Credit Market Turmoil Nearly Over: Bank Chiefs

Source : The Business Times, April 17, 2008

But investors remain unconvinced as bank stocks plummet

(NEW YORK) Richard Fuld, Lloyd Blankfein and John Mack say that the credit- market contraction is winding down. Investors whose bank stocks have plummeted aren't convinced.

Worst is over: (From above onwards), Mr Blankfein, Mr Fuld and MrMack are optimistic

Mr Fuld, chief executive officer of Lehman Brothers Holdings, told shareholders at the firm's annual meeting on Tuesday that the 'the worst is behind us'.

His comments followed similar remarks last week by Goldman Sachs Group's CEO, Mr Blankfein, who told investors that 'we're closer to the end than the beginning' and Mr Mack, Morgan Stanley's chief, who said that the crisis will probably last 'a couple of quarters' longer.

It's not the first time that banking executives expressed optimism that turmoil in the credit markets was contained or approaching an end.

And they were wrong. Total write-downs were about US$97 billion at the end of December and surged to US$181 billion by the end of February.

The world's biggest banks have recorded US$245 billion in asset write-downs and credit losses since the beginning of 2007.

Shareholders need 'more proof before they start believing things are fine again', said Rose Grant, managing director of Eastern Investment Advisors, the money-management unit of Boston-based Eastern Bank, which owns Merrill Lynch shares. Until the firms disclose the full extent of their write-downs and credit losses, 'people are going to sit on the sidelines'.

Investors will be getting a closer look at the magnitude of the ind

ustry's woes this week. JPMorgan Chase, the third biggest US bank by assets, said yesterday that first-quarter profit fell 50 per cent after US$5.1 billion of write-downs and provisions linked to bad home equity loans, financing for leveraged buyouts and sub-prime mortgages.

Merrill, the world's biggest brokerage, reports results today, followed by Citigroup, the largest US bank, tomorrow. All the firms are based in New York.

'Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress,' JPMorgan CEO Jamie Dimon said yesterday.

The International Monetary Fund said last week that losses stemming from the US sub-prime mortgage crisis may reach US$945 billion.

The fund also predicted as much as US$90 billion in further losses from potential downgrades of bond insurance companies.

The group estimated that more than US$500 billion of the losses will be related to banks.

The collapse of the sub-prime market in the US has reached its eighth inning or 'maybe top of the ninth', Mr Mack said on April 8, referring to the final period of a baseball game. Europe is in the sixth inning and the market for commercial mortgage securities is 'probably in the fifth', he said.

'If we are in the ninth inning, it's a double-header,' Sanford C Bernstein's Brad Hintz, the third-ranked securities analyst according Institutional Investor magazine, said in a Bloomberg television interview yesterday. 'It's going to take time for the market to settle down after this.'

The optimistic comments by Mr Fuld, Mr Blankfein and Mr Mack echoed those made by Wall Street executives in June 2007.

Christopher O'Meara, former chief financial officer of Lehman, told investors that 'we continue to believe that sub-prime market challenges are and will continue to be reasonably contained'.

Bear Stearns CFO Sam Molinaro said at the time that while declining value of sub-prime bonds was 'a challenge' for the firm, 'it hasn't spilled into other areas of the market'. 'Sub-prime continues to be weak' and yet 'there's very little effect on other credit markets,' David Viniar, the CFO of Goldman, told reporters on a conference call at the time.

Stan O'Neal, Merrill's former chairman and chief executive officer, said that sub-prime defaults were 'reasonably well contained'.

Bank of America CEO Kenneth Lewis said on June 20 that the housing slump was just about over. 'We're seeing the worst of it,' he said.

Bear Stearns helped trigger the credit contraction after two of its hedge funds, which invested in securities linked to sub-prime mortgages, collapsed in July. The company's fourth- quarter loss of US$854 million was the first in its 85-year history. -- Bloomberg