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Worst Of Credit Crisis May Loom

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The Associated Press

Published: June 19, 2008

NEW YORK - There are new signs that the worst of the global credit crisis is yet to come, and that banks and brokerages caught up in the market turmoil may lose $1 trillion by the time it has passed.

Major U.S. investment banks this week announced yet another painful quarter amid the implosion of mortgage-backed securities and risky credit investments. Regional banks have scrambled to secure fresh capital to stay in business, and by Wednesday there was new talk that embattled investment bank Lehman Bros. might be forced into a sale.

With each passing quarter, Wall Street's top bankers have indicated that the worst of the market turmoil was over - only to face more pain months later. The uncertainty has caused already battered investors to lose confidence in financial companies, and expectations have increased that more layoffs, asset sales and capital raising will be needed in the weeks ahead.

"We thought this was going to be the kitchen-sink quarter, and we're finding out that CEOs and CFOs still don't have a handle on the credit crisis," said William Rutherford, a former state treasurer of Oregon who now runs Rutherford Investment Management. "We haven't disinterred all the dead bodies. What else is out there?"

The deepening credit crisis could cost the global financial system some $945 billion by the time it is over, according to a report from the International Monetary Fund. So far, banks and brokerages have written down nearly $300 billion from bad bets on mortgage-backed securities and other risky investments.

After reporting largely disappointing second-quarter results, executives at Goldman Sachs, Morgan Stanley, and Lehman Bros. still weren't entirely clear when the hemorrhaging will end. David Viniar, Goldman Sachs' chief financial officer, on Monday said that March marked "the bottom of the crisis, at least for now" - making no predictions of what lies ahead.
Morgan Stanley reported profit fell 61 percent on Wednesday, while Lehman Bros. Holdings posted a nearly $3 billion loss. Goldman Sachs Group, considered to have the best handle on the crisis, said profit dropped by 11 percent.

The run on their competitor Bear Stearns three months ago forced the government to save it through a sale to JPMorgan Chase & Co. Since then there has been persistent worry among industry leaders and analysts that a full-fledged bank failure is in the offing if losses continue to mount.

Those worries have hovered over Lehman Bros. since it posted a stunning loss, demoted two top executives and was forced to raise $6 billion in new capital. There's been more talk that CEO Richard Fuld is facing either a sale of the company or massive layoffs to stay afloat.

A spokesman for Lehman declined to comment.

The concerns go beyond just brokerages, though, with continued fears about the strength of regional banks. Fifth Third Bancorp raised $2 billion of capital on Wednesday, following a move by rival KeyCorp to raise $1.6 billion, all toward a goal of bolstering balance sheets.

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