Friday, 04.18.08
Credit Sinkhole
Photo by Flickr User Shutter Cat 7 under a creative commons license
The $1.4 Trillion Question
January/February 2008
Wall Street's Housing Market Makeover
20 March 2007
Analysts call it a "kitchen sink quarter." Companies in shell-shocked industries write down everything that even looks like it might go wrong, clearing the balance sheet for future growth. For banking, that quarter was supposed to be the end of last year. Friday's earning report from Citibank, however, indicates that some in the industry might still have faulty plumbing yet to expose. After giant write-downs last quarter, Citibank again announced it needed to revalue its assets sharply downward. The financial giant took massive write-downs across multiple business lines, pushing revenue into negative territory and causing its second consecutive quarterly loss. The bank has now written down almost $40 billion due to the credit crunch.
The bank's woes offer snapshots of emerging trends. Its net interest margin -- the difference between its borrowing costs and its lending costs -- actually rose in the first quarter of 2007, thanks to cheap funds from the Federal Reserve. Nonetheless, the attempt to deleverage as quickly as possible cost dearly. Banking may be the only industry in which a CEO could proudly announce that "taken over the last two quarters, assets are down nicely." Fitch has cut the company's credit rating over concerns about the loss, and its future profitability.
Citigroup's own view of its profitability seems hardly more optimistic. The loans underlying many of its businesses are actually still performing above what the price of the securities would imply -- the bank actually reports that 90-day credit-card delinquencies are down slightly from the same period last year. Similarly, in the subprime market, delinquencies are still well under 20%, not quite a financial Armageddon. But everyone is waiting for disaster, and pricing accordingly. Citibank's current focus is on bringing down its leverage and cutting expenses, reflecting a general belief on Wall Street that there are still hard times ahead. Banks may be watching their investments go down the drain for quite a while.
The dark at the end of the tunnelWall Street bosses say the credit crunch is nearly over. Chadwick Matlin isn't so sure. |
Don't know much about creditologyDon't understand the credit crisis? Few do, writes David Leonhardt, including those embroiled in it. |
Goodbye, good riddanceJesse Eisinger says the subprime mortgage meltdown could finally end "the credit-ratings racket." |
Long slogThe chief of JPMorganChase warns that the credit crunch will last all year, James Quinn reports. |
