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Unicredit – Another Lehman Brothers?

It is a strange thing that amidst all yesterdays attacks on democracy in Ireland and Greece and worries about State sovereignty in those countries, as well as Portugal and Spain, that it was Italy’s largest bank which suffered a very large fall in share price, the largest of of any bank on the day, I think.

UniCredit lost 4.2% of its share price in one day taking it down to just €1.63 a share.

What does it say that when the bond market and all media eyes are riveted to nations whose very solvency and sovereignty are being question and dismantled, that it is a bank in a nation who we are told is ‘just fine’, that suffers the largest fall?  To me it says rather clearly that UniCredit might have it’s own urgent and special problems.

This notion is supported by the fact that not only did it loose a lot of blood yesterday, but it also suffered a downgrade (Not a serious one, just a gentle warning cut from “buy” to “neutral”)   from two of its closest allies in the banking world – Nomura and JP Morgan.  This downgrade was not as a result of worries about Italy. It was a downgrade of UniCredit based on worries about Unicredit as a bank.

The media and politicians tend to focus on what the rating agencies, Moodys, Fitch and Standard and Poors say. But when it comes to the health of banks it is what other banks think, how they rate each other, that is the early warning sign. Because when banks securitize ‘assets’ and debts, they do so with the help of other banks.  On any security offering or bond issue you will see a list of banks who are the managers of those securities.  Those managers are required to have an intimate knowledge of the assets they are managing.  They will thus have intimate knowledge of the ‘real’ worth and quality of those assets.  And let’s remember that banks have a habit of keeping the senior tranches of these assets on their books.

Banks also buy from each other.  JP Morgan may buy some UniCredit issue and UniCredit has no doubt bought issue from JP Morgan and Nomura.  Thus as a group they have a very good idea of what they each hold.

Let’s go back to Lehman Brothers.  What happened to them was other banks started to refuse to accept Lehman’s ‘assets’ (e.g. Bonds) for Repo agreements.  For those who have forgotten, Repo agreements are short term loans which are the life blood of all banks. One bank agrees to ‘buy’ assets but only for a fixed length of time, after which the assets will be sold back for an agreed profit. It is these Repo agreements which keep banks solvent on a daily basis.

What happened to Lehmans was that the other banks knew that the ‘assets’ Lehmans was trying to use in its Repo transactions were not worth the paper they were valued on.  The other banks would not repo with Lehman, so Lehman duly died.

Now, I am not saying UniCredit is in the same state. Please remember I have absolutely NO inside information.  But when I see two banks who would have a good idea of what UniCredit is holding, downgrading it causing it to lose 4% of its share price, I take notice.

Nomura and JP Morgan have a history of dealings with not just UniCredit but at least one of its major subsidiaries, the German/Irish bank HVB which I have written about recently.

And this brings me to another point about UniCredit and conglomerates like it.  UniCredit is a vast sprawling thing.  It owns, and is made up of, somewhere around a hundred different financial companies, leasing companies and banks all over East and West Europe, the Balkans, former Soviet countries, as well as the Far East. The point about this is that losses are not unified and made apparent on one set of  Über accounts.  So it is quite possible for UniCredit to look quite financially fine, while it is accumulating hideous losses in lets say Unicredit Kazakhstan, Azerbaijan or Belarus.

As I have written before, Unicredit owns Bank Austria which has the largest western banking presence in Eastern Europe.  I wondered in Dominoes falling from the East if UniCredit might not be about to receive a train load of debts from Bank Austria, as well as from its US investment companies – Pioneer Global Asset Management, Pioneer Alternative Investment and Vanderbilt Capital Advisers.

So it is of interest that according to this report part of the reason for Nomura’s downgrade of UniCredit, was due to concerns about UniCredit’s expansion in to the East and losses which might come from those operations. And this combines, for me, with UniCredit now wanting to sell off Pioneer, which used to be such an important part of its securitising cash cow business.

