Letter Re: Australian Bank Move Exposes the Magnitude of the Global Credit Collapse

This afternoon, The National Australia Bank (biggest in Australia, by assets) let the cat out of the bag: They have decided to just fess up and mark down every US mortgage CDO, SIV, and so forth in their portfolio by 90%.

What that means is they are coming flat out and saying that all this re-bundled, repackaged, looks like a bond but it ain’t, US real estate paper that was being carried “Off Balance Sheet” and gumming up the works in banks around the world is worthless and they are making it official. (The loans that they represent will not, in their estimation, ever be repaid, hence, loan paper = worthless.)

The world has been tip-toeing around this for the better part of a year. (Off Balance Sheet is bank speak I believe for “It’s here, we paid for it/lent it out, but it’s not really here so don’t count it on our financial statement.” You try that with your friendly IRS guy! Ha! Funny, though, how they magically appeared when the Fed said they would take it as collateral for loans…) That means that all these “Write-downs” we’ve been seeing (i.e; saying that the paper certificate you bought at $10 is now worth $8, $7, $6, $5…etc) the banks have been slowly dribbling out have been understated.

I don’t know if Wall Street will simply ignore this and dish out spin, but I can bet you that the international banks holding large quantities of this stuff denominated in US dollars will not. I’d also bet that large entities overseas who don’t hold this stuff will take it as writing on the wall for other entities that do…and they’ll sell to save their own skins.

That could quite possibly touch off a selling-storm in US dollar denominated assets or firms they fell are at risk from either their own holdings or their vulnerability to downside economic risk come monday, at least in the Asia Pacific markets, if not before.

A wave of bank bankruptcies or “failed banks” could get thrown into the mix as well. This is because these paper “things” being declared more or less worthless effects the overall value of a bank–i.e. the ratio of it’s “Assets” against the amount of debt it is carrying. (leverage) Banks are already leveraged up to their eyeballs, way beyond what Joe citizen would be allowed to do. (which they’ve been trying to delay the inevitable news that this stuff is not an asset any longer.)

I do not know precisely what effect this will have, but I believe it could spark a sell off in US denominated securities and other assets, which will flood the market with US Dollar stuff and the dollar will be in very deep trouble as far as a piece of paper that has value.

Real things of value, like metal and other tangible goods (as opposed to imaginary IOU paper, which is what most securities are) will take on a whole new life. In addition to what I have already done, I am going to endeavor to get my hands on more, soonest. (Not like it will go down in price anyway, no matter what happens.)

I hope that whoever is in charge at the top can keep this under control. I’d say we’ll have a clearer picture by mid-next week where this may be going. – Jim D.