IN THE space of six months, two of the best known US financial icons across the globe – Citigroup and American International Group – have been kicked out of the venerable Dow Jones Industrial Average index.
There is also talk that the Hang Seng Index may be cutting its weightage of HSBC Holdings as a component stock. Some see this as a sign of the bank’s waning influence over Hong Kong where it traced its roots.
This apparently caused HSBC to fall about 3.8 per cent in today’s trading, dragging the Hang Seng down by nearly 3 per cent.
But first a word on Citi.
In arriving at their decision to drop Citi, the editor-in-chief of Dow Jones, Mr Robert Thomson, said: “It is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and on-going stake.”
He also expressed a hope that Citi would again be considered for inclusion after it had “refashioned itself”.
Fears over the health of beleaguered lenders such as Citi had been buried in the desperate search for good news – China’s strong purchasing manager index data, the surge in the Baltic Dry Index and etc.
But the concerns can just as easily reassert themselves.
In March, Howard Marks, a fund manager with US fund Oaktree, noted that there was widespread unhappiness in Congress about the insurance deal which the Citi cut with the US government, enabling it to only take the first US$30 billion loss on its toxic portfolio then estimated at US$300 billion, and 10 per cent of any losses beyond that.
“Should it come as a surprise that an insurance policy costs significantly less to buy than the amount of risk assumed by the insurer ? If it didn’t, why would anyone buy one ? And should any Congressman be surprised to learn that the US has a preference for seeing Citi survive and is willing to cut a deal,” he wrote.
So far so good. Citi and other major US banks had apparently turned the corner in the first quarter but there are still enough uncertainties to make one wonder if this is merely a lull in the number of mortgages in the troubled US residential market, or it has finally put the worst behind it.
And talking of insurance, it was the credit default swaps written by AIG to insure the risks of other financial institutions that caused so much grief, after it turned out that it had insufficient assets to make good the claims when they were put to it.
Unlike Citi, there is no way AIG is going to find its way back into the Dow Jones Index. Even its chief executive, Edward Liddy, had thrown in his towels after only eight months on the job.
As Oaktree’s Mark Howard pointed out in his advice to his clients, three things need to be accomplished to declare a success over the on-going war against the global financial crisis:
· Reduction of the vast amounts of debts now weighing down on the US economy;
· Dealing with the vast destruction of capital following last year’s meltdown in the value of financial assets and ;
· Restoring investors' confidence.
So far, the only objective which has been accomplished is the restoration of confidence in the financial market, as markets make a V-shaped recovery from March lows.