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Writedown Countdown


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  • | 6:00 p.m. September 4, 2008
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Writedown Countdown

Investors are implementing writedowns checks

on bank stocks as a new Wall Street ritual.

BANKING by Yalman Onaran | Bloomberg News Service

In the good old days on Wall Street, in 2007, analyst James Hyde didn't write a report about a bank without first checking to see how it ranked among managers of stock sales.

Today Hyde says he isn't doing his job right if he doesn't take a peek every other day at a different ranking: the one showing how much banks have lost on their mortgage-related assets. WDCI, the Bloomberg function introduced less than five months ago to track the writedowns, has overtaken LEAG, which ranks bond and stock underwriters, in viewers per day.

"WDCI is the new league table, or even better, the negative league table," says Hyde, a banking analyst at London-based European Credit Management Ltd., which oversees $27 billion for clients. "If people look at LEAG these days, it's to see who the biggest underwriter of mortgage securities was in the past. You're incriminated if you were."

The writedowns and credit-market losses at more than 110 of the world's biggest banks and securities firms reached $514 billion last week as the credit crunch continued to wreak havoc.

Since two Bear Stearns Cos. funds invested in mortgage securities imploded in July 2007, seven bank chiefs have lost their jobs, and regulators have seized 12 U.S. banks. New York- based Bear Stearns, then the nation's fifth-largest securities firm, was forced to sell itself when faced with bankruptcy.

New York University economics professor Nouriel Roubini forecasts that losses will reach $2 trillion - about one-seventh the annual output of the U.S. economy - as problems spread to the U.K., Spain and other countries.

IMF estimate

More than half that amount may be borne by banks and brokers, says Roubini. The rest will hit governments, pension funds, insurers and institutional investors. Roubini expects some 700 U.S. banks to fail and says he doesn't think the broker-dealers can survive as independent entities.

"Recognition of these losses will continue all of next year and perhaps even into 2010," says Roubini, who warned of the credit crisis in February 2007 on his Global EconoMonitor blog. "When I made the $1 trillion to $2 trillion estimate, people thought I was crazy. Now the $1 trillion looks like a floor, and more analysts are leaning toward the $2 trillion."

The tally on WDCI already surpassed the top of the range that the International Monetary Fund estimated in April banks would lose during the credit crunch. The IMF is scheduled to publish an update of its Global Financial Stability Report later this month.

As the losses build, WDCI readership has climbed. In July, an average of 4,000 users looked at the table daily, up 34% from the previous month, according to data compiled by Bloomberg. On some days, more than 10,000 Bloomberg users monitored WDCI. By contrast, LEAG was viewed by an average of 1,800 people daily in July, 17% fewer than a year earlier.

$160 billion gap

The writedowns far exceed the dwindling income investment banks have earned worldwide from initial public offerings. Those fees declined by almost two thirds to $2.1 billion in the first seven months of this year from $5.6 billion last year.

Makeem Asif, a credit analyst at KBC Financial Products in London, says he looks at WDCI several times a week. Asif closely follows the amount of capital raised to cope with the writedowns. Banks and brokers have sold $354 billion of common and preferred stock, convertible and subordinate bonds, as well as equity stakes in other companies to bolster capital. The gap between the losses and capital infusions stands at $160 billion, Bloomberg data show.

"There are still more writedowns to come, and it will be interesting to see what the banks will turn to for capital raising next," Asif says. "Most of the convertible bonds sold by U.S. banks have sold off aggressively since they were issued. So investors will be wary of buying similar assets when the next round comes."

Citigroup Inc. tops the WDCI rankings, with $55.1 billion of writedowns and credit losses since the third quarter of last year. That's almost as much as all the profit the largest U.S. bank by assets made during the previous 10 quarters. Merrill Lynch & Co., the third-largest U.S. securities firm by market value, follows with $51.8 billion of writedowns - more money than it earned in the past two decades. Both banks are based in New York.

UBS AG, Switzerland's largest bank, ranks third with $44.2 billion. That's equal to the profits the Zurich-based financial institution earned from 2002 through 2006.

The three companies, which account for almost one-third of total losses, were the top three underwriters of collateralized debt obligations. CDOs backed by mortgage bonds have been the worst hit in the crisis. Some have lost all their value.

Housing spillover

While the losses started with CDOs, they have spread to other assets, as investors lost appetite for debt tied to the housing market, and slowing economies in the U.S., Europe and Japan led to increased defaults on consumer loans. More losses will come from bank loans not packaged into securities, says Citigroup analyst Steven Wieting, another regular viewer of WDCI.

"The financial sector is the leading indicator for the rest of the economy," says Wieting, managing director of economic and market analysis. "What we have to worry about is the spillover from the housing market to other consumer borrowing and how much these disruptions in banking will hurt the real economy."

More writedowns and losses are expected when banks announce third-quarter results. New York-based JPMorgan Chase & Co., the third-largest U.S. bank by assets, said last month it lost $1.5 billion on its mortgage assets during the first month of the quarter. Overall, banks announced $9.8 billion of writedowns for the quarter as of the end of August, with one month left to go.

'The pains'

Analysts have been cutting their third-quarter profit estimates for banks to reflect the increase in writedowns. Three of the largest U.S. investment banks reporting earnings this month -- Goldman Sachs Group Inc., Morgan Stanley and Lehman Brothers Holdings Inc. -- will have $6.4 billion of valuation reductions, according to Citigroup analyst Prashant Bhatia.

Goldman Sachs analyst William Tanona is forecasting $10 billion of writedowns for Lehman, Morgan Stanley, JPMorgan and Citigroup in the quarter. Lehman has already taken $8.2 billion in writedowns, Morgan Stanley $14.4 billion and JPMorgan $14.3 billion. All the firms are based in New York.

WDCI also keeps track of job cuts on Wall Street, another number monitored by European Credit's Hyde, Citigroup's Wieting and KBC Financial's Asif. Banks and brokers have announced the elimination of 103,100 positions since July 2007 as they struggle to cut costs and their mortgage divisions sit idle.

 

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