The US sub prime crisis claims high profile victims

Just when the optimists among us started thinking that the worst of the sub-prime mess was over and that markets had started moving on, comes the back-to-back news of high profile CEO resignations in the US.

Last week, Stan O’Neal, CEO of Merrill Lynch, had to step down, when it was discovered that the firm’s write-down would be closer to $8B than the previously announced figure of $4.5B. And yesterday, Charles “Chuck” Prince, CEO of Citigroup, also chose to retire, in the wake of losses in the mortgage business, as well as fixed income business. In Citi’s case, the write-downs may well top $15B (indications are that the nearly $6B of bad debts announced some weeks ago may be followed by additional write-downs in the region of $8-11B).

In my view, the worst is not over yet. European and Japanese banks too have a fair amount of exposure to risky American mortgages and it won’t be long before the ripples cross the Atlantic and Pacific. The bottomline: the stock markets are in for a fairly choppy ride over the next 6 months as the story unravels further. And there is also the impact on borrowers- tighter credit, more due diligence, and possibly higher rates. In turn, this will affect not just the housing sector, but also automobile and consumer lending- and the impact will be felt by retailers, airlines, hotels and so on.

Add to the mix the crisis in Pakistan and the shenanigans in India over the Indo-US nuclear deal, and one can do little more than shudder at the spectre staring us in our face.

But hopefully, my gloom is misplaced and all will soon be hunky dory.