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Associate Article

 13 May 2008 13:12 BST

AIG gets caught – who’s next?

Bad debt, defaults and write offs – whichever way you look at it, it’s been a terrible six months for banks. Many of them were quite enjoying the years of cheap credit and a boom in equity markets, but a slump in the US housing market, mixed with numerous revelations about high risk debts needing to be written off, soon wiped the smile off a long list of banker’s faces. The credit crunch moved in, and recession in the US looms.

Despite the collapse of the subprime industry last March, the big financial institution’s share prices continued to rise. On July 19th the Dow Jones Industrial Average (the system for measuring the top thirty companies in America) closed above the 14,000 point mark for the first time in its history. Thoughts of a recession seemed a very long way off. However, things began to unravel just one month later, when subprime mortgage backed securities were discovered in portfolios of banks and hedge funds across the world, and the stock markets endured a mini crash.

Some companies, such as those connected to the boom in commodities and mining, enjoyed a swift recovery in the following month, but for most of the banks the worst was yet to come. More bad debts wrapped up in America began to seep out, and in it was revealed that Northern Rock had to take out an emergency loan from the Bank of England. What followed was the first run on a British bank in 150 years as customers panicked by withdrawing their savings accounts. The bank’s share price simultaneously collapsed along with consumer confidence.

Losses in the financial sector were widespread as a consequence of the subprime debts being written off. Huge firms like Citigroup, HSBC and UBS all revealed losses to be well into billions of USD and share prices fell to pieces. Firms like American Express also revealed losses on their credit cards, and default figures soared, spelling gloom for their investors as they went. Here are some of the most noticeable losses in share prices since peaking in July last year:

  • Northern Rock – 90 per cent
  • Citigroup – 50 per cent
  • Society Generale – 50 per cent
  • American Express – 30 per cent
  • HSBC – 25 per cent

It now seems that any company connected to the subprime crisis is going to get hurt, and big fears at the start of this year came from in the shape of bond insurance. This form of insurance protects financial institutions against potential write offs, and now with the banks revealing the extent of their write offs, insurance looks unsteady. The world’s biggest insurer, AIG fell 10 per cent by mid morning on 11th February, carrying the rest of the market with its auditor, PwC voiced concerns about its involvement in the subprime market. With some of the world’s biggest companies getting hit so hard and so consistently at the moment, it begs the question – who’s next? End of story

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