The IMF now expects total losses related to the credit crunch to hit $1 trillion. Meanwhile, Merrill Lynch has announced yet another write-down, and plans to raise yet more money.
They keep saying the crisis is nearly over. The fat lady seems to be reaching her finale, and then, all of a sudden, she turns the page over and begins a new song of woe.
Cast your mind back to January. At the time banks must have thought all their nightmares were coming true at once. Now they must look back on the beginning of this year as the good old days.
Back in January, the general feeling was that losses related to the credit crunch would come to around $300bn. Some estimates put it at nearer half a billion.
Merrill Lynch made total write-down in 2007 of $22.1bn, and in January its boss John Thain said: “I don’t think you should anticipate any further problems of this magnitude.” He added, “There would have to be something incredibly bad out there to have this happen again, and our whole goal is to get 2007 behind us.”
It’s a bit like that scene in American Werewolf in London, when the main character seemingly wakes up from a nightmare, only to realize it’s not over. He is having a dream within a dream. It’s a trick Hollywood is now well practised at playing, but back then it gave the audience quite a shock.
Well, that’s what happening with the banks today.
It was less than two weeks ago when the bank last announced losses. In the second quarter it lost nearly $5bn, and in revealing its latest quarterly loss the bank found itself in the unenviable position of suffering four straight quarterly losses. So far it has lost $19.2bn, and total write-downs come in at around $40bn.
Then yesterday, as if all that wasn’t bad enough, it revealed yet more write-downs. This time $5.7bn.
And consider this:
When it revealed its last set of quarterly results – ah, that was July 17, it said it was putting a valuation of $11.1bn on CDOs with a nominal valuation of $30.6bn. So that was a big write-down on nominal value – and no one was thrilled by that.
But, just as Harold Wilson said a week is a long time in politics, it appears 12 days is a long time in the world of CDO valuations, because the bank has now sold those same CDOs to Lone Star Funds for just $6.7bn.
And while it was at it, the bank revealed plans to raise another $8.4bn.
Given this seemingly never ending saga of losses, it is no surprise to hear the IMF now reckons total losses from the credit crunch will come to $1tn.
Actually, it’s not that much of a new announcement from the IMF. In April it had estimated that subprime losses would come to $945bn, but back then it was different.
Back then the IMF was really looking at a worst-case scenario. Most analysts thought it was being unduly pessimistic.
But, at the time of writing, losses to date come to just short of half a trillion dollars. So, all of a sudden, that dreadful $1 trillion mark is looking horribly likely.
The IMF said: “At the moment, a bottom for the housing market is not visible. Stemming the decline in the US housing market is necessary for market stabilisation as this would help both households and financial institutions to recover.
“The growing concern is that, with delinquencies and foreclosures in the US housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming more widespread.”
Maybe the time to worry though is if someone says something like: “I don’t think you should anticipate any further problems of this magnitude. There would have to be something incredibly bad out there to have this happen again, and our whole goal is to get 2008 behind us.”
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