Markets brace for news of big losses by banks

Citigroup could write off US$24b, lay off 20,000 staff

(LONDON) Major American banks are expected to unveil substantial losses and secure more cash from abroad in what is shaping up to be a pivotal week for the global credit crisis.

Citigroup could write off as much as US$24 billion and lay off 20,000 workers in a drive to cut costs and boost capital, CNBC said on its website in a report dated Sunday.

CNBC said the plans will be unveiled today when Citi, the largest US bank by assets, reports its fourth-quarter results.

Investment bank Merrill Lynch is just as troubled.

The Financial Times said yesterday that Merrill was seeking about US$4 billion in a second capital raising, and the Kuwait Investment Authority was expected to be a significant investor. A deal could be announced as soon as midweek, the newspaper said, citing people familiar with the matter.

The New York Times on Friday said that Merrill was expected to suffer US$15 billion in losses stemming from bad mortgage investments, almost twice the company’s original estimate, when it releases its results later this week.

FT also reported on Saturday that Citigroup was putting the final touches to its second big fund-raising, seeking up to US$14 billion from Chinese, Kuwaiti and other investors.

The US$200 billion Kuwait Investment Authority had no immediate comment yesterday on the reports that it may buy into the two damaged American banks.

Banks, wrestling with huge losses stemming from mortgages lent to people ill-equipped to repay them, have been seeking cash from sovereign wealth funds.

In December, Merrill secured as much as US$7.5 billion by selling a stake to Temasek Holdings and New York based money manager Davis Selected Advisors.

The month before, Citi agreed to sell up to a 4.9 per cent stake to Abu Dhabi for the same amount.

As well as Merrill and Citi, other big names such as State Street and JP Morgan report results this week.

Wall Street analysts have turned increasingly wary over US financial results for the fourth quarter as well as the first two quarters of 2008, according to a weekly survey by Reuters Estimates yesterday.

The survey showed that analysts expect S&P 500 companies’ fourth-quarter earnings to fall 9.1 per cent from a year earlier.

That was gloomier than the 8.4 per cent decline forecast a week earlier, and the 11.5 per cent growth forecast in an Oct 1 survey.

The Federal Reserve was to auction US$30 billion later yesterday and the European Central Bank and Swiss National Bank will continue their unprecedented US dollar lending to banks as part of coordinated central bank efforts to help calm credit market tensions. The Bank of England will also weigh in.

Results of the latest ‘term auctions’, a plan agreed in December and one which has helped money market rates ease, will come today.

One to three-month Euribor interbank interest rates fell yesterday amid central banks’ moves to inject liquidity into markets.

Most analysts say the threat of further losses at major banks from investments tied to US sub-prime mortgages means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

The Fed is forecast to use its other policy lever – interest rates – before the month is out. It is seen slashing rates by a half-point at its two-day meeting ending on Jan 30 after Fed chairman Ben Bernanke gave a downbeat assessment of the US economy last week and said the central bank was ready to take ‘substantive additional action’.

Swiss banking giant UBS appealed to shareholders last week to back a capital injection by Singapore’s Temasek and a Middle East investor and warned it still could not predict how the sub-prime crisis would play out.

And shares in Northern Rock fell as much as 7 per cent early yesterday on fresh concerns that the bank is facing imminent nationalisation. Northern Rock is Britain’s biggest casualty of the credit crunch and has borrowed around 26 billion pounds (S$72.8 billion) from the Bank of England since it requested emergency funds in September.

 

Source: Reuters (Business Times 15 Jan 08)

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