Fear and mistrust gripped Wall Street on Monday after Citigroup's CEO quit in the wake of mounting credit losses and an influential money manager called the subprime mortgage market a $1 trillion problem.
Charles Prince's resignation from Citibank on Sunday the second high-profile Wall Street CEO ousted in less than a week came as the largest U.S. bank said it will write off as much as $11 billion in losses tied to subprime mortgages.
U.S. stocks followed European shares lower, while safe-haven bonds rallied and even the downtrodden dollar ticked up as skittish investors wondered which bank might be the next to disclose substantial losses.
Prince's departure came just days after Merrill Lynch & Co CEO Stan O'Neal was kicked out following an $8.4 billion write-down.
This situation with the investment banks is analogous to what the market went through when we had all the problems with Enron, said Andrew Busch, global foreign-exchange strategist with BMO Capital Markets in Chicago.
The market had severe doubts over the accuracy of the reporting of earnings and accounting.
Bill Gross, chief investment officer of Pacific Investment Management Co., said mortgage delinquencies and defaults would rise through 2007 and into 2008, and the Federal Reserve would need to cut interest rates further.
There are $1 trillion worth of subprimes and Alt-As and basically garbage loans, he said on CNBC Television, adding that he expects some $250 billion in defaults. We've only begun to see the pain from rising mortgage payments.
Ratings agency Fitch lowered Citigroup's debt ratings on Monday because of exposure to leveraged finance transactions, the subprime market and structured investment vehicles, and Standard & Poor's said it was considering a similar move.
These exposures appear manageable, but taken together exert significant incremental pressure on Citi's finances, Fitch said.
NO LOVE FROM THE FED?
Britain and France rushed to offer reassurance that their economies and banking systems would ride out global credit turmoil. But a U.S. Federal Reserve official gave no indication that more interest rate cuts were upcoming.
Fed Governor Frederic Mishkin said policy-makers acted aggressively with rate cuts in September and October to prevent financial market turbulence from damaging the U.S. economy, but would be equally quick to take them back if necessary to cool inflation.
Recent economic data has shown the U.S. economy holding up remarkably well in the face of a housing recession. On Monday, the Institute for Supply Management reported that its services sector index rose to 55.8 in October from 54.8 a month earlier, better than analysts had expected.
British Chancellor of the Exchequer Alistair Darling said the global banking industry was experiencing great uncertainty, but it was vital to keep Citigroup's problems in perspective.
We are experiencing an unparalleled period of financial uncertainty caused by the problems in the U.S. housing market, Darling told BBC radio. I believe that we can get through that.
French Economy Minister Christine Lagarde said there was no reason to believe the turmoil would damage the French economy.
This crisis does not seem to be having any impact on the American real economy, Lagarde told Europe 1 radio. If the American real economy is protected, there is no reason to believe that there will be an effect on the French real economy. That said, we must remain very attentive and very cautious.
World markets were first gripped by a credit crunch in August when interbank lending dried up as banks realized they did not know which of them was dangerously exposed to mass defaults on shaky U.S. mortgage loans.
After U.S. interest rate cuts and a flood of central bank cash into the money markets to keep them functioning, investors had begun to move back into risk assets in the hope that monetary authorities had capped the crisis. But the Merrill and Citigroup problems renewed fears.