There’s a new group of subprime borrowers in trouble in the US: some of the very banks who created the whole mess in the first place. The likes of Citigroup, Merrill Lynch etc etc.
Judging by the 7% charged to Citigroup in its latest $US14.5 billion bail out and the 9% being charged to Merrill Lynch for its $US6.5 billion cash injection, the once high flying paragons of American financial virtue are down there with all the punters sold the subprime con a couple of years ago.
Still the 7% for the second round of financing is a lot better than the desperate 11% being paid to Abu Dhabi for November’s emergency $US7.5 billion cash injection, which established a new asset class: the commercial bank priced as a junk stock.
According to figures from Bloomberg, Wall Street banks have now raised $US59 billion, mostly from investors in the Middle East and Asia, to replenish capital levels eroded by more than $US100 billion of write-downs from the falling values of mortgage-related assets.
Citigroup’s quarterly results, announced overnight, were stunningly bad. A fourth quarter loss of $US9.8 billion, its dividend cut by 41%, a further 4,000 job cuts (on top of the 17,000 already axed late last year) and a massive $US18.1 billion write-down, of which $US4.1 billion related to a drop in the value of its most profitable business, consumer loans.
That was the company’s first quarterly loss since the Citicorp and Travelers Group merger in 1998. In the same period last year, Citigroup reported a profit of $US5.13 billion, so the turnaround is more than $US14 billion, a figure that’s hard to comprehend. Citi’s revenue was badly damaged, plunging 70% to $US7.2 billion for the quarter, down from $23.8 billion a year earlier.
Analysts said that the write-off of consumer loans would have been enough to generate a lot of concern on its own, but when taken with the surprise fall in retail sales in December, it’s a major worry as consumers are obviously under rising pressure and have cut consumption to stay afloat. That signals bad debt concerns are ahead for banks and other lenders to the $950 billion a year personal loan/credit card market.
The news, coming on top of a 0.4% drop in retail sales in December, saw a general sell-off of stocks and major commodities, including gold and currencies. The Aussie dollar shed a cent after moving through 90 US cents earlier in the week.
The pressure is now on the US Federal Reserve to cut interest rates quickly.
Merrill Lynch, JPMorgan Chase, Wells Fargo and Washington Mutual are all slated to report quarterly results this week. There’s room in the subprime banking sector for new entrants.
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