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Wednesday, 9 July 2008

Credit, housing concerns wipe $1.3 trillion from S&P 500's companies in 2008

NEW YORK - UNITED States financial companies have lost more than US$1 trillion (S$1.4 trillion) in value this year, and yet another decline on Monday shows concerns aren't going away soon.

Banks and brokerages began the week lower on the same fears that have been proven toxic since last summer in the ongoing credit crisis. The financial sector was hit with a confluence of troubles on Monday: cautious remarks from a Federal Reserve official and new capital concerns at Freddie Mac and Fannie Mae.

The drop in names like Lehman Brothers, Morgan Stanley and Merrill Lynch caused the financial section of the Standard & Poor's 500 index to lose almost US$150 billion in value on Monday, according to the rating agency. That means S&P 500's 85 financial components have lost some US$1.3 trillion since the sector reached a high last October.

Even more startling is that shares of 35 of the companies, which include insurers, have lost more than half their value so far this year. The financial sector used to be the index's main driver, and many economists believe that the broader market will rise or fall on their health.

'Some would argue that perhaps the sell-off in financials is overdone, but at the same time there is just much uncertainty out there about write-offs, loan losses, and how bad the housing market is,' said Mr Jim Herrick, a director of equity trading at Baird.

'For a period of time the pain was in the big money centre banks, but now it's spreading.'

Fannie and Freddie fell sharply after Lehman Brothers analyst Bruce Harting said the two government-backed lenders might need to raise billions of dollars in new capital. Both are facing a proposed change to accounting standards that would require financial services firms move bonds backed by pools of loans, also known as securitisations, off their balance sheets.

If this rule is passed, it would end Freddie and Fannie's primary source of generating new revenue. Mr Harting said Fannie Mae would need to raise US$46 billion in cash to meet capital requirements, while Freddie Mac would need US$29 billion.

The broader financial sector was hurt after San Francisco Federal Reserve President Janet Yellen said problems in the housing market and banking system could get even worse before the economy recovers.

Global banks and brokerages have lost nearly US$300 billion from investments in mortgage-backed securities and other risky investments since the credit crisis began one year ago.

And there are fresh signs that Wall Street's biggest investment houses are having trouble navigating through volatile markets.

Goldman Sachs Group, the world's biggest investment bank, disclosed in a regulatory filing that it lost at least US$100 million on nine trading days during the second quarter. Goldman reported that total trading revenue in the second quarter fell 17 per cent to US$4.87 billion, according to the filing.

The firm, known for aggressive trading tactics that can cause big swings from week to week, still far surpassed many of its rivals on the Street. That has put more focus on Merrill Lynch, which will report its quarterly results next Thursday.

Mr John Thain, Merrill's CEO, is said to be examining the sale of stakes the brokerage has in asset manager BlackRock and in Bloomberg. Money raised would be used to offset big write-downs expected at the brokerage.

A spokesman declined to comment about numerous media reports.

However, Mr Thain in the past has said he is open to selling the stakes if Merrill can fetch a good price.

Mr Howard Silverblatt, S&P's senior index analyst, said financial stocks will likely continue to be hurt until some signs develop that show banks and brokerages have a better grip on credit problems.

Merrill's earnings next week could provide that.

'There's still lots of uncertainty out there,' he said. 'And, the financials need to turn around if the whole index wants to recover.' -- AP

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