Citigroup Inc. and UBS AG announce mega write-downs —and the Dow reaches a record high. There is something wrong here, surely? The juxtaposition is not actually so bizarre. Red ink and, in UBS’ case, blood-letting is healthy for the markets because it suggests that the world’s big banks are drawing a line under the credit crisis.
One of the big fears in August was that some large bank or broker would be so badly wounded that it would not be able to take the hit. There were also worries that the banks would try to massage their earnings by not recognizing the full extent of their subprime exposures or by not marking down fully their stuck leverage buyout loans.
There could be further losses if the US economy lurches down. But it does look like the big banks and brokers are making a pretty clean breast of the situation as things stand. The first batch—led by Goldman Sachs Group Inc. and Morgan Stanley—came through relatively unscathed. But that was, at least partly, because their third quarters ended in August and so included the fabulously profitable month of June. The next batch doesn’t have that advantage. And, in the case of Citi and UBS, the numbers are clearly ugly. But they are not enough to cause any serious damage to either bank’s financial strength. And that is a cause for celebration.
Executing senior management, as UBS has done but Citi has not, is also cathartic. Some heads have to roll after a mania during which many banks, well, lost their heads. As Voltaire wrote in Candide, it is necessary occasionally to kill an admiral “pour encourager les autres.”