Tuesday, 19 February 2008

Writedowns Continue to Flow

If you thought writedowns by major financial institutions were nearly over with, think again. From Bloomberg:

Credit Suisse Writedowns to Cut Profit by $1 Billion

Credit Suisse Group, Switzerland's second-largest bank, said an internal review discovered pricing errors on bonds that will cut first-quarter profit by about $1 billion.

Credit Suisse reduced the value of asset-backed securities by $2.85 billion, the Zurich-based bank said in an e-mailed statement today. The company is assessing whether 2007 earnings may be affected by the pricing errors.

The writedowns reflect ``significant adverse first quarter 2008 market developments'' and are the result of an internal review that is continuing, Credit Suisse said. The bank also ``identified mismarkings and pricing errors by a small number of traders'' in the structured credit trading business. Credit Suisse reported last week that net writedowns on debt and loans in 2007 year amounted to 2 billion Swiss francs ($1.8 billion).

``I'm speechless,'' said Georg Kanders, an analyst at WestLB in Duesseldorf with a ``buy'' recommendation on Credit Suisse. ``To announce this just a week after reporting earnings is a major blow. This will again put the whole sector under pressure.''

Also Barclays took a hit in their latest results, from Bloomberg:

Barclays Second-Half Profit Falls 21 Percent on Writedowns

Barclays Plc, the U.K.'s third- biggest bank, said second-half profit fell 21 percent on asset writedowns and a slump in revenue from fixed-income trading.

Net income declined to 1.78 billion pounds ($3.48 billion), or 26.6 pence a share, from 2.26 billion pounds, or 34.5 pence, a year earlier, the company said in a statement today. That beat the 1.73 billion-pound median estimate of 13 analysts surveyed by Bloomberg. The company raised its dividend by 10 percent to 22.5 pence in the second half....

....Barclays Capital, the company's most profitable unit in the first six months of 2007, posted 1.6 billion pounds in net writedowns related to assets including collateralized debt obligations and loans for leveraged buyouts in 2007.

The bank, which abandoned its 63.2 billion-euro ($123 billion) bid for ABN Amro Holding NV in October, posted 1.7 billion pounds of gross writedowns for the first 10 months of 2007.

Barclays writedowns were not unexpected as they had previously been flagged to the market. However more disturbing are the writedowns yet to come. The New York Times had an interesting piece today on that very subject.

Wall St. Banks Confront a String of Write-Downs

Wall Street banks are bracing for another wave of multibillion-dollar losses as the crisis that began with subprime mortgages spreads through the credit markets.

In recent weeks one part of the debt market after another has buckled. High-risk loans used to finance corporate buyouts have plummeted in value. Securities backed by commercial real estate mortgages and student loans have fallen sharply. Even auction-rate securities, arcane investments usually considered as safe as cash, have stumbled.

The breadth and scale of the declines mean more pain for major banks, which have already written off more than $120 billion of losses stemming from bad mortgage-related investments.

The deepening losses might make banks even more reluctant to make the loans needed to prod the slowing American economy. They also could force some banks to raise more capital to bolster their weakened finances.

The losses keep piling up. Leading brokerage firms are likely to write down the value of $200 billion of loans they have made to corporate clients by $10 billion to $14 billion during the first quarter of this year, Meredith Whitney, an analyst at Oppenheimer, wrote in a research report last week.

Those institutions and global banks could suffer an additional $20 billion in losses this year on commercial mortgage-backed securities and other debt instruments tied to commercial mortgages, according to Goldman Sachs, which predicts commercial property prices will decline by as much as 26 percent.

Analysts at UBS go further, predicting the world’s largest banks could ultimately take $123 billion to $203 billion of additional write-downs on subprime-related securities, structured investment vehicles, leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail, a possibility that, for now, is relatively remote.

Such dire predictions underscore how the turmoil in the credit markets is hurting Wall Street even as the Federal Reserve reduces interest rates. Already, once-proud institutions like Merrill Lynch, Citigroup and UBS have gone hat in hand to Middle Eastern and Asian investors to raise capital. “You don’t have a recovery until you have the financial system stabilized,” Ms. Whitney said. “As the banks are trying to recover they will not lend. They are all about self-preservation at this time.”

Click on the link for the full article, it is quite lenghty but a good read and provides an interesting laundry list of the players involved. You have to take your hat off to Meredith Whitney who has been on the ball with this for many months.

As she says, banks are in self-preservation mode at the moment which severly impacts their ability to lend and drive new business. Expect writedowns every quarter for the remainder of the year and expect more injections from SWF's and expect finally someone to go under, my bet is Bear Stearns.

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