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  • After the Bailout
    • Overview
    • Table of Contents
    • About the Author
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CONTENTS

 

Introduction and Summary

• The crisis to end all crises?

• Government intervention averts catastrophe

• The money machine breaks down

• Regulatory intervention

• Risk/reward disparity

• Fair-value accounting

• And now: deleveraging

• So what happens next?

• Coming soon: the second credit crunch

 

Chapter 01    Investment banking: the shape of things to come

• Greed, corruption, complacency or mismanagement?

• So who’s to blame?

• Home ownership – the failed American dream

• Length and depth of recession

• Securitisation is a success story

• Industry in denial?

• The credit party is over

• How fair is fair value?

• The problem of pro-cyclicality

• Basel’s comprehensive strategy

• Mitigating FVA impacts on balance sheets

• It’s the bonus, stupid

• Trader mentality
• The image problem
• Bonuses are all relative
• Future compensation models
• ‘Utility’ banking
• Identity crisis looms
• Small is beautiful

• Viewpoint: Client relationships, continuity and consistency cowards flinch and traitors sneer"

• Viewpoint: "The US Financial Stability Plan"

• Idiots on Wall Street

Chapter 02    Product winners and losers in the new banking landscape

• Corporate bonds

  • Back with a bang
  • Prospects improve for economic stabilisation
  • Investor take-up of new issues
  • Big names tap the market

• Syndicated lending

  • Room for optimism
  • Bank lending issues
  • Returns-based banking
  • Market prospects
  • Exceptions to the rule – Pfizer, Verizon Wireless, Roche
  • Refinancing’s structural evolution
  • Forward start agreements

• Distressed debt and restructuring

  • Action ahead as default projections rise
  • Supply-demand equation
  • No shortage of candidates
  • DIP loans make a come-back
  • Distressed equity

• No way back for LBO or ABS

  • Back to the future
  • Bull market conditions for LBOs
  • ABS: closed for renovation

• Basel has a pop

  • Trading book exposures

     

Chapter 03    2009 European Bond Market Outlook

By Riccardo Barbieri Hermitte, European Head of Trading Strategy, Bank of America

• Overview

• Supply of government securities set to rise sharply

  • Despite a sharply higher recourse to short-term debt…
  • … government bond supply will double in 2009

• Growing competition from government-guaranteed bonds

  • Total issuance of Euro-denominated guaranteed bonds may exceed €400bn in 2009

• Rising deficit and debt ratios as the Euro area falls into recession

  • Italy the biggest issuer, France the largest net borrower in government bonds
  • Sovereign issuers will try to minimise impact of supply on the market

• Bond yields set to fall further in the first half of 2009

  • Bond yields are not particularly low in real terms
  • Real yields are relatively high for the ‘peripherals’
  • Further widening in spreads versus Germany is likely in the coming months
  • A return of risk appetite could reverse the trend in the second half of 2009
  • Debt management policies will also play an important role
  • Our near-term strategy remains to be long on Germany, with a preference for the Bobl

• European banking bail-outs

  • Germany
  • France
  • The Netherlands
  • Belgium

Chapter 04    Regulation and re-regulation: initiatives and issues

• Regulatory overdrive

• Political interference and red tape

• EU regulatory conundrum: how to upgrade financial oversight

  • Role of the European System of Financial Supervisors

• Who knew, and who should have known?

• Re-regulation wave to follow

• Picking up the pieces . . . again

  • Current focus of the FSF

• Optimising US oversight

  • Short-term recommendations
  • President’s Working Group (PWG) on Financial Markets
  • Mortgage origination
  • Liquidity provisioning by the Fed

• Intermediate recommendations

  • Thrift Charter
  • Federal supervision of state-chartered banks
  • Payment and settlement systems oversight
  • Insurance
  • Futures and securities

• Regulators move on ratings agencies

  • SEC transparency and accountability measures

• Derivatives under the gun

  • Death by regulation
  • No to casino capitalism
  • CDS central counterparties
  • Timing misfire
  • ECB sails a line
  • Control politics
  • Knotty issues
  • Participants enter the fray
  • PWG makes its move
  • Policy objectives for OTC derivatives
    • Improve the transparency and integrity of the CDS market
    • Enhance risk management of OTC derivatives
    • Further strengthen the OTC derivatives market infrastructure
    • Strengthen co-operation among regulatory authorities

