More Writedowns Expected For Financial Firms
Earlier today, securities firm Lehman Brothers posted a $2.8 billion loss for the second quarter, much larger than analysts were forecasting. The company also announced plans to raise $6 billion in new capital from the sale of stock to cope with their exposure to the residential mortgage market.
Despite their plans to raise additional capital, Fitch downgraded them to AA- from A+ while Moody’s changed their credit outlook to negative and is considering doing the same for the other investment banks as more writedowns are expected for the sector. Trouble with the bond insurers isn’t helping matters as a ratings downgrades for their insured bonds will lead to additional writedowns for the companies that hold them.
The financial sector is continuing efforts to de-leverage themselves but are forced to sell highly illiquid assets in an increasingly depressed marketplace. Foreclosures and delinquencies have also continued to climb as the housing market worsens.
There are serious doubts in the minds of investors for when the sector will return to profitability. With the securitization market all but dead, the once highly profitable originate to distribute model for mortgages has ceased to be viable.
Financial stocks have fallen recently with the Fed starting to place more emphasis on inflation and sending signals to the market of a future rate hike. European central banks are also considering raising rates which would further depress the dollar if the Fed doesn’t do the same.
