The credit crisis spreads as more banks announce exposure

15 November 2007
Banks and mutual fund managers are hastily putting support in place to prop up their money market funds and prevent their rating being affected because they’re exposed to securities that are vulnerable to the sub prime crisis.

As the credit crunch spreads through the economy, financial institutions are putting security measures in place to prevent further losses like those which have befallen institutions such as Merrill Lynch, Citigroup, and Morgan Stanley which have all been forced to write off billions of dollars.

The Bank of America has revealed new losses from the sub prime mortgage crisis which resulted from a huge number of repossessions; it will encounter a $3 billion hit on writedowns for its portfolio of home loan-baked securities. In order to reduce further exposure to the high-risk sector, it is injecting $600 million into a structured investment vehicle (SIV).

Also this week, Wachovia announced a $1.1 billion writedown, and Countrywide, American’s biggest mortgage provider, said it lent 48 per cent less in October than at the same time last year. It also reported making fewer loans, loans that were smaller and safer than sub prime investments, and cutting more than 2,000 jobs.

Amongst rumours that they are going to take hits similar to its peers, Wall Street bank Goldman Sachs has bucked the trend which is dragging its rivals through the mud and does not expect to take any significant writedowns in the wake of the sub prime crisis. Chief executive, Lloyd Blankfein, said in a conference that the firm is “confident we know how to evaluate these assets”, and offered words of hope for those who have not been so lucky, urging that “The world will not come to an end and the markets will recover.”

Confidence is still being knocked and a mood of caution is persisting among investors as the dollar continues to travel downward and recent oil prices hit record highs. However, signs of improvement in the US economy can be seen as consumer demand is helping to stall an unravelling of the American economy, with Wal-Mart – the world’s largest retailer – announcing improved earnings and better than expected third-quarter profits.

© Fair Investment Company Ltd