Outlook Bleak for US financial firms

Nov 21, 2007

Outlook bleak for US financial firms: Report

NEW YORK - GOLDMAN Sachs has issued a gloomy report on the United States financial services sector, saying housing prices are likely to fall a lot further, write-downs will mount, and some mortgage insurers and guarantors will be forced to raise capital just to survive.

Falling house prices and a worsening economy will drive down securities based on residential mortgages, especially those given to borrowers with the riskiest credit, Goldman financial analysts Lori Appelbaum, Thomas Cholnoky, James Fotheringham and William Tanona wrote in a lengthy report released on Monday.

Meanwhile, the value of collateralised debt obligations - bonds based on pools of mortgages - related to those US sub-prime mortgages, could fall another US$150 billion (S$217 billion) across the industry, the bank said.

That's on top of the US$18 billion financial firms globally wrote down in the third quarter and the US$22 billion that some companies have indicated that they expect in the fourth quarter.

Bourses across the globe sank after an earlier report from the Goldman analysts downgrading Citigroup reignited fears that losses from the global credit crisis may widen.

Stock benchmarks in the US fell to their lowest levels in three months on Monday. In Asia, the Morgan Stanley Capital International's, or MSCI's, measure of other Asia-

Pacific stocks hit its lowest level since late September. Financial stocks were among the worst affected. Inevitability, certain financial guarantors and mortgage insurers will need to raise capital to shore up their balance sheets. The Goldman analysts said these companies will fall into two groups: the desperate - those which will face the risk of going out of business if they do not raise capital; and, the needy - those that could employ other means to do so, such as cutting dividends.

Goldman listed financial guarantors MBIA, Ambac Financial Group, Security Capital Assurance and Assured Guaranty as the desperate. It listed Citigroup, Washington Mutual, First Horizon National and National City in the needy group.

Without the riskier loans such as sub- prime or no-or-low documentation mortgages, returns in the mortgage business will be significantly lower.

'Investor appetite for high-yielding sub- prime mortgage securities fuelled the home pricing bubble, and this investor market is not coming back,' the analysts wrote.

Brokers will rethink their business models focused on these exotic loans, the analysts said.

REUTERS