From Financial Times' Alphaville Blog:
Banking credit catch-22 in action?
We're still not sure whether this is an actual CDS position against itself. Citi's Q1statement has the following:
- A net $2.5 billion positive CVA on derivative positions, excluding monolines, mainly due to the widening of Citi's CDS spreads
- A net $30 million positive CVA of Citi's liabilities at fair value option
However, we do note this bit from Morgan Stanley's recently released Q1 results.
In fact, Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads - which is a significant positive development, but had a near-term negative impact on our revenues.
There's a tiny bit more detail in the footnote of on the bank's $1.69bn of Q1 net revenue in Insitutional Securities.
(1) Results for the quarters ended Mar 31, 2008, Dec 31, 2008 and Mar 31, 2009 include positive / (negative) revenues of $1.8 billion, $(5.7) billion and $(1.5) billion, respectively, related to the movement in Morgan Stanley's credit spreads on certain long term debt.
The banking credit catch-22 in action? We wrote this on Monday in relation to Citi.
If the market thinks Citi is doing well, the bank's shares could rise, its CDS could tighten, its CVA gains could well reverse, hitting its earnings, and vice versa. If the market thinks it's doing badly, Citi's CVA gain will increase, but it could still possibly be in need of more capital.
Which today, turns into…
If the market thinks Morgan Stanley is doing well, the bank's shares could rise, its CDS could tighten, its CVA gains could well reverse, hitting its earnings…
This is something of a problem for financials and should serve to highlight the ephemeral nature of certain bank profits in general.
Holding to Account blogger Luca Pacioli (H/T reader JN) for instance, also points us in the direction of 2008 CVA gains from banks including Barclays, RBS, HSBC and Bank of America, totalling at least $13bn. In his words:
Together with Citi, that means approximately $17.9bn will have to be charged back to bank P&Ls. Or put another way - in the last few months, the above banks have reported $17.9bn of profit they probably will never actually realise (this is on top of the general MTM issues on illiquid assets).