Earlier this week, the Credit Suisse Group, Switzerland’s second largest bank, slipped on a code of sorts. A week after it reported earnings, which is typically the best time to let blood, it slowly let trickle a bit more of the bad stuff.
It was the kind of stuff that banks wish they didn’t have to report, but report they must, because a little bit of math and window dressing just won’t powder over the numbers and make for a petty patched-up face. Credit Suisse told us it had more bad debt—not one that came from lending to some business that went belly-up, but the kind they should have been keeping their eyes peeled for, their books braced for and their accountants primed for—sour debt merrily overlooked because of pricing errors. Just another one in the line of numbers, where the world’s banks have collectively written down more than $100 billion.
The critical juncture it would seem, after months of continuing write-downs everywhere, is rogue trader Jerome Kerveil who, while he didn’t cause the collapse of Société Générale, had successfully cooked up some trading entries. In his own way, Kerveil raised a red flag for all banks that they must watch for losses in subprime mortgages that weren’t immediately visible.
Kerveil, it would seem, has inspired a new round of due diligence at banks which may have left their work-hard, play-hard employees alone, into watching them closely and, better still, pouring over those numbers that they book in at the end of each trading day or week. So, in some ways we’ve entered the second stage of the subprime fallout.
Credit Suisse said it identified “mismarkings and pricing errors by a small number of traders” and that those errors would force a further write-down, on top of the nearly $1.8 billion it booked a week ago. It seems, so far, the errors were just careless mistakes and not a wilful cover-up. The lesson is:?Those?who think?the season for subprime losses is over may have to revisit that thought.
All signs are that banks will use the coming quarter for bloodletting, because really, it’s the best season to do so. Think of it— when was the last time you heard of an accounting scandal that was broken up and reported in dribs and drabs over a period of several years, when was the last time different telecom and dot-com companies catapulted to their over-valued status years apart to tumble down in a heap and over what period of time did junk bonds become truly junkable?
Companies like the people who run it, crave company. While they enjoy being the leader in the pack when it comes to what they do, when it comes to bad news it’s always fashionable to have a large gathering at the party.
Just as Enron’s wormed-out confession to cookie jar accounting was followed by Tyco and a host of others, I deeply suspect that more bad numbers will follow in the world of banking, because bad news that is out now, may in some ways be less severely punished than bad news in a good market. And typically, that window is somewhat short. For a start, some amount of fatigue has set into the markets, which will assume that most banks will have some subprime exposure and consequent losses. The big question will really be the degree of the losses, but even that, with Northern Rock being nationalized, UBS being rescued by sovereign funds and Citibank going for a change of leadership, has somewhat prepared us for sordid stuff.
And the financial world isn’t really a happy place to be in right now. The US economy is teetering and even in India, the darling for investors, big-ticket share offers have lost their shine. The investor world is fence-sitting in a marketplace where similar assets look equally risky. And that indeed may be the best news, for bad-news messengers.
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