The cost of the subprime crisis continues to mount around the world, not just on Wall Street. To date, the total cost stands at around $US50 billion and rising, but without the full disclosure of the continuing cost of holding dud loans and mortgages on balance sheets of banks and other institutions around the world.

On Friday, US broking giant, Merrill Lynch said it would take a write-down totaling $US5.5 billion (about $A6.1 billion) mostly due to its exposure to subprime mortgages. That was after Citigroup, Deutsche Bank and UBS revealed a total of $US9.8 billion in write-downs and losses (or almost $A11 billion).

Last month, other investment banks; Bear Stearns, Goldman Sachs, Lehman brothers and Morgan Stanley revealed a total of $US4.3 billion in losses (around $A4.8 billion). JPMorgan Chase and Bank America have yet to report and both US banks are likely to reveal losses and write of a couple of billion dollars, according to estimates on Wall Street.

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In the wake of the Merrill announcement at the end of last week, the flood of stories failed to include the losses earlier in the year from some other financial blue bloods. The biggest loss is still the $US10.8 billion from global bank HSBC, much of it in respect of its troubled American offshoot, HSBC Finance Corporation.

It was one of the major players in subprime mortgages but took its harsh medicine much earlier in the year, in March. Merrill’s loss included a $US100 million reduction in the value of Merrill’s investment in First Franklin Financial, the subprime lender bought last year for $US1.3 billion, as the subprime boom was busting.

Washington Mutual, America’s biggest savings and loan, said Friday that its third quarter profit fell 75% after setting aside $US975 million to cover bad loans and had losses and write of $US410 million on mortgages and securities. But there are other big losses: American Home Mortgage collapsed two months ago, with losses of around $US1 billion (its mortgaging servicing business was sold last week for a substantial loss).

Then there is WMC, which is part of GE Money, the financial services arm of GE — it has cost its parents the best part of $US1 billion in losses and provisions and write-downs. WMC is being sold off by GE Money; the experience has been too embarrassing. And GMAC, now 49% owned by general Motors and 51% owned by the Cerberus private equity group, has reported total losses and write downs of $US910 million.

Countrywide Financial Services has lost over $US500 million and is looking at more losses in its third quarter. A New York broker late last week estimated the write downs could $US1 billion to $US2 billion. And two American banks have been closed partly because of subprime losses: Miami Valley Bank of Lakeview, Ohio, was closed by state regulators and NetBank of Georgia became the first US savings and loan to fail in three years last month.

Meanwhile in Germany, two banks — one a federally operating bank, IKB, and one a state Landesbank, operated by the state of Saxony, (SachsenLB) — have been bailed out and rescued at a probable cost of $US5 billion or more. Between the two they had around $US50 billion of loans and credit derivates called CDOs (Collaterised Debt Obligations) most of which were based on subprime mortgages in the US.

WestLB, the troubled the largest German state-run bank, incurred a first half loss after revealing losses of more than $US820 million on speculative trades in global stock markets in the first half of 2007. Only a small proportion of these losses related to CDOs and subprime mortgages though.

BNP Paribas, AXA, other European Hedge Funds and Investors lost around $US4 billion plus from investments or setting up off balance sheet investment funds which in turn put money into subprime mortgages and CDOs. Around 10 hedge funds in the US and Europe have either owned up to losses, been forced to close because of losses and the continuing drain on funds: the estimated cost $US10 billion, but we won’t know for up to three years as some of the funds are liquidated over that period of time.

At least one US fund, the Sentinel Investment Funds based in Chicago, lost around $US1.1 billion of $US1.5 billion in money it had on deposit from various investors. Charges are pending.

Here’s a list of “imploded” or suspect hedge funds in the US, Europe and other parts of the world.

In Australia losses are more than $US1.4 billion from Basis Capital, Absolute Capital and Macquarie Fortress. But the most surprising loss was the destruction of non-bank lender, RAMS: floated at $2.50 a share in late July, it is now worth less than 50c a share: the loss, more than $A700 million. But former owner, John Kinghorn and other insiders got over $A600 million in the float.

In the US, the failure and bail out of Northern Rock is the biggest victim, although not directly due to investment in US subprime mortgages. Its losses are hard to work out but total borrowings from the Bank of England/UK Treasury are now put at some 10.9 billion pounds, or more than $US20 billion: that’s an indication of the extent of the finance needed to keep the bank afloat while it is sold off.

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Peter Fray
Peter Fray
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