Greenspan, King see more pain for banks, US

FE Team | Published: November 07, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

LONDON, Nov 6 (Reuters): Central bankers, past and present, warned Tuesday of more pain to come for the US economy and that banks worldwide could take several months yet to reveal their full losses from US subprime mortgage lending.
Former Federal Reserve Chairman Alan Greenspan and billionaire investor George Soros said the downturn in the US housing market had yet to take its full toll on growth.
Bank of England Governor Mervyn King said banks would take some considerable time to flush out total losses related to mass defaults on US mortgages leant to people ill-equipped to pay.
Banks, particularly in the United States, have come clean about huge losses tied to the subprime mortgage sector.
The head of US banking giant Citigroup quit Sunday, taking the blame for expected losses of $8-11 billion before taxes, that on top of $6.5 billion it wrote off three weeks ago.
Charles Prince's departure came five days after Merrill Lynch & Co ousted its chief executive, Stanley O'Neal, following an $8.4 billion write-down there.
Banks in Europe have been hit too and Britain suffered its first full-blown bank run since the 19th century in September when the Bank of England had to step in to offer Northern Rock funding as "lender of last resort."
King said the decision to offer emergency funding to Northern Rock was taken because of worries over systemic risk.
Greenspan told a forum in Tokyo that high inventories of unsold homes presented a major risk to the US economy and that he was not sanguine about how quickly the glut could be reduced.
Soros said in a lecture at New York University that the US economy was on the verge of a serious correction and that the Federal Reserve may be underestimating the potential slowdown.
Bill Gross, chief investment officer at the world's No 1 bond fund PIMCO, told CNBC Television the Fed could not afford to let US housing prices fall sharply and would need to cut rates aggressively, perhaps to 3.5 per cent.
The Fed has already slashed rates by 75 basis points to 4.5 per cent in an effort to limit damage to the broader economy from the housing market slide and resulting liquidity crunch.
Estimates of eventual total losses vary but all the figures put forward are staggering.
JPMorgan thinks the financial services industry is sitting on $60 billion in undisclosed losses. PIMCO's Gross, characterises the subprime crisis as a "$1 trillion problem."
Markets were first gripped by a credit crunch in August when interbank lending dried up as banks realised they did not know which of them was dangerously exposed to shaky US home loans.