Mortgage crisis still darkening the horizon for US banks

15 April 2008 / by Rachael Stiles
The already dark cloud surrounding America's banking sector darkened further yesterday as the country's fourth biggest bank admitted it needs $7 billion of funds as a result of the sub prime mortgage crash.

North Carolina-based Wachovia revealed that is has incurred an unexpected loss of $350 million in the first quarter of 2008, compared to making a $2.3 billion profit this time last year, which has driven down its shares by 10 per cent.

Wachovia's losses have been caused by a rise in provisions against home loans that turned sour when the homeowners were unable to keep up with their mortgage repayments; changes in consumer behaviour are also being blamed as Americans struggle to cope with the rising costs of food and energy, just as UK consumers are also doing.

In preparation for the impending crisis and credit-related losses, the bank set side $2.8 billion this year, compared with $177 million for the same quarter of 2007, before the credit crisis broke last summer.

As a result of its losses, the corporate and investment bank will cut 500 jobs in addition to the 260 which have already been cut since October 2007.

Wachovia has now joined other banks that have been hit hard by the credit crisis, two of which are America's largest banks – Citigroup and Merrill Lynch – which are both poised to announce massive writedowns as a result of losses from the sub prime mortgage market. Analysts are expecting to feel shocks to the tune of $17 billion later this week when the two banks report their quarterly results.

© Fair Investment Company Ltd