“Everyone is always shouting, ‘Quickly, quickly, quickly. In my opinion, you should move quickly only when you need to go to the toilet.”–Alexander Bakaev, head of the Russian Finance Ministry’s Department of Accounting Methodology.
It took a while for the details to emerge, but several banks and brokerage houses have lost big in the recent collapse in Russia and the ensuing panic in Latin American stock markets.
The first bank to come forward and report its losses was the Republic Bank of New York, which $10-20 million when the Russian government defaulted on $43 billion in short-term debt last month. This was a shock to other bankers, because Republic Bank of New York is only the 27th largest bank in the U.S.–relatively small–and well-known for its “conservative” lending practices (which says a lot about how unstable the bigger banks are).
Within the past two weeks, larger American banks began to issue their statements. Chase Manhattan and Citicorp both lost about $200 million each. Bankers Trust took a heavy loss, too, but refused to say how much.
Brokerage firms and investment companies dropped a load, too. Merrill Lynch and Morgan Stanley Dean Witter, the two largest securities firms in the world, posted losses related to Russia and volatile markets in Venezuela, Brazil, Colombia, and Argentina. Merrill Lynch’s loss is $135 million. The other losers were: Travelers Group (Salomon Smith Barney), Lehman Bros, and Donaldson Jufkin & Jenrette–a who’s who of Wall Street.
But the bad times are just beginning. U.S. banks and securities firms only had small amounts invested in Russian markets compared to what they own in Latin American debt and securities. The six “money-center” banks–Chase, Citicorp, BankAmerica, JP Morgan, Bankers Trust, and First Chicago–together own about $61.9 billion in Latin American investments, which far surpasses anything they owned in Russia or the whole of Asia. For example, Citicorp’s exposure to Latin America is $15.5 billion, versus a mere $400 million it owned of Russian investments (now mostly worthless). Chase Manhattan’s exposure to just one country–Brazil–is about $3.5 billion.
Notably, Moody’s Investor’s Service, which rates the credit-worthiness of corporate and government debt, downgraded Brazil’s debt only a week ago–a sign that Brazil’s ability to pay is slipping.
Another valuable service that Moody’s performs is its rating of the world’s banks. Each nation’s banking sector is assigned a rating according to its ability to pay its own debts and depositors without needing the World Bank, IMF, or taxpayers to bail them out. The ratings for specific banks are grouped together by nation and an average score is assigned to each country. This only makes sense for smaller countries with smaller banks, because the largest banks tend to be truly multinational, but the scores are interesting anyway. They show how truly dismal the global markets really are.
The scale is a simple one, like a high school report-card, and it’s laughably restrained in how it describes each rating: “A” banks have “exceptional financial strength,” “B” banks are “strong,” “C” banks are merely “good,” “D” banks have only “adequate financial strength” (meaning that they’re just teetering on the edge of collapse), and “E” banks have “very weak intrinsic financial strength”–in other words, they “already receive outside support or are likely to need it.”
A glance at Moody’s list immediately shows that no nation’s banks rate an A (so much for the free markets’ mythical ability to promote excellence). Only three nations rate a B: The Netherlands, Switzerland, and tiny Liechtenstein. A few other nations can claim to be almost “strong”: Spain, Belgium, Canada, Singapore, and Luxembourg. But then the list drops down to the realm of C+ nations–those that are just barely above mediocre: the U.K., Sweden, Germany, and the good ol’ USA.
Unfortunately for U.S. banks, most Latin American nations rank very low on the list. Colombia and Peru hover in the D+ range; Brazil, Venezuela, Panama, Argentina, and Ecuador lurk in the mid to low D range. Interestingly, the Mexican banking system, still heavily in debt to U.S. banks, is fifth from the bottom–way behind Russia (D) and just ahead of South Korea, Thailand, Pakistan, and Indonesia (E). The list, of course, leaves off F nations and neglects to define what an F would mean, but we can guess which countries would qualify and why (i.e., Cuba, Libya, Iraq, Nicaragua, Nigeria, Angola … indeed, most of Africa).
Our analysis of Moody’s ratings of world banks only confirms what we already know: that the wealthy feed on the poor. But, by the same token, the wealthy rely on the poor to provide them a continuous profit–when that begins to collapse, the rich go down, too.
So keep all of this in mind when you read or hear pundits say that the Russian collapse doesn’t mean anything, that it was relatively small, and it won’t have any impact on the U.S. economy. In reality, it’s just another domino in a line that stretches around the globe.