Saturday, September 27, 2008
Banks in US in serious problem
Wachovia Corp.'s suitors may use a template honed by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week: Wait to see whether regulators will seize the bank, then buy the best assets and let the government sort out the rest, according to analysts. The bidders may try that tactic again at Charlotte, North Carolina-based Wachovia following its 27 percent plunge in New York trading yesterday, according to analysts at Goldman Sachs Group Inc. and Egan-Jones Ratings Co. They may get help from regulators, who said the U.S. benefited from seizing and selling WaMu because the Federal Deposit Insurance Corp. didn't have to tap its $45 billion insurance fund.
Wachovia dropped $3.70 to $10 in New York Stock Exchange composite trading yesterday and lost $1.50 more in extended hours. Yields on Wachovia's bonds soared to 24 percent, from 7.5 percent on Sept. 5, an indication that investors are concerned about default. Analysts questioned Wachovia's ability to stay independent after seeing loan losses tied to WaMu. JPMorgan is taking on $176 billion in mortgage-related assets and taking writedowns of about $31 billion, the New York bank said. Some of those were option ARM loans, which are prone to default because they let borrowers defer some interest and add it to the principal.
Given that Wachovia also has huge exposures to mortgage loans, other banks are licking their chops at the sidelines, waiting for the Bank to run into more problems, and begin the downward spiral of liquidity problems -> credit problems -> credit rating downgrades -> unable to raise funds. And given the financial deal to take on the massive bad mortgage assets of depressed companies is under active discussion among the politicians, but no immediate solution yet seems to be coming out, sentiment will only go worse.
What does this mean for Indian markets ? As liquidity problems arise among top US companies, they will try and get funds from wherever they can, including liquidating their stock holdings in the Indian market, causing more downturns.
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