Analysts Say Subprime Losses Could Top $600bn
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In a report out late last week, Geraud Charpin, the head of European credit strategy at UBS in London, said 'we have to recognise the risk that the economy will suffer more damage than what consensus suggests........ All the investment schemes that have been built on the basis of a strong and resilient economic backdrop have to be unwound / scaled down'. UBS expects the final bill for banks and brokers from the crisis to hit $350bn, less than half of which ($160bn) has already been disclosed.
And US and European stocks ended February down - the fourth-straight monthly fall, as the mood deteriorates and the bad news continues to hit.
Reuters reports that Punk Ziegel has lowered its first-quarter earnings estimates on a number of financial firms, including Citi, Goldman and Merrill. Analyst Richard Bove said in a note to clients that 'economic reports and management statements suggest that the economic environment has weakened in the past month. Therefore, the loan provisions for each of the companies has been dramatically increased to reflect the changing economic environment'.
The Wall Street Journal reports that The Royal Bank Canada has posted its fiscal first-quarter profits. Net income came in 17% down at $1.27bn, after $190m of US subprime lending-related write downs. CEO Gordon Nixon said that 'our US residential builder finance business continues to face pressure as the US economy remains under stress, but we are managing the current challenges'.
Bloomberg reports that Joseph Cassano, the head of AIG's financial products unit, is stepping down after the insurer lost $11.1bn on credit-default swaps and other fixed income products.The news agency also reports that Takefuji Corp, the Japanese consumer finance company, has confirmed it may lose as much as $291m on derivatives contracts arranged for it by Merrill Lynch. In the meantime, the Bank for International Settlements has said that derivatives trading fell by 21% in the fourth-quarter to $539 trillion - the biggest drop in 14 years.
Reuters reports that Warren Buffett's Berkshire Hathaway ended 2007 with $40bn of exposure to derivatives contracts designed to pay-off if junk bonds stay out of default and stock indexes rise. Berkshire has written 54 derivatives contracts requiring payouts if certain high-yield bonds default between now and 2013. The other contracts are said to involve put options on the S&P 500 and four other indexes.
The Wall Street Journal reports that PIMCO is moving its cash out of US Treasury bills into 'high quality' assets being liquidated by under-pressure financial institutions. CEO Bill Gross said that 'we're moving into assets that have been unwound and sold without discretion. There are tremendous hedge fund unwinds of municipal securities (for example)'.
Finally, Reuters reports that Nomura Holdings has replaced Nobuyuki Kaga as CEO and President with Kenichi Watanabe. Kaga steps down following a sharp drop in the firm's earnings.
