Nightmare on Wall Street far from over

Gnawing doubts are pervading the forex markets that even more large write-downs will follow.

The stock market has been full of ghoulish tales this week of major problems still to hit the world's biggest banks. As Halloween passed on Wednesday, some analysts are warning the nightmare on Wall Street is far from over.

Shares in some of America's biggest banks slumped to their lowest level in several years on fears they might have to take the pain of fresh multi-million dollar write-downs from their exposure to America's sickly mortgage market.

Merrill Lynch, the world's largest brokerage, yesterday led financial shares to their lowest level in two years after analysts at Deutsche said it may write down another $10bn for losses on sub-prime assets. Merrill's shares tumbled almost 9pc to $56.93 in afternoon trading.

Rumours were circulating that Citi may be forced to slash its dividend to meet its capital ratio requirements while others were considering rights issues. Deutsche Bank said Citi may face "greater-than-expected write-downs in collateralised debt obligations and other structured products". The bank's shares slipped 4pc to $37.11.

Meanwhile, fears about European banks are also growing after UBS reported its first loss in years. Merrill Lynch, which itself last week wrote off $7.9bn, said UBS will be forced to make an additional $8bn write-down.

There were also warnings that Belgian-Dutch group Fortis could be vulnerable to a further deterioration in the US housing market and investors expressed frustration that ABN Amro, which was to publish third-quarter figures on Thursday, did not do, saying it would move to the same reporting timetable as new owner Royal Bank of Scotland. RBS is due to report its full-year results on February 28.

One seasoned trader said: "Some of these rumours may be coming from the fact that it has been All Souls' Day this week, a holiday in several countries. But some of them seem real. The problem is, no one really knows. There's a lot of worry out there as far as where is the bottom on financials."

Having admitted there could be further problems, Wall Street's blue-chip banks are now holding their breath to see what happens to the US housing market, in which many of their off-balance sheet vehicles are invested.

The signs are not promising. A key derivatives index tied to sub-prime mortgages, called the ABX, has hit new lows in recent days, signalling the value of mortgage-backed securities held by banks is weakening which could bring fresh write-downs.

Analysts said it was difficult to know the extent of the problems because it is almost impossible to put a value on the credit derivatives sitting on banks' books.

One issue making it hard to get a clear idea is that banks do not have to assign what they believe is a market price to derivatives they hold, but can instead "mark to model" their holdings.

One analyst said: "A cynic might say marking to model is putting whatever price your proprietary trader says is the price."

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