Once again the pressure is rising on world financial markets, especially on banks and brokerages in the US, as reports of losses and warnings about the intensifying pain from the subprime mortgage crisis continue to grow.
In fact according to the chief financial officer of one big US broker, the liquidity crunch has returned, a factor that forced his firm to confess to a surprise near $4 billion extra loss on dodgy securities.
Wall Street had its second 300 plus fall in a week, losing 361 points overnight, much of that coming in the last hour as investors focused on worse than expected loss estimates from a big credit card company; the make up of the huge $US39 billion loss from General Motors, and broker estimates of between $US60 and $100 billion in additional loan losses and write downs for banks and others on dodgy subprime mortgages and associated securities.
GM is now valued by the US market at $US19 billion, compared to that accounting loss, which does include big write downs on its former 49% owned finance arm, GMAC and its subprime mortgage problems.
Our market fell by around 140-160 points this morning in reaction to the US, spooked by falls in the copper price and an easing in oil. Gold however held up as the US dollar again fell against the euro.
As well it was a warning from Washington Mutual, which is America’s biggest savings and loan lender, that it now saw the subprime crisis continuing for all of next year, and reports of a stepped up investigation into possible fraud involving it and two big quasi Government owned mortgage insurers (Freddie Mac and Fannie Mae), also spooked the market.
Those new loss estimates came from an analyst with the banking arm of the Royal Bank of Scotland who pointed out that an accounting rule change in the US next week will force investors holding hard to value securities, such as subprime mortgage associated credit derivatives, to take a tough line in valuing them.
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Then America’s biggest insurer, AIG said its earnings fell 27% because of over $US1.4 billion in losses. These were much worse than expected because the losses were higher than forecast because of the housing crisis and the subprime mortgage debacle. That came after the market shut, as did another shock from a big securities house.
Morgan Stanley, the second-biggest broking house, told the market in a statement that its losses from dodgy subprime mortgages and related securities had risen by $US3.7 billion over the past two months.
The firm said in a statement that this was worse than its traders (and auditors?) had expected. It could mean the firm is barely profitable in the fourth quarter, if at all, so steep is the loss. Morgan Stanley had been considered to be one of the few US financial companies (Goldman Sachs was another) to have all but escaped the impact the crisis has had on the balance sheets of bigger rivals like Merrill Lynch, UBS and Citigroup.
And, in the most worrying comment, Bloomberg quoted the Morgan Stanley Chief Financial Officer, Colm Kelleher, as saying: “The dislocation in the market has been quite severe, liquidity has dried up. You need to see some of these long positions reduced, you need to see buyers coming in; you need to see an easing of liquidity in the market.”
Kelleher said he now estimates the credit markets will take three or four quarters to recover, instead of the one or two he estimated when the firm reported third-quarter results in the middle of September, when it appeared it had only been lightly brushed by the crisis and associated credit freeze.
Analysts will now question the accounts of Goldman Sachs, Lehman Brothers and Bear Stearns, which also reported early and seemingly were not as badly hurt as the market thought they should have been.
The combination of events in the past two days has again raised the question of whether the US Federal Reserve will be forced to cut interest rates to again relieve pressure on Wall Street’s balance sheets and not help the economy, which seems to be holding up.
The big fall on Wall Street overnight has again erased all the gains since the Fed’s rate cut on September 18.
Besides the New York state probe of Washington Mutual the company said it now saw home prices falling in 2008 as the slump continued; said had to set aside $US1.3 billion this quarter alone for losses on bad loans; and saw US residential mortgage lending plunging by a third to $US1.5 trillion next year, compared to industry forecasts of $US2.3 trillion this year.
But the most worrying report was buried on the day. Shares in Capital One, a huge US credit card company, fell 7% after the company raised its 2008 loss provisions for bad credit card and mortgage debts from $US 4.9 billion to “the mid $5-billions”.
Analysts said this was a sign of the subprime and housing crisis seeping into other types of consumer debt. That’s a development no one wants to see.