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Banks Reel from Credit Crisis, but Hope for Rescue

Published: Monday, 12 Nov 2007 | 4:00 PM ET

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By: CNBC.com

The cavalry may be on the way for the financial sector, but in the meantime individual institutions are continuing to get hit with damage from the growing subprime mortgage crisis.

The latest casualties are Europe's biggest bank and the United States' biggest mortgage lender. This comes on the heels of a string of negative news last week, as banks and other financial outfits suffered losses on assets backed by subprime mortgages -- loans made to risky borrowers during the housing boom of the last few years.

AP
Indeed, banks worldwide may lose as much as $400 billion from subprime mortgages, as at least one in four of the risky home loans go into default, analysts said on Monday. (Read the full report on loss estimates here).

And the pain isn't stopping there. E-Trade Financial shares were trading sharply lower on Monday after a Citigroup analyst downgraded the stock, citing news Friday that the online brokerage had seen a significant deterioration in the value of its holdings of securities backed by home mortgages, and will take a writedown in the fourth quarter. (Read the E-Trade report here).

Those losses could compound an already tight credit situation worldwide. Lenders are clamping down on loans and lending practices until the full extent of the subprime damage becomes clear.

"The subprime black hole is appearing deeper, darker and scarier than they thought," Blackstone Group President and Chief Operating Officer Hamilton James said, referring to investment banks. James spoke on a conference call with media after its earnings were released on Monday. Blackstone swung to a loss in the quarter.

HSBC Outlook

HSBC [HBC Loading... () ], Europe's biggest bank, is this week expected to unveil a further big hit from its exposure to U.S. subprime mortgages.

HSBC Finance, the unit formerly called Household, will unveil third-quarter results on Wednesday. The Sunday Telegraph newspaper said HSBC will reveal a new $1 billion hit in its results. But the figure could be higher than that, as losses from the run-off of the U.S. mortgage book were about $2 billion in the second quarter and the market has deteriorated since then, analysts have said.

HSBC declined to comment on Sunday. (Read the full report on HSBC here).

Countrywide Rating Worries

Meanwhile, Countrywide [CFC Loading... () ], the largest U.S. mortgage lender, said in a U.S. regulatory filing on Friday that if its credit rating dropped below its current rating, this would "severely" limit its access to the public corporate debt market, which could have repercussions for its business.

A below investment-grade rating also would mean Countrywide would face more restrictive terms and higher rates when it renegotiated or refinanced its existing borrowings, the company said in a U.S. Securities and Exchange Commission filing.

"While we retain our investment grade ratings, all three rating agencies have placed our ratings on some form of negative outlook," the company said in the filling. (Read the full report on Countrywide here).

Help on the Way?

There may be some relief on the way. The three largest U.S. banks -- Citigroup, JPMorgan Chase and Bank of America, with the backing of the U.S. Treasury Department -- have agreed on the structure of a $100 billion super fund designed to help unblock the credit markets, the Wall Street Journal reported Monday, citing people familiar with the situation.

The superfund is aimed at buying certain assets from structured investment vehicles, the banks' off-balance-sheet entities that own mortgage-backed assets, to prevent them from selling the assets at fire-sale prices -- a move most believe would exacerbate the current credit crunch.

But the fund still has to obtain the blessing of the banks' corporate managements, legal departments, tax experts and credit-rating providers that will assess the debt associated with it, before it can become operational, the paper said.

And some are skeptical that such a fund could actually cure the root cause of the current crisis: loans going bad.

"The biggest concern is … who's going to regulate it, how big it will be and are we putting off losses that should have been disclosed today?" Mannus Cranny, head of sales at Cantor Index, told CNBC's "Worldwide Exchange." (Read the full report on the superfund here).

Friday Fallout

These latest developments follow a string of bad news from the banking sector as it struggles to contain the fallout from the defaults on risky loans made during the housing boom.