Fears are rising in the credit markets that turbulence could last for months as big US and European banks come under pressure due to losses on US mortgage securities.
Shares in banks and insurance groups continued to tumble yesterday as analysts warned that losses from mortgage securities could force some institutions to shore up their capital bases. The turmoil has already claimed the jobs of two of the biggest names on Wall Street and prices in the US money markets yesterday suggest the climate of mistrust will last well into next year.
Citigroup joined Merrill Lynch in the search for a new chief executive to succeed Charles Prince. Insiders at Merrill said there were big obstacles to Larry Fink of BlackRock, their first-choice candidate. If he is to succeed Stan O'Neal as chairman and chief executive, the bank may need to buy out his $400 million stake in the investment group.
Citi shares were off 5 per cent to $35.96 in midday trade after falling 11 per cent last week, while the cost of insuring its bonds against default rose to record levels.
Investors sold off shares in European banks, notably Royal Bank of Scotland, UBS and Barclays, amid fears of write-offs.
Sentiment for specialist insurers such as MBIA and Ambac, which provide credit guarantees to lenders and investors, also deteriorated. Michael Cox, analyst at RBS, said: "If losses in US subprime and CDOs [collateralised debt obligations] containing subprime collateral prove worse than anticipated ... some of the monolines may need to raise fresh capital in order to maintain their triple-A ratings."
Gerald Lucas, senior investment adviser at Deutsche Bank, said: "Investors now believe the credit squeeze will last a lot longer."
He pointed out that the future cost of raising dollars in the interbank market rose sharply yesterday in New York. The projected three-month US Libor rate for contracts which will be struck in three months rose to 45bp from 29bp on Friday.
