European banks reveal extent of subprime shock waves

      PARIS, December 11, 2007 – UBS, SachsenLB, Lloyds TSB, Societe Generale:
four European banks revealing delayed strains from the US home-loan crisis
which is still shaking global finance four months after it broke in August.
   On the wider front of short-term interest rates, vital to how banks
refinance their immediate needs, there is renewed tension in the money markets
as the year-end approaches.
   The European Central Bank provided an extra 60 billion euros (88 billion
dollars) of three-month bank funding on Tuesday at an average rate of 4.88
percent and a lowest rate of 4.81 percent, a marked increase from the last
such arrangement three weeks ago.
   ECB board member Lorenzo Bini Smaghi said on Monday that rate tension
reflected "concern" about year-end cash requirements but was misplaced because
central bank policy of "stabilising overnight rates will continue."
   UBS and SachsenLB have been hit so hard by their exposure to the so-called
subprime mortgage market and the financial instruments it generated that their
capital bases have been weakened.
   On Monday, UBS, one of the most prestigious names in Swiss and European
banking, bit on the bullet of its losses, making a record write-off of about
10 billion dollars (6.8 billion euros) and announcing that the hole was being
plugged mainly by the Singapore state investment fund, and also by an unnamed
Middle East investor.
   UBS also warned of a loss in the fourth quarter and possibly for the whole
year, and said that overall it needed 17.1 billion dollars of new capital. It
plans to sell its own shares and to replace a cash dividend with a dividend in
shares.
   The sudden arrival of the Singapore sovereign wealth fund occurred only
days after the Organisation for Economic Cooperation and Development had
focused on the rising importance of such emerging-country funds as corporate
investors to recycle huge inflows of foreign, mainly dollar, reserves.
   Analysts said that by acting radically and quickly, UBS wanted to reassure
that it was putting nasty surprises behind it.
   In Germany, the waves from the mortgage shock could have a far bigger
impact than expected on the regional state bank SachsenLB, according to a
group of experts who estimate its exposure at 43 billion euros, the
Sueddeutsche Zeitung newspaper reported.
   It added that the fallout could overwhelm an emergency rescue organised for
the bank after the US crisis emerged.
   At leading British bank Lloyds TSB, which puts the subprime damage to its
accounts at 280 million euros, managing director Eric Daniels said that a
"low-risk" strategy had limited fallout, but the last few months had been one
of the most difficult in global finance for a generation.
   In France, Societe Generale, another leading European bank, said it was
going to bring back into its balance sheet assets covered by a so-called
structured investment vehicle (SIV) because otherwise it faced a possible
problem of liquidity after a decision by the credit-rating agency Moody’s to
put the fund on negative watch.
   SIVs contain long-term assets which are often linked to US property assets
now considered at risk and which are refinanced by the issue of short-term
commercial paper.
   The bank, by taking over directly these assets, with a value of 4.3 billion
euros, takes responsibility for refinancing them if investors want their money
out.
   The main objective for Societe Generale is to protect its reputation and
"credibility with investors" since it was not contractually obliged to
consolidate a SIV, an analyst at brokers Richelieu Finance, Benoit de
Broissia, told AFP.
   HSBC bank, a leading European and global operator, has also consolidated
two such vehicles into its accounts in this way after injecting 35 billion
dollars, and the biggest player in the sector, US bank Citigroup, has been
affected to the tune of 64.9 billion euros through six vehicles.
   Although the effect on bank profits of consolidating such instruments is
likely to be small, the change increases the amount of shareholders’ funds
immobilised to underpin lending and is therefore likely to crimp the writing
of new loans.
   The essence of the mortgage crisis, and the continuing shock waves, is that
vast quantities of home loans issued in the US, on which poor borrowers have
defaulted, had been restructured into complex debt instruments sold on the
international market.
   When the loans turned bad, financiers had great difficulty in identifying
where the risks lay in the repackaged paper. Uncertainty restricted the amount
of money flowing through short-term markets and is obliging some lenders to
write off large sums while strengthening their capital base.
   The repercussions continue to show in the tension in short term money
markets and, in the words of the head of leading French insurer AXA, Henri de
Castries, the shock waves threaten the wider economy because "less activity by
the banks means less lending, and less lending means less growth."
Eve Szeftel
(AFP)