NAB has made some strange decisions, leading to scepticism about its long-term prospects, and its Big Four rivals are not travelling well either NAB chairman Michael Chaney's halo slipped askew yesterday when the bank made a shock $830 million write-down a few days after it raised $850 million of debt and two weeks after a $900 million capital raising for a dividend reinvestment plan
     Besides hurting NAB's credibility, the downgrade again raised eyebrows about its continuous disclosure habits
     To try to appease the 20 bond holders who invested in the issue on Tuesday, NAB contacted them after yesterday's writedown to give them the option of withdrawing
     Two weeks ago the bank told the market there was a "risk that further provisioning may be required" on its $US1.1 billion exposure to collateralised debt obligations
     It took two weeks to do the numbers and reveal they had deteriorated by another $830 million
     From that fairly sanguine statement, investors were expecting a small to moderate increase in the $181 million provision, not an increase of more than 450 per cent. Also since then, the US has approved support for Freddie Mac and Fannie Mae, which indirectly eases the downward pressure of forced sales on house prices
     The sequence of events regarding the provision doesn't augur well for the market's trust in NAB, particularly concerning the $4.5 billion conduit of other "purchased assets" from corporate land, and the bank's self-originated CDOs
     NAB has an $8.5 billion exposure to NabCapital-sponsored conduits. The assets held by these conduits include CDOs, collateralised loan obligations, bonds and corporate loans
     In a supplementary note released yesterday, NAB detailed the other $4.5 billion of CDOs it is exposed to. It doesn't make a pretty picture
     The CDOs include a $388 million exposure to European infrastructure assets, $1.69 billion in leveraged loans in Europe, $831 million in commercial property in Europe and $1.57 billion in synthetic CDOs to corporates in Europe and the US
     The $8.5 billion NabCapital-sponsored conduits are yet to be broken down, but again they are not without risk
     NAB boss John Stewart went to great lengths to say these had top credit ratings, but in this climate credit ratings have even less credibility than NAB
     Remember it was the credit rating agencies that gave AAA ratings to the monoline insurers, which lent out their credit ratings to sub-prime mortgage lenders and virtually toppled the system
     The upshot is, given NAB's track record over the years in risk management, it is work keeping an eye on the $13 billion-plus worth of conduits, particularly as the market deteriorates
     It is no surprise that the bank took a hammering on the stock market yesterday, falling 13.5 per cent to $26.56
     It was less than a year ago that Stewart said the bank had no exposure to sub-prime debt and it wasn't that long ago that the bank -- with Chaney at the helm -- said it was looking at strategic alliances, only to announce a $US789 million acquisition of a rural bank in the US at a whopping 19.2 times earnings
     The board agreed to this acquisition at a time when the US was in the midst of a credit and housing crisis. Not only did NAB pay more than double the then trading multiples of US regional banks, it bought into a region where it doesn't operate
     The Great Western Bank has only 11 per cent of its loan book in agribusiness and an exposure to property. It is only a matter of time before it will make provisions on this acquisition
     The other bank savaged was ANZ, which fell 8.7 per cent, as the market questioned whether it would be next to announce more provisions from its derivative exposures
     Westpac fell 3.4 per cent and Commonwealth Bank fell 6.5 per cent due to their limited exposure to conduits with international exposures
     According to Wilson HTM analyst Brett Le Mesurier, ANZ's total notional CDS-related exposure is $46 billion, which is almost twice that of the next most exposed bank, NAB
     A recent report by Citigroup warns that all the banks have had their fair share of announcements on credit issues in the past six to nine months, but ANZ leads the country on publicly announced problems. These include ABC Learning, Centro, Countrywide, Opes Prime, Chimaera, Hedley Group, ACA and Bill Express
     It estimates a write-down in the order of $1.2 billion to $2.4 billion on monoline-related counterparty risk
     This exposure to the shady world of CDOs and other derivatives goes a long way towards explaining why the banks have taken a pounding in the past year, with more than a third wiped from the sector's market capitalisation as investors become increasingly worried that so much of the banks' activity occurs in the murky underworld that is not reported in their official balance sheets
     There is little doubt that banking stocks will be in for more violent swings over the coming months as some of the more exposed banks come clean about their exposures
     The big winners will be the hedge funds, which will take advantage of the nervousness of the market and continue to short banking stocks.


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