Fear of more huge losses hits markets
By Yvette EssenStock markets in Europe and the US tumbled yesterday after concerns deepened about further credit losses at financial companies and weak US housing data.
Fears that Citigroup and UBS will have to make writedowns of billions of pounds and a credit crunch-related hit from Swiss Re, the world's largest reinsurer, of $1.1bn (£524m) pushed the Dow Jones industrial average down 218 points.
In London fears of contagion pushed the FTSE 100 back below the level it began the year, down 170.4 points to 6120.8. The FTSE 250 slumped 361.7 points to a 12-month low of 10404. European markets also fell, with the DAX in Germany and the CAC index in France down 100 and 91 points respectively.
Citigroup fell more than 5pc on Wall Street after a Goldman Sachs analyst estimated the investment bank will make a $15bn (£7.3bn) writedown and the research firm CreditSights said UBS could take a further $9bn in writedowns. The heads of Germany's biggest banks, Deutsche Bank and Commerzbank, added to the gloomy sentiment with warnings that the US sub-prime crisis was far from over.
General Motors was the biggest faller on the Dow Jones index, shedding 6.7pc to an 18-month low of $27.32, over concerns about credit issues at its financing arm, GMAC.
Poor third-quarter figures at Lowe's, the second-largest US home improvement retailer, knocked its shares down 7pc.
Lowe's warning that the turmoil in the housing market will continue into next year came at the same time as figures from the US National Association of Home Builders showing that confidence remains close to record lows. This pushed stock markets even lower, amid expectations that the Federal Reserve will not cut rates any further.
News that Swiss Re had written off a client's collateralised debt obligations (CDOs) stoked speculation that the insurance sector will become embroiled in the market fall-out. Swiss Re's shares tumbled up to 9pc after the company said it had been hit by two credit default swaps, giving a client protection against a fall in the value of a portfolio of assets.
Just over 18pc of the $4.75bn portfolio was made up of asset-backed securities in the form of CDOs and 28pc was exposed to subprime securities. Swiss Re revealed it has marked down the CDOs "to zero" while the sub-prime securities have been written down to 62pc of their original value.
The Swiss bank said: "The unprecedented and severe ratings downgrades undertaken by the rating agencies in October and the lack of any truly liquid market for these securities has resulted in a material reduction of the value of the underlying assets."
George Quinn, the bank's chief financial officer, described the loss as "significant", and said: "Obviously there are lessons to be learnt after a loss of this size". He said, the problem was "isolated in a single area of the firm", and "there are no similar transactions elsewhere in our portfolio", but there "remains the risk of further downgrades".
Chris Hitchins, an insurance analyst at Keefe, Bruyette & Woods, said there was no indication Swiss Re had such an exposure when it reported its first-half results earlier this month. He said that although the market had suspected Swiss Re could be exposed to the mounting credit crisis "the management's credibility is somewhat tarnished".
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