You’re a big bank. Things got tough. Looks like they’re getting tougher. While everyone around you was losing their head… you lost yours too. And now you’re buried in a mortgage-backed train-wreck. Worse – here’s the clincher – other banks hedged to the hilt and now no one will hedge any more. Shorting the ABX costs the earth. How do you offset those big CDO writedowns?
Buy a Chinese bank!
Bank of America announced on Tuesday that it was sitting on a potential gain of more than $30bn – more than offsetting its subprime writedowns, reported the FT. All from a $3bn investment two years ago for an 8.5 per cent stake in China Construction Bank. What better hedge for space-age structured finance bets than a $1.8trn agricultural peasant depositor market!
Little surprise that other Western banks, of course, have stakes in Chinese financial institutions too. Soothing balm for subprimania or just more bets ready to go badly wrong?
HSBC owns a 18.6 per cent stake in China Bank of Communications. It bought that for $1bn in 2004. Here’s a graph of Bocom’s Hang Seng performance (via Bloomberg):
Citi owns a 20 per cent stake in the Shanghai Pudong development bank – bought in 2005, and a 20 per cent stake in the Guangdong development bank, bought in 2006 for $3.1bn. Pudong development bank (Shanghai):
Royal Bank of Scotland leads a 10 per cent investment in Bank of China. RBS itself owns half of that stake, but also manages shares for Merrill Lynch. Bank of China:
Goldman Sachs have a 5 per cent stake in Beijing’s Industrial and Commercial Bank of China, which they bought in April 2006 for a mere $2.6bn. ICBC’s Hang Seng performance:
Disclaimer: the value of your Chinese banking bubble may go down, as well as up.