Credit crisis set to worsen as banks, property and investors suffer losses

02 November 2007
The credit crisis is far from over and a second wave could soon be seen in light of falling figures amongst banks, the mortgage-linked index and investors.

Deutsche Bank has reported a 19 per cent drop in pre-tax profits for the third quarter of 2007, largely due to writedowns on losses in the credit markets caused by the recent crunch, when problems in the US sub prime market leaked into the global economy.

The German bank yesterday announced losses of €603 million on leveraged loans and commitments, and a further €1.56 billion was lost through debt and trading operations, which included mortgage-backed securities.

Having benefited from the US sub prime mortgage market during the first nine months of the year, things turned sour for the bank in August when those trades turned against the bank as sub prime mortgages were falling into arrears and repossessions started rising considerably. Witnessing such an effect of the credit crisis on one of the largest operators in the fixed income market has shaken investors, pushing its stock down more than 15 points.

Dr Josef Ackermann, Chairman of the Management Board at Deutsche Bank, said: “The third quarter of 2007 was a period of exceptional turbulence in financial markets. In investment banking, our performance was significantly impacted by this extremely challenging environment; however, our 'stable' businesses performed well and we reaped the benefits of some recent investments.”

Meanwhile in America, a key mortgage-linked derivatives index is being pushed to new lows as a result of the housing crisis – the index is used to calculate the prices of a group of assets associated with sub prime loans and provides the financial industry a way to track mortgage-linked securities. There are fears in the market that lenders will be forced to make massive writedowns on top of those already made which have meant big losses for US and European banks which are still rolling in the wake of the credit crisis.

Investors are also drowning in a sea of downgrades on complex mortgage securities issued by investment banks such as Merrill Lynch – these cuts came about as a result of rating agencies granting potentially risky borrowers a loan whilst failing to take into account looser lending criteria and a slowing property market. Rating agencies are now trying to deal with the backlog of late mortgage payments from 2007.

Merrill Lynch suffered losses of $7.9 billion in the third quarter of 2007, causing serious concern for fourth quarter results. Rating agencies have admitted that the losses in the bad credit mortgage market have far surpassed their initial predictions.

© Fair Investment Company Ltd