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Sat, Nov 17, 2007 - Page 10 News List

Investors worried over the extent of bank writedowns


Checking to see which bank is revealing billion-dollar losses in its portfolio has become something of a daily routine on Wall Street. On Thursday, traders fretted about Barclays' multibillion dollar writedown over their morning coffee.

The British bank estimated it would write down US$2.7 billion for losses on securities linked to mortgages for borrowers with poor credit. Barclays, along with Wells Fargo & Co, SunTrust Banks Inc and General Electric Asset Management joined the slew of financial companies anticipating, in total, more than US$30 billion in losses this quarter.

That figure doesn't exceed the roughly US$44 billion written down by financial institutions in the third quarter, but the fourth quarter is only half-way over -- leaving investors wondering how many more writedowns are on the way.

Deutsche Bank analysts estimate that over the next few years, the current credit crisis will have led to about US$300 billion to US$400 billion in losses for companies with investments exposed to subprime loans.

Wells Fargo and SunTrust officials said on Thursday they anticipated more losses from defaulting mortgages this quarter, although they have little exposure to the problematic debt instruments known as collateralized debt obligations (CDO).

"We have not seen a nationwide decline in housing like this since the Great Depression," Wells Fargo chief executive officer John Stumpf said.

General Electric Asset Management said on Thursday that outside investors had withdrawn US$600 million from a US$5.6 billion fund involving mortgage-backed securities. Late on Wednesday, NovaStar Financial Inc said it lost about US$252 million due to mortgages.

Many investors are bracing for UBS AG to report a substantial writedown -- a Lehman Brothers analyst is reportedly estimating a writedown of US$7 billion to US$8 billion. However, the Swiss bank said it expects to post a fourth-quarter profit.

Earlier this week, Britain's HSBC said it would write down US$3.4 billion; Bear Stearns Cos announced a writedown of US$1.2 billion; and Bank of America reported a writedown of US$3.3 billion.

Those followed even larger estimates a few weeks ago from Citigroup Inc and Merrill Lynch & Co, which expect writedowns as much as US$11 billion and US$6 billion respectively.

Because it's so hard to know how much some investments are worth in the tight credit markets, Wall Street remains uncertain how high losses really are.

Certain accounting rules require companies to price their holdings according to the market value; when there is no market, they have to estimate.

Neri Bukspan, chief accountant for Standard & Poor's credit market services, likened the process to figuring out how much your house is worth when no one in your neighborhood can sell theirs -- a scenario many US homeowners can relate to right now.

"Some argue this is highly judgmental, that management could introduce their own bias," Bukspan said.

Furthermore, if the credit markets worsen, banks will inevitably have to write down their portfolios further.

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