British Banks Worry as Billions Go Down Drain in Credit Crunch ; ANALYSIS

By Goodway, Nick | The Evening Standard (London, England), November 9, 2007 | Go to article overview
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British Banks Worry as Billions Go Down Drain in Credit Crunch ; ANALYSIS


Goodway, Nick, The Evening Standard (London, England)


IN THE past few weeks US banks have been forced to write-off tens of billions of dollars following the collapse in credit-related securities.

Two of the biggest bank chiefs have lost their jobs and some analysts fear the eventual losses could run into hundreds of billions of dollars.

The crisis triggered by low-quality homebuyers on the other side of the Atlantic defaulting on their subprime mortgages has already claimed a highprofile victim here in the shape of Northern Rock. But as the UK's major banks all approach their financial yearends their share prices have collapsed on fears that they will follow their US counterparts with massive write-offs.

The banks are set to tell the market how badly they have fared when they begin issuing pre-close trading reports at the end of this month and early next.

In the States by far the biggest writeoffs have all come from the large investment banks. They were the specialists at the heart of the complex market which built up in collateralised debt obligations for asset-backed securities..

Merrill Lynch announced the largest third quarter writedown at $8.4 billion (Pounds 4 billion), which cost its chief executive Stan O'Neal his job with a reported golden farewell worth $161 million.

That was topped by Citigroup which, having announced a third- quarter writedown of $6.5 billion, upped its estimate last weekend to as much as $11 billion. Charles "Chuck" Prince, chairman and chief executive, fell on his sword.

Then this week Morgan Stanley said it will take a $3.7 billion writedown in its fourth quarter but warned that this could rise to $6 billion if all its subprime assets turn bad.

The problem is that the credit crisis is far from over. Banks and investors in banks have no way of knowing just how much some of their most risky assets types will fall in value.

The difficulty is exemplified by the wide range of analysts' forecasts for the likely total cost. Citigroup's Matt King predicts total writedowns of $64 billion among US banks and brokerages.

Deutsche bank analyst Michael Mayo estimates $50 billion.

But that's peanuts compared with the estimate by Royal Bank of Scotland's chief credit strategist Bob Janjuah who said: "This credit crisis, when all is out, will see $250 billion to $500 billion of losses."

In a pun on the banks' normal valuation method for esoteric assets known as mark-to-market, which means they value them on current market prices, Janjuah said "the heat is on and it is inevitable that more players will have to revalue at least a decent portion" of assets they currently value using "mark-to-make believe".

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