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Banking write downs and losses continue. Which bank will eventually become insolvent?

Posted by Adrian on December 11, 2007

Swiss banking giant UBS (chart) has revealed a massive write down of $10 billion dollars. These huge asset losses are connected with the subrprime mortgage market which is continuing to collapse in the US. These write downs or asset held depreciation (mortgage backed securities) have escalated towards the end of 2007, with the Q2 and Q3 next year (2008 ) promising to reveal even further losses from investment and retail banks that were connected directly, or even indirectly to the American subprime mortgage market.

The question is could these huge write downs cause any one of the big, medium investment or retail banks to become insolvent?

UBS needed emergency shots of capital amidst the losses it endured in 2007, the extra capital that was injected into the bank came from Government of Singapore investment corporation and the Oman government, the contributed amounts totaled $11.4 billion.

An obviously serious situation for a large investment bank to be in, from BBC Business:

“BBC business editor Robert Peston said that the fact UBS had felt the need to raise so much new capital was “all you need to know about the gravity of what has occurred, both for UBS and for the world financial system”.

The US housing market will continue it’s rapid deterioration throughout 2008, with mortgages resetting to higher percentages throughout the new year. This will put further strain of the mortgage backed securities that the investment banks hold, not to mention the contraction of the lending and retail banking sector, from Associated Press:

“Defaults and foreclosures have skyrocketed this year as subprime borrowers struggled with too-high payments and resetting interest rates. Bank of America Securities estimates that $361 billion in subprime loans are scheduled to reset next year (2008), and falling home prices and tighter lending standards will keep these borrowers from refinancing into more manageable loans.”

Regarding Washington Mutual Inc (lender and savings bank).

“SEATTLE (AP) – Washington Mutual Inc., the nation’s largest savings and loan, said Monday problems in the mortgage and credit markets are forcing it to close offices, slash over 3,100 jobs, and set aside far more than expected for loan losses in its fourth quarter.”

It will be a matter of time when we do hear about a bank becoming insolvent, as global contraction on money and investment takes hold next year in 2008.


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