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 Financialshares 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, 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, 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 Chaseand 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.