Markets fear banks have $1 trillion in toxic debt
By Sean O'Grady, Economics Editor
Published: 06 November 2007
A new phase in the credit crunch, one of "$1 trillion losses" seems to be
dawning. The crisis at Citigroup and renewed doubts about some of the
world's
leading banks disquieted stock markets on both sides of the Atlantic
yesterday, with the fractious mood set to continue.
The FTSE 100 fell 69.2 to 6,461.4, with Alliance & Leicester (down 4
per
cent) and Barclays (off 3 per cent, to a two-year low) singled out for
punishment. In New York, Citigroup, down |4.9 per cent to multi-year lows,
weighed on the Dow Jones index, which fell 51.7, or 0.4 per cent, to
13,543.4. Merrill Lynch, Goldman Sachs and Lehman Brothers also dropped on
speculation they face more writedowns on top of the $40bn (£19bn)
announced
in the past four months.
Bill Gross, the chief investment officer of Pacific Investment Management,
said US mortgage delinquencies and defaults would rise in 2008. "There are
$1 trillion worth of sub-primes, Alt-As [self-certified] and basically
garbage loans," he said, adding that he expects some $250bn in defaults.
"We've
only begun to see the pain from rising mortgage payments," he added. Brian
Gendreau, an investment strategist at ING, commented: "Financials are 20
per
cent of the S&P 500 and if that sector doesn't do well all bets are
off.
People just don't know what's on the balance sheets."
The banks remain unwilling to lend to each other, preferring to rebuild
their balance sheets and "hoard liquidity" to buttress themselves against
any shocks from repatriating off-balance-sheet losses from their special
investment vehicles (SIVs). However, this tightening up has led to a
vicious
circle. Making credit tougher has exacerbated the problems of struggling
mortgage holders in America; default rates then rise and make the banks
even
more exposed to losses as credit agencies downgrade their assets. This
seems
to be what happened at Citigroup. The admission that it was unable to
assure
investors that a potential $11bn write-down for sub-prime mortgages would
not grow has led to this fresh fit of extreme nervousness. Huge
write-downs
by Merrill Lynch ($7.9bn) and UBS ($3.4bn) have not helped.
Samir Shah at Landsbanki Securities said: "People thought most of the bad
news had been priced in. It seems we're entering a second phase of the
credit squeeze. We're going back to a place where liquidity is drying up
and
volatility is increasing."
Barclays has seen its shares savaged. "There is a concern about the extent
of the debts among the banks generally and who will be left holding the
debt," Richard Hunter, of Hargreaves Lansdown, said. "There's a
read-across
to Barclays Capital. People are concerned about the exposure it has."
Profit
growth at its subsidiary was "strong", the bank declared last month,
though
it offered no comment yesterday.
Alliance & Leicester also suffered from vague rumours that it had
turned
to the Bank of England for emergency funding. An A&L spokesman offered
this reassurance: "Each week in recent months, including last week,
Alliance
& Leicester has successfully raised the funds it requires. We have
also
continued our share buy-back programme."
The Chancellor, Alistair Darling, also pleaded for calm. "We are
experiencing an unparalleled period of financial uncertainty caused by the
problems in the US housing market," he said. "I believe that we can get
through that. Many banks in this country have very strong balance sheets
after years of making very good profits."
Meanwhile, on the continent, newspaper re****ts named two German banks -
WestLB and a small specialised bank for professional people - as possible
next victims of the crisis.
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