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Investors brace for bank losses in pivotal week
2008-01-14
Major American banks are expected to unveil substantial losses and secure more cash from abroad in what is shaping up to be a pivotal week for the global credit crisis, with central banks also poised to weigh in again. Citigroup Inc. (C.N) could write off as much as $24 billion and lay off 20,000 workers in a drive to cut costs and boost capital, CNBC said on its Web site in a report dated Sunday. CNBC said the plans will be unveiled on Tuesday when Citi, the largest U.S. bank by assets, reports fourth quarter results. Investment bank Merrill Lynch (MER.N) is just as troubled. The Financial Times said on Monday that Merrill was seeking about $4 billion in a second capital raising, and the Kuwait Investment Authority was expected to be a significant investor. A deal could be announced as soon as midweek, the paper said, citing people familiar with the matter. The New York Times on Friday reported Merrill was expected to suffer $15 billion in losses stemming from bad mortgage investments, when it releases its results later this week. The FT also reported on Saturday that Citigroup was putting the final touches to its second big fundraising, seeking up to $14 billion from Chinese, Kuwaiti and other investors. The $200 billion Kuwait Investment Authority had no immediate comment on Monday on the reports it may buy into the two damaged American banks. But the Wall Street Journal said Citigroup's plan to sell a $2 billion stake to China Development Bank (CHDB.UL) may be in jeopardy due to Chinese government opposition. Banks, wrestling with huge losses stemming from U.S. mortgages lent to people ill-equipped to repay them, have been seeking cash from sovereign wealth funds. In December, Merrill secured as much as $7.5 billion by selling a stake to Singapore's government and an asset manager. The month before, Citi agreed to sell up to a 4.9 percent stake to Abu Dhabi for the same amount. CENTRAL BANKS BACK As well as Merrill and Citi, other big names such as State Street (STT.N) and JP Morgan (JPM.N) report results this week. Furthermore, the Federal Reserve will auction $30 billion later on Monday and the European Central Bank and Swiss National Bank will continue their unprecedented U.S. dollar lending to banks, as part of ongoing coordinated central bank efforts to help calm credit market tensions. The Bank of England will also weigh in. Results of the latest "term auctions," a plan agreed in December and one which has helped money market rates ease, will come on Tuesday. Most experts say despite the central bank action, the threat of further losses at major banks from investments tied to U.S. subprime mortgages means the crisis is far from over as crucial lending between commercial banks remains patchy at best. The Fed is forecast to use its other policy lever -- interest rates -- before the month is out. It is seen slashing rates by a half-point to 3.75 percent at its two-day meeting ending on January 30 after Fed Chairman Ben Bernanke said last week the central bank was ready to take "substantive additional action." The interbank cost of borrowing dollars fell sharply on Monday as financial markets continued to bet heavily on aggressive U.S. rate cuts. Three-month dollar Libor rates fell more than 20 basis points, the biggest one-day fall since September 19, the day after the Fed slashed its key rate 50 basis points to 4.75 percent. Three-month euro Libor was fixed lower at 4.54813 percent but one-month rates edged up marginally. The ECB and Bank of England declined to cut rates at meetings last week although credit problems in Europe persist. "It's not yet clear what impact the financial turmoil will have on the real economy. We are going through a delicate phase. This is not the time to lose control of salaries and costs: we would further lose control on inflation," ECB Executive Board member Lorenzo Bini Smaghi told Italy's La Repubblica newspaper. Swiss banking giant UBS AG (UBSN.VX) appealed to its shareholders last week to back a capital injection by the Singapore government and a Middle East investor and warned it still could not predict how the subprime crisis will play out. And shares in stricken British lender Northern Rock (NRK.L) fell as much as 7 percent on Monday, on fresh concerns it faces imminent nationalization. Northern Rock is Britain's biggest casualty of the credit crunch and has borrowed around 26 billion pounds from the Bank of England since it requested emergency funds in September. (Editing by Ian Jones)
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