Banks Have Their Heads in Sand on Risky Loans; Main Characters in an Unfolding Drama (Left to Right): George W Bush, Gordon Brown, Alistair Darling, US Fed Chairman Ben Bernanke and Bank of England Chief Mervyn King

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Byline: Lucy Farndon

WHAT a difference a year makes. On February 8 2007, banking giant HSBCwas slated for a major muck up in the US after suffering a $10.6bn ([pounds sterling]5.4bn) hiton subprime loans.

The word 'contagion' wasn't mentioned. This was just a niche problem confinedto HSBC and a few other reckless banks who had loaned too much money toundesirables who couldn't afford the repayments.

Now, 'sub-prime' is everybody's problem. Though, even 12 months on, there isstill no clear sense as to how bad the fallout will be.

What we do know is that the big banks have so far announced combined losses andwritedowns of $120bn.

It is also clear that most experts believe this to be less than half the likelytotal cost.

But when even august bodies such as the US Federal Reserve, the Organisationfor Economic Cooperation and Development and the G7 finances ministers candiffer in their estimates by as much as $200bn (more than the output ofPortugal) it is hardly surprising that the rest of us are left totallyconfused.

'The banking industry has had its head in the sand, so many of the losses areonly starting to emerge when companies are forced to reveal them in annualresults,' said one source at a UK bank.

'Some people are reluctant to admit how bad it is, others are probably tooincompetent to realise.' It took until last August and the near-collapse ofNorthern Rock for many to register that the crisis stretched far wider thanAmerica's trailer parks.

The sub-prime troubles had developed into a full scale 'credit crunch'.

Even so, for months afterwards, investment bankers maintained this was ashort-term blip.

Last October, investors were in such good spirits that they propelled the FTSE100 index up to 6,730, flirting with the all-time highs seen in the dot.comboom.

The Dow Jones hit a record high..

After a New Year reality check, the footsie has come back to a more sober 5,707and that probably won't be the last of it.

Yesterday alone, there was flurry of bad news. …