Bank stock slump illustrates worst crisis in decades

By Neil Behrmann

November, 2007 :- The slump in leading global bank shares during the past few months illustrates that the banking crisis is the worst in decades.

Massive loss provisions and write offs on mortgage backed securities and other arcane credit products have led to a poor results season for US and European banks. The dramatic slide in share prices of Merrill Lynch, Bear Stearns, Citigroup and Morgan Stanley illustrate the shock reports in the US. Bear Stearns has slid following the collapse of two credit hedge funds, which were declared bankrupt. On the other side of the Atlantic, the two banks that were fierce competitors to buy Dutch bank, ABN Amro are amongst the worst performing shares. RBS, the victor is down 44 percent from its highs and Barclays bank by 42 percent. Both banks have been caught in the credit crisis. UBS, which has been forced to close a large hedge fund business, has also slid on the Swiss stock market.

HSBC and Standard Chartered shares have fallen from their peaks too. HSBC was hit by the sub prime debacle in the US and dud European credit funds. In contrast, Standard & Chartered, which has concentrated on Asia and other emerging markets, has in relative terms, been by far the best performer in the bank bear market.

Indeed, on the London stock exchange, some £90 billion ($185 bn) has been wiped off the market capitalisation of Britain’s eight leading banks in the past nine months. The market fears that UK banks are heading for major credit losses. There are concerns about the multi billion UK government bailout of Northern Rock, which taxpayers will eventually have to fund.

Bank

2007 high

November Price

Slump

Merrill Lynch

98.7

53.3

-46%

Bear Stearns

172.6

96.9

-44%

RBS

725

402.8

-44%

Citigroup

57

33.1

-42%

Barclays Bank

794

474.5

-40%

UBS

66.3

45.7

-31%

Morgan Stanley

75.5

54.2

-28%

JP Morgan

53.3

42.3

-21%

HSBC

1019

841

-18%

Standard Chartered

1872

1675

-11%

Citigroup is a classic example of the extent of the crisis. Richard Stuckey, one of the bank executives in a fourteen bank creditor team helped unwind the giant Long Term Capital Management hedge fund in 1998. Almost a decade later he has been appointed to run Citigroup’s newly formed Subprime Portfolio unit. The new division, which was formed after Citigroup announced an $8 billion to $11 billion write off, will manage $55 billion of the bank's sub-prime and other risky asset backed securities. Estimates of the US Federal Reserve Bank and commercial banks is that US and European bank losses on sub prime loans and their esoteric packaged credit instruments could be $300 billion.

Several economists believe that British and European banks are as vulnerable, if not more vulnerable than their American counterparts. Thus the surge of sterling and the euro is thought to be bizarre. The mortgage security crisis is likened to the credit crunch that occurred in Britain and Germany in the early 1970’s. At that time there was excessive lending on commercial property in the UK. Property companies and banks, notably London and County Securities, went bankrupt. By the end of 1973, the Bank of England organised a “lifeboat” support package to preserve liquidity in the market and allow orderly liquidation of the fringe banks’ portfolios. At its peak the “lifeboat” had loans outstanding to numerous banks and there were fears that National Westminster Bank, a major clearing bank would fail. In 1974, Herstatt, a German bank failed, causing an international financial crisis at the time.

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