any news on the court case, page-8

http://business.smh.com.au/business/nabs-ugly-surprise-20080725-3kt6.html

Hmmm, could a lawsuit be pending to NAB (not centro this time)... this surely wouldn't be that dissimiliar to centro's case. And if a lawsuit doesn't go ahead based on this confession, why should centro potentially suffer...

NAB's ugly surprise
Email Print Normal font Large font AdvertisementMichael West
July 25, 2008 - 12:32PM

Thank goodness for the word "direct''. Like many of his counterparts, National Australia Bank chief John Stewart has been keen to point out since the credit market seized up a year ago that the bank had no "direct'' exposure to subprime.

Whoops. A cool $830 million provision for CDO exposures bobs out of the blue. CDOs are collateralised debt obligations, or thousands of loans bundled together and split into millions of securities so no one can quite value them by splitting them all apart.

They were supposed to be a nice robust security having gained the ratings blessing of S&P and Moody in return for a fee which you could sell because the diversity of many debts supposedly offset the risk of holding specific debts.

Wrong, now no one wants to buy them and because they are not trading few have seen fit to write them off yet.

As a consequence, local councils all around the country who were sold CDOs by investment banks for their lovely yield, their safety and their credit rating are now sitting on hundreds of millions of dollars of dud securities.

The councils are loathe to write them off because the local investment manager is naturally reluctant to have a multi-million loss in his portfolio.

NAB biting the bullet therefore will bring much anxiety. For NAB, the latest confession brings the bank's CDO exposure to $1.01 billion. It will hit the bottom line by about $450 million.

The critical question is, what else is out there?

When subprime first bit, the estimated losses for the global banking system were put at $US400 billion ($420 billion). By the end of last year it was touted at $US800 billion and by last month a US research firm Bridgewater Associates was saying $US1.6 trillion.

Pinning the tail on this subprime donkey is an exercise in high speculation but also, it seems, is picking even the exposures of the local banks. One, they don't want to tell us in one go. Two, they might not know what is good and bad themselves.

Citigroup banking research reckons ANZ and NAB are the prime candidates. ANZ leads the way with a $23 billion exposure to credit default swaps (CDS) and NAB with its conduits (off-balance-sheet dumping grounds for things you can't sell).

Not strictly subprime, CDS (as opposed to CDOs) are corporate debt insurance derivatives. There is a large amorphous market for these things, believed by some to be an accident waiting to happen as no one seems to have bothered making specific reserves for CDS unlike regular insurance markets.

According to Citigroup, Westpac and CBA are "well down the risk'' curve on this fancy derivative risk. While neither has disclosed adequately on its credit issues both have a "smaller CDS counterparty risk'' estimated at $3 billion for CBA and $9 billion for Westpac.

Their conduit lines are also smaller at an estimated $3 billion and $7 billion.

Watch out for other acronyms such as SIV and ABS. They are also dangerous.