NEW YORK -- Ed Rombach has worked in just about every area of financial services since the late 1970s, from fixed-income trading and derivatives to commodity sales and risk management. Yet in three decades, he can't recall anything like the parade of multibillion-dollar writedowns, executive purges, and rating downgrades that has ravaged Wall Street in recent weeks.
"I've never seen anything like it," said Mr. Rombach, a risk specialist with Thomson Financial IFR. "This is just like a gigantic, slow-motion train wreck."
And the scariest part? He thinks the turmoil in the subprime mortgage market could continue into the spring, when the bulk of these adjustable-rate loans are due to be reset, bringing with it an escalating series of charges for some of the largest banks in the world.
While most industry observers believe that these blue-chip firms will ultimately weather the storm, the economic impact of their disastrous foray into mortgage-backed securities and other complex structured products promises to be wide-ranging.
The capital strength of banks like Citigroup Inc., which announced plans Sunday evening to take an additional $8-billion (U.S.) to $11-billion in writedowns, is seriously eroded, meaning consumers will find it much more difficult to borrow. The U.S. Federal Reserve Board acknowledged yesterday it has seen evidence of tightening lending standards, and noted that demand for loans is also ebbing.
On Wall Street, meanwhile, the usual November chatter about year-end bonuses has been replaced by grim discussions of layoffs.
Citigroup, which three weeks ago announced a $1.6-billion charge to cover its subprime exposure, has lost more than a quarter of its market value in the past month, and its travails follow an $8.4-billion charge absorbed by brokerage Merrill Lynch & Co. Charles Prince, the head of Citigroup, and Stanley O'Neal, the Merrill Lynch boss, both quit their posts amid the financial damage. Meanwhile, several other firms, including UBS AG, Credit Suisse Group Inc., Bear Stearns Cos. Inc., and Deutsche Bank AG have also reduced the value of similar portfolios by billions of dollars.
However, many investors fear that even these exorbitant markdowns do not reflect the extent of the punishment the banks are set to face, given how gruesome the credit picture has become.
"For Citibank, the big question mark is what the charges will actually be," said Joe Scott, an analyst with Fitch Ratings. Fitch downgraded the bank to double-A yesterday, the third-highest credit rating, and gave it a negative outlook, suggesting more trouble on the horizon.
William Tanona, an analyst with Goldman Sachs, echoed these sentiments in a research note, saying he would not be surprised if additional charges were needed, given how much the market has deteriorated.
Even Citigroup acknowledged the difficulty of assessing just how badly its portfolio would suffer.
"There's no way I think anyone can give you an assurance of how things are going to move," chief financial officer Gary Crittenden said on a conference call. "We've taken what we think is a reasonable stab."
The bleeding, however, appears poised to continue.
Canadian banks have remained fairly well insulated against the debacle, although they will not likely be immune to an expected slowdown in industry earnings.
The fixed-income business, a huge source of earnings for the banking sector, is all but dead until these issues are sorted out, and one analyst predicted that profit growth will slow to a meagre 4 or 5 per cent for the Big Six next year.
"This is going to be pretty bad," he said.
Richard Ziegel, an analyst with Punk Ziegel & Co. in New York, said the recent turmoil in the financial industry can be partly chalked up to poor risk-management systems, and his belief that bank managers didn't adequately understand the debt-related securities they were selling to investors.
He also noted that the debt markets were growing at a much faster clip than the American economy was generating income, creating a situation in which lenders could not be repaid.
"It has been our belief for a long, long time that the inability to pay debt ... would result in a financial crisis," he said. "And we got it."