Basically I am suggesting that it might be worth keeping an eye on UniCredit for signs that it is having short term funding and overnight liquidity troubles.  Just the early first stages, nothing too serious yet.  But we live in febrile and feverish times when a mild infection can spread alarmingly quickly.  When problems thought to be hidden or quarantined can suddenly erupt.

I think UniCredit will figure larger in our news in the coming months, as will Italy itself.

36 Responses to Unicredit – Another Lehman Brothers?

  1. Whistleblower IRL December 16, 2010 at 1:12 pm #

    "Italian bank UniCredit lost substantial ground, falling 4.2 per cent to €1.63 as it was also hit by downgrades from Nomura and JPMorgan."
    – Financial Times, 15 Dec. '10
    http://www.ft.com/cms/s/0/c814b7ec-083a-11e0-8527-00144feabdc0.html

    UniCredit might be losing even more 'substanial ground' as more is revealed in Irish press about UniCredit Ireland in the next few days.

    To read more about UniCredit's conduct in Ireland, please visit my blog:
    http://whistleblowerirl.blogspot.com/

    Further points to consider:

    1. Die Presse, one of the leading Austrian newspapers, wrote this yesterday evening:
    "…some EU governments – particularly those in Berlin – fear that its guarantees…would have to pay for the ailing state budgets from Ireland, Portugal, Spain or even Italy".
    http://diepresse.com/home/politik/eu/618806/EuroKrisenfonds_Ein-Deutscher-treibt-Rettungsgeld-auf

    2. The Financial Times wrote last Monday:
    "One grim certainty for Italians is that with a national debt close to 120% of GDP – and, at $2,380bn, more than the debts of Portugal, Ireland, Greece and Spain put together…"
    http://www.ft.com/cms/s/0/65245ed0-061e-11e0-976b-00144feabdc0.html

    3. Golem XIV wrote over a week ago, before the latest Madoff-UniCredit revelations of last Friday :
    "Unicredit is an institution that never gets mentioned because it is SO big relative to its parent nation that their fates are one. Whatever happens to Unicredit happens to Italy. Thus whatever problems Unicredit may or may not have, no one mentions them because everyone knows Unicredit has the 100% backing of the Italian State and Treasury. You mess with Unicredit, you mess with Italy."
    http://golemxiv-credo.blogspot.com/2010/12/dominoes-falling-from-east.html

    4. Last, but not least, the Governor of Banca d'Italia, Italy's central bank, said in the Financial Times last Friday:
    " I'm only too aware that we could easily cross the line and loose everything we have". http://www.ft.com/draghi

    Yesterday's downgrade of UniCredit by JP Morgan and Nomura, inidicates that they have simply begun to connect the dots.

    The emerging picture is not a pretty one.

  2. Bastiat1 December 16, 2010 at 1:47 pm #

    I just wanted to congratulate you on your work. You are bringing to the public domain a body of work that is often truly remarkable, if not pretty depressing.

    How is it possible that Unicredit could get through the EU Bank Stress tests? How can we ever have trust in the system again and what are the long term implications for politics I wonder.

    Many thanks again I hope we get to see you more on television as there are so few effective commentators out there.

  3. Max December 16, 2010 at 4:15 pm #

    What you're describing with Unicredit sounds more like AIG than Lehman. AIG was so sprawling, management was clueless until literally hours before collapse. With so many inter- and extra- EMU credit writing businesses at Unicredit, what are the odds that:

    a) there isn't a black box of high exposure
    b) management has a clue about it

  4. RichGB December 16, 2010 at 5:18 pm #

    Look towards Switzerland too. The Euro is almost at an all-time low against the Swiss Franc.
    The Swiss National Bank has large Euro reserves and must have sustained some massive losses this year.

  5. 24K December 16, 2010 at 6:25 pm #

    Rich, no link? What's going on?

    Whistleblower, Do you know your comment font colour is white and the background colour is, drum roll….

    White 🙂

  6. Fungus FitzJuggler III December 17, 2010 at 2:08 am #

    All banking, if poorly regulated, ends in bankruptcy of banks.

