By GRAHAM FROST 03/10/2007
The liquidity crunch of the Summer is showing up dramatically in bank profits. On October 3rd Deutsche wrote off Euros 2.2 billion on structured credit products, leveraged loans, mortgage backed securities, and trading operations. The usual suspects! It was preceded two days earlier by Citigroup as Chuck-who stopped the music?-Prince revealed $6bn in write offs. On the same day UBS revealed a write off of between SFr600m to SFR800m. Why the rush to show the dirty laundry? Investors wanted to know where and how much the damage was so that they can take a view on current balance sheet impairment and future growth prospects. Confessing banks have largely been rewarded by an immediate increase in their share prices.
We wonder whether that may be premature and if it will be a Winter of discontent. After all, mortgages will cost more as banks charge an appropriate rate for risk, further write offs are likely as banks put a tradeable price on instruments rather than an imaginary one, and institutions sort out which are the solid banks its safe to lend to.