Barclays swept up in sub-prime panic

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The Independent Online

Barclays was forced to make a rare public denial in response to rumours that it was facing a multibillion-pound loss related to the meltdown in the sub-prime mortgage market in America, just as fresh signs emerged that the credit crisis was worsening.

The London Stock Exchange briefly suspended trading in the Barclays shares yesterday after they fell by more than 9 per cent in early trading. The drop – so severe it triggered an automatic stoppage to allow the electronic trading system to determine it was not due to a technical error – was brought on by widespread speculation Barclays could be forced to write-down up to $10bn (£4.8bn) due to bad bets on securities backed by underperforming home loans in America. "There is absolutely no substance to these rumours," a company spokesman said.

The response was also meant to dampen rumours that chief executive, John Varley, or Bob Diamond, head of the Barclays Capital investment banking unit, were on the cusp of resigning. Barclays shares recovered to end down 2.5 per cent on a rough day for the FTSE 100, which lost 77 points to close at 6,304.9, bringing its one-week loss to 3.5 per cent. The Dow shed 223.6 to close at 13,042.7 – 4.1 per cent down on the week.

The speculation around UK banking stocks has arisen due to the lack of clarity about how much exposure they may have to the sub-prime market in the US. Wall Street giants Morgan Stanley, Citigroup and Merrill Lynch have revealed losses and future writedowns of up to a combined $32bn in the past two weeks. The losses led to the resignations of the chief executives of the latter two.

UK banks, on the other hand, have so far remained mum in part because they need only give results twice a year, rather than the quarterly numbers published in America. They must report "material adverse changes" to the business, but how this is defined is subject to interpretation. The upshot has been rampant speculation about looming skeletons in the closet of banks in the form of structured investment vehicles (SIVs), which often rely on bonds backed by dodgy loans, and collateralised debt obligations (CDOs), which are securities comprised of bundles of loans.

Moody's, the credit rating agency, placed $30.3bn of debt held by 16 SIVs on review for possible downgrade yesterday. David Fanger of Moody's said the banks that most often sponsor or manage these vehicles could be hit if they are forced to inject liquidity or to help restructure them.

He added, however, he was unsure of the extent of the exposure to the affected SIVs. "Broadly speaking, there is little transparency on who is holding these instruments, and therefore we are undoubtedly not aware of every bank that holds SIV capital notes," he said. "It is possible that yesterday's rating actions could adversely impact some of the banks we rate." SIVs sponsored by nine banks including HSBC, Standard Chartered and Citigroup were affected by the agency's ratings moves.

All of the UK's major banks have absorbed heavy share price declines. Since the start of the month, Barclays has lost 17 per cent of its value and Royal Bank of Scotland has shed 19.1 per cent.

Further uncertainty was injected into the market yesterday by a fresh batch of bad news from America. The mortgage lending giant Fannie Mae reported its third-quarter loss more than doubled to $1.4bn and gave a downbeat outlook for 2008. Wachovia, America's fourth largest bank, admitted the value of its CDOs had decreased by $1.1bn in October alone. Citigroup predicted banks that issue CDOs comprised of asset-backed securities, which rely on the cash flows from individual loan repayments, could be forced to write-down up to a combined $64bn. Matt King, the author of the report, predicted Barclays would likely have to write-down up to $2.8bn, while Royal Bank of Scotland could lose $1.9bn.