Subprime Flare-up Burns Banks

The Age

Wednesday November 28, 2007

Marc Moncrief, Banking Reporter

A NEW wave of subprime mortgage woes is hammering the world's largest banks, with job cuts and write-downs expected from Wall Street to London's City.

Shares in HSBC fell more than 2% in Hong Kong after Europe's biggest bank said it would pump about $US35 billion ($A40 billion) into a pair of structured investment vehicles damaged by failing loans in the US.

SIVs borrow short-term money to buy higher-yield debt including bank bonds, mortgage-backed securities and collateralised debt obligations. They have lost as much as 30% of their value as loans given to "subprime" borrowers with poor credit profiles in the US have begun to fail.

Analysts at Goldman Sachs said the $US35 billion bail-out would not be sufficient, and HSBC would probably need a further $US12 billion. Goldman Sachs downgraded HSBC shares to "sell".

HSBC will also take assets worth $US45 billion from the two SIVs - Cullinan Finance and Asscher Finance - onto its own balance sheet. HSBC said in a statement it did not expect the move to affect earnings because the risk of default would remain with the SIVs' existing investors.

HSBC will transfer those investors to at least one new vehicle, and will guarantee liquidity in the new vehicle. The bank said it expected the guarantee to give the new SIV a more robust credit rating than Cullinan or Asscher, which would open access to money the previous SIVs were denied because of their credit profile.

While HSBC restructured, US TV network CNBC reported that Citigroup, which lends more money than any other bank in the world, may cut up to 45,000 jobs worldwide to make up for its subprime mortgage losses, estimated at up to $US17 billion.

A Citigroup spokeswoman said the numbers reported were "not factual", but that Citi was "reviewing ways to be more efficient and cost-effective".

In April, former chief executive Charles Prince announced he would cut 5% of Citi's workforce - about 17,000 jobs. A month later, Mr Prince resigned with a $US140 million package. Citi shares have lost about 45% of their value since the start of the year.

CNBC's report arose before Citigroup announced that the Abu Dhabi Investment Authority - the gulf state's sovereign fund - would buy $US7.5 billion of "equity units", which will be converted into Citigroup shares.

Win Bischoff, who stepped in as acting chief executive after Mr Prince's departure, said the money would "allow Citi to pursue attractive opportunities to grow its business".

Last night, Britain's third-largest bank, Barclay's, said net profit would be "broadly in line" with analysts' expectations.

Barclays said earlier this month that it would write down about #1.3 billion ($A3.1 billion) of subprime-affected securities. The announcement was welcomed as an indication the worst was already in the market.

It is expected Royal Bank of Scotland, the No. 2 British bank, will next week announce a write-down of as much as #1 billion of collateralised debt obligations, which are shares in a pool of bonds that may include subprime debt exposures.

One spark of hope has come from embattled British bank Northern Rock, with Sir Richard Branson's Virgin Group announced as its preferred bidder. London's Daily Telegraph has estimated Virgin could make #200 million in fees for allowing Northern Rock to change its name to Virgin Money.

© 2007 The Age

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