    Unrestricted credit is deadly to economies even if many individuals can see what is coming. The timing of the bank run and official covering of the bank, depends on how long it can keep dancing and finding a seat when the music stops. Every time the music stops, more of the money machine falls apart, but the rest of it keeps going.

    Creating money is easy it requires demand for money! Surely everyone will queue for a loan? Ahhh, there's the rub! We no longer want to borrow of if we do, the banks own cautious rule will prevent the lending. On a macro-scale the only borrowers are sovereign and the only lenders are those of last resort. Like Japan. And like Japan, this can last a lot longer than anyone ever thought. John Mauldin said we would muddle through. But the money machine is broken.

    This means economies no longer have a positive money multiplier. It is below one. The more banks there were, the lower the multiplier is to the extent that they now suck money out of the economy.

    Iceland therefore, took the correct Alexandrine approach: cut the knot!

  7. Pat December 17, 2010 at 7:25 am #

    I notice that Senator Joe Higgins said in the Irish Senate today that he does not see why there should be 26 central banks in Europe and supported the idea of Euro Bonds. I agree.

  8. RichGB December 17, 2010 at 8:13 am #

    Hi 24K

    I have a couple of links for you: HERE and, just for fun, HERE

  9. RichGB December 17, 2010 at 8:53 am #

    HERE is more ammunition against people who believe the propaganda that banks must be solvent because they have paid back their TARP loans. This article confirms that Goldman Sachs have repaid their $10 billion TARP loan; however, during the 12 months after the re-payment they sold over $100 billion of mortgage-backed securities back to the Fed.

    It's okay for the USA to bankrupt itself as long as Wall Street remains replete with winners. Duh!

  10. dave from france December 17, 2010 at 9:15 am #

    Morning RichGB, good work and looking forward to that database !

    The Guardian Business page has this– expected news I know–

    Ireland's credit rating slashed five notches

    I posted a link but not clickable …

  11. dave from france December 17, 2010 at 9:16 am #

    I'm frog2 BTW

  12. Whistleblower IRL December 17, 2010 at 9:31 am #

    Moody's slashes Ireland to Baa1, warns more may be ahead

    2:53am EST
    "DUBLIN (Reuters) – Moody's Investors Service slashed Ireland's credit rating by five notches to Baa1 from Aa2 on Friday and warned further downgrades could follow if Ireland was unable to stabilize debt metrics in the foreseeable future.
    The downgrade followed Fitch's move last week to become the first ratings agency to strip Ireland of its 'A' credit status, cutting it by three notches to BBB+ following the debt-stricken government's request for an EU/IMF bailout.
    Moody's said the crystallization of bank-related contingent liabilities, increased uncertainty regarding the country's economic outlook and decline in the government's financial strength were the key drivers of the action.
    It said the outlook on the Baa1 rating was negative.
    "Ireland's sovereign creditworthiness has suffered from the repeated crystallization of bank related contingent liabilities on the government's balance sheet," Dietmar Hornung, vice president and senior credit officer at Moody's said.
    "The increased uncertainty regarding the outlook for the Irish economy – an additional determinant of today's rating action – is the result of the continued severe downturn in the financial services and real estate sectors as well as the ongoing contraction in private sector credit."

    http://www.reuters.com/article/idUSTRE6BG19D20101217

    Just wait until Moody's reads the revelations that are about to appear this weekend in the Irish press about the 'adventures' of UniCredit in Ireland.

    This morning's Financial Times reads:

    "UniCredit is facing the biggest potential bill – Mr Picard named it in a $19.6bn claim that could in theory be tripled if he proves his allegation that the bank participated in an “illegal scheme”…Mr Picard has already convinced Santander, the Spanish banking group, and Union Bancaire Privée of Switzerland to pay more than $700m to the victims."
    http://www.ft.com/cms/s/0/e544bb08-0954-11e0-ada6-00144feabdc0.html

    The defendants in Picard's suits include Pioneer Alternative Investments, which has its HQ in Dublin. Pioneer, Bank Austria and Bank Medici which are are also on the defendants list, are entirely/partially owned by UniCredit.

