America’s second biggest bank, Bank America, has warned that third quarter earnings will take a hit from the impact of the subprime mess and the associated credit markets freeze and ETrade, the big online broking company, says earnings would slump 25% in the current quarter due to the costs of exiting the wholesale mortgage lending business.
Bloomberg quoted Bank of America’s Chief Financial Officer, Joe Price, as telling investors that trading and other areas of the bank’s capital markets and advisory services unit are “being adversely affected by all of these conditions.” He cited stress on subprime mortgages and in the commercial paper market as being especially severe.
“These are quite challenging financial times, and I cannot remember when credit markets in particular have been as volatile and unpredictable as they have been for the last few months,” said Price.
Bank of America joins the growing list of banks and securities firms to warn that the fallout from rising defaults on subprime loans will hurt profit. Merrill Lynch & Co. said last week that “challenging” conditions in fixed-income markets required “fair value adjustments” to certain investments and financing commitments, and any losses will be reflected in third quarter earnings.
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And tonight Lehman Brothers is the first of the big five Wall Street investment banks due to report its latest earnings. It might be overshadowed by the Fed’s decision but its results will be poured over as the bank has been a big player in the refinancing of subprime mortgages in the US and other parts of the world through so-called CDOs (collaterallised debt obligations). That includes Australia where its recently acquired subsidiary, Grange Securities, has been a very aggressive marketer of subprime CDOs and CDOs based on subprime corporate debt to councils and other local government bodies in NSW and Victoria in particular.