This week, Wall Street will be carefully watching the quarterly earnings announcements (and loan loss provisions) from Citigroup, J.P. Morgan Chase and other major banks in relation to the U.S. banking crisis. Some big banks, like Wells Fargo, have almost no exposure to Collateralized Debt Obligations (CDOs) and Structured Investment Vehicles (SIVs), while American Express warned late last Thursday that it is experiencing rising delinquencies and slower spending from its card members.
The banking industry is in a tailspin. Banks are desperately seeking fresh capital to stay afloat. On Friday, Swiss banking giant UBS said that 2008 was "likely to be another difficult year." As a result, UBS is seeking permission to receive 13 billion Swiss francs ($11.8 billion) from the Singapore (government) Investment Corporation and an unidentified Saudi Arabian investor.
Currently, there seems to a race to see which financial institution will have the biggest cumulative writedowns. Until Friday, Citibank and UBS were leading the way, but a report on Friday from The New York Times (see below) said that a massive writedown of up to $15 billion will be forthcoming from Merrill Lynch. Clearly, UBS, Citibank and Merrill Lynch are desperately seeking new capital infusions. Citigroup is reported to be seeking up to $14 billion from the Kuwait Investment Authority and China's recently formed sovereign wealth fund, despite the fact that it received a $7.5 billion capita injection from the Abu Dhabi Investment Authority two months ago. Merrill Lynch is also seeking a second capital injection from a Middle Eastern sovereign fund. It looks like these sovereign wealth funds are poised to virtually take over the U.S. financial industry.
In the interim, the official lenders of last resort - namely the Federal Reserve and other central banks - have injected approximately $1 trillion into the system and are still struggling to restore confidence and counteract the U.S. banking crisis. Although there was some improvement in London Inter-Bank Overnight Rates (LIBOR) last week, we still have a long way to go before lower LIBOR rates can help stimulate business spending and lower all the adjustable mortgages tied to the LIBOR index.