    For more info about UniCredit and its Dublin adventures, please visit my blog:
    http://whistleblowerirl.blogspot.com/

    .

  13. RichGB December 17, 2010 at 9:36 am #

    Hi frog2

    HERE is the link you mentioned.

    I will be taking advantage of the Christmas holidays to set up a reference website. When I'm a little more solvent I will subscribe to some databases and magazines to obtain more detailed data. However, copyright will be an interesting impediment to the direct dissemination of data.

    Has anybody here used the BankScope database? Do you know how much it costs?

  14. RichGB December 17, 2010 at 10:15 am #

    Hi frog2

    I've pasted a link on the Guardian CiF to this blog. It seems to work for me.

  15. dave from france December 17, 2010 at 11:16 am #

    Rich
    My attempts at links at the Gdn come out as –
    " ** href=http://golemxiv-credo.blogspot.com/> Golem's blog"
    missing the closing tag!
    I was on IE7, now Chrome, same all over.

  16. John December 17, 2010 at 4:00 pm #

    Just came across this very sad story on BBC website today http://www.bbc.co.uk/news/world-south-asia-11997571

    It seems the micro-finance industry, long the poster-boy of "pro-poor" development, has fallen into the same trap as its masters on Wall St. See quote below

    – "Multiple lending, over-indebtedness, coercive recovery practices and unseemly enrichment by promoters and senior executives [of micro-credit companies] has led to this situation," says Vijay Mahajan, chairman of India's Microfinance Institutions Network.

    – India's micro-finance crisis mirrors the 2008 subprime mortgage meltdown in the US, where finance companies threw cheap and easy loans at homebuyers until prices crashed and borrowers were unable to sell their homes or pay their debts. –

    So does this then really come down to a moral question of greed? Has greed become more socially acceptable, as commentators like Krugman argue in explaining the widening gap between the incomes of professionals (doctors and lawyers for instance) and the financial class. If so, what's the best way to get the toothpaste back in the tube?

    Sure there is anger that someone like Richard Fuld walked away with billions in bonuses, but isn't it also true that society in general has almost come to accept that such things are inevitable or even acceptable?

  17. 24K December 17, 2010 at 7:06 pm #

    Thanks Rich 🙂

    So it's AAA till you bail out those poor bankers and then your AAA goes to ZZZ and how much you pay for bailing the poor bankers out goes up. They must have some book they reference for this stuff like the Necromoneycon.

    £$%$s.

  18. 24K December 17, 2010 at 8:42 pm #

    Rich, it would be nice if the website had levels of difficulty/understanding.

    Imagine a coral reef is the economy. Most people see it from the boat (no glass floor) through the moving water, a blur. Anybody interested would at first just hold their breath and pop their head under and have a quick look.

    "That's nice". Now if they want to see more they have to snorkel. Then they can spend all day looking at the coral and the fish.

    But if you want to really learn about the coral you've got to scuba. Then you can go deep and check out the bottom feeders hiding in the nooks and caranies, learn their names and habits.

    And if you want to go to the depths you gotta breath oxgen rich liquid like in The Abyss. Although I don't think you'll find any nice aliens down there.

    On the coral scale I put myself on the beach with a tequila.

  19. andrew December 17, 2010 at 10:24 pm #

    John : you write r.e. greed/ bonuses etc
    "isn't it also true that society in general has almost come to accept that such things are inevitable or even acceptable?"

    I'm not sure it is true.
    For a start, the kind of person who thinks greed is "inevitable or even acceptable" tends to be either greedy themselves, or fatalistic, and not everybody falls into one or other category. The author of this site for instance does not.
    Secondly, your suggestion assumes the persistence of a status quo. Society in general, i can't generalise about, but i'm sure you would agree today's status quo isn't tomorrows…. the one thing you can trust is: things change, evolve.

