 billion in the 2007-10 periods. The IMF forecasts European banks to lose about $1.3 trillion. A total of nearly US$2.2 trillion in bank losses on toxic assets and loans is expected. The toxic blend is two-thirds of the losses from bad loans and the other third from toxic securities.

The estimates are based on corporate write-downs and losses from subprime securities, mortgages, CDOs, derivatives and SIVs. In addition losses on bad loans, or non-performing loans are estimated. We have seen over the past few years these corporate disclosures have been at best grossly understated. Whilst there have been some truth shakeouts there a likely to many more surprises lurking.

Furthermore what constitutes a bad loan can be very complex within intricate financial structures. Definitions also vary between nations and accounting principles. Some are more conservative and include a provision for future loan losses. We have seen with the trickery at Lehman’s and Greece’s CDS manipulation these numbers can be very rubbery.

The list of IMF estimated losses (in billions of dollars at current exchange rates):

BANK 2007 2008 2009 2010 TOTALS (YTD)

• Citigroup 29.1 63.4 30.7 7.3 $130.5
• Bank of America 12.1 29.2 35.5 10.8 $87.6
• Wachovia Corp* 4.0 73.4 $77.4
• HSBC 19.3 30.3 26.4 $76.0
• Lloyds 6.8 28.9 36.1 6.8 28.9 36.1 $71.8
• Merrill Lynch* 25.1 38.6 $63.7
• Royal Bank Scotland 7.0 23.5 21.3 4.0 $55.8
• UBS 50.6 1.8 0.1 $52.5
• JPMorgan Chase 4.5 10.2 29.5 7.9 $52.1
• Fannie Mae 4.7 26.9 15.4 $47.0
• Freddie Mac 5.2 24.4 12.8 $42.4
• Washington Mutual*** 5.1 36.7 $41.8
• Barclays 7.0 16.5 12.7 2.3 $38.5
• Wells Fargo 3.5 8.7 18.2 5.3 $35.7
• Santander 4.8 8.3 13.2 3.2 $29.5
• Lehman Brothers++ 12.5 14.0 $26.5
• BNP Paribas# 2.4 8.0 11.4 1.7 $23.5
• Morgan Stanley 10.3 10.1 2.4 $22.8
• Commerzbank, Dresdner 3.9 13.3 4.5 $22.3
• UniCredit 3.5 5.1 11.3 2.3 $22.2
• Deutsche Bank 4.0 11.2 4.9 0.4 $20.5
• BBVA 2.7 4.2 7.7 1.5 $16.1
• Credit Suisse 3.5 11.9 0.5 0.1 $16.0
• Credit Agricole# 2.7 4.4 6.3 1.4 $14.8
• IKB ++++ $14.7
• Societe Generale# 1.3 3.7 7.9 1.5 $14.4
• National City+++ $14.0
• Intesa Sanpaolo 1.6 4.5 4.9 0.9 $11.9
• ING 7.1 2.4 0.9 $10.4
• Bayern LB 1.1 8.0 $9.1
• Goldman Sachs 1.7 4.9 1.9 $8.5
• Natixis# 2.0 2.5 2.0 0.1 $6.6
• Canadian Imperial Bank Commerce $6.5
• Standard Chartered 0.8 1.8 2.0 $4.6
• Erste Bank 0.8 2.5 1.3 $4.6
• Bear Stearns**** 3.0 0.6 $3.6
• Fortis $3.1
• WestLB $3.0
• Rabobank 0.8 1.7 $2.5

Total: $1,204.9

(Sources: IMF, Reuters, and corporate reports)

Asset ownership changes

• * Acquired by Wells Fargo at the end of 2008.
• ** Acquired by Bank of America on Jan 1, 2009.
• *** Assets acquired by JPMorgan in Sept. 2008.
• **** Bought by JPMorgan in March 2008.
• + Includes HBOS, taken over by Lloyds in Jan. 2009.
• ++ Filed for bankruptcy in Sept. 2008.
• +++ Bought by PNC Financial Services Group in Dec. 2008.
• ++++ Bought by Lone Star in Aug. 2008 after state-led bailouts.
• # France bank estimates based on 'cost of risk'.

