The turbulence in the financial sector because of losses from US subprime mortgage securities could be worse than expected, the Financial Times reports.
US and European banks are coming under more pressure. Shares in banks and insurers continued to tumble yesterday as analysts warned that losses from mortgage securities could leave some institutions short of capital.
The turmoil has already cost chief executives their jobs at Citigroup, Merrill Lynch and UBS, and prices in the money markets yesterday suggested traders expected the credit problems to last at least into next year.
Federal Reserve governor Randall Kroszner told the FT “conditions for subprime borrowers have the potential to get worse before they get better.” He called on mortgage investors and servicers to consider modifying subprime loans en masse rather than on a case by case basis “to help large groups of borrowers.”
Meanwhile, bankers cast doubt on the plan, backed by the US Treasury, to launch a “superfund” to purchase distressed assets from troubled investment vehicles.
They said that the management upheaval at Citi, which lost its chief executive, Chuck Prince, on Sunday and the growing strain on its balance sheet were likely to slow down efforts to get the fund off the ground. In addition, some of the senior executives heading the project at Bank of America, one of the three key banks involved, were recently sacked in the shake-up of its investment bank.
Citi shares were off nearly 5% after dropping 11% last week, while the cost of insuring its bonds against default rose to record levels. Fitch, the credit rating agency, downgraded Citi’s debt one notch.
“Investors now believe the credit squeeze will last a lot longer [than before],” says Gerald Lucas, senior investment adviser at Deutsche Bank, who pointed out that the future cost of raising dollars in the interbank market – through a forward contract – rose sharply in New York, the FT reports.
Huw van Steenis, an analyst at Morgan Stanley, adds, “The bear market for banks is unlikely to end until we get some clarity on the extent of the losses.”
Investors pushed down shares for other banks amid fears of future writeoffs. Specialist insurers that provide credit to lenders and investors remained a concern for investors. MBIA shares were off more than 6%.
Frederic Mishkin, a US Federal Reserve governor, tried to reassure investors by stressing that the US economy appeared well placed to absorb the subprime problems.