Another cascade of depressing news as more and more financial and other groups are caught up in the imploding US subprime mortgage and housing sectors.

ETrade, the US online brokerage and financial services firm, has been hurt by big losses on subprime mortgages and its shares collapsed overnight, falling more than 50% in New York. The damage was done after the firm revealed in a filing with the US Securities and Exchange Commission that it faces bigger losses on a $US3 billion portfolio of loans.

Citigroup analyst, Prashant Bhatia, wrote in a report that there’s 15% chance the company will seek protection from creditors after poor management “put the viability of the franchise at risk”.

ETrade shares fell $US5.04, or 59%, to $US3.55 on the NASDAQ Market. The stock has fallen 84% this year, wiping out about $US8 billion in market value.

Two investment analysts: one at Deutsche Bank and the other at Bear Stearns, have separately estimated losses on subprime mortgages and dodgy credit derivatives could hit $US400 billion for US investors.

Deutsche Bank estimated that banks and brokers will be forced to write down as much as $US130 billion because of the slump in subprime-related debt. Banks alone might have to write-off $US60 billion to $US70 billion this year.

Deutsche estimates that $US1.2 trillion of the $US10 trillion of outstanding US house mortgages are considered to be subprime. And it says it expects 30% to 40% of subprime debt to default. Loss rates on about $US200 billion of securities based on derivatives linked to subprime debt will run as high as 80%.

These estimates are larger and more comprehensive estimates than anything so far given in the US and top the estimate of $US150 billion in losses given by US Fed chairman Ben Bernanke at a Congressional hearing last week.

The president of the Blackstone private equity buyout group, Tony James, told reporters in the US this morning that mortgage crisis is deeper and “scarier” than anyone expected. He was speaking after producing worse than expected quarterly results which saw the Blackstone shares fall 7%.

James was confident on deals saying that, “Lately, deal flow was up and, frankly, up significantly, and prices are down. So that bodes well both for activity levels and future returns.”

But he added: “The mortgage black hole is, I think, worse than anyone saw. Deeper, darker, scarier. [The banks] are now looking at new reserves and my sense … is they don’t have a clear picture of how this will play out and confidence is low.”

The analyst who triggered the current slump, CIBC’s Meredith Whitney, says the share price of America’s biggest bank, Citigroup may fall a further 14% to below $US30 a share because of the impact of impending losses and write-downs by it and other banks.

In a report quoted on Bloomberg she and another analyst wrote: “The optics for the group are not good at the moment, but they are poised to get worse.” They forecast the bank’s capital position will worsen with so-called Tier 1 capital falling “materially” this quarter.

Whitney’s downgrade of Citigroup on 1 November helped force the resignation of the bank’s CEO, Charles Prince and saw the bank forced to admit to further losses of $US8 billion to $US11 billion.

Fortune magazine has estimated that from June 29, the dozen biggest Wall Street firms and the commercial banks with the largest investment arms — a list that includes Citigroup, Merrill Lynch, Bank Of America, JPMorgan Chase, Morgan Stanley and UBS and Credit Suisse — have lost more than $US240 billion in market value. Dozens of smaller companies in the mortgage business have suffered huge losses or folded completely.

According to Fortune, Merrill’s $US41 billion exposure to subprime paper was more than its entire shareholders’ equity of $US38 billion. “That this huge position went unhedged astonishes everyone on Wall Street. The $7.9 billion write-down meant that Merrill lost 19% on its bonds.”

“Merrill still has $US21 billion of unhedged exposure to subprime bonds. It’s also holding $US11 billion in CDO bonds that it says are fully hedged. Analysts are forecasting another $US4 billion write down this quarter.”

In Germany, WestLB AG, the German state-owned bank under investigation over questionable trading losses, said it will report a full-year loss of more than $US145 million for 2007 because of “persistently difficult market developments.”

And here’s two handy websites: The Mortgage Lender Implode-o-meter and the Hedge Fund Implode-o-meter. ML-implode discloses that 182 businesses, companies, firms and other associated with selling or dealing in subprime mortgages or the derivatives have gone bust or disappeared since the end of 2007, while HF-implode shows that 37 individual funds have gone or been closed or are liquidating.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey