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The NewsFuror

Thursday, December 13, 2007

US banks reveal more debt losses

warning sign on lending by Cleveland government
Banks had been making a huge profit from sub-prime loans
Three major US banks, including Bank of America and Wachovia, have warned that losses linked to investments in soured US home loans will get worse.

Shares in all three firms fell as each separately said earnings would take a hit as the value of mortgage-backed securities continues to decline.

Wachovia said it would write down $1bn (£489m) in its fourth quarter, nearly double its original estimate.

Regional lender PNC said it would miss its fourth-quarter profit target.

The swathe of bad news indicates that banks are still suffering from a killer hangover as a result of taking on too much risk when interest rates were low in the US, Europe and UK.

Many people on low incomes or with bad credit took advantage of rock-bottom mortgage repayments to get on the property ladder.

A lucrative market sprung up whereby these sub-prime mortgages, as they are called, would be packaged along with other debt of a higher quality and then sold to investors.

But with interest rates in the US at five-year highs as recently as August, sub-prime mortgage repayments have become much less affordable leading to steep loan defaults and subsequently a drop in value in investments centred on this sector.

Downbeat

Bank of America chief executive Ken Lewis said the firm's fourth-quarter results would be "disappointing", predicting further fall-out from the problems in credit markets next year.

The bank had last month forecast that it would have to write off $3bn of soured investments, but said on Wednesday it would be more than that.

Separately, Wachovia boss Ken Thompson was equally bearish and could not say when the credit crisis might ease.

He said Wachovia, the fourth-largest US bank, was facing "as tough an environment as I've ever seen".

Pittsburgh-based PNC, the largest bank in Pennsylvania, marked down its fourth-quarter earnings after its mortgage portfolio weakened by $1.5bn.

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