T Nation

Big Banks, Big Trouble

Investors fear for US bank losses
By Francesco Guerrera in New York

"Wall Street is bracing itself for a week dominated by news of large losses, multibillion dollar writedowns and thousands of job cuts as Citigroup and Merrill Lynch, two of the worst casualties of the credit crunch, report results.

Investors and bankers fear that another set of dire numbers by the two lenders will reverse the slight improvement in sentiment in recent weeks and quash hopes of an end to the financial turmoil soon.

First-quarter results at the two banks are expected to be hit by huge markdowns on their portfolios of mortgage-backed securities and leveraged loans.

Citi is likely to report a writedown of more than $10bn, while Merrill Lynch could suffer a writedown of more than $7bn, according to analysts.

Vikram Pandit, Citi�??s chief executive, is working on a cost-cutting plan that could cut more than 25,000 of the company�??s 370,000 employees. John Thain, his counterpart at Merrill Lynch, is also in the throes of a restructuring that could axe more than 2,000 jobs."


The orchestra is warming up…

These further writedowns are just part of the on going market correction. The problem with mortgage backed securities is that most of them (CFD’s and various other SIV’s) are incredibly complex. They have packaged, repackaged and chopped up all existing debt then sold them on to hundreds of different investors.

The fact that the process has been incredibly opaque and that many have invested irresponsibly (they did not fully understand the risk) means that we are still, today, witnessing these writedowns.

It’s just a question of time for all the possible repercussions (of the MBS) to become obvious.

Job losses are unfortunately just another risk that anyone who works in the sector has to accept.

I think that this crisis which has stemmed from an under appreciation of risk, corruption and mis practice by certain mortgage lenders as well as flawed business models by other mortgage based businesses (Northern Rock) will in the long run (say 2 years) even out and actually strengthen the financial system.

As for the plausible recession I think America is already suffering. If we go back to the basics; the number of imports coming has already decreased substantially. A clear sign of consumer caution.

The rest of the world is not so much at risk so long as the situation will clear up within the next 2 years.