Banks' Subprime New Year

It's a brand new year, but the same mess of troubles for big U.S. banks, as the credit crunch continues to plague lenders.

On the first business day of 2008, Cleveland's National City slashed its dividend in half, shut down more mortgage operations and said it was going to fire 900 more people, all "to help meet the challenges ahead, and to continue as a strong competitor in the financial services industry," says Chief Executive Peter Raskind.

National City has struggled with rising credit costs and a mortgage business in rapid decline. Like many other banks, both on Wall Street and Main Street, it's been forced to shore up capital eroded by losses. The bank will issue more securities to boost its regulatory capital levels.

The moves come as investors are monitoring the situation at Citigroup, which is also likely to slash its dividend. Thousands of job cuts are likely in coming weeks--by some estimates, they could total 5% to 10% of Citigroup's 320,000 workforce.

Citi has been pummeled by the troubles in the credit markets, via its exposure to mortgage derivatives held on its trading books, mortgage securities held in once off-balance sheet entities, and rising credit costs in its subprime lending division.

In November, the bank took $7.5 billion of new capital from the investment fund of Abu Dhabi, one of several sovereign funds taking stakes in faltering U.S. banks. Bear Stearns and Morgan Stanley have taken Middle Eastern and Chinese cash. UBS, in a move that proved more controversial with some of its shareholders, sold a piece of itself to a fund in Singapore.

Merrill Lynch, also on the ropes because of mortgage derivatives, said last week that it would get $6.2 billion in capital by selling a stake to the Singapore investment fund Temasek, and it would sell its middle market lending operations to GE Capital. Layoffs are expected imminently.

Merrill and other commercial banks begin reporting fourth-quarter and year-end results later this month. Analysts are bracing for a rough ride. Merrill is expected to write down another $11.5 billion in losses. Citigroup is expected to write off anywhere from $12 billion to $18.7 billion, and JPMorgan Chase between $1 billion and $3.4 billion. "It will be a couple of quarters before the current credit crisis is fully digested by the markets," says Goldman Sachs analyst William Tanona.

National City is seen reporting a per-share loss of 8 cents for the quarter, according to Goldman research. Wachovia is expected to report quarterly profits down 84% from the last quarter of 2006, while Bank of America will likely see numbers come in 88% lower, Goldman says.

Two other big lenders, Comerica and Fifth Third, are seen having profit declines of 43% and 59%, respectively.

The fourth quarter will be "clearly a 'kitchen-sink' quarter, as banks incur big reserve builds and write-downs," says Lori Appelbaum, another analyst at Goldman Sachs. "The next couple of quarters will be difficult as the economy operates at near recessionary conditions."