• OTC derivatives operational improvements

Chapter 05    Taking short: a global clampdown on short selling

• Introduction

• US short selling regulations

  • Form SH Order
  • Amendments to Regulation SHO; penalties for failure to close failed positions
  • Other provisions
  • The Short Sale Ban Order (Expired)

• The EU: short selling under the European Market Abuse Directive

  • UK
  • UK: measures relating to rights issue securities
  • Belgium
  • France
  • Germany
  • Ireland
  • Italy
  • Luxembourg
  • The Netherlands

• Non-EU jurisdictions

  • Australia
  • Brazil
  • Canada
  • Hong Kong
  • India
  • Japan
  • People’s Republic of China
  • Russia
  • Singapore
  • United Arab Emirates

   

Chapter 06    Management failure and the banking crisis – the way forward

By Davide Taliente, Head of EMEA Banking, Oliver Wyman, London

• Underlying strategic and structural weaknesses

• Management failure – the case for the defence

  • Front-line egos make the management task impossible
  • The regulatory and accounting frameworks were wrong
  • Black swans
  • Failure of risk management technology
  • Failure in board fiduciary duty

• Management failure – the case for the prosecution

  • Calling the bluff of the giant egos
  • Implementation of strategic oversight over client business
  • Management of reputational and operational risks
  • Risk management uncertainty
  • Board information

• An objective evaluation of management performance

  • Operations
  • Setting targets and objectives
  • Managing talent and optimising incentives
  • Risk management
  • Strategy
  • Critical tactics going forward
  • Bifocal risk management
  • Ego-proof compensation models
  • Clients come first

• A profound reshaping of the industry is likely

  • Challenging strategic questions

• So where does management go from here?

• What are regulators likely to do?

• What are governments (as shareholders) likely to do?

    

Chapter 07    Overview of global liquidity and stability programmes

• For a few trillion dollars more . . .

• The price of government control

• EC scene-setting

  • Updated guidance
  • EC consensus on bail-out guidelines

• Government programme summaries

Chapter 08    US government programmes

• Current programme status

• The Financial Stability Plan Troubled Asset Relief Program

  • Additional executive compensation rules under TARP Capital Purchase Program

• Potential asset guarantee programmes

  • Comments on guarantee programmes
  • Other proposed structures
  • Eligible assets
  • Determining risk and pricing premiums
  • Payout
  • Setting premiums
  • Market value of the guarantee
  • Administrative issues

• Temporary Liquidity Guarantee Program

• Targeted Investment Program

• Bank of America, Citigroup bail-outs

  • Summary of terms: Bank of America
  • Summary of terms: Citigroup
  • Summary of warrant terms

• Development of TARP

• Legislators approve TARP

  • US appoints TARP staff
  • TARP Capital Purchase Program detailed
  • U-turn on TARP confounds markets

• Summary of senior preferred terms

• First qualified equity offering under TARP

• Development of other programmes

• Term Auction Facility

• Term Securities Lending Facility

• Options on TSLF draws

• Primary Dealer Credit Facility

• Term repurchase agreements

• Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

  • Rule exemptions

• Temporary Guarantee Program for Money Market Funds

• Extension of Temporary Guarantee Program for Money Market Funds

• Money Market Investor Funding Facility

• Temporary Liquidity Guarantee Program

• Troubled Asset Auction Program

• Systemically Significant Failing Institutions Program

• Commercial Paper Funding Facility

• Term Asset-Backed Securities Loan Facility

• Purchase of Government-Sponsored Enterprise obligations

• Revised plan for AIG

• Canada

• Canadian Lenders Assurance Facility

• Insured Mortgage Purchase Program

Chapter 09    UK government programmes

• Current programme status

• Multiple rescue schemes

• Extension of Credit Guarantee Scheme

• £50bn ABS guarantee

• Bank of England liquidity facilities

• £50bn Asset Purchase Facility

• Capital regulation

• Asset Protection Scheme

  • Introduction
  • Eligible institutions
  • Conditions and lending commitments
  • Disclosure
  • Eligible assets
  • Assessment of first loss amount and fee
  • Management of the assets
  • Duration of the Scheme
  • Administration of the Scheme

