Grim warnings send ripples through markets
NEW YORK/LONDON (Reuters) - Bleak warnings of more pain to come in the credit sphere snowballed on Tuesday and fears of subprime losses yet to be unearthed rattled money markets.
Bank of England Governor Mervyn King said it would take months for banks to reveal their full losses stemming from risky mortgages and former Federal Reserve chief Alan Greenspan said the housing debacle was a major risk to the U.S. economy.
Red ink flowed as IndyMac Bancorp Inc IMB.N, one of the largest independent U.S. mortgage lenders, posted a third-quarter net loss of $202.7 million due to mounting delinquencies and a collapse in investor demand to buy its home loans.
The loss was five times larger than it had projected, giving life to investor fears of more skeletons in the financial sector's closet. Emblematic of the market's mood, Goldman Sachs (GS.N) had to deny swirling rumors that it may need to write down mortgage-related losses.
International Monetary Fund chief economist Simon Johnson said financial market anxiety may have entered a second phase that could cause more credit tightening. Meanwhile, BoE's King reminded investors the banking sector had a long slog ahead.
"I think most people expect that we have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we're going in the right direction," he said in an interview with the BBC.
BALANCE-SHEET SHOCK
As fears rise of more balance-sheet shock, economists worry that the deteriorating value of the mortgage debt and derivatives banks hold will choke off the traditional lending they do to the rest of the economy, dragging down growth.
Giving credence to these fears, billionaire investor George Soros forecast on Monday that the U.S. economy is "on the verge of a very serious economic correction" after decades of overspending.
"We have borrowed an awful lot of money and now the bill is coming to us," he said during a lecture at the New York University.
Rising money market rates showed heightened concern among banks about the credit-worthiness of their counterparts. London interbank offered rates for dollar deposits LIBOR posted their biggest increase since late September.
"We are watching the credit markets with concern," said Johnson at the IMF.
In Europe, Germany's Commerzbank (CBKG.DE) posted a third quarter net profit of 339 million euros ($493 million) after writing off 291 million euros of assets exposed to the market for risky U.S. mortgages.
Others have already announced far bigger hits.
The head of U.S. banking giant Citigroup (C.N) quit on Sunday, taking the blame for expected losses of $8-11 billion before taxes, on top of $6.5 billion it wrote off three weeks ago.
Charles Prince's departure came five days after Merrill Lynch & Co MER.N ousted its chief executive, Stanley O'Neal, following an $8.4 billion write-down there.
Citigroup on Tuesday named Richard Stuckey, who helped stabilize the Long-Term Capital Management LP hedge fund, to fix its troubled subprime mortgage portfolio.
MOVE THOSE HOMES
Estimates of eventual total losses vary but all the figures put forward are staggering.
JPMorgan (JPM.N) thinks the financial services industry is sitting on $60 billion in undisclosed losses. Bill Gross, chief investment officer at the world's No. 1 bond fund PIMCO, characterizes the subprime crisis as a "$1 trillion problem."
Greenspan said about $900 billion of subprime mortgages had been securitized into fixed-income instruments, and the excess level of unsold homes was driving price declines that are eroding the value of the securities backed by those mortgages.
"The critical issue on the whole subprime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States," he said.
