/ 30 January 2008

Crisis inflicts fresh wounds, UBS cut deepest

Fresh write-offs at big European and Japanese banks on Wednesday drove investors’ attention firmly back onto the credit crunch after days gazing at Société Générale’s stunning losses, which it blames on a junior trader.

With the Federal Reserve expected to cut interest rates for the second week running, Swiss bank UBS illuminated the depth of the crisis — unveiling $4-billion in new write-downs tied to the United States subprime mortgage meltdown, dragging it deep into the red for the year.

UBS has now written off a total of $18,4-billion on the back of a credit crisis that has caused over $100-billion in losses worldwide and forced UBS and others, such as Citigroup and Merrill Lynch, to seek emergency capital from abroad.

The Swiss bank posted a 12,5-billion Swiss franc ($11,45-billion) loss for the last three months of 2007 and a full-year loss of 4,4-billion francs.

Newspaper reports said subprime losses at Japan’s Mizuho Financial Group may have ballooned to as much as $2,8-billion, potentially forcing the bank to cut its full-year forecast for a second time.

Japan’s second-largest bank, which reports results on Thursday, may have to inject ¥200-billion ($1,9-billion) or more into its faltering brokerage unit, the Nikkei business daily said.

A Mizuho spokesperson declined to comment on the reports but the bank’s president, Terunobu Maeda, said in November that the bank was having a tough time pricing its subprime investments.

”2007 [was] a horrible year for the banks and the sector is not out of the woods yet,” said Franz Wenzel, strategist at AXA Investment Managers in Paris. ”Most of the banks will try to put all the write-downs in their 2007 results as they want to clean the balance sheet going forward.”

Munich Re, the world’s second-biggest reinsurer, bucked the trend, posting record earnings for 2007 and booking fourth quarter losses of less then €10-million on investments exposed to the subprime market.

BNP Paribas, France’s biggest listed bank, said it expected fourth quarter net profit would fall 41,8% to €1-billion ($1,48-billion), as rumours swirled that it may pounce on weakened rival Société Générale.

”The market crisis is too serious for us to have anything to be proud of,” Paribas chief executive Michel Pebereau told Le Monde newspaper ”Nobody can say we have come through it.”

On August 9 last year, Paribas helped spark round one of the credit crisis by freezing three of its investment funds as defaults mounted on subprime mortgages, lent to Americans ill-equipped to repay them.

Interbank lending virtually dried up as banks realised they did not know which among them were dangerously exposed to the US subprime sector, forcing central banks to pour funds into money markets to keep them oiled, something they are still doing.

The interbank cost of borrowing dollars fell slightly ahead of a widely-expected Fed interest rate cut.

Euro and sterling Libor rates have also drifted lower in recent weeks but one-month euro rates edged up on Wednesday while three-month sterling rates eased for the first session in five.

Cut and cut again

Later on Wednesday, the Fed is expected to follow up last week’s surprise 75 basis point interest rate cut, to 3,5%, with a further half point reduction.

Financial markets see a three-in-four chance the Fed will lower benchmark overnight rates by a half-percentage point as it seeks to counter the risk of a US recession.

But with credit jitters compounded by Société Générale’s losses of more than $7-billion, which it said last week it had uncovered through massive unauthorised stock trading by one of its employees, markets looked unlikely to be overly impressed.

The shadow of an FBI investigation spread across the subprime crisis on Tuesday.

The FBI said it was investigating 14 corporations over possible accounting fraud and insider trading violations in a crackdown on subprime lending. The companies were not named.

The FBI said it was cooperating with the Securities and Exchange Commission. Goldman Sachs, Morgan Stanley and Bear Stearns each said government investigators were seeking information from them about their subprime activities. – Reuters