Interest Rate Roundup

Monday, November 05, 2007

Write-downs, charges, and losses, oh my!

Forget lions, tigers, and bears. That's plenty of other news on Wall Street to scare the heck out of Dorothy this morning. Let's get right to it ...

* Citigroup jettisoned its Chief Executive Officer Chuck Prince over the weekend. The global bank also is on track to take another $8 billion to $11 billion in impairments on its subprime mortgage and bond book in the fourth quarter. It already took a $7 billion hit in Q3. The cost of debt default protection on Citigroup bonds has risen, while Fitch Ratings has lowered its Citigroup debt credit rating to AA from AA+.

* The Wall Street Journal reports that big lenders don't like the idea of allowing bankruptcy judges to restructure mortgage terms and conditions to help borrowers avoid foreclosure. Currently, judges can only restructure terms and conditions on unsecured, non-mortgage debt (credit cards and the like). Here's one excerpt of how things might work under proposed legislation:

"The new bill, sponsored by Reps. Brad Miller (D., N.C.) and Linda Sanchez (D., Calif.), would allow bankruptcy judges to change the interest rate and length of a mortgage for borrowers in bankruptcy, in an effort to avoid foreclosure. It could also potentially allow judges to change the balance of a loan. For example, if a borrower near foreclosure owed $125,000 on a house now worth $100,000, the judge could mark $25,000 as 'unsecured debt,' which would make it much harder for the bank to recover that portion."

* The Financial Times weighs in on why it's so darn hard figuring out who is losing how much on subprime mortgages and related securities. It's worth a read if you have the time. A key excerpt:

"When Merrill Lynch, the US bank, announced 10 days ago that it was taking $8bn-worth of losses on mortgage-related securities, bankers and regulators around the world reeled in shock. For the writedown was twice the size of the losses that Merrill had forecast just a two and a half weeks earlier – a “staggering” multi-billion dollar gap, as Standard and Poor’s, the US credit rating agency, observed.

"But last week, investors received an even more staggering set of numbers. As financial analysts perused Merrill’s results, some came to the conclusion that the US bank could be forced to make $4bn more write-offs in the coming months.

"These calculations were not limited to Merrill: after UBS unveiled $3.4bn (€2.3bn, £1.6bn) of third-quarter mortgage-related losses last week, Merrill Lynch analysts warned that the Swiss bank would need to take up to $8bn more losses in the fourth quarter of this year. Meanwhile, Citigroup's share price slumped on rumours that it may need to acknowledge another $10bn of losses.

"Such a tsunami of red ink would undoubtedly be shocking at any time. But right now, this news is proving particularly unsettling for investors for two particular reasons. First, the numbers offer an unpleasant reminder that the pain from this summer’s credit turmoil is still far from over – contrary to what some bullish American bankers and policymakers were trying to claim a few weeks ago. “To judge from secondary market prices, losses on mortgage inventory are likely to be larger in the fourth quarter than the third quarter,” warns Tim Bond, analyst at Barclays Capital, the UK bank.

"Second, the write-downs have reminded investors just how little is known about where the bodies from this summer’s credit turmoil might lie. Perhaps the most shocking thing about recent announcements is that while big banks might have now written down their mortgage holdings by more than $20bn, this does not appear to capture all the potential losses."


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