We ♥ John Hempton.
So we thought we’d present the Australian hedge fund manager’s latest thoughts on the financial fallout (no pun intended) from Japan’s devestating earthquake:
Warren Buffett once said that Fannie Mae had more supercatastrophe risk in it than Berkshire Hathaway. He figured the really really big hurricane or earthquake could do more damage to Fannie than Berkshire even though Berkshire is the largest supercat insurer in the world.
Buffett was – I suspect – right.
We now unfortunately have a gruesome test of Buffett statement on finance and supercatastrophe. There is probably more uninsured damage in the destruction of North East Japan than in any other event in history – and uninsured damage falls sharply on banks.
77 Bank – deeply concentrated in the disaster zone – is the test. It is not a test I would want to repeat. But I think we will – at the end of this – be able to confirm Buffett’s observation that banks don’t like supercats.
Now, Hempton covered 77 bank back in early 2008, so some figures have inevitably changed. But given Japan’s loooong lost decade, we’re sure some things haven’t.
So here’s a quick recap.
77 is a regional bank in Sendai, the Japanese city that bore the brunt of of Friday’s tsunamis. It’s got hefty market share in the capital of Miyage prefec, which means it’s phenomenally exposed to the environmental catastrophe that’s just happened.
But even before Friday, it had some issues.
77 did relatively little lending and lots of deposit-taking. That’s not unusual in Japan, a place where bank lending has stagnated for years and interest rates are effectively at zero or below, but it’s noteworthy. Like many banks, instead of lending 77 would collect deposits and park them in yen securities like Japanese government bonds.
And then it sits on them. It has been, needless to say, not very profitable.
Up until now, 77 has very few loan losses because (dum dum dum) it made very few loans. And now, with Friday’s disaster, it will suddenly have to deal with loan losses on a potentially very wide scale without much pre-tax profitability to offset them.
That’s Hempton’s theory anyway. And we would add that nervousness in the Japanese government bond market, where lots of regional and megabanks have upped their investment in recent months, has the potential to provide some ‘indirect exposure’ to the earthquake, even if they have no direct exposure to the area.
No wonder the Bank of Japan is rushing to act.
Japan’s megabank-bond tremors – FT Alphaville