    When you talk about people throwing in the moral towel because greed is so prevalent…that's almost a definition of decadence. The Borgias, alongside others who can be cited as historical reference points in the as yet unwritten World History of Greed, ended badly. Pope Pius III , on succeeding Rodrigo Borgia ( pope alexander XIV) refused to conduct a mass for his departed soul, noting "It is blasphemous to pray for the damned". That is more or less how the people of Ireland responded to the news that Banker John Foy had taken Allied Irish to the high court for his bonus.

    The current bleeding dry of national coffers by private banks can't carry on for ever. Alan Greenspan thought the banks would look after their own self-interest and wouldn't do anything which would be damaging to them and then damaging to the economy/society as a whole. That kind of greed was acceptable, sure. But he was wrong.. And when countries like Ireland, Italy, Spain, Japan, etc start having their sovereignty called into question by the claims of the most greedy few…..I reckon the few are doomed. . Greedy people are outnumbered. Thats how trade works, and that's also why Sport is so popular , it relies on fairplay . Football is a moral activity . Beyond that,there wouldnt be a betting industry ( a kind of Sport Leverage) if 99% of people were not cheats. I reckon people in general have a natural sense of what is fair, most people dislike being treated unfairly.

    I think those that " to accept that such things" ( corruption greed, hypocrisy etc) " are inevitable or even acceptable" are a minority who will ( mostly ) get their come-uppance,because fairness is a self preservation reflex . Call me an optimist of you want.

    As George Perec once said " in the battle between yourself and the world: back the world".

  20. andrew December 17, 2010 at 10:40 pm #

    24K
    "On the coral scale I put myself on the beach with a tequila."

    🙂

    Better situated that the scuba diver to see the boat full of people running onto the reef…

  21. wirplit December 18, 2010 at 12:12 am #

    So the waves from Ireland are now hitting the British Banks here Might need to leave the beach and get to higher ground fast…

  22. richard in norway December 18, 2010 at 12:24 am #

    help

    i know that this is not the place for it but i don't know where to post this, so please forgive me for polluting this site with possibly mindless conspiracy theories. but i'm sure you have all heard about the Stockholm bombing

    i would just like to mention something that i find strange

    this man grew up in irak until he was 10 and then he moved to sweden and lived there for another 10 years talking swedish, then as an adult he moves to the UK and learn to speak english properly

    but in his prerecorded martyrdom thingy, he spoke with a perfect english accent, now i have never met anyone who having learnt a language as an adult manages to speak it without a hint of accent, more often than not the accent is quite heavy(i know that mine is when i speak norwegian)

    there are people that can achieve this, at least so I’m told but such people are exceptional, that is to say gifted, well above normal IQ, the kind of folk who can achieve anything they want. not low life loser suicide bombers

    i smell a rat

    i'm also disturbed that i spent a lot of time looking for a place to voice my suspicions and all the time end up at muslim hating sites, i mean how many muslim hating sites are there, has anyone noticed that hating muslims and loving free unregulated markets are pretty much the same thing. look around europe all the really nasty neoliberal parties are hiding their Milton Friedman ideology behind fear of muslim terrorists

    anyhow if someone can point me in the right direction on this bombing thing i would be must grateful and will delete this post afterwards

  23. John December 18, 2010 at 3:40 am #

    Hi Andrew,

    The reason I posted the link to the micro-finance story was that it gives a different perspective on what is the same problem – if systems are not properly regulated then they will be exploited. If I sounded a bit fatalistic about this then I did not express myself clearly enough. In fact, our fatalism is just what the financial "masters of the universe" are relying on.

    My late-night philosophical musings may well be off-topic – apologies. I will try to be more constructive with future postings

  24. RichGB December 18, 2010 at 11:01 am #

    @24K
    I love the coral island analogy. There should be a small section containing links to people and organisations who disagree with us. This will be the shark-infested waters some distance away from your idyllic atoll.

