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To: Ahda who wrote (595)	12/13/2000 2:16:16 PM
From: Keith Monahan	Respond to of 24758

Banking on Trouble Phyllis Berman, Forbes Magazine, 12.25.00 Many big banks reported an increase in nonperforming loans in the third quarter, and the fourth quarter is likely to produce more of the same. That could mean big earnings hits for some banks—and a further tightening of credit, snagging an already-tiring economy. Bank of America's bad-loan load grew 44% in the third quarter over the same period last year; FleetBoston's 30%; and Bank One's 29%. A big regional, Wachovia, saw its nonperforming loans almost double to $460 million. All four have conceded that the fourth quarter could bring still more troubled debt. The federal regulator's annual report on the banking industry released in October estimated that $56 billion in commercial banks loans classified adversely. That is 8% of the total $701 billion of outstanding commercial loans, up from 5.3% just last year. Within weeks regulators were again pressing the banks to go even further and reclassify still more loans as risky—and that could force banks to increase their reserves. Our bank industry sources tell us that federal bank examiners have been swarming over syndicated-loan portfolios at several leading banks and forcing downgrades. The examiners rate loans on a scale of shakiness that ranges from 1 (gilt-edged) to 10. They are pushing banks to reclassify some 3- and 4-rated loans, which compel up to 1.3% in reserves against the loan, to 7 (5% reserve), 8 (15%) or 9 (50%). Once a loan is reclassified, all institutions holding a piece of the loan are bound by the new rating. The tricky part is figuring out which banks may be most vulnerable. Chase and Bank of America together account for about 50% of the origination of syndicated leveraged lending, but nobody knows what they or any other banks have in their leveraged portfolio today. But J.P. Morgan's Romain Burnand, with the help of bank researchers LoanWare, devised a vague indicator of current bank holdings by looking at all loans extended since 1997. Chase and Bank of America top his list of subinvestment-grade loans to telecom/cable industry clients, approximately $19 billion over that time period. In the latest two years, risky loans to these industries amounted to 10% of Chase's recent market cap and 15% of BofA's. Contrast that with two Canadian banks—Scotia Capital (with $7.7 billion in telecom/cable leveraged lending) and Toronto Dominion ($10.2 billion)—which are far more exposed. For both of these banks subgrade telecom/cable loans since 1999 exceeded 30% of the banks' recent market capitalization. So far this year earnings are up at Bank of America, Scotia and Toronto Dominion, and off about 11% at Chase. But it is almost inevitable that lenders like these—and their borrowers—will be under heightened pressure in the next year.

To: Ahda who wrote (595)	12/13/2000 2:22:17 PM
From: Bilow	Respond to of 24758

Hi Darleen Shurgot; In response to my writing that odds and probabilities are different ways of describing the same thing, you wrote: "Are you and Accountant". While I have a lot of respect for the accounting profession, I am not one. If you doubt what odds and probabilities are, to the mathematical community, here's a reference, found using a quick google search, just for you: NOTES: [1] The material in this chapter is largely drawn from Simon (1969; 3rd edition with Paul Burstein, 1985). [2] A given probability may be expressed in terms of probability, odds, or chances, and I shall use all three terms to help familiarize you with them. If the chances are 1 in 10, the odds are 9 to 1, and the probability is .1. If the odds are 2 to 5, the chances are 5 in 7, and the probability is 5/7. If the odds are 99 to 1, the chances are 1 in 100, and the probability is .01. If the odds are 100 to 1, the chances are 1 in 101, and the probability is 1/101. "Likelihood" is a synonym for "probability". inform.umd.edu There are plenty of other examples of this in the mathematical literature. One possible difference between odds and probabilities is that odds are used in a wagering sense to describe the payoff from a given bet. But that is not the usual meaning to mathematicians, as the above passage makes clear. It has been many years since I took an elementary probability class, but I have a very good mind for remembering the details of things like this, as I use them regularly in my work. -- Carl

To: Ahda who wrote (595)	12/13/2000 2:27:42 PM
From: Bilow	Respond to of 24758

Hi Darleen Shurgot; If you still have doubts about odds and probabilities, as used in the mathematical community, here's another reference for you: Some Related Notation, Concepts and Terminology Probabilities are variously stated as decimal fractions, percents, or common fractions, and the latter sometimes have numerator and denominator separated by the word "in" instead of a horizontal bar or slash. The probability 0.25, for example, might alternatively be expressed as "25%" or "1/4" or "1 in 4". "Chance" (or its plural form) is often used as a synonym for "probability". For example, according to published direct quotations, the seismologist cited above actually said "5% chance", rather than ".05 probability". "Odds" provides equivalent information, but the numbers are different. The odds in favor of an event are expressed as a ratio of the probabilities of the event occurring, and not occurring. An event with probability .25 of occurring has probability 1-.25 = .75 of not occurring, and thus odds .25/.75, which would be written as odds of 1/3, or 1 to 3. Odds and probability can each be converted into the other: odds = prob / (1 - prob) prob = odds / (1 + odds) Remark: While probabilities have an upper limit of 1.0, which will sometimes be inconvenient, odds can take on any non-negative values. A further transformation, to log(odds), can take on any real values, having no lower limit either. While of no immediate concern at this point in the course, these matters will become relevant later in the 210 sequence when regression analysis is considered. sscnet.ucla.edu -- Carl