[DEBATE] : Investment banks 'to lose $30bn' -
Riaz K. Tayob
riazt at iafrica.com
Sun Sep 16 22:32:33 BST 2007
Investment banks 'to lose $30bn'
World investment banks are set to reveal they have lost about $30bn
(£15bn) from bad debts linked to the global credit crunch, a report says.
Analysts are predicting the firms - many of which report quarterly
results this week - will have to write-off 10% of the $300bn loans they
In some cases profits will be almost wiped out, the Sunday Times said.
The report comes ahead of a Federal Reserve meeting which is expected to
see a cut US interest rates.
The Fed is tipped to reduce rates from 5.25% by 0.25 or 0.5 percentage
points in a move that would be aimed at preventing the downturn in the
housing market and the credit crunch from severely denting the US economy.
By making money cheaper to borrow, it is hoped that people would spend
and invest more, revitalising the economy.
The results from investment banks including Merrill Lynch and Bear
Sterns will provide the first real insight into the impact of the crisis
on some of the world's biggest banks.
"The hits will essentially mean that some investment banks will have
made almost no money over the last quarter," said Khan Abouhossein, an
analyst at JP Morgan. "Profits will be close to zero".
As well as their involvement in bad debt, most are expected to reveal
their exposure to commercial paper - short term debt issued by large
corporations and financial institutions.
The paper is not used to finance large scale investments but provides
short term money - or cash flow - to these businesses.
When they mature, these short term loans are generally rolled over and
re-financed but the current crisis in the debt markets has led to
unwillingness among investors to do this for some loans.
The credit crunch has been brought about largely by troubles in the US
housing market where people with low incomes were given mortgages that
they have been unable to repay, and have therefore defaulted on.
But because these so-called sub-prime loans have been sold on to banks
and other institutions, it has been difficult to gauge who has exposure
to the losses, and to what extent they threaten various companies.
Former Fed chairman Alan Greenspan has told CBS's 60 Minutes programme
that during his tenure he "didn't get" how the surge in sub-prime
lending might dent the economy, saying he had no notion of how large it
had become until he was about to leave office.
Story from BBC NEWS:
Published: 2007/09/16 15:13:16 GMT
© BBC MMVII
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