Tuesday, April 15, 2008

The meltdown marches on

US banks Citigroup and Merrill Lynch reveal fresh $15bn loss
Wall Street and Broadway street signs in New York city

CITIGROUP and Merrill Lynch will heap further pain on Wall Street this week as they reveal additional sub-prime write-downs totalling $15 billion (£7.6 billion) or more.

In another sign of the intense pressure on leading banks, Deutsche Bank is attempting to offload some of its €35 billion (£28 billion) of toxic debt to a consortium of private-equity firms.

Huge exposure to American mortgages is expected to result in Citi taking a $10 billion hit to its accounts, dragging the bank to a first-quarter loss of almost $3 billion. Some analysts believe Citi’s write-downs could stretch to as much as $12 billion.

Merrill will suffer $5 billion of write-downs, analysts say, which would push the bank $2.7 billion into the red.

It is expected to knock a further 20% from the value of its sub-prime holdings, in spite of the fact that it announced $18 billion of write-downs only three months ago.

The new rash of Wall Street losses and write-downs come in addition to the billions that have already been recorded.

The world’s biggest banks have suffered losses and write-downs totalling almost $250 billion since the beginning of 2007, according to analysts. Last week the IMF shocked markets by saying that global losses from the credit crisis could rise to $945 billion.

JP Morgan is expected to offer the only glimmer of hope from this week’s results, posting a small profit, in spite of huge exposures to leveraged loans.

Some of the world’s biggest banks are beginning to work on new solutions to relieve tension in the financial markets.

Deutsche Bank is understood to be talking to a number of private-equity funds about a disposal of some of its backlog of loans to venture-capital firms.

The value of leveraged loans sitting on Deutsche’s balance sheet is greater than its shareholder equity. The bank is planning to sell on the loans to the private-equity funds at a loss to free up its balance sheet, according to market sources.

The plan mirrors a similar move by Citi to sell $12 billion of its leveraged-loan portfolio to private-equity firms including Blackstone, Apollo and Texas Pacific Group.

The Citi deal is hoping to close the deal in time for this week’s results. It is one of a number of significant moves by Vikram Pandit, Citi’s new chief executive.

But the sale could be hampered by problems with the planned inclusion of loans related to EMI, the music business. Citi bankrolled its buyout last year by Terra Firma Capital Partners, and still holds about $5 billion of EMI debt.

It was reported yesterday that Citi had been forced to remove some of these loans from the sale after buyers complained they did not have sufficient financial information on EMI.

Citi announced plans to sell its Diners Club credit-cards business to Discover last week, and is also considering a sale of its German retail-banking operations.

City insiders believe job losses are inevitable. Pandit is thought to be considering a radical reshaping of the bank’s equity research organisation. Insiders say that it may be slimmed down to focus on its top 300 clients, rather than providing a wider service to investors.

Some banks are looking to use the crisis to steal a march on their competitors. HSBC last week revealed its intention to use the tightening credit conditions as an opportunity to boost its 3% share of the UK mortgage market.

Abbey, which is owned by Spain’s Santander, has written close to 20% of all the mortgages handed out in Britain in the first quarter, according to sources close to the company. The bank is funding its expansion in the market by attracting more money from savers, analysts say.

Original article posted here.

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