I-Banks Not Quite Springing Forward

March 31, 2008

If life on Wall Street were produced in Hollywood, right about now would come the trite "passage of time" sequence-the flipping of calendar pages on an abandoned desk, possibly, or a view of Battery Park from a downtown window, the seasons rolling by, time-lapse style. The credit crisis: summer, fall, winter, um, spring.

Yes, my friends, March 20 made spring official, yet no credit market rebirth has appeared on the horizon. The end of the first quarter brings with it, well, nothing but more crappy news and ominous predictions, i.e., the loss of thousands of financial sector jobs (see Market Buzz, next page) and another round of billion-dollar write-downs for the investment banks.

Sitting atop this most undesirable of league tables we find Citigroup, which Oppenheimer analyst Meredith Whitney predicts will write down $13.1 billion for the first quarter of 2008, $2.15 billion of that from leveraged loans (see chart, next page). Fighting the good fight for spot No. 2 is UBS, which may see $11 billion in write-downs, $650 million of that from leveraged loans.

(Meanwhile, Deutsche Bank says in its annual 2007 report that as of Dec. 31 it had €36 billion ($56.9 billion) in leveraged finance exposure, €20 billion unfunded, which means a €1.3 billion write-down immediately, and the bank predicts more to come.)

Oppenheimer's forecast of bank performance, which finds that it will be weaker than in its previous estimates, is based on declines in the ABX indices and the LCDX index and on the widening in CMBX spreads, all of which means increased write-downs.

According to Whitney's analysis, most of the losses for Citi and UBS are coming from ABS CDO exposure, something rival JPMorgan apparently avoided. JPMorgan's total write-down for the first quarter, Whitney predicts, will lag behind its peers at $2.8 billion, though the bank does take the No. 2 spot behind Citi for predicted leveraged loan losses-$1.3 billion.

But mere numbers were not all Whitney had for JPMorgan. The well-known analyst had this to say about Jamie Dimon's decision to quintuple the firm's $2 per share offer for Bear Stearns:

e_SDLqJamie Dimon was clearly very upset with how distraught Bear employees were," she told the British newspaper the Times. "His decision to raise the offer was definitely a human move, and as a leader you can't be human. He has made a big mistake and opened a Pandora's box. If $10, why not $20, or $50? It's like with a child: If you give the shareholders an inch, they will go for a mile."

Yeah, next thing you know, they'll be wanting wheels for their bicycle.-CJC

First Quarter '08 Write-Down Estimates (in U.S.$ millions)

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