The US sub-prime crisis deepens

Quite apart from the small investors and home owners, it appears that some of the big boys are taking a hit or two in the sub prime crisis as well.

It’s unlikely that the chairman of Citigroup or Morgan Stanley will have their houses foreclosed upon, but, in a sick way, it’s nice to know the banks have been caught with their pants down as it were. According to Mike Mayo of Deutsch Bank, Morgan Stanley will be writing off $3 to $5 billion this coming quarter.

The ripples of this crisis are spreading further outwards as we speak and the upside down pyramid of failed mortgages is spreading inexorably upwards to the higher reaches of American financial institutions.

One analyst, CreditSights, put the potential losses at as much as $9.4 billion for Merrill Lynch, $5.1 billion for Goldman, $3.8 billion for Morgan Stanley and $3.9 billion for Lehman. Top of the list has to be Citigroup who are facing mortgage write-offs of as much as $11 billion. Stocks in all these firms took a down turn recently and Citigroup shares are at a one-year low. Down from $57 to under $35.

But what does this mean to the small investor or home-owner? Several things and it’s not all bad news.

Money is going to become increasingly difficult to find. The belt-tightening going on in the upper echelons of the mortgage world means mortgages are going to become harder to obtain and, despite a drop in the Fed recently, more expensive. Citigroup, along with all the other major players will be looking to do some repair work over the next year and this is where it will begin.

Foreclosures will continue to rise as the financial institutions attempt to limit their losses. One man’s loss is another man’s gain – residential property in all but a few prime locations is going to be available at bargain basement prices for the foreseeable future. Don’t look for a quick buck though, any property purchase made now will need to be sat on for a time – we’re not out of the woods just yet.

Real Estate agents are going to be fighting tooth and nail for a chance to sell your house.

Now is a good time to buy stocks in the firms reporting major losses. Citigroup, Merrill Lynch, Morgan Stanley, Lehman Brothers Holdings, Bear Stearns and Goldman Sachs Group all look a good bet at the moment.

Resources:

Wall Street Journal Stocks analysis

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