The National Australia Banks decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a “meltdown”.

We are now way beyond sub-prime. NAB says that it is suffering a 55 per
cent loss on American housing loans – an event that has never happened
in the history of a developed country in recent memory. This is an
unprecedented event and means that the cost of bailing out the US
financial system is now far beyond the highest estimates. A US
recession is now locked in, but more alarmingly, 55 per cent loan
losses point to the possibility of a depression.

It means the cost of bailing out housing exposures to the two mortgage
insurers will be so great that it will leave no room to bail out
anything else and there are several US banks that are now in big
trouble. NAB says that the dislocation in the residential market is
separate from the corporate market, but the flow on is inevitable.

While global banks have been writing down their balance sheet assets,
few have tackled their conduit exposures which are off balance sheet
but to which they are ultimately liable.

This morning at around 6am I wrote that we had been experiencing a
‘dead cat bounce’. I had no idea that NAB would trigger the downturn
and confirm what I had written. And of course Wall Street will receive
a deep shock when it wakes up.

How did NAB get caught in $1.2 billion mess? They had a number of big
clients who wanted to invest in these US housing loans. They were
sucked in by the ‘triple A ratinggiven to the securities by the
rating agencies. They did not take into account that the monoline
insurers who guaranteed some of the loans had no substance. To become a
player NAB took out $1.2 billion in these triple A securities and 90
per cent of it has been lost.

Many Australian institutions are very angry. NAB is paying out far too
much in dividends and should be conserving capital. The American bank
it purchased, Great Western, was a good idea but it is now clear it
overpaid for it. Fortunately it only has a small exposure to the bad
loans. But what’s happening to the NAB is not the main game.

The global banks have been marking to market the assets they held on
their balance sheet, but the vast amounts held in so called ‘conduit
trust accountshave not been written down because they were not
marketable. NAB wrote them down when they saw the bad mortgages.

US banks have written down $450 billion in bad housing loans. The
revelation from NAB means that they will now certainly need to take
provisions to $1,000 billion. But write-downs of $1,300 billion and
perhaps even more are on the cards.

Where will the equity come from to cover these bad loans? The world has
never attempted a rescue effort of this size and it will make liquidity
in the globe very tight. That’s why corporates will be hit. All
Australian companies that need equity should raise it now.