The 67% drop in quarterly earnings by Morgan Stanley this week, the $US2.8 billion loss and $US6 billion capital raising by Lehman Bros, and worries about big UK banks like Barclays, have renewed fears across the world’s financial markets.

Now Citigroup has added to the pressure with yet another warning about more write-downs and losses being on the way.

The bank’s chief financial officer said overnight that Citigroup would suffer more “substantial” write-downs on debt investments in the second quarter which ends on June 30. The CFO, Gary Crittenden, was quoted as saying that there will likely be more write-downs related to leveraged loans and bond insurers.

That saw Citigroup shares fall back under $US20 to $US19.64, before closing down 23 cents at $US20.17

Crittenden was reported as saying that the banks’ second-quarter write-downs on structured debt products known as collateralised debt obligations, or CDOs, would be lower than they were in the first quarter. Then Citigroup cut the value of its CDOs by about $US3 billion out of total write-downs of more than $US14 billion.

This added to the nervousness after the results from Morgan Stanley, Goldman Sachs (which showed a sharp earnings drop), the losses at Lehman Bros and two big write-downs, losses and dividend cuts by a couple of large US regional banks. Fifth Third Bancorp is trying to raise $US2 billion in new capital and dropped dividend 66% this week and Keycorp, another Midwestern regional is trying to raise a similar amount and cut its dividend in half.

The shares prices of both sank and confirmed warnings from some leading analysts and bankers that the next wave of US banking problems will appear in the country’s regional banking sector where falling house prices and plunging commercial property values have many in a double pincer.

On top of that, global futures and options broker MF Global warned overnight that tight credit spreads will weigh on its first-quarter earnings.

So it probably comes as no surprise to learn that the level of so-called short interest on the New York Stock Exchange is now at an all-time high, suggesting an increase in bearish sentiment in the market.

Figures out this week showed that short interest rose to about 17.65 billion shares, compared with the previous record high of 16.43 billion shares on May 30. The latest figure is equal to around 4.3% of all listed shares on the NYSE.

Short interest is where investors sell securities “short” profit from betting stocks will fall. The short-sellers borrow shares and then sell them, waiting for the stock to fall so they can buy the shares back at the lower price, return them to the lender and pocket the difference.

“Shorts” have attracted a lot of attention here, but in the US, where they have to be registered, the level of activity forms a valuable tool for investors and can signal changes in market sentiment.

But not here where the ASX and ASIC have turned a blind eye to the practice (and stock lending) and the activities of margin lenders doing both until Tricom and Opes Prime happened.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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