Thursday, March 27, 2008

Citi/Merrill to Face Massive Write downs in Q1

The financial sector continues to get battered by the deepening housing crisis. Many on the street expected the majority of the financial write downs would be taken in the 4th quarter of last year. Well as the numbers start coming out it looks like 1st of '08 is going to be just as bad.

Meredith Whitney of Oppenheimer, who is become a star analyst on Wall St. because of her accurate calls on the financials, predicts in a report today the following write downs:

"She said Citigroup's first-quarter write-down could total $13.12 billion, and that write-downs in the sector could top $50 billion.
"Many expected the fourth quarter to be the 'kitchen sink' for the industry," Whitney wrote in a separate report dated Thursday. "First-quarter results (will) be a rude awakening."
In October, Whitney correctly predicted that Citigroup would cut its dividend and raise $30 billion of capital. She expects more banks to seek new capital, with Citigroup "most needing of the swiftest and largest capital raise."
Whitney now expects Merrill to lose $3 per share in the first quarter, and tripled her projected write-down from $2 billion. She had previously forecast a profit of 45 cents per share. The analyst also cut her 2008 profit-per-share forecast to 20 cents from $4."

"UBS, meanwhile, may suffer a first-quarter loss of $2.75 per share, Whitney wrote. She previously forecast a profit of 72 cents per share. The analyst cut her 2008 profit per share forecast to 45 cents from $3.70.
Whitney wrote that UBS faces write-downs of $6.86 billion on CDOs, $3.19 billion on Alt-A loans, $650 million on leveraged loans and $355 million on commercial real estate."

These numbers are staggering: $13 billion in writedowns for Citi, $6 billion for Merrill, and $11 billion for UBS. Expect this to force banks to hoard more cash and make lending standards even more tough. They will also be pressured to raise capital. This is being shown in the Libor rate today as it has hit its highest level since March 14th according to Bloomberg. This higher rate is another indicator to use that tells you banks are hoarding cash instead of lending.

As these foreclosures continue to rise so will the write downs at the banks.

Also today:

The foreclosure rates on subprime were also released by the Fed on CNBC today for the fourth quarter. The Fed said that there were 180,000 subprime foreclosures in the 4th quarter. The 90 day delinquency rates on subprime were at 24%!!!. So 1 in 4 subprime loans is now 90 days past due.

This data shows that the end seems to be nowhere in sight. Expect many of these 90 day past due homes to be foreclosed on shortly. this as a result will further depress housing prices as it just adds to inventories and banks are forced to sell these foreclosed properties at a huge discount. The crisis continues to deepen in the housing market and the time bomb keeps ticking.


Anonymous said...

IMHO your blog is very interesting ;). But there are almost no comments. I do not understand why. I hope that number of viewers is a little bit higher. I like your independent view of subprime "submarine" ;). Taking into account weaker and weaker data for US economy Wall Street seems to be disoriented and irrational at the moment. Of course in long-term, playing with all mortage cards on the table is unavoidable. Keep doing that great job.

I recommend you to watch funny video on YouTube titled "The Long Johns - The Last Laugh - George Parr - Subprime". Maybe you have seen it already.

Two guys in video explain why

God does not bless GreenSpam and Be(a)rnanke ;).

Jeff said...

Hey anon

Glad you are liking the blog and thanks for the feedback! I started this about a month ago and the pageviews has been growing steadily.

Fortune Magazine just invited me to be one of their blogs on their new online financial site so I think that will increase the exposure as well.

I agree with you, Wall St. and many investors are totally irrational when it comes to pricing these financials. The talking heads on CNBC keep calling bottoms everyday and then look like fools when the next set of writedowns come I will check out the you tube video.