Forbes Magazine:What, Me Worry?
Posted by waltercat on on another board.
Monday August 19, 12:21 pm Eastern Time
Forbes Magazine
What, Me Worry?
By Scott Woolley
The banks that led $365 billion in telecom lending have avoided big losses. The folks
they used to offload the risk weren't so lucky.
The bankers that fueled the telecom borrowing binge should be throwing themselves off
a rooftop by now. Since early 1998 they have lent $365 billion to telecom companies,
says Loan Pricing Corp. Then came an unending string of defaults. Winstar,
McLeodUSA, 360 Networks, Global Crossing and Metromedia Fiber have filed for
bankruptcy protection--trailed by the biggest belly flop of all, WorldCom with $32 billion
in debt. Qwest may go next.
Yet the debacle has, so far, barely bruised the banks that led the way: J.P. Morgan
Chase (NYSE:JPM - News) , Citigroup (NYSE:C - News) and Bank of America
(NYSE:BAC - News) . Those three each led over $40 billion in telecom debt deals last
year alone. But they have eluded the financial fallout by shifting much of the flaky
paper--and most of the risk--on such institutions as the California Public Employees
Retirement Systems (Calpers) and the pension fund for government workers in Los
Angeles County as well as lesser rivals like Mellon Financial (NYSE:MEL - News) .
Which helps explain why the banks floated so many risky loans in the first place.
"Bankers have gotten away from being bankers," says Frank Colombo, managing
director at Seaport Group, which trades distressed debt. "There used to be a discipline
founded from the fact that you own the debt."
The big banks offloaded the risk by syndicating loans widely to other banks and
shipping bonds to pension funds and insurance companies drawn to the high yields.
Now Calpers and other pension funds are among the bondholders suing J.P. Morgan,
Citigroup, Bank of America and myriad other lenders, charging a lack of due diligence
in their underwriting. (The banks say the suits have no merit.)
Calpers lost $330 million in WorldCom debt. A Texas teachers' pension fund lost $59
million, the New York State pension fund $88 million. Mellon Financial just wrote off
$100 million as a result of bum WorldCom loans it held. Since the beginning of 2001
the value of telecom debt in the secondary market has fallen 28%, compared with no
change for the debt market overall.
The megabanks' exposure, by contrast, was mild. J.P. Morgan, which led telecom
deals worth $235 billion since 1998, today holds $8 billion in telecom loans--mostly
very senior debt that is likely to be repaid in full. Last quarter J.P. Morgan saw
commercial loan chargeoffs rise $81 million to $293 million, due in part to telecom
problems as well as the overall sluggish economy. As for the biggest bankruptcy in
history--WorldCom--J.P. Morgan's exposure ended up being less than $20 million.
Sometimes banks fare all too well at spreading the risk to others. WorldCom's wipeout
was a nonevent at Citigroup's banking arm, which sold off the risk to institutional
clients--including Citigroup's own insurance divisions, which owned $335 million in
WorldCom debt that is now worth a tiny fraction of that, says Chief Financial Officer
Todd Thomson. As the year began, 4% of Citigroup's corporate credit loan portfolio
was in telecom, compared with 8% of total debt offerings since 1998. Bank of
America's total is down to 1%.
Now the big Wall Street banks are capitalizing nicely on the sad shape of telecom. The
big loans they make now are debtor-in-possession financing deals with companies in
Chapter 11. Unlike earlier loans, this paper is typically very well secured. Among the
leaders of WorldCom's recent $750 million possession loan: J.P. Morgan and
Citigroup.
It could be months or years before Calpers and other stung debt-holders get a verdict
in their lawsuits against the lead lenders. A bigger threat: More falling telecom
dominoes could yet stick the banks with debt they can't dump or hedge. Wireless
companies, some looking overextended, tend to have much more bank debt. Other
telecom companies also have bank lines of credit they can draw on as a last resort.
But, for now at least, the megabanks have shown that making bad loans can be a good
business--as long as you can find suckers you can fob them off on. |
