By Nigel Cassidy
Business reporter, BBC News |
 When the International Monetary Fund warned that losses from the credit crunch could reach almost a trillion dollars (�500m), it raised an important, not to say worrying question. If the world's banks have written off around $250bn so far, that means almost three-quarters of the losses are still lurking somewhere. So exactly who is going to take the hit for the rest? Over the next few weeks and months, many more institutions will be obliged to come clean about their exposure to what the IMF calls "impaired assets". These are parcels of debt that they thought would generate them an income, yet which turned out to be near-worthless. Talking to bankers in the City of London, it soon becomes clear that there are many theories as to where the next batches of dodgy loans may pop up. Asia next? One suggestion is that banks or investment vehicles in Japan, China or Singapore were exposed to sub-prime loans they have not yet revealed. After all, the young guns of Wall Street touting the now infamous collateralised debt obligations had many clients in Asia and were very persuasive. Should such buyers have been the government-owned and more secretive sovereign wealth funds, the eventual losses may never be publicised or come to light. Another possible conclusion is that individual companies may be sitting on losses because their finance departments switched perfectly good assets into such loans in the belief these would boost returns. About half of the IMF's estimated trillion-dollar losses will take the form of direct write-downs by banks, according to banking analyst Sandy Chen, a director at City firm Panmure Gordon. If he turns out to be correct, that means the banks could be about half way through the process of getting the bad news out into the open. "The original investors were hedge funds, other funds, insurance companies and investment banks," Mr Chen says. "They will end up getting the bills, but we shouldn't forget that at the end of the day, it's the end-investor in bank shares and the funds who will foot the bill." Deteriorating credit But much of the damage to hedge funds has already become public, says Ralph Silva, a senior industry adviser from Tower Group. "I expect the additional write-downs will come from tier one banks. That is, the top banks in the US, the UK, Germany and some in France," Mr Silva says. "I say that because these are the banks most heavily leveraged in the mortgage business in the United States. As time progresses, there will be additional defaults, so therefore additional losses." That's partly because the US housing and credit market is continuing to deteriorate. It is also because the value of the complex investments still containing bad assets is constantly fluctuating. There's a feeling in the City that politicians were being unrealistic when they demanded every institution should immediately come clean about their losses. Although this might be highly desirable to begin the financial recovery, recent history has shown that revealing sub-prime exposure unilaterally could be devastating for a company's share price, possibly even terminal for that institution as predators circle. So there's an idea for global policymakers, one agreed day when every single global institution comes clean together. As it is, the credit crunch losses are still in the financial system, but nobody wants to blink first.
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As time progresses there will be additional defaults, so therefore additional losses.
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