NAB, National Australia Bank, was just forced to write down over ninety percent of its exposure to US mortgages via so-called SIV's or conduits last Friday, to the order of $830 million dollars.
This was by no means a matter of choice for NAB. The bank had just issued and sold $850 million worth of new debt paper. Buyers of that debt are now screaming bloody murder. They are asking why this information, which surely must have been known to the bank at the time of the debt sale, was not disclosed to the market beforehand. They are now demanding their money back or some other way to back out of the deal.
Yet, what happened to this single Australian bank is nothing compared to what will happen to US equity and bond markets when they wake up on Monday morning, July 28, 2008. Robert Gottliebsen of The Business Spectator, an Australian financial news and analysis portal, wrote a commentary pointing to the possible consequences of NAB's write-down.
The Ugly Truth
The low-down on this write-down: According to Gottliebsen, after having written down $450 billion of mortgage loan related assets since last year, US banks will have to take an additional hit of a whopping trillion buckos if the system as a whole wants to come clean, the way NAB just did.
The reason: Bad loans on banks' balance sheets were written off at market value, but those bad loans that had been repackaged and sold off to shady SIV's or 'conduits' (so that they would not burden a bank's balance sheet and restrict its future loan-making capabilities) were not. Those loans were not written off at market value because the market for them had simply disappeared, vanished into thin air - the realm from whence the 'money' they once added to M1 had originally hailed.
In order to account for that lack of a market, NAB has taken the as yet unprecedented step of writing off almost the entire amount of these CDO's or collateralized debt obligations - since it is impossible to predict when and how many of the underlying mortgages get defaulted upon. So far, the usual way of dealing with these imploding assets has been to value them on an "accrual basis". That pretty much entails accounting for bad debt losses based on past experience. The only problem is that there is no past experience with a near-complete collapse of these loan assets, so no reliable figures could be named. At least, that was the best excuse these banks could find to hide behind in their required disclosures.
Now, however, NAB's unprecedented disclosure has broken the dam. US investors are going to demand that US banks do the same thing NAB did, namely, to write off nearly the entire amount of the loans generated and sold off to SIV's! Will the US government pass a new law that prevents banks from marking their SIV assets to market?
When US banks see themselves forced to do more or less the same, they may well find they are floating in a very small vessel up a certain creek without an effective propulsion device. In other words, they will not have any capacity for further lending because the liabilities from their conduit markdowns will have eaten up much, if not all, of their capital.
In still other words, Hell's gates will yawn wide on Wall Street Monday morning - which is where those gates have apparently been all along.
The Effect on Gold
My personal take is that the power brokers on Wall Street and their lackeys in DC will be far too busy to effectively lean on gold and silver during that time. They will frantically try to slap down the forest fire with their wet-rag regulatory powers.
How will they extinguish this fire? Is JP Morgan Chase going to buy the entire failing US financial system as its forbear nearly did in 1907? Will they powers of the air sell oil futures to drop its price back to $50 or so to counter the "bad news effect" this will have on traders and investors? Will they manufacture news about unexpected rises in oil stocks? Will the Treasury announce that it will sell the entire US gold stock into the market? I doubt it, but who knows?
We might easily see some new "banking holidays", though.
Poor bankers. They worked so hard getting us all into debt and into houses and SUV's we can't sell anymore. They surely deserve a holiday or two, don't they?
Making calls like this is dangerous, but it's very much within the realm of the possible for gold to go up by $50 bucks or so tomorrow. We will see. We'll be able to gauge the remaining power of this benighted and abusive financial system by the degree to which gold's rise tomorrow will be controlled - or not controlled.