December 31, 2007
Tom Bawden in New York
New year celebrations may not always usher in a better year. As Wall Street reflects on the misery of the past six months – the credit crisis, sub-prime losses, executive sackings and share-price slides – many say that the worst is yet to come.
As Goldman Sachs pointed out last week, Citigroup still has an estimated $25 billion (£12.5 billion) of collateralised debt obligations (CDOs) on its books, the bundled packages of sub-prime loans that are now perceived as so risky they are effectively worthless.
Merrill Lynch, which is expected to admit to writedowns of almost $12 billion in the fourth quarter alone, has about $8 billion of CDOs in its portfolio. According to Goldman estimates, JPMorgan is exposed to around $5 billion of the securities.
Even though American banks have collectively written off at least $60 billion in combined sub-prime-related securities, James Owers, Professor of Finance at Georgia State University, says that “the worst credit crunch in modern history still has some way to go yet . . . The repercussions will eventually be more widespread than the savings and loan crisis.” (This occurred in the 1980s and led to the closure of 1,000 American building societies, with the loss of $150 billion).