Unicredit – Another Lehman Brothers?


by David Malone

It is a strange thing that amidst all yesterdays attacks on democracy in Ireland and Greece and worries about State sovereignty in those countries, as well as Portugal and Spain, that it was Italy’s largest bank which suffered a very large fall in share price, the largest of of any bank on the day, I think.

UniCredit lost 4.2% of its share price in one day taking it down to just €1.63 a share.

What does it say that when the bond market and all media eyes are riveted to nations whose very solvency and sovereignty are being question and dismantled, that it is a bank in a nation who we are told is ‘just fine’, that suffers the largest fall? To me it says rather clearly that UniCredit might have it’s own urgent and special problems.

This notion is supported by the fact that not only did it loose a lot of blood yesterday, but it also suffered a downgrade (Not a serious one, just a gentle warning cut from “buy” to “neutral”) from two of its closest allies in the banking world – Nomura and JP Morgan. This downgrade was not as a result of worries about Italy. It was a downgrade of UniCredit based on worries about Unicredit as a bank.

The media and politicians tend to focus on what the rating agencies, Moodys, Fitch and Standard and Poors say. But when it comes to the health of banks it is what other banks think, how they rate each other, that is the early warning sign. Because when banks securitize ‘assets’ and debts, they do so with the help of other banks.  On any security offering or bond issue you will see a list of banks who are the managers of those securities.  Those managers are required to have an intimate knowledge of the assets they are managing. They will thus have intimate knowledge of the ‘real’ worth and quality of those assets.  And let’s remember that banks have a habit of keeping the senior tranches of these assets on their books.

Banks also buy from each other. JP Morgan may buy some UniCredit issue and UniCredit has no doubt bought issue from JP Morgan and Nomura.  Thus as a group they have a very good idea of what they each hold.

Let’s go back to Lehman Brothers. What happened to them was other banks started to refuse to accept Lehman’s ‘assets’ (e.g. Bonds) for Repo agreements.  For those who have forgotten, Repo agreements are short term loans which are the life blood of all banks. One bank agrees to ‘buy’ assets but only for a fixed length of time, after which the assets will be sold back for an agreed profit. It is these Repo agreements which keep banks solvent on a daily basis.

What happened to Lehmans was that the other banks knew that the ‘assets’ Lehmans was trying to use in its Repo transactions were not worth the paper they were valued on. The other banks would not repo with Lehman, so Lehman duly died.

Now, I am not saying UniCredit is in the same state. Please remember I have absolutely NO inside information. But when I see two banks who would have a good idea of what UniCredit is holding, downgrading it causing it to lose 4% of its share price, I take notice.

Nomura and JP Morgan have a history of dealings with not just UniCredit but at least one of its major subsidiaries, the German/Irish bank HVB which I have written about recently.

And this brings me to another point about UniCredit and conglomerates like it. UniCredit is a vast sprawling thing. It owns, and is made up of, somewhere around a hundred different financial companies, leasing companies and banks all over East and West Europe, the Balkans, former Soviet countries, as well as the Far East. The point about this is that losses are not unified and made apparent on one set of  Über accounts. So it is quite possible for UniCredit to look quite financially fine, while it is accumulating hideous losses in lets say Unicredit Kazakhstan, Azerbaijan or Belarus.

As I have written before, Unicredit owns Bank Austria which has the largest western banking presence in Eastern Europe. I wondered in Dominoes falling from the East if UniCredit might not be about to receive a train load of debts from Bank Austria, as well as from its US investment companies – Pioneer Global Asset Management, Pioneer Alternative Investment and Vanderbilt Capital Advisers.

So it is of interest that according to this report part of the reason for Nomura’s downgrade was due to concerns about UniCredit’s expansion in to the East and losses which might come from those operations. And this combines, for me, with UniCredit now wanting to sell off Pioneer, which used to be such an important part of its securitising cash cow business.

Basically I am suggesting that it might be worth keeping an eye on UniCredit for signs that it is having short term funding and overnight liquidity troubles. Just the early first stages, nothing too serious yet. But we live in febrile and feverish times when a mild infection can spread alarmingly quickly.  When problems thought to be hidden or quarantined can suddenly erupt.

I think UniCredit will figure larger in our news in the coming months, as will Italy itself.



This article is reproduced with thanks to David Malone. He is the author of the book Debt Generation. You can read and listen to excerpts from his book here: http://www.debtgeneration.org/index.php