US banks continue to suffer from credit crunch woes

by Richard Kilner

Story link: US banks continue to suffer from credit crunch woes

Despite concerted action by central banks across the globe the credit crunch does not appear to be substantially slowing down.

Merrill Lynch has had to revise its original loss estimate of $7.5bn to $15bn, a doubling of financial damage caused by ruined mortgages.

The higher than estimated loss has led the firm to seek further capital from external sources, and is said to be expecting $3-4bn from a Middle East government fund.

Citigroup is also interested in gaining capital investment from outside sources, and is hoping to achieve a $10bn capital injection from an overseas government.

In late 2007, Citigroup raised $7.5bn through the sale of a 4.9% stake to Abu Dhabi.

Morgan Stanley has a writedown of over $9bn, though it has since received $5bn from China.

The enormous losses incurred by financial institutions worldwide are due to the US subprime mortgage crisis, where people classed as subprime were given mortgages they were unlikely to be able to repay.

Elsewhere, speculation is mounting that Bank of America Corp is in advanced takeover talks with ailing firm Countrywide Financial Corp.

In February 2007 Countrywide was worth $26bn, a figure that imploded in the wake of housing crisis and has since plunged to a mere $4.8bn.

The possibility of a rate cut of 50 basis points by the Federal Reserve has helped the markets somewhat, but conversely some see the unusually high cut hinted at by the Reserve’s chairman as a sign of worry.