    I liked the phrase 'necromoneycon' so much I bought the company. Actually, I've registered it as the domain name for the website. Google is already showing you and one other person as having used it, but you'll get full credit when I publish. Oh, alright! And a link to your website.

  25. RichGB December 18, 2010 at 11:32 am #

    Hi John

    I think you have a valid point regarding the greater acceptance of greed. How can consumerism – an activity that will save our economy, apparently – be encouraged without the promotion of greed. We are bombarded by advertisements and sponsorship deals every day, like brainwashing, the steady drip, drip, drip of Chinese water torture.

    However, I feel shoddy in thinking that my greed is of the same 'quality' as that of the financial class. When personal greed affects other people, like an addiction that has got out of hand, I think a new term is called for. Decadence is a possibility, but it too does not convey strong censure. Hmmm, what about cannibalism?

  26. 46Martman December 18, 2010 at 11:49 am #

    To add to the problems coming from Ireland
    Lloyds Banking Group admits £4.3bn of losses on Irish loans.
    Which raised fears that Royal Bank of Scotland could also be facing rising losses in the debt-laden country.
    http://www.guardian.co.uk/business/2010/dec/17/lloyds-banking-group-ireland-loan-losses

    The article goes onto say

    In a further sign of the stress facing Ireland, the Bank of England announced a £10bn swap deal with the European Central Bank to provide sterling to the markets. The last time such agreements were signed was during the 2008 banking crisis.

    Slowly the chickens are coming home to roost

  27. Golem XIV - Thoughts December 18, 2010 at 11:53 am #

    richard,

    no problem at all posting what concerns you. If I were you I would go to deep politics forum. I have no doubt you will find people already discussing it and people who will have opinions. Jan, is a friend of mine. If in doubt ask him what he thinks.

    And then please come back and tell us what you find and your thoughts on it.

  28. RichGB December 18, 2010 at 12:01 pm #

    Hi frog2

    I notice the quotes are not being added too. When I post to the Guardian I normally click on the Comments box link button and paste in, for example: http://golemxiv-cred.blogspot.com, without quotes or spaces.
    The Guardian CiF then translates this to
    (a href="http://golemxiv-cred.blogspot.com")http://golemxiv-cred.blogspot.com(/a)
    I wonder if there is confusion regarding character encoding.

  29. 24K December 18, 2010 at 12:29 pm #

    hehe, dude!

    I made a page for my banker songs, Zombie Bank Death Squad. The songs are free to download from there. A link to that would be great.

  30. richard in norway December 18, 2010 at 1:51 pm #

    golem

    deep politics is down or has been nuked :r

    but thanks for the steer

  31. Whistleblower IRL December 18, 2010 at 3:26 pm #

    Finally, a publisher with guts has printed an account the circumstances of my resignation from my position as Risk Manager at UniCredit Ireland in 2007:

    Village magazine's December-January cover-story:

    'Still waiting for the truth from the regulator'

    http://www.villagemagazine.ie/

    Regards from Dublin,
    http://whistleblowerirl.blogspot.com/

    .

  32. RichGB December 18, 2010 at 3:46 pm #

    Nice one Whistleblower.

    Hi Golem, after looking at the BoE's latest financial stability report (HERE) I notice they are projecting Japan's sovereign debt to reach 250% of GDP by 2015! I think it's even worse than you reported recently.

  33. dave from france December 19, 2010 at 10:37 am #

    Hi RichGB
    I sorted the linking thing, but now I'm in pre-mod at the Guardian ! First time in four years.

    Good news on Whistleblower there.

  34. william price December 21, 2010 at 1:39 pm #

    excellent news Whistleblower!

  35. Whistleblower IRL December 23, 2010 at 9:49 am #

    William Price and Dave from France,

    1. Thank you for the encouragement.

    2. The Guardian has placed me on pre-mod for the last 3 weeks. NONE of my comments were published. Please do try and post a link to my blog on it.

    Thanks,
    W.

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