Banks May Write Down $34 Billion and No End in Sight

Citigroup, JP Morgan Chase, and Merrill Lynch & Co, may be forced to write down an additional $34 billion in assets related to the subprime mortgage collapse. The irony is that an analyst from Goldman Sachs is making the prediction.

Citigroup, JP Morgan Chase, and Merrill Lynch & Co, may be forced to write down an additional $34 billion in assets related to the subprime mortgage collapse. 

The irony is that an analyst from Goldman Sachs is making the prediction.

In an article I wrote severaral weeks ago entitled: Financial Companies Face $1.2 Trillion Risk I explained why banks were going to have to write-down significant assets.  Sadly, I believe $34 billion is a small percent of the bad debt and risk in the  market and that write-downs will continue into 2008 and 2009.

From a corporate standpoint, the losses have forced Citicorp's former CEO Chuck Prince III out as well as Merrill Lynch's former CEO.  Citigroup, which just a few years ago was the largest financial services firm in the world, is facing capital shortages and may have to cut its dividend or raise additional capital, beyond the $7 billion it already raised.  Others banks such as Washington Mutual, Countrywide, and IndyMac are facing severe pressures and face further write-downs.  And the mortgage guarantors Freddie Mae and Freddie Mac are scrambling as delinquincies increase.

On top of that, the real estate market isn't getting any better.  Bloomberg reported today that sales of new homes fell more than expected to a 12 year low.  This will continue to pressure house prices.  In an analysis done by the Boston Fed, falling home prices were seen as the main contributor to mortgage foreclosures.  Eric Rosengren, the President of the Boston Fed had this to say in a speech he gave on December 3, 2007:

"As a result of these significant problems emerging, the Boston Fed has undertaken a significant research agenda to better understand recent mortgage-market trends. Much of my talk today benefits from that work, so let me just highlight some of the initial findings. Much of the work is being done by Kris Gerardi, Adam Shapiro, and Paul Willen, who have just published a working paper on subprime defaults that can be accessed on our web site [2]. They have been examining data on all loans in Massachusetts since 1987.

They are finding, among other things, that the current problems in the subprime market are heavily dependent on economic conditions – particularly housing prices. [3] As a result, the outlook for how much worse this problem could become depends critically on the outlook for the economy and the housing market. We are currently expecting the economy to grow well below potential for the next two quarters, before gradually improving over the course of next year. Our research suggests that the foreclosure crisis will get worse before it gets better, but our forecast is quite dependent on how far house prices fall."

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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