• Development of the Credit Guarantee Scheme

• Establishment of Credit Guarantee Scheme

• Changes to Credit Guarantee Scheme

• Development of other programmes

• Special Liquidity Scheme

  • Long-term asset swaps
  • Credit risk stays with the banks
  • The assets banks can swap

• Banking Reform Bill

• Consultation on banking "special resolution regime"

• UK Bank Recapitalisation Fund

• Operational Standing Lending and Deposit Facilities and Discount Window Facility

  • Operational Standing Lending and Deposit Facilities
  • Discount Window Facility

• Extended collateral for long-term repo operations
  Lending Panel
  Creation of UK Financial Investments Ltd
  Liquidity rules for UK banks, building societies and investment firms

Chapter 10    European government programmes

• Austria

• €100bn from Vienna

• Erste inaugurates guaranteed issuance

  • Erste Bank bond

• Belgium

• A torrid time

• Bank recaps

  • Fortis
  • KBC
  • Dexia
  • Ethias

• Denmark

• DKK35bn exposure

• Financial Services Authority’s powers are strengthened

• Guaranteed bonds

  • Danske Bank bond

• Finland

• €50bn guarantees for unsecured credit facilities

• France

• €360bn centralised approach

• SPPE

• SFEF

• Bond issuance

• SFEF bonds

• Germany

• Government pledges €480bn

• Financial Market Stabilisation Fund

• Operations of the Fund

  • Guarantees
  • Participations
  • Risk positions

• Conditions for stabilisation measures

• The Acceleration Act

  • Capital markets law
  • Privileged transfers
  • No German merger control
  • Other provisions

• Government-guaranteed bonds

  • Commerzbank bond
  • HSH Nordbank bond
  • Bayerische Landesbank bond

• Greece

• €28bn three-part scheme

• Bank takers

• Ireland

• Government weighs in with €110bn

• State participations

• BoI, AIB seek government cash

• Guarantee scheme

  • Guarantee fee

• AIB kicks off guaranteed bond supply

  • Allied Irish Banks PLC bond

• Bank of Ireland pays up

  • Bank of Ireland bond

• Irish Nationwide taps sterling

• Irish Nationwide Building Society bond

• Domestic bid for Anglo Irish

  • Anglo Irish Bank Corp bond

• Italy

• Collateralised interbank trading

• Guarantee and swap scheme

• Recap scheme

• Netherlands

• €200bn Credit Guarantee Scheme

• Guaranteed issuance

  • LeasePlan Corp NV bond
  • NIBC Bank NV bond
  • €20bn recap fund
  • ING
  • AEGON
  • SNS REAAL
  • Fortis bail-out

• Norway

• US$50bn government bond swap facility

  • Auction calendar for exchange programme
  • Auction terms

• Portugal

• €20bn support programme

• Guaranteed supply

  • Caixa Geral de Depósitos bond
  • Banco Espirito Santo bond
  • Banco Comercial Português bond

• Nationalisation of BPN

• Rescue of BPP

• Spain

• Government earmarks €150bn

  • FAAF auctions

• Sweden

• US$190bn guarantee programme

• Stabilisation fund set up

  • Handelsbanken Hybrid Tier 1 bond
  • Swedbank AB bond

• Switzerland

• UBS bail-out

  • US$6bn in MCNs
  • New UBS compensation model

• Increase in equity capital

• Credit Suisse capital increase

Chapter 11    Japanese government programmes

• US$800bn multi-headed package

• Immediate policy package for stabilisation

  • ¥64trn (US$712bn) to stabilise financial markets and support financing
  • ¥10trn (US$111bn) in fiscal measures
  • Measures to stabilise the stock market
  • Flexible management of stock ownership restriction on banks
  • Measures for strengthening financial functions
  • Measures to facilitate stock purchases by Japanese-style ESOPs

• Direct action

• Liquidity and outright purchases

  • Distinctive features of outright purchases
  • Conditions for implementation
  • Implementation factors
  • Conducting purchases only for the term required and in an appropriate scale
  • Ensuring the Bank's financial health
  • Outright purchases of CP
  • Outright purchases of JGBs

LIST OF TABLES AND FIGURES

Table I.1: FIG borrowings, 2006-09 (€m)

