Bernanke to speak as credit fears mount

LONDON (Reuters) - Towering losses at Merrill Lynch (MER.N) on Thursday stirred credit crisis fears before a key testimony by U.S. central bank chief Ben Bernanke.

Merrill took a $14.1 billion write-down in the fourth quarter on bad subprime mortgage bets plus other charges that have forced the sale of pieces of the company to foreign investors to raise capital.

The brokerage reported a fourth-quarter net loss of $9.8 billion, the largest in the company's history, a figure Chief Executive John Thain called "clearly unacceptable."

Analysts expected Merrill's write-down to land anywhere between $10 billion and $15 billion. For the year, Merrill's subprime mortgage-related losses totaled nearly $23 billion.

The U.S. banking world has posted some huge losses this week. On Wednesday, JPMorgan Chase (JPM.N), the no. 3 U.S. bank, reported lower fourth quarter profits as it took a $1.3 billion loss on subprime mortgage-related positions.

That followed a colossal $18.1 billion write-off by America's largest bank Citigroup (C.N), which resulted in an overall fourth quarter loss of $9.83 billion -- its first quarterly loss since its creation in 1998.

The Bank of New York Mellon (BK.N) reported a relatively paltry $118 million write-down on Thursday as it announced lower fourth quarter profits.

Banks, wrestling with huge losses stemming from U.S. mortgages lent to people ill-equipped to repay them, have been actively seeking cash from abroad from sovereign wealth funds.

Merrill said on Tuesday it would raise $6.6 billion from selling preferred shares to an investor group that included the Kuwait Investment Authority. That is on top of the $6.2 billion capital infusion announced last month in a deal with Singapore's Temasek Holdings and U.S.-based Davis Selected Advisers.

Citi said it was raising $14.5 billion, largely from foreign investors, having raised $7.5 billion in November by selling a 4.9 percent stake to Abu Dhabi. Swiss bank UBS has gone down a similar route.

The crisis remains global in scope. Japanese banks' subprime valuation losses have expanded since the end of September, the head of the Financial Services Agency, Takafumi Sato, said on Thursday.

The regulator had previously said Japanese banks' subprime exposure stood at around 1.2 trillion yen ($11.20 billion) as of the end of September.

Europe has been hit too, creating enough concern for the finance ministers of Britain, Germany, France and Italy to meet in Paris on Thursday to discuss how best to respond to the credit crisis. Their leaders will hold a London summit at the end of the month.

Stricken German lender WestLB (WDLG.UL) will probably foot the bill for two structured investment vehicles by putting them onto its books, its chief executive told Reuters on Thursday, a move that would squeeze its capital base and profits further.

WAITING FOR BEN

With fears of a U.S. recession growing, interest rate futures are pricing in an almost 1-in-2 chance of a hefty 75 basis point cut in U.S. interest rates, when the Federal Reserve meets at the month's end, or possibly even earlier.

Fed Chairman Bernanke testifies to the U.S. Congress later on Thursday.

He told the New York Times Magazine in an interview released on Wednesday that problems in credit markets were tenacious.

Money market rates continued their downward trajectory on Thursday. They shot up in August as banks realized they did not know which among them were dangerously exposed to the U.S. subprime meltdown, and stopped lending to each other.

Interbank lending rates for the dollar, euro and sterling all continued a fall started when major central banks announced a plan in December to flood the interbank market with dollars in a series of unprecedented auctions. The cost of one-month dollar cash hit its lowest since October 2005.

But most experts say the losses at major banks means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

Moody's Investors Service placed Ambac Financial Inc (ABK.N), which insures more than $500 billion in bonds, on review for a possible ratings cut, an event that could trigger similar downgrades on billions of dollars of debt.

Moody's announcement came after Ambac said on Wednesday it was recording a $3.5 billion write-down, equivalent to nearly two-thirds of its net worth, and plans to raise $1 billion in new capital to maintain its ratings.