The banks house of cards is highlighted by these huge sums and game of pass the parcel that is ongoing. The latest chapter is the European sovereign debt crisis.

We have seen the three largest U.S. banks report quarterly earnings. Bank of America, JPMorgan and Citigroup all beat Wall Street analysts' forecasts on profits. The better profits were the result of lower credit losses from the loose Federal Reserve Bank monetary policy. However the huge influx of investment bank revenue reversed. 

There is little doubt the 1000 point flash crash on May 6 rattled investors and traders alike. William Smith, CEO of Smith Asset Management summed it up 'When we experienced the flash crash, it put a lot of people on the sidelines (and) hurt investor confidence.' May to June saw extreme stock market movements and there were rumors of huge bank and hedge fund losses on derivatives. This killed investment bank revenue. 

Then we add in the usual suspects around the European debt contagion and the crash of BP stock on the Horizon Deepwater oil spill the fear index or VIX spiked. This meant the revenue source from selling options and liquidity long equity trades became loss making. 

Stock markets were not impressed, add in pungent consumer sentiment numbers and all three banks were smashed. Bank of America puked 9.16 percent to close at $13.98. Citigroup shares lost 6.25 percent to close at $3.90 and JPMorgan Chase was cut 3.68 percent to close at $38.97. Hedge fund legend John Paulson lost over a billion dollars in the day’s route due to his larger Bank of America holding. 

Morgan Stanley shares also fell losing 3.32 percent to $24.74. Goldman Sachs shares however were marginally higher at $146.21. This was more a result of Goldman Sachs agreeing to pay $550 million to settle its U.S. Securities and Exchange Commission lawsuit. Apparently this was a bargain.

When one peeks through the Internet it would seem inevitable that a modern end of days is near. I have never quite understood how one gets glee from such pronouncements but it seems multitudes do. For mine I see this as a monumental mess up with bankers, the establishment and politicians entwined with mass greed. The end of times scenario is nice for those that want to devoid themselves of responsibility as do the abundant conspiracy theories.

The Senators and Congressmen need to take responsibility, but they won’t. If you think they will take a look at the handling of the Gulf oil disaster. They remain blissfully unaware of even rudimentary public perception and economic fundamentals. Oh they are aware when it comes to campaign contributions but that is for another day!

The masses have let their own greed enable the bankers and establishment sway them with their greed. The trillion dollar bank losses on toxic assets and loans are testament to that. We have seen at least forty years of the financial foundation of Europe and America besieged with illogical and deficient decision-making. Each time it has got too hard the public has responded with increasing discontent only to be sated with underhanded appeasement. Witness the European protests, the US bland apathy, some would say this is all blind faith. What do we get? We get politicians pronouncing solutions of magnificent social benefits. This is exactly what got us here.

What we need is a mash of the bankers and politicians taking their share of the hit. Will there be a politician willing to enforce that austerity on the corporate and political elite? One suspect there is and the public will respond accordingly. That sits well with the section of the public without their hands out for blind social welfare. If not the modern times of prosperity doesn’t end well. Currently we see banks taking no responsibility and expect, nay demand they are paid in full for their diseased lending policies.

When we stop asking the working population to pay for the massive incompetent public servants, the corporate elites and the greased bankers thinks will improve. Guess what everyone wins then; it takes but a few to make the hard decisions. Will they? If not Johnson and Johnson have run out of enough band-aids to plaster up the mess. Trillion dollar bank losses on toxic assets and loans will seem like a cheap way out if we don’t address the true underlying greed and idiotic expectations. With the Investment bank revenues plunge in the June quarter the financial house of cards looks more and more vulnerable?