Table 1.1: Composite leading indicators
Table 1.2: Investment bank segment revenues, Q106 to Q308 (US$m)
Table 1.3: Aggregate revenue data: investment bank sample

Table 2.1: Corporate bond issuance, January 2009 (€m)
Table 2.2: Corporate bond issuance, January 2008 (€m)
Table 2.3: US leveraged loan bookrunners, 2008 (US$m)
Table 2.4: US leveraged loan bookrunners, 2007 (US$m)
Table 2.5: EMEA sponsored loan mandated arrangers, 2008 (US$m)
Table 2.6: EMEA sponsored loan mandated arrangers, 2007 (US$m)
Table 2.7: Global CDOs, 2008 (US$m)
Table 2.8: Global CDOs, 2007 (US$m)
Table 2.9: Global CDOs, 2006 (US$m)
Table 2.10: US ABS (excl MBS),2008 (US$m)
Table 2.11: US ABS (excl MBS), 2007 (US$m)
Table 2.12: US ABS (excl MBS), 2006 (US$m)
Table 2.13: Securitisations – All European RMBS, 2008 (US$m)
Table 2.14: Securitisations – All European RMBS, 2007 (US$m)
Table 2.15: Securitisations – All European RMBS, 2006 (US$m)

Table 3.1: Euro-11 government funding requirements and bond issuance, 2007–09 (€bn)
Table 3.2: Gross issuance of government bonds, 2007–09 (€bn)
Table 3.3: Government bond redemptions, 2007–09 (€bn)
Table 3.4: Net issuance of government bonds, 2007–09 (€bn)
Table 3.5: Government-guaranteed bond issuance by banks and agencies, Q4 2008 (€bn)
Table 3.6: General government budget balances, 2005–09 (% of GDP)
Table 3.7: General government gross debt, 2005–09 (% of GDP)
Table 3.8: Government bond issuance by maturity, 2007–09 (€bn)
Table 3.9: Projected monthly net cash flows, 2009 (€bn)
Table 3.10: Projected monthly net cash flows by country, 2009 (€bn)
Table 3.11: German 10-year bond yield in real terms
Table 3.12: Capital injections, government guarantees and related bond issuance

Table 8.1: Term Auction Facility results
Table 8.2: TARP investments, Oct 2008-–16 Jan 2009 -– Capital Purchase Program
Table 8.3: TARP investments, Oct 2008–16 Jan 2009 – Significant Failing Institutions
Table 8.4: TARP investments, Oct 2008–16 Jan 2009 – Automotive Industry Financing Program
Table 8.5: TARP investments, Oct 2008–16 Jan 2009 – Targeted Investment Program
Table 8.6: TARP investments, Oct 2008–16 Jan 2009 – Asset Guarantee Program

Table 9.1: Publicly-issued guaranteed debt
Table 9.2: Special Liquidity Scheme: haircuts
Table 9.3: Fees for drawings of gilts

Table 10.1: Operations of the Financial Market Stabilisation Fund
Table 10.2: Ireland – Indicative preference share term sheets
Table 10.3: Netherlands -– Annual guarantee fee
Table 10.4: Norway – Auction calendar for exchange programme
Table 10.5: Norway – Possible maturity and rollover dates applying to 12 Jan 2009 auction
Table 10.6: Spain – FAAF auction results
Table 10.7: Switzerland UBS net exposures

Table 12.1: South Korea; Government investments into state-run banks, January 2009
Table 12.2: Capital raised and planned capital expansion by South Korean banks, end 2008 (KRWbn)

Figure 1.1: Stock price performance, January 2006-November 2008
Figure 1.2: Strong slowdown on the OECD area
Figure 1.3: Strong slowdown in China
Figure 1.4: Strong slowdown in the US
Figure 1.5: Strong slowdown on the Euro area

Figure 3.1: German 10-year bond yield in real terms
Figure 3.2: Italian 10-year bond yield in real terms
Figure 3.3: Curve spreads in the German bond market, 2006–Sep 08

Figure 6.1: P/E ratio impacts of banking crises, 1980–2006
Figure 6.2.: Relative P/E changes in M&A activity during downturns and until recovery

Figure 10.1: Structure of the Financial Market Stabilisation Fund
Figure 10.2: Financing of the Financial Market Stabilisation Fund

Figure 12.1: Bak f Korea's Bank Capital Expansion Fund

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