Investment banks set to write off $130bn

Financial Times ^ | October 6 2002 21:06 | By Lina Saigol in London

[DeaconBenjamin]

Investment banks in Europe and North America are set to write off more than $130bn in loan losses this year, the highest level ever recorded.

The magnitude of the losses is set to trigger another wave of job cuts across the industry, as investment banks struggle to reduce costs and boost income amid persistently weak equity markets and the worst deal drought for seven years.

Simon Harris, head of corporate and commercial banking at Oliver, Wyman, the global financial consultancy that carried out the research, said the losses also underlined the crisis facing integrated investment banks.

These are under fire from US regulators and lawmakers for questionable practices over stock offerings and potential conflicts of interests involving analysts' research.

Mr Harris said, during the credit boom of the 1990s, firms with commercial banking arms such as Citigroup and JP Morgan Chase aggressively used their ability to offer credit to forge relationships with big companies and win lucrative investment banking mandates.

"As recent banks' earnings announcements demonstrate, this strategy is now coming home to roost," he said.

Rising credit losses and falling trading revenues are cited for plans by JP Morgan Chase, the US investment bank, to cut up to 4,000 more jobs in its wholesale banking operations.

Investors have been concerned about JP Morgan's involvement in the collapse of Enron and its susceptibility to the rising tide of problem corporate loans.

Last month, it said credit losses would reach $1.4bn in the third quarter, up from $302m in the previous quarter, reflecting "adverse developments" at telecommunications and cable companies. JP Morgan is now trying to scale back its loan book and has been reducing new loans and commitments.

In Europe, Dresdner Bank, a unit of Allianz, has also been hit by its corporate lending policy, incurring a loss of €1bn in the second quarter due to loan losses and falling investment banking revenues. Dresdner is now reducing its corporate lending and equity trading operations in the US and Latin America.

"Banks cannot drive using the rear view mirror alone . . . Recent events are a painful lesson of the risk of lending decisions that are not taken purely on the creditworthiness of a company," Mr Harris said.

However, he dismissed fears of insolvencies, saying banks are better capitalised now than they were during previous recessions.

[Anti-Bubba182]

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[gcruse]

Good news for the economy. $130 billion of
receivable is written off and may be spent for
something else! Now get out there and invest.

[imperator007]

If Bush does not deal with the economy and fire Oneil, we are doomed to a major depression.

[sourcery]

Federal Reserve Board of Governors: Advance Notice of Meeting under Expedited Procedures

[Mike Darancette]

Looks like it's going to be a bumpy ride.

Japan tanking, EU tanking - Thank you Bill Clinton!

[TopQuark]

Is this some kind of the "broken window" argument? A write-off creates no opportunities; it's a recognition of a loss incurred.

[gcruse]

I know it's ridiculous. But the money that would
have been used to pay back those loans will now
go to something else. It could happen! ;)

[Moonman62]

Now get out there and invest.

Republicans no longer believe in investment, only consumption. Now get out there and buy something. It won't solve our economic problems, but it will put off our economic collapse.

[paul544]

Now if you can find an easy way to make the sheeple see that, we'll be doing OK.

[Moonman62]

If Bush does not deal with the economy and fire Oneil, we are doomed to a major depression.

Not only O'Neill, but Lawrence Lindsey. And the Big Boss himself has been penny wise and pound foolish.

[JasonC]

One entry accounting at its worst. Either way somebody has the money - the debtor or the creditor. Paying debts does not destroy wealth or create it, neither does not paying debts. But the reason the debts are not being paid is that real capital investments that were expected to be profitable have proven not to be. The defaults do not cause, but they do signal, a real economic loss - one that has already occurred. And real economic losses mean less real capital for the whole society, to pursue all its various investments.

[gcruse]

I know. But let me play devil's advocate.
The bank writes the loans off, charging
them against the bad debt expense account
the bank maintains for the purpose. The
balance in that account and more drop to
the bottom line as a reduction of profits,
which might or might not make its way to
the shareholders and might or might not
result in the banks shedding marginal employees
and tightening up their operations.

In the meantime, the people who owed the money
spend it on something else, boosting that sector
of the economy.

[Moonman62]

Japan tanking, EU tanking - Thank you Bill Clinton!

Greenspan is the main culprit, followed by Bob Rubin. While Bush inherited economic problems, he was the one in position to fix them. He could have properly placed the blame on Greenspan and removed him when he took office. Our economic future is much bleaker after two years of Bush's demand mangagement policies, approval of big government, and the shunning of our most promising and vibrant economic sectors.

[RightWhale]

$130 billion of receivable is written off and may be spent for something else!

Worked for Enron.

[gcruse]

Shoot, when I was is school back in the dark ages,
we were taught that writing a check created money
and increased the size on M1 (?). Something for
nothing...until it clears.

[razorback-bert]

Don't what to say bump.

[RightWhale]

The thing is, see, there is about $2 trillion missing from the economy since the past couple of years. It is the money that disappeared from the stock market, and it didn't end up in somebody's pocket to be spent. It is vaporized or gone to wherever things go when people stop believing in them. By the time it is written off, it doesn't exist, and can't be used except to balance the books. No matter what, the books will be balanced.

< /series mode >

[gcruse]

Yeah, that did suck. That was the destruction of wealth.
I only know one guy who got out on top. I'd get out,
but worry about getting back in at the right time. So there it sits. I hope in five years it will be turned around,
but don't expect to regain what we had two years ago. That was our Roaring Twenties.

[Mike Darancette]

Now if you can find an easy way to make the sheeple see that, we'll be doing OK.

Depressing short term interests then changing long term Govt debt to short term debt to artificially decrease the deficit.

Not investigating Wall Street when the Brokerage Houses and Banks were bilking the public with false recommendations and inside trading in IPOs.

No wonder the financial publications were good to Clinton, Clinton let Wall Street get away with murder.

The Clinton Economy was a Ponzi Scheme that enriched insiders and Clinton's cronies.