The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a “meltdown”.
We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans – an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.
John Stewart and Michael Chaney’s decision to go straight to 90 per cent provisioning on National Australia Bank’s portfolio of US residential mortgage-backed securities (RMBS) is a shocking event that will reverberate around the world.
The CEO and chairman of NAB will live with the consequences of their decision as it affects their own bank, but so will every other banker on the planet.
NAB’s exposure to the US property market through the CDOs held in its conduits is relatively small – $1.2 billion worth of structured finance assets. The money is in 10 collateralised debt obligations (CDOs) in two conduits (off balance sheet vehicles to which NAB provides “liquidity”).
Leaving aside the dodgy nature of the vehicles, the assets themselves were all rated AAA, which technically means a one in 10,000 chance of default.
Stewart, Chaney and the NAB risk committee have now assessed the prospect of loss at 90 per cent, that is a 9,000 in 10,000 chance of default. In other words, the securities have turned out to be far worse than junk.
To be specific, the 10 CDOs consist of two “super senior” strips and eight AAA senior strips. The NAB brains trust has now determined, on a worst case basis, that it will recover half of the super senior CDOs and none of the AAA senior debt.
To repeat: NAB is now expecting 100 per cent loss on $900 million worth of AAA rated debt securities.
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