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Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional $34 billion in securities linked to the collapse of the subprime mortgage market, according to Goldman Sachs Group Inc.
L.A. Times - Business
Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional $34 billion in bonds linked to the collapse of the sub-prime mortgage market, analysts at rival Goldman Sachs Group Inc. say in a new report.
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Goldman Sachs took the knife to its Wall Street rivals yesterday, predicting that the credit crunch would force Citigroup to slash its dividend by 40 per cent. At the same time it emerged that Merrill Lynch was preparing to cut 1,600 jobs from its trading desks. William Tanona, a leading Goldman Sachs analyst, said that Citigroup, the world’s largest bank, would have to cut its payout to shareholders to preserve its capital position and write off $18 billion ($£9 billion) of assets in the fourth quarter, compared with earlier estimates of $11 billion. Goldman said that Citigroup would need fresh capital of between $5 billion and $10 billion in addition to a recent $7.5 billion commitment from the Abu Dhabi Investment Authority. Under that deal, the Abu Dhabi sovereign wealth fund is protected from a possible dividend cut, as it bought Citigroup bonds convertible into stock. The bonds, which will vest into a 5 per cent shareholding on conversion, pay an annual coupon of 11 per cent, compared with the existing dividend yield for shareholders of 7.3 per cent. Citigroup$’s largest shareholders include Capital Research & Management, with 4.6 per cent, Prince Alwaleed bin Talal, who controls 3.97 per cent, and Barclays Global Investors, with 3.76 per cent. Mr Tanona said that he had raised his loss estimates for Merrill Lynch and JPMorgan and forecast that, combined with Citigroup, the three will have chalked up $33.6 billion of writedowns in the fourth quarter. Goldman said it now forecast that Merrill and JPMorgan would record increased writedowns of $11.5 billion and $3.4 billion respectively $– up from $6 billion and $1.7 billion. Most of the writedowns are linked to the banks$’ exposure to collateralised debt obligations, special debt instruments that were invested in risky assets, such as US sub-prime mortgages. Mr Tanona said: “We still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets.”