Day of reckoning for banks hit by US mortgage crisis

WASHINGTON – IT IS D-Day for the world’s big banks as they finalise last year’s results and try to account for the full scale of the credit upheaval spawned by the United States sub-prime crisis that threatens to stall the global economy.

Over the next two weeks, most major US banks will file annual reports with the US Securities and Exchange Commission (SEC).

Several of Europe’s biggest financial firms will also release 2007 earnings statements.

For some, it will be the first audited reckoning of how badly they were burned by the market turmoil that began with defaulting US sub-prime mortgage loans.

Those reports should go a long way towards clarifying banks’ financial positions as at the end of last year.

Figuring out how far the credit crisis will spread is much harder and may determine whether the world economy is heading for a recession.

Banks buried in bad debts have less leeway to lend to consumers and companies that drive the economy.

They have also grown wary of lending to each other because of uncertainty about which firms face heavy losses.

To date, major banks have disclosed more than US$140 billion (S$198 billion) in losses tied to mortgages, complex debts and other bad credits.

German Finance Minister Peer Steinbrueck said total write-offs could reach US$400 billion, suggesting that the barrage of bad banking sector news was likely to continue.

Mr Torsten Slok, an economist at Deutsche Bank, said bank write-downs of US$400 billion would no doubt be painful, but the impact on lending – and, therefore, the economy – would depend on how widely the losses were spread.

‘How much is $400 billion? If it is spread throughout the financial system, it’s peanuts. If it’s concentrated among only a few banks, it’s serious,’ he said.

The deadline for most publicly traded US banks to file annual reports with the SEC is Feb 29.

Although many, like Merrill Lynch and Citigroup, already revealed heavy losses when they issued fourthquarter results in recent weeks, these final year-end reports face closer scrutiny from accountants and could contain some new shocks.

European banks slated to report earnings this week include Barclays, BNP Paribas and Societe Generale.

Last week, Swiss bank UBS reported a net fourth-quarter loss of US$11.3 billion.

It also revealed that it had tens of billions of dollars in exposure to US mortgage loans, leveraged finance and other potentially risky categories.

Mr Kenneth Rogoff, an economics professor at Harvard University and former chief economist of the International Monetary Fund, said sub-prime-related write-offs were just the beginning.

With losses from commercial real estate defaults, unpaid credit card bills, auto loans, corporate debt and other items added in, the grand total may top US$1 trillion, he said.

‘We haven’t, by any means, seen everything,’ Mr Rogoff said. ‘If it were just the sub-prime debt, it wouldn’t be so bad. We’re just entering the US recession, so the defaults are just beginning.’

Source: REUTERS (The Straits Times 19 Feb 08)