Central bankers see more credit pain

Central bankers past and present warned on Tuesday of more credit pain to come as Germany's Commerzbank and a big American lender became the latest to reveal losses from U.S. subprime mortgage lending.

IndyMac Bancorp Inc, one of the largest independent U.S. mortgage lenders, posted a quarterly loss more than five times as big as it had projected while Commerzbank's profits undercut forecasts due to a big subprime investment write-down.

Bank of England Governor Mervyn King said banks would take some considerable time to flush out total losses related to mass defaults on U.S. mortgages leant to people ill-equipped to pay.

"We have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we're going in the right direction," King told the BBC.

Banks, particularly in the United States, have come clean about huge losses tied to the subprime mortgage sector.

IndyMac's net loss was $202.7 million versus a profit of $86.2 million a year earlier, as it was battered by mounting defaults and a collapse in investor demand for its loans.

Commerzbank posted a third quarter net profit of 339 million euros ($493 million) after writing off 291 million euros of assets exposed to the market for risky U.S. mortgages.

Others have already announced far bigger hits.

The head of U.S. banking giant Citigroup quit on Sunday, taking the blame for expected losses of $8-11 billion before taxes, on top of $6.5 billion it wrote off three weeks ago.

Charles Prince's departure came five days after Merrill Lynch & Co ousted its chief executive, Stanley O'Neal, following an $8.4 billion write-down there.

Citigroup has named veteran financial expert Richard Stuckey to head a new team managing its subprime mortgage portfolio, according to an internal memo seen by Reuters, a move taken positively by the U.S. stock market.

GREENSPAN ALARMED

Former Federal Reserve Chairman Alan Greenspan and billionaire investor George Soros said the downturn in the U.S. housing market had yet to take its full toll on growth.

Greenspan told a forum in Tokyo that high inventories of unsold homes presented a major risk to the U.S. economy and that he was not sanguine about how quickly the glut could be reduced.

"We still need to accelerate the rate of inventory liquidation, and that will mean bringing housing starts down and sales up. We have a long way to go," said Greenspan, who was answering questions via video link from Washington.

Soros said in a lecture at New York University that the U.S. economy was on the verge of a serious correction.

"I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Federal Reserve Chairman Ben) Bernanke is seeing," he said.

The Fed has already slashed rates by 75 basis points to 4.5 percent in an effort to limit damage to the broader economy from the housing market slide and resulting liquidity squeeze.

SCARY NUMBERS

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 shaky U.S. home loans.

With precarious U.S. mortgages bundled up into complex financial products and sold on around the globe, uncertainty about where the exposure lies remains intense.

Money markets tightened on Tuesday, reflecting renewed jitters -- London interbank offered rates for dollar deposits posted their biggest increase since late September.

Estimates of eventual total losses vary but all the figures put forward are staggering.

JPMorgan thinks the financial services industry is sitting on $60 billion in undisclosed losses. Bill Gross, chief investment officer at the world's No. 1 bond fund PIMCO, characterizes the subprime crisis as a "$1 trillion problem".

Greenspan said about $900 billion of subprime mortgages had been securitized into fixed-income instruments, and the excess level of unsold homes was driving price declines that are eroding the value of the securities backed by those mortgages.

"The critical issue on the whole subprime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States," he said.

Stock markets rose modestly, after Monday's Citigroup-led sell-off, but experts were loath to predict a prolonged rally.

"There's lots of uncertainty ... after the Citi writedowns, which gives the impression we haven't seen the end of it," said Philippe Gijsels, strategist at Fortis Bank in Brussels.