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A new wave of loan write-downs by major banks early this week was greeted by a big yawn in the stock market.
Even so, every new revelation from Washington Mutual (WM, news, msgs), UBS AG (UBS, news, msgs) and the gang makes it clearer that top U.S. and European bankers have acted much more like drunken sailors on shore leave than captains of industry over the past few years.
It's not too harsh to conclude now, in fact, that bankers essentially threw away their families' life savings on reckless real-estate gambles and that with their shares down 50%-plus and their capital bases in tatters, they're now lying in the proverbial gutter begging for a hand from passers-by. Brother, can you spare a billion?
With the Fed and the European Central Bank practicing tough love -- witness the Fed's paltry quarter-point rate cut Tuesday -- the banks are wide open to a blitzkrieg of life-changing investments and buyouts by the only parties in the world that seem to have the guts, foresight and cash to help: sovereign funds in Singapore, China and the emirates of the Persian Gulf.
Make no mistake, this is a significant moment in world financial history. Seen from the vantage point of textbooks written 20 years from now, it's possible that we will view this as a time of "reverse colonization," an era in which nations that were once the poor, remote recipients of Western largesse have managed to turn the tables and dictate the terms of global finance.
From giants to junk
In the past two weeks alone, Singapore announced that it would make a $10 billion investment in UBS, and the Abu Dhabi Investment Authority pledged to make a $7.5 billion investment in Citigroup (C, news, msgs).Both investment groups are expected to take board seats, which means these moves alone put the fate of two of the largest banks in Europe and the United States in the hands of managers from regions that not long ago were dismissed as high-risk. So who's too risky now? The purchases were made via convertible securities that pay stunning yields of 9% and 11%, which essentially classify UBS and Citigroup as junk-bond-level credits. It looks like developed markets are the new emerging markets.
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This didn't have to happen. But the big Western banks committed the same sin of hubris that toppled the European, Russian and Chinese monarchies of centuries past. They took their power for granted, trampled the rights of their constituencies and wasted vast sums of money entrusted to them by taking risks they didn't understand.
We really need to be plain about this: Companies such as Washington Mutual, which announced a $1.6 billion write-down of home-lending-unit losses Monday, essentially took money placed in passbook savings accounts by hard-working, conservative customers -- many of them retirees -- and shoveled it to low-income, Fantasy Island condo flippers. Bankers paid 2% or less to customers they obviously considered suckers and lent it out at 6%-plus to customers they courted.
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For a few years, the gamble worked, and banks made billions that they turned around and spent on acquisitions, skyscrapers and lavish executive pay packages. But now that the gambit has soured, banks are firing workers, cutting back on the extension of credit to legitimate businesspeople and slashing dividends. While the real-estate speculators and disgraced execs walk away from their messes chastened but unharmed, the hourly workers, entrepreneurs and retirees are left to suffer -- likely for years.
Continued: A new sheriff in town
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